22 January 2009

South Africa: Warning Over Product-Recall Law

Johannesburg — A NEW law could cost South African companies billions of rand in product recalls, industry experts aid this week.

Suppliers of goods could be held liable for any damage caused by the goods, regardless of fault on the part of the supplier, according to the Consumer Protection Bill. This introduces the possibility of an increase in product recalls.

"One of the biggest threats to a company's bottom line is product recall," said Keith Marshall, regional manager of liabilities at AIG SA. "The costs of recalling a product can be astronomical and this, in addition to reputational damage, could force a business to close its doors," Marshall said.

Under the bill, no negligence needs to be proved. There just needs to be a causal link between harm, as defined by the bill, and the defective product.

In the UK, where similar regulations are in effect, overall product recall increased 125% from 2004 to 2007. In the case of nonfood consumer goods, this figure was 894%.

"We have been watching developments on a global scale and SA is likely to follow a similar trajectory," Marshall said.

Due to strict product liability, businesses need to understand the entire supply chain and be extra diligent regarding quality control, but they also need to ensure they are adequately covered, he said.

In response to strict liability provisions, insurance companies were developing solutions to protect businesses from the devastating effects of recalls.

Product recall policies usually covered the key expense areas, and also provided the expertise of independent recall consultants to guide the company through the critical first few weeks of a product recall.

Eric Levenstein, a director at commercial law firm Werksmans Attorneys, said that insurance premiums for manufacturers and suppliers were likely to increase, along with certain production costs, once the bill was passed into law.

This is because consumers who fall victim to defective products will have more legal clout, raising the risk of liability damages claims.

Levenstein said that product warning and information would have to be looked at carefully, also potentially driving up costs.

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