When negotiating contracts concerning supply of products or services, the parties typically pay attention to the regulation of liability for defects. That may give the parties the misconception that the contractual risks have been handled sufficiently. But this is not correct if the parties have forgotten to regulate product liability.

When negotiating contracts concerning supply of products or services, the parties typically pay attention to the regulation of liability for defects. That may give the parties the misconception that the contractual risks have been handled sufficiently. But this is not correct if the parties have forgotten to regulate product liability.

When negotiating contracts concerning supply of products or services, the parties will in most situations pay attention to the regulation of liability for defects. Liability for defects means liability for the product/service (products, raw materials, systems, machines, services, etc.) not complying with the parties' agreement.

The parties typically ensure to define what a defect is, how quickly a complaint about a defect must be made and for how long a complaint may be made. Often, the parties also agree on a limitation of liability covering liability for defects.

The regulation of the liability for defects often gives the parties the misconception that the contractual risks have been handled sufficiently. But this is not correct if the parties have forgotten to regulate the product liability. Liability for defects and product liability are not the same and are therefore two different risk areas. Both areas are subject to different rules, and it is possible to insure against product liability whereas it is generally not possible to insure against liability for defects.

Difference between liability for defects and product liability

Liability for defects arises when the actual product does not live up to the parties' agreement (a solar cell panel breaks, a machine breaks down, a repair is below professional standards, etc.). If you have regulated your liability for defects as a supplier, you are well on the way to handling the risk. But the risk handling is not complete.

Product liability describes the damage a product may cause to persons or objects because the product has an unintended or non-existing effect. So, product liability is about a product’s damage to something other than itself (a battery explodes in the hand, a crane collapses and hits a building, a power switch does not work so that the building burns to the ground, etc.).

Rules on product liability

You may incur product liability under different sets of rules. Partly under the Product Liability Act and partly under the rules on product liability developed through case law. In some situations, these sets of rules overlap, and in other situations, they have individual scopes.

Also other parties than your direct contracting party may potentially raise a claim against you due to product liability. For example, if the product sold to the contracting party is resold to a third party and then causes damage. The risk of such claims should also be handled in the contract.

Consequently, the contractual regulation of product liability and the risk of liability may become rather complex. And the need for action increases in line with the increasing complexity. As a minimum, you should consider these three main points:

  • Firstly, you should find out which rules on product liability you wish to be subject to. These rules may vary depending on the specific context of your supply.
  • Secondly, you should get an overview of all product liability situations that may arise in relation to your supply so that the risk of these situations is regulated in the contract.
  • Thirdly, you should ensure that the regulation of the risk is described correctly, clearly and precisely in the contract. It must be clear to the parties what they have agreed if something goes wrong afterwards and you actually need the contract to find out what applies.

Authors

Søren Hornbæk Svendsen

Partner

Christina Steen

Partner

Andreas Schønbeck

Senior Attorney