The China Price and Product Liability Insurance: Never the Twain Shall Meet

China manufacturing contracts are very different from Western manufacturing contracts, for a whole host of reasons, most of which stem from either differences in laws or differences in economics. This means our China manufacturing lawyers often must explain why they are doing something in China manufacturing so different from the way the client “always does it” in the West. One of the more complicated things our China lawyers often must explain is how we usually handle product liability insurance in our China manufacturing contracts.

The below is an amalgamation of about a half dozen emails our international manufacturing lawyers have written to explain product liability protections in China manufacturing agreements.

The only real way to cover yourself for liability arising from the use of your product in the United States or in Europe is to obtain insurance in your own name for all applicable risks. Such insurance is expensive, but there is no practical alternative.

We draft our contract manufacturing agreements with China so the Chinese factory is liable for damages caused by defects in your product, including losses incurred due to products liability claims and losses resulting from government mandated product recalls. We provide this to show the Chinese side you are serious about getting a product free from defects. As a practical matter, however, you are unlikely to have success in trying to force the Chinese factory to fund your product liability defense or your product recall. The odds of your getting a litigation judgment or arbitration award in China against the Chinese factory for reimbursement of a U.S.  based products/consumer liability award or government mandated recall costs are also mighty slim. Typically, the most you can expect is a credit on future purchases. Chinese courts (like most foreign courts) believe the U.S. consumer products liability system is fundamentally unfair and they will not support claims based on damages awarded in the U.S. resulting from such claims. The same is true for U.S. government mandated product recalls. Repair or replace or a compensating credit is usually the most that can be obtained, and you will probably need to work pretty hard to get that. So though we include the language, it does not provide much real protection. Your own insurance is what is required. 

Few Chinese factories either carry or will carry insurance for matters that occur in the United States. Most Chinese factories simply refuse to consider the issue. Other factories will say: you obtain the insurance in the United States. But hey, if you want us to pay the premium, let us know the amount. We will then increase the cost of your product to cover the cost of the insurance premium.

The basic point from the Chinese side is that the China price is low because factories in China take no liability for what happens in the United States (or Europe or Canada or Australia, etc.) except for the standard repair and replace warranty for manufacturing defects. That is part of the China price. If you want to load all U.S. liability on the Chinese factory, the price will end up being close to or the same as the U.S. price. So the exercise makes no sense.

We have had clients that, for various legitimate reasons, nonetheless wanted their China manufacturer to sign a contract that required the Chinese manufacturer buy and maintain an insurance policy that covered the products for product liability claims.

Most Chinese manufacturers refused to sign. This then delays execution of your contract manufacturing agreement.

Many of the Chinese manufacturers that did sign ended up ignoring the provisions, stating quite accurately that such insurance is nearly impossible to get in China at any price. The American companies for the most part would then ignore the fact that their Chinese manufacturer had failed to secure the required insurance.

The problem with this though is that if you include provisions in your China manufacturing contract that you will later ignore, you weaken the entire agreement. It suggests you will ignore other provisions both to your manufacturer and to a court. So this is not a good idea. For any China contract, it is best that you include in the agreement only matters that you will take a hard line on and enforce. Loose, we will think about it, maybe we will do it language does not work in China. Clear, simple, blunt is the best way to write for Chinese contracts. If you allow a Chinese manufacturer to be flexible, it will most of the time use that flexibility against you. If you require a Chinese judge to think, the judge will likely give up and deny your claim.

Most insurers have standard language they like to force on everyone and that standard language rarely works for China. We can include that language but it may mean the Chinese side will reject your entire agreement? Or maybe they will sign, knowing they will ignore it later?