Confirming samples before the commencement of mass production is also a widely used approach. The buyer should inspect and approve the quality of the sample including the material used in it, so that the approved sample can be used as a benchmark for subsequent supplied products.

Lastly, procuring a performance bond from the supplier and/or requiring the supplier to procure product liability insurance will give additional assurance to the foreign buyer against any unpredictable quality risks.

Andy Wang
Associate
Pinsent Masons Shanghai

The domestic perspective

When a consumer suffers bodily injury or property loss due to defective products, he or she is entitled to claim for product liability against both the original producer and the sellers. Most foreign jurisdictions implement stricter product liability rules than China. Foreign companies may use a combination of the following measures to minimise risks in the supply chain when purchasing products from China:

1. Know suppliers: Before commencing business, the Chinese supplier should be subjected to a comprehensive investigation. Among others, its production capacity, management structure, financial status and supply chain should be verified to gain a better understanding of whether the company is capable of manufacturing qualified products and bearing any potential liabilities. Relevant information may be acquired directly from the supplier, but it is best confirmed through independent queries, site visits and a private investigation of the company's registered file.

2. Execute contracts: A contract clearly specifying the rights and obligations of both parties will educate your supplier on the importance of meeting quality standards; moreover it will give you clear legal grounds to claim for any damages resulting from the supplier's breach. Reference can be made to production standards, quality control standards, inspection procedures, terms for acceptance and rejection, warranty periods and liabilities for breach, including joint liability if damage results from materials supplied by subcontractors.

3. Monitor production: Before undertaking large-scale production, you should have your supplier produce several samples, which can be used as the standard if any disputes on quality arise. Production samples and input materials should be frequently examined or tested, particularly for large orders. While this may result in higher productions costs, it can help to avert the harm and costs that will result from the discovery of defective products.

Other options include the purchase of export product liability insurance on the products to be exported – which is expensive but would cover any damages resulting from product liability claims for defective products; and controlling the supply chain through a permanent presence in China, or even completing the manufacturing processes through a wholly-owned subsidiary in China.

Maarten Roos
Senior consultant
Wang Jing & Co

The in-house perspective
In order to be better positioned in dealing with potential legal risks associated with a foreign company's sourcing activities in China, that Company should proactively identify all risk factors and avoid such risks by doing the following:

First, establishing standard terms and conditions (T&C) for the Company to use in China for all sourcing and purchasing transactions. Such T&C shall be prepared in accordance with China's, and other relevant countries', contract laws, tort and product liability laws, civil procedural laws, and other related laws and regulations. It is recommended that such T&C shall be reviewed and finalised by both Chinese and foreign attorneys, and any modifications and changes to the T&C shall also be reviewed and approved by a counsel.

Second, whenever relevant, appropriate arrangements, languages and terms (i.e. supplier's warranties and representations) must be provided in the purchasing contract to address intellectual property, environmental, health and safety, and other product-specific regulatory and industrial standard issues.

Third, it is strongly advisable to have an onsite visit of the supplier's manufacturing facilities before placing any major purchasing orders with the supplier.

Fourth, product liability insurance shall be carried by manufacturers, importers and/or distributors for certain types of goods (i.e. all types of vehicles, generators and electronic products). This type of insurance protects both the business and the end user or customers against potential losses, and covers both legal fees and the final judgment awarded in the event of such losses.

Fifth, appropriate product warning label(s) must be placed on the product pursuant to the legal requirements of China and the country where the products are distributed or used.

Finally, for US companies and their subsidiaries, the purchase or supply contract should also include Foreign Corrupt Practices Act (FCPA) warranties to ensure that the supplier and its agent will not have an issue with FCPA and other anti-corruption regulations. Additionally, supply chain employees' training in the area of relevant governmental regulations and the Company's best practice are crucial for the Company to minimise the legal risks in its supply chain.

Jason Cao
Chief legal counsel
Dover Corporation, China Regional Headquarters