February 22, 2017

Managing a product recall in Hong Kong

As the recent Samsung and VW product recall issues have shown, the consequences of a recall can be globally significant. Often, the need for product recall insurance is not recognised until after a company has suffered a recall. The reputational damage that can be incurred, combined with the ever-growing complexity of supply chains and the new exposures created by technology, mean that risk managers will need to be aware of the product recall regime in their sector and in any jurisdiction they operate in, to fully understand the potential consequences of a recall. 

A product recall is an action to remove from sale, distribution and consumption consumer goods that may pose a safety hazard to consumers. The recall process is usually initiated as a result of reports or complaints on the quality or safety of a particular consumer product, or as a result of analysis and testing of samples of consumer products.

In Hong Kong, the product recall regime is governed by several pieces of legislation. The general legislation governing consumer products is the Consumer Goods Safety Ordinance (Cap. 456), with the Customs and Excise Department being the responsible authority. This provides that specific consumer goods such as food and water, pharmaceutical products, electrical products and traditional Chinese medicine, which are governed by specific legislation, are excluded from the ambit of the Ordinance. Such carve-outs in effect render the Hong Kong product recall regime a sectoral one, with different sectoral authorities administering recall and monitoring their own products.

A recent example is the recall of ‘hairy crab’ in November 2016, where samples were tested and found to contain excessive dioxins and dioxin-like polychlorinated biphenyls – chemical compounds that may cause reproductive and developmental problems. The Centre for Food Safety of the Food and Environmental Hygiene Department (CFS), the food safety watchdog, is empowered by section 30 of the Food Safety Ordinance (Cap. 612) to prohibit the import and supply of any food and to direct that any food be recalled. It instructed the local importers concerned to remove the tainted hairy crabs from shelves, stop sale and initiate a recall.

The recall process is followed by recall assessment, where the adequacy of the supplier’s action will be assessed. The authority will consider the promptness of product withdrawal, the provision of customer enquiry assistance, agreement among the importers, distributors and retailers on recall and other remedial actions taken.

The relevant authority may take further action in response to inadequate actions taken by suppliers in implementing the product recall. For example, the Public Health and Municipal Service Ordinance (Cap. 132) empowers the CFS to examine and seize the tainted hairy crabs, which were found to remain on sale after instructions to recall have been given.

Pharmaceutical product recalls also exemplify the sectoral product recall regime. Under the Pharmacy and Poisons Ordinance (Cap. 138), Antibiotics Ordinance (Cap. 137) and Dangerous Drugs Ordinance (Cap. 134), suppliers or importers need to apply for licenses when dealing with the pharmaceutical trade. The relevant authority for pharmaceutical products in Hong Kong, the Department of Health, has published the Pharmaceutical Products Recall Guidelines, which stipulate that the guidelines are the licensing conditions for licensees, failing which the licensees may have their licenses revoked or suspended. Substantially, the pharmaceutical licensing regime incorporated product recall regulations and strict compliance with the guidelines is necessary for licensees to operate their business.

A concern about the sectoral product recall regime in Hong Kong is the lack of clarity as to the governing law and the responsible authority in relation to a particular consumer product. This received some attention when Samsung launched the recall of its Galaxy Note 7. While the Consumer Goods Safety Ordinance carves out electrical products from its general applicability, ambiguity arises as to whether mobile phones fall into such a category, as electrical products that are to be governed by the Electrical and Mechanical Services Department, the authority responsible for electrical products.

There is no clear definition of ‘electrical product’. Potentially, mobile phones may also be captured by the Telecommunications Ordinance (Cap. 106), though the Communications Authority has no specific empowerment under the Telecommunications Ordinance to initiate a recall. It remains unclear which authority would be responsible for instructing and monitoring the recall of mobile phones or other electronic products.

After a product recall, there are potential product liability claims against the manufacturer or supplier of the defective products. The Hong Kong insurance law on product liability insurance largely follows the UK position. Founded on the tortious nature of product liability, typical product liability insurance policies cover liabilities in tort, ie negligence claims against the manufacturer, and should be construed in accordance with tort law.

It is therefore necessary to show that the product supplied has caused external physical damage, such as personal injury or property damage. Pure economic loss is often insufficient. Therefore, product liability policies may exclude liability incurred in respect of product recall and the associated loss of profits. A tailored product recall policy may be better placed to manage the risk associated with a product recall.

Published in Commercial Risk Asia on 22nd February 2017: http://www.commercialriskonline.com/managing-product-recall-hong-kong/