Canada: Trade Implications of Proposed Consumer Products Safety Act

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

By Cliff Sosnow AND Elysia Van Zeyl
(Blake, Cassels & Graydon LLP)

The federal government recently introduced new legislation that, when passed, will dramatically increase the obligations of Canadian companies and impose particularly onerous requirements on companies that import consumer products from foreign suppliers. This legislation, referred to as the Consumer Products Safety Act, follows several recent high-profile recalls affecting toys, food, and pharmaceuticals.

Recalls Will No Longer Be Voluntary
When approved, Bill C-52 will provide the Minister of Health with extensive powers to deal with products that pose health or safety risks to consumers, including the ability to issue mandatory recalls. This new power represents a significant change from the current system whereby product recalls are entirely voluntary. The Minister will also be given the authority to ban any product that poses an “existing or potential hazard”. Moreover, the Minister will be granted the ability to disclose confidential company information in the absence of company consent where it is believed that a product poses a “serious and imminent” health risk.

New Ministerial Powers to Order Health Safety Tests
The proposed legislation empowers the Minister to order an importer or manufacturer to conduct tests on consumer products and to compile any information that the Minister considers necessary to verify compliance with the Act or regulations. The Minister may also require importers or manufacturers to provide documents that contain information on the results of such tests within the timeframe to be determined by the Minister. Failure to comply with any such order by the Minister is an offence under the Act.

These obligations could pose difficulties for importers who may not have access to thorough and accurate information from their foreign suppliers. Furthermore, considering that international suppliers may not be required to comply with equivalent standards in their home country, there is no guarantee that such information or records even exist. Thus, in the absence of full co-operation by foreign suppliers, importers may have to choose between conducting tests themselves and providing the requisite information, facing penalties, or choosing new sources of supply from co-operating foreign suppliers.

To sign up for the free International Corporate Counsel Briefing

More information on North American Free Trade & Investment Report

Negotiating Insurance Protection for China Imports

Recalls of Chinese-made products have proliferated this year, eroding importers’ profits, threatening their market share and damaging brands. According to Ryan S. Smethurst, of McDermott Will & Emery, writing in WorldTrade Executive's Practical China Tax & Finance Strategies, faced with these risks and potential liability, counsel to importers of Chinese goods should proactively assess the scope of their insurance programs and carefully negotiate insurance-related provisions in their contracts with Chinese suppliers. The following are some of Mr. Smethurst recommendations, excerpted from the WTE articles:

Most importers purchase liability insurance with products coverage. Such policies typically cover claims arising out of product-related damage to third-party property or injuries to consumers and the costs of defending a product liability lawsuit. Consequently, product liability coverage is essential “front line” protection for any importer of Chinese goods.

In light of recent revelations concerning manufacturing defects and quality control issues in China, importers should re-evaluate their existing product liability coverage to assess its scope, the sufficiency of its limits, the effect of defense costs on limits, and who has the right to control the importer’s defense and settlement decisions in litigation. Importers also should assess the financial strength of their product liability underwriter and its claims handling reputation, as well as any endorsements or other policy provisions specific to the importer’s business.

But liability policies with products coverage do not offer complete protection. Such policies do not cover product recall and other costs in addition to, or in the absence of, actual or alleged injury to third parties. Product liability coverage also will not apply to the extent that property damage or bodily injury was caused by sales of products that the importer had recalled or otherwise knew were defective.

Many importers, therefore, should consider adding product recall coverage to their insurance portfolios. Unlike product liability coverage, product recall policies apply in the event that a product on the market is likely to cause damage or injury to third parties; no actual or alleged damage or injury is required for the policy to respond. Thus, product recall coverage is triggered where an importer incurs costs proactively to prevent injury or damage. It also typically covers the costs of communicating a recall to consumers, of replacing unsaleable products and of mitigating damage to the corporate brand through public relations and crisis management initiatives. These costs can be devastating. The unfortunate case of Foreign Tire Sales is a case in point. FTS, a family-owned tire import business, was forced to recall 450,000 defective Chinese-made tires at a projected cost of $90 million. In addition, product recall policies may cover lost profits occasioned by the negative publicity and lost sales that often result from a recall. Product recall coverage, however, often comes at a hefty price. Importers should confer with their insurance brokers to discuss pricing and the effect of the Chinese products scandal on the breadth of product recall policies currently on the market.

Chinese Suppliers’ Liability Insurance

Importers also should evaluate whether their Chinese suppliers maintain liability insurance and, if so, whether it is adequate and accessible from the importer’s perspective. An importer faced with a product liability lawsuit in the United States, for example, may be entitled to make a claim against a Chinese manufacturer’s liability insurer if that insurer has conferred additional insured status to the importer or has included in its policy a provision extending coverage to entities contracting with the named insured. Although such rights can offer an importer protection in addition to its own insurance, an importer must carefully negotiate these terms and ensure their conscientious implementation by the supplier and its affected insurers. More