Product Liability in INDIA

Total Recall: product liability in India 25 Apr 2010, 0322 hrs IST,Aman Dhall,ET Bureau

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Topics: Nokia Honda Maruti Suzuki India Inc Food and Drug Administration Product Recall KPMG Advisory Services

Despite the growing trend of product recalls globally, Indian companies don’t have a comprehensive strategy to tackle the threat, with a majority still dependent on the traditional product liability cover, according to insurance experts. Even as more Indian manufacturers exporting goods to the overseas markets opt for the product recall insurance plan, insurance experts say the time has come for India Inc to look at this policy as a ‘risk management tool’ and not as a mere obligation. “Given the legal framework in India, there are limited damages slapped by consumers on to the manufacturers,” feels Shashwat Sharma, director at KPMG Advisory Services, adding that “the product has a great future with the consumer market becoming more sensitive to safety standards and regulatory provisions more stringent.” In India, as it stands, most companies opt for product liability insurance that insures their liability against third party claims and bodily injuries. But they tend to overlook product recall cover that protects them against recall costs, consultancy fees, lab expenses, re-work and replacement costs, plus brand equity loss in case of a defective product. The business for this product comes from sectors such as auto ancillary, food and beverages, pharma, telecom and electronics. “Majority of this demand is driven by contractual requirements, mostly from contracts of manufacturers with US and European entities,” says Ritesh Kumar, chief executive of HDFC ERGO General Insurance. On the other hand, multinationals have the recall cover built into their global progammes. Some of them seek cover locally to the extent of deductibles under those policies. Over the last decade, US-based Food and Drug Administration (FDA) has triggered several recalls in the food and pharmaceutical industry as witnessed in the cases of Indian companies, Sun Pharmaceutical and Ranbaxy Laboratories. In recent times, carmaker Maruti Suzuki too faced a similar situation when it had to recall 100,000 A-Star cars for faulty parts. Incidentally, this was not the first time the four-wheeler manufacturer was in a spot, in the beginning of the millenium the company had recalled 76,000 Omni vans. Earlier, even global biggies such as Honda and Nokia had to recall their products owing to defective parts. Insurance brokers say safety apart, a recall severely hurts a company’s reputation in the market. “The repercussions are widespread. And that’s where the potential lies for this product,” says Sanjay Kedia, country head of Marsh Insurance Brokers. Even Rajive Kumaraswami, head of risk and reinsurance at ICICI Lombard General Insurance agrees. He says gradually owing to increased awareness, companies are waking up to cover their domestic sales too. The product recall insurance, which was introduced in the Indian market as an extension under the product liability insurance, has evolved as a standalone product over the years. General insurers say the new recall liabilities arising from pollution and transportation has given rise to the newer comprehensive general liability policy that has practically replaced the traditional model of the product liability cover with extension for recall. “There is also a demand for loss of stock due to recall. The product contamination cover which has its genesis in the food and beverage industry—chocolates and colas—has also triggered the demand for this cover,” says RK Kaul, chairman and managing director of Oriental Insurance. Moreover, within this product, general insurance companies are now selling different types of recall covers—namely first party and third party recall. In India, the demand is primarily for the third party recall, as auto components and equipment parts form a major part of the export pool. The pricing of this product has so far remained stable for the last few years and is a function of various underwriting considerations like the industry type, products territory where products are being sold, turnover of company, limits of liability being purchased. Insurers typically charge about 1-1.5% as premium of the limit of liability. General insurers expect the rates to increase as globally there has been an increase in the frequency of claims reported on this cover. And since product recall is not an off-the-shelf cover, insurance brokers say if companies can negotiate with general insurance companies they can avail themselves of maximum possible triggers of recall covered under the policy.

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Product Liability law in India

LIABILITY FOR MANUFACTURING OR DISTRIBUTING A DEFECTIVE PRODUCT IN INDIA

In India, Product liability law, also called “products liability”, governs the liability of manufacturers, wholesalers, distributors, and vendors for injury to a person or property caused by dangerous or defective products. The goal of product liability laws is to help protect consumers from dangerous or defective products, while holding manufacturers, distributors, and retailers responsible for putting into the market place products that they knew or should have known were dangerous or defective.

Civil Product liability in India is, essentially, governed by

a) The Consumer Protection Act, 1986

b) The Sales of Goods Act, 1930

c) The Monopolies and Restrictive Trade Practices Act, 1969 (hereinafter referred to as the “MRTP Act”)

d) The law of Torts.

e) special statues pertaining to specific goods

The laws relating to product liability, in India, have been constantly evolving, by way of judicial interpretations and amendments, to become one of the most important socio-economic legislations for the protection of consumers. The legislation, in respect of product liability in India, though was enacted to protect the interest of consumers but the same was, earlier, construed narrowly, thereby frustrating the object sought to be achieved. The trend, however, has changed in the recent times with the Courts adopting a pro-consumer approach. The Courts, in India, have now started awarding compensation and damages which are more punitive than compensatory in nature.

In Wheels World vs. Pradeep Kumar Khurana MANU/CF/0280/2002 the complainant, a doctor by profession, complained to the respondent about deficiency in service in not repairing, free of charge, a technical fault, which occurred during warranty period, in his new Montana car and then not delivering the same for a period of 4 years. A sum of Rs. 30, 000/- with interest @ 18% per annum from 2/7/1988 to 7/5/1992, was awarded as compensation, in favour of the complainant for his suffering, both professionally and otherwise, on account of non availability of car for a period of 4 years. Further interest, at the same rate for the same period, was also awarded on an amount of Rs. 82, 000/-, being the price of the car as well as an amount of Rs. 55, 00/- towards costs and, last but not the least, an amount of Rs. 50, 000/-, which was deposited by the Respondent on account of stay of imprisonment, was also awarded to the petitioner.

The product liability law, in India, apart from the civil liability, also imposes criminal liability in case of non-compliance with the provisions of each of the below mentioned Acts. The said Acts are in addition to and not in derogation of any other laws in force, which implies that an action imposing penal liability can be simultaneously initiated along with a claim under civil law. Some of these are special Acts pertaining to sale of specific goods such as food, drugs, cosmetics etc.. The provisions of these enactments are preventive in form , though the relief envisaged is an action for breach in civil or criminal court.

· The Foods Adulteration Act, 1954

· The Food Safety and Standards Act, 2006

· The Drug & Cosmetics Act, 1940

· The Indian Penal Code, 1860

· The Standards of Weights and Measures Act, 1956

· The Agricultural Produce (Grading and Marking) Act, 1937 for marking and grading of commodities like vegetables, butter, etc.

· The Indian Standards Institution (Certification Marks) Act , 1952 to formulate a number of standards for different products by ISI

· The Bureau of Indian Standards Act , 1986

Each of the aforesaid Acts provides for imposition of fine and/or imprisonment in case of supply of defective products or adulterated consumables.

The Food Safety and Standards Act, 2006 is the most recent legislation which comprehensively deals with food and safety standards which are to be complied with by manufacturers and producers, non-compliance of which imposes a liability, upon defaulters, of fine, extending upto Rs. Ten Lakhs and/or imprisonment.

The provisions of Indian Penal Code (IPC), on the other hand, in respect of product liability, are attracted when the element of cheating and fraud can be attributed to such defects. For example, in the case of Smt. Uma Deepak v. Maruti Udyog Ltd Ors (2003) CPJ 90(MRTP) the Complainant alleged that the car sold by the opposite party was not only accidental but the price, for the same, was also overcharged. The Court, in response to the allegations made by the complainant, directed arrest of the Directors as well as the manager of the dealers/agents who sold the said defective car to the complainant and remanded them to judicial custody. Subsequent thereto, the said officers of the opposite party were released on bail and were directed to replace the disputed car with a new car.

Provisions of IPC are also attracted to provide punishment to offenders for false weights and measures , adulteration of goods ( food, drugs etc -6 months imprisonment, fine of 1000 rupees or both), and false property marks ( one year imprisonment, fine or both). The period of limitation as per Section 468 of the Criminal Procedure Code is 6 months if offence is punishable with fine only , and one year if offence is punishable with upto one year imprisonment and three years if offence is punishable with imprisonment of above one year and upto three years.

The provisions of the Standards of Weights and Measures Act, 1976 are attracted in case of any false packaging, weight or measure which does not conform to the standards established by or under the said Act and breaches the mandatory declaratory requirements on a package. If any mandatory declaration is found missing on the package a fine of upto 2000 rupees shall be levied as per Rule 39 of the Standards of weights and measures packaged commodity rules.

The Drugs and Cosmetic Act, 1940 also provides for criminal liability for manufacturers and producers of medicinal products or cosmetics etc, which do not adhere to the prescribed standards.

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