Unearthing Product Liability Roots
Feb 28, 2017
Consumers are increasingly in search of natural and safe products resulting in the consumer demand for organic products seeing a sharp increase over the past 15 years. Driven by this demand, the production and trade in organic commodities has grown proportionately, resulting in evermore claims relating to organic products.
Insurers had instructed us to conduct an investigation into the liability issue of a Dutch trading company, it involved a shipment comprised of organic sunflower cakes from a former Eastern bloc country and destined for the animal feed industry. The shipment in question originated from a company that had the necessary organic certificates and a certified biological farm. The pre-shipment, loading and unloading samples taken by reputable experts in the field, had been analysed for residues of pesticides earlier that year and had been found to be in order.
The insured, a Dutch trading company that supplies organic products, was however held liable by a mixed feed company in Germany. Upon further inspection, it was found that the feed for laying hens produced by the mixed feed company contained residues of insect pesticides and a fungicide, which could be traced back to the sunflower cakes supplied to them, originating from the insured. The mixed feed company reported the matter, in accordance with European regulations, to the Food and Consumer Product Safety Authority of Germany. The relevant authorities of all EU Member states were informed via the EU’s reporting system. As a result, biological mixed feed companies in the Netherlands, Germany, Belgium and France also lodged claims against the insured.
The insured was ordered by the competent Dutch authorities (SKAL) to block the supply of sunflower cakes in stock. The insured’s clients were informed that they needed to stop the distribution of sunflower cakes in question and any mixed feed that included this product had to be recalled from the end users. The end users of the organic mixed feed were not allowed to bring any of their products; eggs, milk or meat, to market as organic products. The essence of organic products is that the end products are not allowed to contain pesticides. The reason the Food and Consumer Product Safety Authorities prohibited the sale of these end products was because consumers needed to be confident that the animals used to produce eggs, milk and/or meat had been fed organic feed, even if there is no danger whatsoever to public health. In this case, there was no examination of whether there were in fact residues of pesticides in the eggs, milk or meat.
Due to the international nature of this claim and the various juridical systems implicated, substantial work was required to examine the applicable legal frameworks and contractual relationships between all parties involved. By way of example, the company in the former Eastern bloc, was subject to Grain and Free Trade Association (GAFTA) conditions with arbitration seated in London, the German clients were governed by the conditions for biological products of Deutsche Getreidehandel with arbitration in Hamburg and for the Dutch clients, the comparable Dutch Trade in Grain and Feed material (CNGD) conditions applied with arbitration in Rotterdam.
We conducted further investigations at several of the insured’s clients, including that of the first German mixed feed company who had raised a claim against the insured, as well as several laying farms to which the mixed feed company had supplied feed for laying hens. It was found that the sunflower cakes supplied to this German mixed feed company alone represented a total claim of more than EUR 2.5 million. The actual research in this context involved a traceability investigation, assessing the quality systems of the mixed feed company and factory farms (German KAT quality system), as well as obtaining samples for analysis from the mixed feed company.
The root cause of most of the damage in this case was as a result of the German Food and Consumer Product Safety Authority’s decision to prohibit the factory farms from selling affected eggs as organic eggs, during a six-week period. This decision was not deemed to have any support under EU or German legislation or regulations, henceforth the German mixed feed company and laying farms filed an objection against this decision; regrettably the decision was upheld in the appeal.
The financial consequences of this decision were considerable, as this claim concerned ten companies with a total of more than 900,000 laying hens, the eggs of which were thus not to be brought to market as organic products for a period of six weeks. Apart from the price differential between organic and non-organic eggs and different packaging that would be required, the affected businesses were also further impacted as they could not bring these eggs to market via retail companies since the colour of the affected eggs’ yolks were different to those of conventional eggs. To mitigate losses, the only solution was to sell them as industrial eggs and have them processed into egg powder and other by-products at a considerably lower price point.
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