Fipronil egg scare: implications for corporates

On 7 August 2017 the Food Standards Agency (FSA) and Food Standards Scotland (FSS) announced that 21,000 eggs imported into the UK from farms in Belgium and the Netherlands were contaminated with the pesticide Fipronil.  The number of contaminated eggs imported into the UK is now estimated at 700,000 and around 70 different products containing eggs potentially contaminated with Fipronil have been recalled. Investigations into the incident in Europe are continuing.

The cost of the recalls has yet to be quantified but the losses (which will include the cost of the product recalls, business interruption losses, damage to reputation, and the settlement of any third party compensation claims) may be significant. Some parties will be looking to recoup their losses from other parties down the supply chain and, where relevant, their insurers.

Civil Liability

Commercial disputes

Commercial claims are likely; producers and retailers who have suffered financial losses as a result of the product recalls are likely to pursue claims against suppliers for breach of contract.  Contractual liability may arise from breach of express terms in the contracts for supply (in the form of a warranty or guarantee), or implied terms under the Sale of Goods Act 1979 (as amended) and the Sale of Goods and Services Act 1982 (as amended).  These imply terms as to the description, quality and fitness for purpose of products into all contracts of sale and supply.  Fipronil is not authorised in the EU for use on farm animals destined for human consumption and so despite the low health risk, arguably any eggs produced from chickens treated with Fipronil are not fit for purpose.

Contractual liability may also attach to pre-contractual statements as to the qualities of the product.  Such statements can be incorporated into the contract as terms, or form the basis of a separate contract between the buyer and the seller or the buyer and a third party.  The buyer will be able to claim damages for breach of contract and, in some cases, reject the goods and terminate the contract.

Consumer claims

The European Chemical Agency information card for Fipronil identifies the neat substance as a serious health hazard which is fatal if inhaled, toxic if swallowed, toxic in contact with skin, and causes damage to organs through prolonged or repeated exposure, as well as being harmful to the environment.  However, due to diluted quantities likely to be present in egg products, the FSA has stated that “it is very unlikely that there is any risk to public health from consuming these foods”.

While consumers are not party to the relevant contracts of supply, they will have contracts with the retailer from whom the product in question was purchased.  Absent any risk to health however, there is unlikely to be any loss on which to found a claim for breach of contract.

Consumers may seek to pursue claims in tort against the producers of the contaminated eggs. Under English law, manufacturers owe a duty of care to a class of persons to whom damage (meaning personal injury or property damage) is foreseeable if a product is defective.  The standard is tested objectively and the manufacturer will not be at fault if a particular danger could not have been anticipated.  Given that Fipronil is not authorised for use on food-producing farm animals manufacturers are unlikely to be able to suggest that any damage was not foreseeable.  However, due to the low health risk associated with eating the contaminated eggs, there is unlikely to be any serious risk of personal injury litigation.

Given the low likelihood of personal injury, consumers are also unlikely to have claims under the Consumer Protection Act 1987 (as amended) (which transposes the Product Liability Directive (85/374/EEC and 1999/34/EC) into UK law).  This imposes strict liability on producers, persons who hold themselves out to be producers, and importers into the EU for damage caused by defective products and allows consumers who are injured or suffer damage as a result of defective products to sue for compensation without having to prove that the producer was negligent.

Criminal liability

Product safety

Criminal liability may arise under the Food Safety Act 1990 and related regulations including the General Food Regulations 2004.

It is not suggested that UK egg producers have used Fipronil themselves in breach of regulation.  However, it is an offence under the 1990 Act for any food business to either sell, to the purchaser’s prejudice, food which is not of the substance demanded (ie free of harmful pesticide residues), or to render food injurious to health (such as by using a contaminated egg ingredient).  This applies to businesses anywhere along the supply chain from importers to wholesalers to retailers and catering businesses.  Environmental health departments of local authorities enforce food safety regulations and have powers to issue enforcement notices to prohibit sales or shut down production processes where necessary.  Successful prosecutions can result in fines, compensation orders for damage caused, as well as up to two years imprisonment for officers found personally liable and their disqualification as directors. It is also an offence under the 2004 Regulations to place unsafe food on the (EU) market.

Again, if the FSA’s conclusions are correct that there is little risk of physical injury to consumers, criminal liability is unlikely.

If the levels of Fipronil do however turn out to be higher than expected and potentially harmful, food businesses accused of an offence may nevertheless be able to establish that they took all reasonable precautions and carried out all due diligence to ensure compliance.  Part of the defence could involve showing that another person (such as an identified supplier of the contaminated egg product) was at fault or provided misleading information which was relied on.  However, in order to avail themselves of this defence, food manufacturers must perform their own reasonable checks on the food or show that they reasonably relied on checks made by suppliers; and that they had no reason to suspect that they were committing an offence.  Food manufacturers would therefore be wise to routinely ask suppliers to provide evidence of their own and egg producer’s compliance checks and assurances.

Retailers of others branded food goods are not required to carry out checks on the food they stock but must still show that they could not reasonably have been expected to know that they were committing an offence.  So for example continuing to stock products known or suspected to be harmfully contaminated once alerted to the issue may scupper a retailer’s ability to use the due diligence defence.  If these due diligence procedures have not received full attention to date, now may be the time to review and revise company policies.

Even if charges are never brought, the disruption of an investigation with raids on premises and the seizure and potential destruction of stock can be considerable.  Business under investigation should note that there is also an offence of failing to give reasonable assistance to the regulator.

Insurance position

Product liability insurance

Product liability policies are principally concerned with damage caused to persons and other property by a defective product that is supplied by the insured.  The basic indemnity provided is for protection of the insured against legal liability for or in respect of bodily injury, illness or disease or physical damage to property not in the custody or control of the insured which is caused by the product.  In this regard, the policy reflects the law of tort by requiring some form of external physical loss or damage.  In English law “damage” usually refers to a changed physical state to external property and the relevant alteration must be harmful in the commercial context (Pilkington United Kingdom Limited v CGU Insurance Plc [2004] EWCA Civ 23).  A defect or deterioration in the commodity or product itself is not “damage”.

Product liability policies typically exclude the costs of recalling, replacing or repairing the product itself and any liabilities covered by contracts or agreements.  Accordingly, claims under such policies are generally restricted to liabilities in tort.

Product recall insurance

The FSA has issued a recall of around 70 different products which contain more than 15% of the contaminated eggs in their final products.  Product recall policies generally cover the insured’s legal liability for the costs of removing, recovering, repairing or replacing a product which is defective or dysfunctional; or financial losses incurred by customers or third parties which arise as a result of product impairment (i.e. a product failing to perform the function for which it was manufactured, designed or sold).  They also typically cover the costs and expenses incurred by the insured which are associated with the cost of recalling its own products (which may also include business interruption losses and brand restoration costs).  Given that Fipronil is not authorised for use on food-producing farm animals it is likely that products containing the contaminated eggs will be considered defective or dysfunctional.

Where the cover is for the costs and expenses incurred by the insured in respect of a product recall, product recall policies will often stipulate that the recall must be necessary in order to prevent the prospects of legal liability arising from the use or consumption of the product.  While, as noted above, the risk of physical injury arising from consumption of the contaminated eggs is low, the FSA has deemed recalls necessary due to the fact that Fipronil is not authorised for use in food-producing animals.

Some product recall policies will contain more stringent limitations which specify that there must be an actual or imminent threat of danger, injury or harm associated with the product’s use.  In some cases insureds can find themselves in a position where they are exposed to uninsured losses where a precautionary recall has been carried out in the absence of actual or imminent danger of injury or harm.

James Allsop
James Allsop
Senior Associate, dispute resolution
Email | Profile
+44 20 7466 2588

Leave a Comment

Filed under Insurance, Product recall

Comments are closed.