Consumer Protection Act: Companies Are Moving To Ring-Fence Product Liability Risks
Employees, left, serve customers at a pharmacy in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Consumer Protection Act: Companies Are Moving To Ring-Fence Product Liability Risks

The introduction of product liability under the new consumer protection law marks an end of the ‘buyer beware’ doctrine. While the law was enacted in 2019, most of its provisions, including those related to product liability, became effective starting July this year.

The provisions hold manufacturers or sellers liable for any harm arising from a defect or deficiency in a product or service, allowing consumers to claim compensation against such liability.

Prior to the 2019 Act, India’s product liability framework was scattered across multiple legislations. While the law did not cap the quantum of damages, Indian courts have seldom awarded blockbuster amounts. This, however, may change due to the new law and is prompting companies to assess ways to minimise and mitigate any foreseeable product liability risk.

Watertight Agreements

The grievance redressal powers continue to vest in district, state and national consumer commissions, which can grant compensation against damages resulting from defective manufacturing or design, deviation from applicable specification/standards or non-confirmation to express warranties by a party.

This liability is not limited to manufacturers alone. It also covers product sellers — persons who import, sell, distribute, lease, install or label products for commercial purpose.

In light of this, the language of business contracts between a manufacturer, its vendor and distributor would be critical, experts said.

A risk mitigation strategy for product liability must consider appropriate contractual changes, Prasenjit Chakravarti, partner at law firm Khaitan & Co., told BloombergQuint.

For instance, Chakravarti pointed out, manufacturer-vendor contracts must specify:

  • How a party will, and to what extent, indemnify the other in case of any potential product liability risk.
  • The payment clause must allow a party to set off product liability claims against amounts payable under the agreement.
  • The insurance clause must clearly indicate the need for sufficient insurance cover to address product liability risk.
  • The contract must allow for liability set-off due to contributory negligence by a supplier, distributor. Under contributory negligence, a person cannot claim damages from another party if it is found out that an injury partly arose due to his own negligence.

Companies will also need to assess who they do business with.

There will be an increased focus on diligence of sellers and suppliers, Neerav Merchant, partner at law firm Majmudar & Partners, said. An organisation must carry out a diligence of existing as well as prospective suppliers’ market standing, quality record, credentials and manufacturing practices to avoid or minimise product liability risk that may arise from any material, service or product supplied by them, he said.

And finally, manufacturers, service providers and traders will have to ensure that their contracts with consumers don’t end getting categorised as ‘unfair’, experts pointed out. The law frowns upon agreements that significantly change the rights of consumers by imposing excessive security deposit, disproportionate penalty, unreasonable charges, unilateral termination without sufficient cause etc.

Sector-Specific Changes

The introduction of product liability has seen a spurt in activity across all industrial sectors. Experts said while the sectoral impact may vary, manufacturers in the automobile and FMCG sectors must specifically consider risk mitigation strategies.

The auto sector in particular has seen many instances of vehicle recalls. For instance, Maruti Suzuki Ltd. recently recalled vehicles on account of faults in the fuel system.

Merchant pointed out that the product liability provisions require automakers to strictly avoid any defects in manufacturing or design.

Automobile manufacturers must avoid any express warranties that may be proven false in their advertisements or representations to public. We may see a substantial rise in general commercial liability insurance to be taken by automobile companies.
Neerav Merchant, Partner, Majmudar & Partners

Chakravarti said companies that intend to acquire businesses susceptible to product liability claims must have general and broadly-worded representations, warranties and a robust indemnity package in the merger agreements to mitigate any past liability emanating from the acquired entity.

Also read: Consumer Protection Act 2019 Ushers In More Benefits For Consumers

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