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Global sourcing has lots of exciting potential. The recent entry of Alibaba.com onto the global stage along with others such as the FITA Buy/Sell Exchange, Euro Pages and Global Sources seems to presage a new age of borderless commerce.

However, on a bad day, that also looks like caveat emptor on steroids.  Small business owners worry about the genuineness of certifications, whether products are manufactured according to specifications, and the scariest question of all.  Who is liable if an imported product harms the end user?

You are, Mr. Importer/Distributor/Retailer, especially if you are sourcing from the Far East, because you are very likely the only party reachable by U.S. Courts in a product liability suit.  So, what can you do?  Since isolationism is not really an option, the solution may lie in careful choices of suppliers and products, product liability insurance and contractual indemnification agreements.

Vet the Supplier and the Product

Of course, it would be great to have a long-standing relationship with a trusted supplier, but that piece of advice presumes that you don’t need any advice. Some search sites, such as Global Sources claim to research the suppliers they work with, others such as Alibaba.com, are simply directories. This is a service that some import or customs brokers offer.

The more conservative advice is also to stay away from products where potential liability may be particularly high:  medical devices, consumables (including animal food) and anything relating to children.

Product Liability Insurance

Having been as careful as possible about supplier and product, step two for the importer is to buy product liability insurance. This is likely to be expensive because insurers assume that there will be no other legal recourse, either in this country, or the country of origin. As a way of providing additional protection and possibly reducing the cost of this coverage, the importer should probably try to negotiate a contractual provision requiring the supplier to indemnify the importer for any legal liability arising from defective or dangerous products.

Of course, that too may be unenforceable, so at risk of going all “belt and suspenders,” the importer may require the supplier to secure the indemnification agreement with product liability insurance purchased by the supplier. This is not a substitute for the importer’s insurance, but a supplement to it. The supplier should be asked to provide a U.S. policy, rather than one from the country of origin to ensure that the coverage matches the liability that could result from the application of U.S. law.  A U.S. insurer will also review the safety record of the supplier as part of the underwriting process.

Purchase Contract

Checking on the reputation of your foreign supplier is a great idea, when and if there is the opportunity to do that, and your business should carry liability insurance, in any event.

The contract you negotiate, complete with indemnification agreements, and the specifications for the product are more realistically your first lines of defense. The agreement should provide you with the opportunity to inspect and reject defective or non-conforming goods before paying for them.

There are limits, however, to what even a thorough inspection can detect. When a defective product hurts a consumer and the consumer sues,  product liability insurance can come to the rescue. It is particularly important when dealing with overseas suppliers. Reducing risks makes global commerce an even more appealing choice.

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