Made in China: Caveat venditor

By Jocelyn Kellam and Madeleine Kearney.

Key Points:
Australian companies who source goods from overseas face liability for substandard goods under Australian laws. Australian Customs regulations impose liability on importers of non-compliant goods.

There is an urban myth that after WWII the quality of Japanese goods was of such poor repute that a town was renamed "Usa" so that goods could be legally labelled as "MADE IN USA". While Usa City does exist (it is located in Oita Prefecture on Kyushu Island), and the quality of some Japanese goods following the war was poor, the city (and its famous shrine) have been in existence for far more than 1000 years.

It is perhaps timely to recall this story given that the recent worldwide toy recalls have focused attention on problems with quality of Chinese goods. Unfortunately, it appears that such problems are not the exception. Media reports suggest that approximately 60 percent of US product recalls in the first half of 2007 related to goods made in China, including a wide range of products from pet food to tyres.

Reports of problems with other Chinese-made products include:

• The deaths in Panama in 2006 of people who had taken medicine contaminated with a chemical imported from China allegedly passed off as the harmless ingredient glycerine.
• The closure of 180 food factories in China after inspectors had found illegal dyes, industrial wax and formaldehyde being used to make candy, pickles, crackers and seafood. Reports indicate that half of 223,297 of the factories inspected by the Chinese regulator, General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) were not completely certified.
• The sentencing to death of a former regulatory official in Beijing for taking bribes to approve substandard medicines, which included an antibiotic blamed for at least 10 deaths.
• A Chinese-made toothpaste containing diethylene glycol, a thickening agent in antifreeze known as DEG, has been banned or stopped by governments in North and South America, Europe and Asia.

The Chinese response

The Chinese Government believes ensuring product quality is important to improving national economic competitiveness. With attention also being focused on China with the 2008 Olympics in Beijing, China is taking action to strengthen administration and enforcement of Chinese product safety laws.

Following the recent toy recalls, Chinese President Hu Jintao has vowed to crack down on unsafe products. At APEC in September, Mr Jintao said China took product safety seriously, and was determined to stamp out rogue manufacturers.

These steps will follow on earlier initiatives regarding product safety in recent years. Other Chinese initiatives include:

• The reaching of Memorandum of Understanding between US Consumer Product Safety Commission and its Chinese counterpart, AQSIQ in April, 2004.
• An EU-China Memorandum of Understanding (MEMO/05/418) between the EU Directorate General for Health and Consumer Affairs (DG SANCO) and AQSIQ was signed in January 2006.
• An agreement in relation to toys between DG SANCO from the European Commission and AQSIQ in September 2006, outlining a strategy for improving the safety of Chinese toys, and inter alia, contains a commitment from AQSIQ on tightening up inspection and supervision of toys exported to Europe.
• On 18 September 2006, the American National Standards Institute and the National Institute of Standards and Technology, with the Standardization Administration of China announced the availability of a Standards Portal providing information about product standards to facilitate the trade of goods and services between the United States and the People's Republic of China.

Risks under Australian product liability laws

There are two bases upon which Australian companies can be held liable to pay compensation to consumers injured by defective goods imported from overseas.

First, the Trade Practices Act deems Australian companies which import goods from overseas to be the manufacturer of goods for the purposes of both Part V Division 2A and Part VA. Second, the Act also provides a mechanism designed to assist a potential plaintiff who is experiencing difficulty in identifying the manufacturer of a defective product. The potential plaintiff may request any or all known suppliers of the goods to provide the name of the manufacturer or the entity that supplied the goods. If the potential plaintiff still does not know who manufactured the goods 30 days after this request is made, each supplier that did not comply with the request is deemed to be the manufacturer for the purposes of the claim. A corporation that does not respond to such a request within 30 days may find itself defending a claim over goods it did not actually make.

These provisions mean that Australian companies can find themselves strictly liable for products where the safety is not such as persons generally are entitled to expect or where the goods are not of merchantable quality or fit for purpose.

Further, a supplier can be prosecuted in respect of products which do not comply with a prescribed consumer safety standard, a product information standard or a banning order. The Government also has the power to order a supplier to undertake a compulsory product recall in respect of such goods and goods which will or may cause injury and the supplier is not taking satisfactory remedial action.

Customs laws and regulations

China is increasingly important to Australia in terms of trade. Since April 2005, Australia and China have been engaged in ongoing negotiations on a Free Trade Agreement (FTA). Most recently, the ninth round of the Australia-China Free Trade Agreement negotiations was held from 18 to 22 June in Beijing.  Australian imports of merchandise from China in 2006-7 increased 17% to 27, 139 million. Australian exports increased by 25.7% to 22,800 million.

A wide variety of products are prohibited imports under the Customs (Prohibited Imports) Regulations 1956. Under section 233AB of the Customs Act 1901 the penalty for importing a prohibited import is the greater of:

• three times the value of the goods; or
• $100,000.

The following goods are examples of prohibited imports:

• certain products - cosmetics, glazed ceramic ware for tableware and cooking, novelty erasers resembling food in scent or appearance, novelty money boxes, pencils and paintbrushes, and toys - that contain in excess of prescribed thresholds for toxic materials (including heavy metals);
• asbestos and goods containing asbestos (subject to very limited exceptions); and
• goods subject to a permanent ban under the Trade Practices Act such as candles and candle wicks containing more than 0.06% lead, glucomannan in tablet form, jelly cups containing konjac, toothpaste containing more than 0.25% by weight of diethylene glycol and a particular brand of retractable dog leads.

Following several high profile recalls of goods contaminated with heavy metal, revisions to the heavy metal thresholds in respect of children's products came into effect on 25 August 2007. Under the old standard, the surface coating of children's toys was permitted to contain up to 250 mg/kg of lead. This threshold has been reduced to 90mg/kg under the new thresholds.

Other risk management steps

There are a number of proactive preventative measures which importers and suppliers of imported goods in Australia can take to minimise legal risks. These include the implementation of quality assurance programs to ensure that products are manufactured to specifications (which should be regularly reviewed to take into account changes in the law).

Appropriate contractual conditions are also important. Where feasible, agreements should include:

• appropriate warranty and indemnity clauses;
• an obligation on the manufacturer to obtain insurance coverage, noting the Australian importers' interest under the policy; and
• a record of any specifications to which the goods are to be made, in particular because international standards relating to goods may vary.

Differences between legal systems are important factors for importers and exporters to consider. Unlike Australia, not all countries are a party to the International Convention on the Sale of Goods, which affords purchasers with some contractual protections. Importers must be careful to include jurisdiction and choice of law clauses in their international contracts. Assuming that an Australian judgment is enforceable, it may well be that these clauses should name an Australian court as the appropriate forum, with Australian law to be applicable should any dispute arise.

Conclusion

We can only speculate whether the poor quality of some goods being exported from China is the result of a former state-directed economy, or of an early capitalist production system, or perhaps both. The examples of other economies in Asia- such as Japan and Korea - suggest that such problems may only persist in the short term. Whatever the cause, "Made in China" is a claim not synonymous with quality in the minds of consumers today. While the Australian public wants goods which are cheap in terms of price, products which are cheap in terms of quality can give rise to legal liability on the part of Australian importers and suppliers.

For further information, please contact Jocelyn Kellam.