The following article is of importance if you run any business that manufactures or sells goods.
The Consumer Protection Act (CPA) is an act which governs the relationship between companies and clients. The key issue within the Act is that it stops companies from being tempted to pass the buck onto other parties when a product is defective or not meeting certain quality control standards.
Don’t lose focus
The potential of a company facing the National Consumer Tribunal, which makes rulings on CPA infringements, can be devastating as the judgement in cases can possibly run into millions of Rands. This could mean that smaller to medium companies have the potential of losing their entire businesses over a CPA case.
Commenting on the growing nature of this risk, Gillian Wolman, Head of Litigation at Risk Benefit Solutions says that companies need to be vigilant when it comes to their actions. “The growing global trend towards liability and accountability of company directors is increasingly resulting in directors being held accountable when the company sustains a loss. The new Companies Act of 2008 has also placed increasingly complex responsibilities on companies and the individuals in charge of these companies. This coupled with the codification on common law fiduciary duties and responsibilities in terms of the Act, means that no organisation is safe from a law suit; no matter how big or small,” she says.
She points to a local construction firm currently facing a collusion case, and explains that the business could possibly face a maximum penalty of 10% of annual company turnover.
Protection is necessary
This is a prime example of why Directors and Officers (D&O) cover is becoming increasingly important in the industry. There is no possible way that a major supermarket can check the quality of each and every item that comes from suppliers; and if the law means that they cannot shift the responsibility to suppliers, they face increased risks.
Simon Colman, Underwriting Executive at SHA, points to the recent lawsuit lodged against Massmart as well as its retail store, Builders Warehouse, claiming millions of Rands for injuries caused by alleged defective ladders. “This is a prime example of the dispersion of litigation which may occur when more than one party has played a role in the supply chain.”
In such a case, both parties are jointly and severally liable for harm caused by the product. The law does allow for some defences on the part of the retailer, particularly where it is impossible for them to test the safety of every single product, like examining the contents of tinned food.
“None the less, retailers need to remember that a multitude of products are imported into South Africa, which means that consumers will find it very difficult to take action against the manufacturer and will instead focus their attention on the local retailer.”
In order to negate this, Coleman suggests that companies should incorporate broadform liability into their basic cover.
“Retailers must have broadform liability policies that include adequate product liability in place, even if they are not involved in the manufacturing of the product. The limits of liability traditionally purchased by retailers on their insurance policies are also generally too low. A proper liability insurance programme takes into account the escalating legal defence costs in the modern day South Africa, as well as the increasing number of awards for personal injuries,” says Coleman.
Increase quality control measures
There are actually a lot of examples we can point to. As Coleman points out, there is the case involving Massmart, and there was the whole case of price fixing involving Tiger Brands in 2007.
More recently, Tastic recalled Simply Delicious products from retailer’s shelves after tests found traces of potentially carcinogenic ingredients. There was also a case in 2005 where a major spice producer had to recall certain products after it was found that certain food colorants had the potential to cause cancer.
Colman advises that retailers can also rethink their quality assurance protocols as an additional measure to mitigate the possibility of litigation and awards, especially if the retailer can demonstrate that they have done everything reasonably possible to ensure safety.
“The CPA also empowers the National Consumer Commission to initiate a product recall if they feel a dangerous product is on the shelf. The costs of a recall can run into the millions within a few days. Traditional policies do not cover these costs and retailers should speak to their insurance brokers about such cover,” Colman concludes