In contracts between companies relating to products such as manufactured goods (continuous sales contracts, manufacturing consignment contracts and OEM contracts), there are often provisions regarding the distribution of liability (including the exemption and reduction of liability) between the contracting parties when product liability for the product is called into question by a third party.
Such provisions relate to the interests of both parties, but are often particularly important to contracting parties located downstream of the manufacturing and distribution processes.
That is, under the Product Liability Act, pursuing product liability from a certain manufacturer is only possible if the claim that it had an inherent defect that caused damage to the product when the manufacturer put the product into distribution (usually at the time of shipment) is proved. If there is a defect in a product (including parts) shipped by the upstream manufacturer, the defect will likely be inherited by the products manufactured or processed by the downstream manufacturer using it, although the opposite is not true.
Therefore, the victim usually selects, as a partner for pursuing responsibility, a manufacturer located as low as possible on the downstream side of the manufacturing and distribution process primarily among manufacturers who are expected to have a certain degree of ability to compensate.
In this case, it is legally possible for a manufacturer who has a liability to the victim for the products to exercise the right to indemnity against the upstream manufacturer. Legal structures may include the non-performance of obligations to supply conforming articles pursuant to the contract, tort, and product liability.
However, no matter which legal structure is adopted, there is no guarantee that the compensation will be granted. Under the Product Liability Act, a defect can be affirmed if the product lacks the safety normally required, and the burden of proof for the defect is relaxed to some extent, but it is the victim who suffered direct damage from the accident that will receive the greatest benefit. In most cases, the burden of proof of claim is raised to a greater or lesser extent when the manufacturer whose product liability is called into question is reimbursed.
In short, the contracting parties located downstream of the manufacturing and distribution processes are at a disadvantage from the beginning regarding product liability to a third party, and it is especially important to establish provisions on product liability for the downstream parties and reduce their liability.
For example, if the downstream party is not involved in any manufacturing or processing (in the case of importers and label manufacturers), the party should aim to get them to agree to fully reimburse the other parties for any design or manufacturing defects.
In addition, if the downstream party receives the supply of Part A from the other party and manufactures products using it, at the very least the party should aim to get them to agree to fully reimburse to other parties for any defects attributable to Part A.
However, if Part B was used in the product in addition to Part A, and it is unclear to the end whether the manufacturing defect is caused by Part A or Part B, it is often difficult to reimburse the other party even if an agreement like the one above is used. Other risk mitigation measures, such as purchasing product liability insurance, should also be considered.
Since a mere vendor/distributor is not a responsible entity in the Product Liability Act, in general there are no provisions regarding product liability in vendor agreements or distribution agreements. (However, this is only true of the Product Liability Act in Japan. For example, in the United States, mere vendors are sometimes included in the responsible entities.)