Product displacement

Chocolate lovers will have been devastated by news in the run-up to Easter that Cadbury was recalling a number of Creme Eggs. The company took this step after the warning ‘may contain nuts’ was inadvertently left off packaging, prompting fears that an unwitting member of the public could be harmed.

This is the second time in 12 months that Cadbury has launched a major recall. It fits in with statistics released last month showing that recalls of consumer goods are up by 20 per cent over the past year. Clearly, businesses are increasingly concerned by the reputational damage that faulty products can attract and the potential for subsequent litigation.

Releasing an unsafe product to market may result in liabilities to consumers. This has been the case since that famous snail in a bottle, when manufacturers lost the protection of the doctrine of privity of contract in Donoghue v Stevenson (1932), allowing individuals injured by unsafe products to sue directly for negligence. The Consumer Protection Act 1987 later imposed strict liability on manufacturers of defective products.

Indeed, putting unsafe products onto the market, or failing to withdraw them, may in some circumstances amount to a criminal offence. This typically occurs under the Food Safety Act 1990, in which the courts have discretion to order the offender to compensate individuals able to show loss or injury as a result. Thus, steps to reduce the risk of actual loss to third parties, such as product recalls, come to the fore in efforts to limit manufacturers’ liabilities, avoid harm to consumers and minimise damage to brand names.

From a commercial perspective, the decision over whether to recall a product may be difficult. Manufacturers are often uncertain of the potential recall costs, the implications involved for brand reputation and the degree of risk to the consumer posed by the product. Partly because of such considerations, a general product safety regime has been brought in throughout the EU to try to ensure the primacy of consumer safety. That regime has been modified in the past two years so that the state now adopts an active role in the regulation of product recalls.

The General Product Safety Regulations 2005 came into force on 1 October 2005. They transposed into UK law directive 2001/95/EC on general product safety, but also contain their own enforcement provisions. The regulations complement, but do not replace, provisions in existing vertical product safety legislation. Therefore certain product sectors – notably but not exclusively food – remain subject to considerable additional specific legislation.

Under the regulations, producers are obliged to take measures to avoid the risks their products might pose. These include withdrawal (where necessary), warning consumers as to the risks, or, as a last resort, recall. Distributors are under a general duty to help ensure compliance with applicable safety requirements and to participate in the monitoring of the safety of products placed on the market.

Where they know they have released a product that is not compliant with the general safety requirement, both manufacturers and distributors are obliged to notify the relevant enforcement authority in writing and then cooperate with the authority’s action plan to avoid the risk. The major departure for UK law is that the enforcement authorities’ powers now include the power to order mandatory recalls.

Increased recalls and the Cadbury experience
An upward trend in product recalls has been recorded since the early 1990s and is likely to reflect a complex interaction of factors, of which legislation is but one. Prior to the implementation of the regulations it was still widely predicted that there would be a significant increase in the number of product recalls. This had reportedly been the experience elsewhere in Europe, where according to PricewaterhouseCoopers the European Commission reported a 175 per cent increase in product recall notifications, from an average of four per week in February 2004 to 11 per week in February 2005.

Reviews of the UK experience since the implementation of the regulations suggest that the impact here has been less dramatic, but that product recalls overall are indeed up (if not in fact in the food sector).

Given Cadbury’s experience in 2006, it would not be surprising if producers and distributors are inclined to err on the side of caution. On 19 June 2006 Cadbury informed the Food Standards Agency (FSA) that in January it had detected salmonella contamination at its plant in Marlbrook, Herefordshire. Despite Cadbury’s claims that levels of salmonella did not pose a significant risk, measures to correct the problem were taken in March, even though affected products had already been distributed to market. The FSA advised Cadbury to initiate a recall, which it undertook on 23 June 2006, and the FSA issued a food alert.

By late June the authorities announced that they would focus on the apparent long delay in notifying authorities of the contamination. The national press subsequently reported that Cadbury and its directors might face criminal and civil proceedings, most likely for offences under the Food Safety Act 1990.

The FSA sought the views of the independent Advisory Committee on the Microbiological Safety of Food, which met on 30 June 2006; and while acknowledging that the quantification of risk was very difficult, it concluded that the presence of salmonella in ready-to-eat products was unacceptable at any level. It was also critical of Cadbury’s risk assessment and procedures. On 21 July 2006 the Salmonella Montevideo National Outbreak Control Team concluded that consumption of Cadbury products was the most likely cause for a recent outbreak of what is a comparatively rare strain.

The commercial impact on Cadbury, at least in the short term, appears to have been significant. In August 2006 Cadbury announced lost sales of £5m. Recall costs had amounted to some £13m (£7m after insurance) with a full-year cost estimated at £20m. The trading impact was under review, with the share price, at least temporarily, slightly dented.

It would not be surprising, then, if companies, particularly in the most heavily regulated product sectors, have become more cautious. When Cadbury issued the further product recall notice on 10 February 2007, there was no suggestion that it had been hesitant a second time.

The product recall insurance market and issues facing insurers and insureds
Cadbury reportedly made significant but incomplete recoveries from its insurers in relation to the salmonella product recall costs. As a huge and profitable company, Cadbury was presumably better able than many to cope with the financial impact of the uninsured losses. Yet outside certain sectors (notably food and pharmaceuticals) product recall insurance remains less widely purchased than might be expected, despite the fact that the London market has historically provided an expansive range of suitable insurance products.

It would be surprising if the demand for product recall insurance does not grow. Companies looking at product recall insurance should understand that having a product recall strategy ready in advance is a good idea. The existence of such a strategy will directly affect the rating of risk. A company should also have in place systems in advance to record its additional costs in order to support any claim against insurers for such costs.

In short, commercial manufacturers and suppliers should check that they have the appropriate recall cover well in advance of the day they might have to use it so as to avoid being left with egg on their faces.
Trevor Davies is senior partner at Davies Lavery Solicitors