Proposed reforms to the Product Liability Directive - the implications for future claims

Directive 85/374/EEC provides for compensation on a strict liability basis for personal injury, death or damage to personal property caused by a defective product. Various provisions of the Directive have remained controversial as between consumers and the manufacturing and insurance industries both before and since the Directive was passed in 1985. It will be recalled that the Directive seeks to achieve a balance between the interests of consumers and producers. The Directive provides that the Commission must present a report on the application of the Directive every five years and, if necessary, submit appropriate proposals. In its First Report in 1995, the Commission concluded that:

"The Directive is generally perceived to have been an important piece of legislation. It has contributed towards an increased awareness of and emphasis on product safety. The Directive has eased the burden on the Plaintiff in proving his case. At this moment, the Directive does not appear to have had the effect on increasing the number of claims made nor does there appear to have been an increase in the level of insurance premiums as a consequence of the Directive.

However, experience is still limited and is only likely to develop slowly. For example, there is only very limited jurisprudence from all the Member States and to date no national court has referred any question of interpretation to the European Court...

Having regard to the information obtained regarding the application of the Directive, the Commission does not consider it necessary, at this stage, to submit any proposals for amendment to the Directive. Nevertheless, certain aspects of the Directive concerning the protection of consumers and the functioning of the Internal Market require continued monitoring. This is the case, for example, with the exclusion by the Majority of Member States of unprocessed agricultural products, whose impact the Commission will evaluate".

The BSE issue and food generally

The BSE crisis has had many serious consequences, primarily claims that beef containing the virus has caused human and animal deaths. The fear that far more numerous deaths might have occurred has also raised very great concern. A Temporary Committee of Inquiry into BSE was established which made various findings. In commenting on the Temporary Committee’s conclusions, the European Parliament called for various changes and improvements to be made to regulatory and liability laws, including a change to Directive 85/374/EEC so as to provide that individuals throughout the EEA could seek compensation for damages caused by defective primary agricultural products. Accordingly, on 1 October 1997, the Commission issued a proposal to modify Directive 85/374/EEC in the manner requested by Parliament.

The Directive originally provided that primary agricultural products (i.e. products of the soil, stock-farming and of fisheries) and game are not covered by its provisions. However, products which have undergone initial processing are covered (Article 2). Nevertheless, member states were given the option, (under Article 15(1)(a)), of providing for liability on the part of agricultural producers for defective primary products. This derogation was enacted by Greece, Luxembourg, Sweden and Finland.

When the Directive was being drafted, there was strong pressure from the agricultural sector to exclude agricultural products from the scope of the Directive. It was argued that strict liability for defective agricultural products might be too great a burden if these products were not industrially manufactured. This was accepted by the European Parliament and the amended proposal from the Commission.

In deciding to revive the original proposal to include all agricultural products, the Commission was influenced by the following factors

a.An increase in public expectations of greater protection of health, particularly arising out of fears raised by BSE. A survey in 1997 found that 35% of EU citizens consider that food is not safe.

b.The fact that liability for agricultural products exists under the national laws of Greece, Luxembourg, Sweden, Finland, and now France. Such liability is viewed as being a more efficient compensation system. The absence of uniformity amongst national laws is also not ideal, given that if the Directive were to be adopted now, it would almost certainly not involve derogations since it will be adopted under Article 100a of the EC Treaty which permits qualified majority voting.

c.The absence of irreversible effects being observed on agricultural economies and insurers in general in the Commission’s first report on the Directive, issued in 1995. The Commission assert that there is nothing to indicate a priori that including agricultural products within its scope would have an irreversible negative impact on agricultural economies.

d.Uncertainty as to the scope of the exclusion resulting from the definition of the concept of "initial processing".

e.Imperfect harmonisation of the law governing the liability of farmers, leading to a distortion of competition and impedance of the free movement of agricultural products.

The Commission stated that its objectives in this proposal were to increase the level of consumer protection against damage caused to consumers’ health and property by a defective product and to further the approximation of national laws with regard to liability for defective products started by the Directive. The amendment would not have retroactive effect but was to apply to primary agricultural products and game put into circulation from 1 January 1999.

In short, this measure was aimed at introducing strict liability of farmers for their products. Liability would, in addition, continue to rest with the processor who produces a finished product or with a person who presents himself as if he were the producer of the product by putting his name or trademark on it. Where one or more producers of the same product exist, or it can be said that a farmer and then a processor are responsible for a product which can legally be defined as being two separate products, the consumer has an option of which defendants to sue.

Parliamentary Environment Committee’s proposals for radical reform

The proposal relating to primary agricultural products and game was considered and generally approved by various Committees of the European Parliament. The Committeeon Agriculture and Rural Development noted that agricultural production is largely at the mercy of phenomena over which the producer has no influence, such as the weather and atmospheric and/or water polution, so agricultural producers may legitimately wonder why they should bear liability. However, it accepted that exempting primary products from the system of liabilty without fault no longer seems justified, especially where there would be competitive distortions between agricultural producers in the Union since some Member States had already introduced such liability but others had not. The Committee noted that, since zero risk does not exist, any producer takes a risk in placing a product on the market, which includes the risk of liability, and it seemed unfair that agricultural products should be exempt from this rule. Neverthless, risk reduction through product safety measures is particularly important. The Committee thought that liability should be excluded for damage resulting from natural disasters or other causes of force majeure, and that the Commission should evaluate the impact of an extension of liability on agricultural economies.

So far so good. However, dramatic new proposals were made by the Rapporteur of the Committee on the Environment, Public Health and Consumer Protection, the German MEP Mrs Dagmar Roth-Behrendt, which were beyond the scope of the agricultural issue and were extremely wide-ranging. Her proposals fell under the following headings:

1.Burden of proof

Mrs Roth-Behrendt accepted that, under normal circumstances, consumers have no major problems in proving damage. She asserted that it is harder to prove the defect and/or the causal relationship between defect and damage and consumers rarely have the financial and technical means required to prove a defect, especially in the case of technically complex products such as chemical products or medicaments. The producer has far greater resources available to prove that his products are not defective. She therefore suggested that in "typical situations" it would be possible for a court to infer the existence of a defect or of a causal relationship between defect and damage, shifting the burden of disproving these points onto the producer. The plaintiff would merely have to prove damage.

This proposal encountered wide criticism. A technical point was made that the circumstances in which the presumption might operate (i.e. what would be a "typical situation") were quite unclear. Mrs Roth-Behrendt protested in Committee that she was not trying to reverse the burden of proof, merely to explain the link between that burden and the origin of damage. Critics responded that such a statement is meaningless. Any such rule would clearly encourage claims, since mere assertion by a claimant that he or she had suffered damage would result in liability: industry fears that this would encourage groundless and fraudulent claims.

There were other more basic objections to the proposal. First, the reversal of the burden of proof is contrary to scientific methodology, which is the foundation for the expert evidence necessary to prove, for example, that a particular product caused the claimant’s medical condition. Scientific methodology is based on generating a hypothesis and testing it to see if it can be disproved. Science cannot prove a negative proposition. No amount of data can prove, for example, that a particular drug does not cause limb reductions. It can only prove the falsity of a positive proposition. Thus, reversing the burden of proof would impose on a manufacturer an impossible burden - that of proving a negative.

Second, a reversal of the burden of proof would cause the key test of defectiveness in the Directive, the "safety that one can reasonably expect", to completely disappear, making the standard one of absolute safety. In addition, a legal system must be clear, coherent and consistent. Thus, the rules for liability to pay compensation for damage caused by products must be coherent and consistent with other rules such as liability arising from breach of contract and for activities of services. The primary rule is that a plaintiff must prove all elements of the claim. The alternative, liability based on mere assertion, leads only to anarchy. Reversal of the burden of proof remains anomalous when viewed across the legal systems of the globe and also alongside the rules for contractual, service and other tortious liability, for which the burden remains on the plaintiff.

Industry commented that the proposed change would require a manufacturer to prove that a product which is not in his possession is free from defect when it was used. Under the current regime the principal concern of many manufacturers and insurers is to verify the details of claims. This involves claimants being encouraged to produce supporting evidence as quickly as possible. Litigation systems which do not encourage early verification and production of evidence are inefficient and costly. The proposed amendment would not encourage consumers to substantiate claims; quite the reserve. It would lead to an increase in the number of product liability claims, including those which are unmeritorious or fraudulent. If the amendment were passed it would make the burden of proof requirements in virtually all Member States different between strict liability and every other form of legal liability (e.g. breach of continued supply of services). It was argued that this is unjustified where there is no evidence of significant problems relating to the current burden of proof arrangements.

A further criticism of reversing the burden of proof was that it would not lead to any improvement in consumer protection in the very types of cases for which it had been intended to help consumers prove liability, namely BSE cases. This is because the consumer could not identify the product which had caused his injury - how many of us would know which beef products we had consumed, say, five years ago, or could prove which were infected? Assertion that a particular producer was liable might be entirely arbitrary - and incorrect - and would lead to ridicule of the legal system if manifestly innocent producers had the burden of disproving their (non-) liability.

2.The "development risks" defence

The defence provides that the risk of compensation for injury falls on the consumer, rather than the manufacturer, where the product contains a defect which the producer could not have discovered prior to marketing, based on the existing state of scientific and technical knowledge. The defence is, therefore, of considerable relevance to defects arising out of products which contain innovations. Mrs Roth-Behrendt considered that this defence is the most significant shortcoming in the Directive. She objected that the provision transfers to consumers all the risks connected with the development and introduction of new products. She argued that the producer of newly-developed products, who enjoys a competitive advantage because of the use of new technologies and who may make corresponding profits after successfully putting the innovative product into circulation, should logically also assume liability in the event of his product proving to be defective. She asserted that producers rather than consumers should bear the costs of any damage that occurs. Accordingly, she proposed that Article 7(e) should be deleted.

The issue of the "development risks" defence has been hotly contested between consumers and industry and the arguments are now well known. In short, consumers argue for compensation for undiscoverable damage from risks and industry seeks to protect innovation. As the arguments stand, the issue is decided by government on policy grounds, favouring industry. All Member States (apart from Finland and Luxembourg) have adopted the development risk defence.

3.Financial cap on liability

The Directive currently provides for a cap on total liability of ECU 70 million (Article 16). Mrs Roth-Behrendt argued that where a large number of people are injured, the cap would operate so that individual claimants would receive compensation for only part of their damage or might receive nothing at all. It has long been recognised that the mechanism by which this provision might operate is unclear. She argued that consumer expectation was that total compensation would be payable. Accordingly, she proposed that the cap should be deleted.

Again, the arguments for the financial cap were based on limiting the effect of claims affecting a large number of people which would amount to such a large sum that the available compensation should be rationed. This provision is based on recognising economic and commercial reality by providing at least some certainty. The reality of the position would be that if a multiplicity of claims amounted to a very large total sum, a manufacturer simply might not have sufficient assets itself, nor insurance cover, to satisfy all claims. The result would inevitably be that some consumers would not receive full compensation. The result might also be that the business would fail, leading to unemployment and the unavailability of its other, presumably useful, products. There is a limit to the amount of insurance cover that is available in the insurance market and there is also a limit on the resources which producers are enabled to allocate to purchasing insurance. There has been no suggestion that it would be appropriate to require all companies to hold a minimum level of insurance cover - that provision would act inequitably against small and medium-sized enterprises, who might not be able to afford the premiums. The view of the Commission when the Directive was passed was that fixing a cap of ECU 70 million was at a level that would exceed the level of damages in even the most catastrophic situations then foreseeable. The overall economic effect of the cap, therefore, was to place a limit on the amount of insurance cover which major companies might need to purchase and, therefore, keep the insurance costs, both to producers and within the insurance market, within reasonable levels. On this basis, the cap has a sensible economic effect.

Industry argued that if the threshold for financial liability were to be removed it would create greater uncertainty in the legal framework governing product liability. Against the background of the uncertainty created by this and the other amendments the cost of insuring these risks would be likely to increase significantly. The ability of insurers to price their risks accurately and competitively would be undermined and insurers could well be extremely cautious (both in terms of premium and cover granted) about accepting risks in this area. This would make it more difficult and costly for manufacturers to insure against claims and would ultimately reduce choice of products for consumers.

4.Property damage deductible

Mrs Roth-Behrendt proposed that the lower threshold of ECU 500 for cases of material damage, i.e. property damage, to personal property (Article 9(b)) should be deleted, on the basis that this did not fully compensate damage suffered.

Industry responded that the original purpose behind this provision was to discourage claims for relatively inconsequential amounts, since this might otherwise lead to disproportionate costs for both consumers and producers, and also encourage fraudulent claims which would be harder to verify (and which would be less likely to happen in cases of personal injury than with property damage, thereby justifying a different approach).

5.Limitation

Mrs Roth-Behrendt proposed that the 3 year limitation period (Article 10(1)) should be extended to 5 years. Lawyers commented that this would introduce a not insignificant disruption in harmonisation of national laws, given that general fault liability (negligence) rules in countries such as the UK, Germany and Austria are 3 years. This proposal was dropped when the matter came to be considered by the full Environment Committee.

6.10 year cut-off

The Directive currently bars a consumer’s right to institute proceedings later than 10 years after the product has been put into distribution (Article 11). Mrs Roth-Behrendt proposed that this cut-off should be deleted. Industry argued that the current system of no fault liability established by the Directive represents a significant incremental burden for manufacturers and is highly advantageous to users of products. In exchange for this a manufacturer is provided with the certainty that after a finite period the rights conferred on an injured person under the Directive are extinguished and his liability would cease, provided that his product had not caused damage during that time. This increases the likelihood of being able to insure such risks. For damage occurring subsequently, a manufacturer would continue to be liable under national provisions, where applicable.

Industry asserted that there is no evidence that the current regime is causing problems for consumers. They pointed to various wider policy objections. First, claimants should be, and are, encouraged to act with reasonable speed. Permitting claims indefinitely raises serious issues of proof (reliability and availability of evidence after a reasonable period). Decisions based on unreliable information are unsatisfactory as between litigants and on the basis that the state does not wish its judicial system to be frustrated or brought into disrepute by having to decide cases on inadequate evidence or waste its resources (centralised and those of its individual litigants) on cases where the evidence is inadequate. The amendment would put pressure on companies to retain records longer than they normally would, at great cost. It would also lead judges and states to be criticised for failure to deliver fast and just decisions. In England, the Law Commission recently recognised the force of these various policy considerations in proposing that there should be an unextendable long-stop limitation period. The length of time which is chosen is in some senses purely arbitrary but if the date is to have any advantages at all it has to be accepted that it would be possible that not every claim might fall within it.

7.Mental damage

Claimable damage under the Directive includes that "caused by death or personal injuries" (Article 9). Mrs Roth-Behrendt asserted that mental illnesses caused by defective products, for example as a result of the consumption of defective foodstuffs or mediaments, are not covered. Accordingly, she proposed that mental damage should be claimable. It seems, however, that mental damage may already be claimable, to the extent that it is "caused by personal injury", so the amendment would be unnecessary. Psychological damage is claimable under national law in a number of member states, although examples where this is not so have not been put forward in the public debate on this issue. Industry called for further evidence of the way in which the current provision has been implemented and operated on a national basis before reform is considered. There was some uncertainty over whether the proposal was intended to extend liability from physical injury to mere fear of injury (e.g. fear of infection with BSE). This would be a significant step which raises great difficulties of objective proof and might give rise to unjustified claims.

Comments

It is interesting that the above proposals did not arise as a result of evidence of any practical problem which had arisen with the Directive or its operation. No problems from real cases were cited. No problems were identified at the time of the Commission’s 1995 review. Industry said that the proposals were simply a consumer "wish list" and took no account of the balance which it is necessary to achieve between consumers and industry, nor the effects which would inevitably flow if the careful balance provided for in the Directive were to be upset. It was asserted that that balance would in fact be completely upset if any or all of the amendments were accepted. There would be the spectre of increased litigation and increased insurance costs. The Parliament’s Economic and Monetary Affairs and Industrial Policy Committee voted against all but the agricultural products amendment, on the basis that, both individually and collectively, they would restrain the development of important productive sectors of the European Union’s economy without bringing any substantial benefit to consumers.

The Commission stated that the proposals lacked assessment, in other words there was no data to justify them and their potential consequences remained uncertain. The Commission preferred to proceed by way of an evidence-based approach, by undertaking a careful review of the potential consequences of any reform. Commissioner Monti announced that this would be done within the context of the next 5 year review of the Directive which the Commission has to undertake by 2000. Accordingly, the Commission propose to issue a Green Paper in 1999 which would invite evidence to be submitted so as to form the basis of an open and informed public debate on the Directive.

The European Parliament’s Committee on Legal Affairs and a Citizens’ Rights criticised the draft proposals of Mrs Roth-Behrendt and voted against them on 24 June 1998. They were concerned, first, that the uncontroversial proposals relating to primary agricultural products and game would be seriously delayed. Secondly, they raised a jurisdiction issue by questioning whether Parliament had the right to raise amendments of such a wide-ranging nature or whether they were procedurally inadmissible. Thirdly, the financial implications of these proposals were clearly very serious: if they had been proposals initially put forward by the Commission, the Commission would have had to have put forward studies analysing the consequences, including an assessment of the economic impact, which the Environment Committee was not in a position to put forward. The financial and practical consequences would be camouflaged if these studies were not undertaken and the Legal Affairs Committee called for these analyses to be done.

Further legislative consideration

Nevertheless, the proposals of Mrs Roth-Behrendt were considered by the full Environment Committee on 23 September 1998 and all of them were passed except for the extension of the 3 year limitation period (point 5 above). On consideration by plenary Parliament on 5 November 1998 the following amendments were passed:-

1.the Commission’s proposals for inclusion of agricultural products, including seeds, genetic material, fertilising and plant-protection agents, animal feed etc: the Commission is to issue a report on the effects of this amendment by 1 January 2002;

2.extension of claimable damage to include damage caused by mental injuries;

3.removal of the 500 ECU deduction in relation to property damage;

4.extension of the 10 year cut-off in the case of hidden defects to 20 years: a definition of "hidden defect" was proposed but, somewhat illogically, not approved;

5.increasing the total cap on liability from 70 million ECU to 140 million ECU;

6.a requirement that the Commission should submit a proposal for amending the Directive with a view to its general revision by the end of the year 2000.

All other amendments were rejected by the Parliament, including:-

a.reversing the burden of proof;

b.deleting the development risk defence;

c.removing the total cap on liability.

On 17 December 1998 the Council of Ministers adopted a common position to approve only the original Commission proposal on agricultural products: all of the Parliament’s proposals were rejected. The matter reverts to Parliament for a second Reading.

The rules now provide that in the event of a dispute between the Council and the Parliament over legislative proposals, there would be a period of conciliation (negotiation of a compromise) with the involvement of the Commission.

What factors need to be considered in any reform of product liability law?

In the above analysis, care has been taken to summarise the arguments of both consumers and industry. The debate in the Community institutions has not succeeded in resolving the conflicting arguments. Indeed, there has been very little debate on the merits of the various arguments and counter-arguments. It does no justice to advancing the position of either side merely to ignore the arguments of the other. The essential nature of the arguments boil down, on the consumers’ side, to protection of health and safety and compensation (with some undercurrent of deterrence although this is not as strong a factor as some assert, given the protection afforded by properly observed and enforced product regulation and appropriate post-marketing action) and, on industry’s side, protection of efficient economic interests in the name of prosperity, innovation and employment, all ultimately in the interests of the Union’s citizens. It is unfortunate that this debate can become politically polarised rather than constructive. Given the nature of the issues, the Commission is right to proceed on the basis that assertions and assumptions as to the real effects of this law on product damage, ability to claim compensation, and economic performance need to be studied. This is the approach which it is proposed will be initiated by the Green Paper.

Certain essential truths need to be recognised. First, a system of strict liability compensation for damage caused by products already exists. Second, this system is based on the need to balance different interests of consumers and industry. Individuals may disagree with certain aspects or with how the balance is struck, but one must recognise that the Community legislator has made a decision on striking the balance, which establishes its policy in the light of the many and varied factors. Third, the currently available evidence is that the level of product liability claims across Europe has not particularly altered before and after the Directive, and the level is low, certainly relative to the USA where other factors explain the existence of a litigation culture. Widespread evidence of injuries which are genuinely caused by defective products (or producers’ negligence) which go uncompensated is not quoted: reliable statistics of this are certainly not available. Fourth, there would be implications if the balance were to be altered. These implications might well be serious. Surely the Commission is, therefore, right to proceed on the basis of examining what results would be likely to follow if the balance were altered.

The key question which needs to be answered is: How many claims fail because of a defect in the substantive law in the Directive? In answering this, these questions arise: How many more people with "valid" claims would succeed than do currently succeed if any provision in the Directive were to be altered? Conversely, what would be the adverse consequences of any change? For example, if there were no development risk defence, how many claims would succeed which currently do not (or might be made arising out of a major product incident of the type which might occur periodically) and what would be the costs to industry in terms of products not developed or marketed, increased insurance, profitability, employment and so on?

Whilst the evidence-based approach proposed by the Commission is obviously justifiable, care should be taken in evaluating any statistics which might be produced. There are notorious difficulties over methodology and the relevance and interpretation of research data. For example, assessment of causation is vital in investigating a product safety incident: factors such as misuse, absence of maintenance, age of the product, contributory negligence, assumption of risk, and alternative causative factors must all be excluded before reaching a conclusion that a particular product is faulty. Yet it is all too easy to gain misleading publicity for unverified assertions that a large number of products are dangerous and claims can be made. Mere assertions unsupported by common sense or good research are not convincing.

It is also necessary to consider the severity of alleged injuries. Experience shows that many product claims involve relatively minor trivial injuries which, therefore, do not justify either significant damages or significant costs being spent in pursuing them. The mere assertion that there might be a significant number of claims (which may well relate only to particular product sectors) would not justify concern leading to major law reform and imposing large costs on industry (if this were to be the result) if the injuries concerned are not serious. The principle of proportionality must apply here, as anywhere else.

Conclusions

Major law reform initiatives in product liability and product regulation often follow public and governmental concern over the implications of major incidents. The thalidomide phocomelia injuries of the 1960s led ultimately to the product liability Directive in 1985 and spurred the introduction of comprehensive medicines regulation. The BSE virus injuries of the 1990s led directly to the latest amendment on product liability and to reform of veterinary and food regulation. Opportunistic proposals were made by Mrs Roth-Behrendt to radically alter the product liability Directive but failed and, instead, a policy of rational study and evidence-based decision-making is now to be applied to examine in a public and transparent way whether any further amendments are justified. This process is not based on rhetoric. Given the undeniable existence of a strict liability system, the balance currently struck between the interests of consumers and producers, the absence of evidence of a large number of injuries or claims, and the assertions made that changes to it could have serious adverse consequences, it is suggested that consumers, manufacturers, suppliers, insurers and governments would indeed be best advised to justify any major changes and show that they would produce benefits which clearly outweighed their costs. The challenge to all is: prove your assertions for change are justified.

Christopher J S Hodges

21st December 1998

Christopher Hodges. Partner, Cameron McKenna, Solicitors, London; editor of Product liability: European Laws and Practice; author of the Commission’s 1995 study on the Product Liability Directive.