Chinese Drywall Maker Defaults in US Lawsuit

This Highlights The Product Risks, And Legal And Contractual Problems

Last month a US District Court judge in New Orleans issued a default judgment against a Chinese manufacturer which failed to respond to a lawsuit. Taishan Gypsum Co. Ltd., a Beijing company controlled by the Chinese government, neglected to show up in court on September 25, 2009. They are major makers and suppliers of allegedly defective drywall used extensively in home construction in Florida and other states.

The flood of problems involving products manufactured in China is causing US customers of Chinese companies to review their legal remedies. They are finding that legal redress is hard or impossible to achieve.

The product problems are by now well known to those who do business world-wide. Just a few of the other industries and product types affected are food products, toys, medical devices and pharmaceuticals. Defects in the products are showing up very frequently causing the customer company to recall their end product, to suffer product liability claims and to suffer damage to their reputations in the marketplace.

The solutions to this problem are few and are not often satisfactory.

Most buyers of Chinese product have a contract with their supplier which may contain remedies including indemnification of the buyer by the seller. The problem, though, is proving to be enforcement of the contract. Suing in the US is often a waste of time as the target company will generally have no assets here, and will probably not respond to the suit, Suing in China has its own problems, as the plaintiff is then at the mercy of the Chinese courts which may be corrupt at worst and non-responsive at best.

One suggestion we have always made to our clients is to have the contract subject to Hong Kong law, with Hong Kong as the venue for litigation. The Hong Kong legal system is westernized and effective. Also, there is a treaty between mainland China and Hong Kong facilitating enforcement of judgments rendered in the Hong Kong courts. This treaty also applies to arbitration awards, and arbitration in Hong Kong may be the most effective course of all.

We are watching the development now of an insurance product that might have an application to this problem. Many or most Chinese companies have not carried products liability insurance, but they are being pushed by their larger customers to purchase it. In reaction to that we’ve seen the emergence of the Vendor Influenced Products Liability (VIP) insurance product. The uniqueness of this kind of policy is that the terms and conditions can be influenced if not controlled by the buyer, and this should include the usual “additional insured” status for the buyer where appropriate. The reason for being of this product is that the influence of the (US) buyer on the policy will make the terms comply with western standards for products liability insurance, and some standardization will be the result. This is brand new and we will be following its progress.

Oct 18, 2009