Evolution of the automotive sector – evolving safety and liability
November 2022 | TALKINGPOINT | SECTOR ANALYSIS
Financier Worldwide Magazine
November 2022 Issue
FW discusses the evolution of safety and liability across the automotive sector with Miriam Richter, Florian Hoffmann and Benjamin von Bodungen at Bird & Bird LLP.
FW: How would you describe evolving safety issues in the automotive industry? What aspects are presenting the greatest challenges?
von Bodungen: Very recently, European Union (EU) type-approval law has taken a quantum leap forward in terms of vehicle safety. As of 6 July 2022, Regulation (EU) 2019/2144 regarding the general safety of motor vehicles and the protection of vehicle occupants and vulnerable road users is mandatory in all EU member states. With certain transition periods, in future all motor vehicles will have to be equipped with additional safety-relevant features, such as advanced emergency braking systems, intelligent speed assistance, emergency lane‐keeping systems, driver drowsiness and attention warning, advanced driver distraction warning and reversing detection. These safety systems are considered to have a high potential to considerably reduce casualty numbers. What is more, the requirements specified in UN Regulations 155 and 156 will become an indispensable part of the type-approval process going forward. These global technical regulations set demanding standards for manufacturers when it comes to establishing and maintaining processes for combatting cyber risks and updating vehicle software.
“Players in the automotive industry need to think much more holistically and across the entire product lifecycle.”
FW: What key liability considerations do automotive companies need to make when evaluating product safety concerns – from inception through to development and commercialisation?
Richter: When evaluating product safety concerns under German law, automotive companies must keep in mind strict liability under the Product Liability Act and fault-based producer liability in civil law, obligations under public law in accordance with the Product Safety Act and the Market Surveillance Regulation (EU) 2019/1020, and criminal liability. Manufacturers are obliged to organise their operations in such a way that, as a matter of principle, only safe products are placed on the market and, wherever a source of danger arises due to faulty manufacturing, to ensure that – as far as possible – this does not come to fruition. Manufacturers therefore have a duty of care both when the product is placed on the market and after it has been placed on the market. Automotive companies need to consider four categories of possible defects: design defects, manufacturing defects, instructional defects and product observation defects. In this context, the general safety expectations are of enormous importance.
Hoffmann: To meet the general safety expectations, it is essential that automotive companies at least comply with the statutory product requirements and the relevant technical standards. In particular, ISO 26262 should be mentioned here, but original equipment manufacturers (OEMs) regularly demand that their suppliers comply with this standard. However, technical standards like ISO 26262 only represent a minimum standard. Compliance with technical standards is therefore not necessarily sufficient to exclude liability. This applies, for example, if the technical development or scientific findings have gone beyond the standards or if hazards have become apparent during use of the product which have not yet been taken into account in the standards. The manufacturer is liable if the defect was recognisable and avoidable during construction. Hence, we recommend that automotive companies adopt active product safety management that goes beyond compliance with statutory product requirements and technical standards.
FW: To what extent are you seeing original equipment manufacturers (OEMs) requesting that their suppliers designate product safety representatives in order to minimise risks during the development and production process?
Richter: The requirement to appoint a product safety representative (PSR) usually comes from contractual obligations with OEMs. German OEMs began requiring appointment of a PSR throughout the supply chain several years ago. Such requirements often refer to chapter 4.3.2 of the International Automotive Task Force (IATF) 16949, which allows further customer-specific requirements for the quality management system. Since the approach has met with the approval of the German Association of the Automotive Industry (VDA), the VDA recommends the designation of a PSR in its VDA Red Volume ‘Product Integrity’, which was published for the first time in November 2018. In the latest volume, published March 2021, the VDA specifies the role as product safety and conformity representative (PSCR). According to the VDA, the aim is to create a communication network both in-house and throughout the automotive supply chain that serves to exchange early warnings and lessons learned.
Hoffmann: With this in mind, more OEMs are requesting that their suppliers designate a PSR. For example, some OEMs stipulate in their purchasing terms and conditions that, in order to ensure product safety and avoid product liability cases regarding goods, the seller must appoint a product safety officer in its company for each production location and designate this individual as the key contact in the business-to-business portal supplier database before the first delivery. Other OEMs continue to leave this to the suppliers. However, there are also suppliers that demand appointment of a PSR from their sub-suppliers. According to the quality requirements of a major German tier 1 supplier, for instance, a PSR must be available at all production sites of tier 2 suppliers that produce for the tier 1 supplier. So, the requirement to appoint a PSR is becoming increasingly significant in the automotive supply chain.
“The requirement to appoint a PSR is becoming increasingly significant in the automotive supply chain.”
FW: What implications might the designation of a product safety representative have for potential regulatory, civil and criminal liability, both for the supplier and for the designated employee?
Richter: Under German law, in civil law terms, appointing a PSR may increase the chances of a supplier defending itself against potential product liability claims by affected third parties if it can prove the PSR carried out their duties. We therefore recommend that suppliers keep detailed documentation to log these activities. Moreover, designating a PSR may have an impact on a manufacturer’s civil liability within the supply chain toward the OEM. If the OEM can demonstrate a proper quality management system throughout its entire supply chain, this can help to exclude liability vis-à-vis an affected third party, at least for manufacturing defects. If the OEM succeeds in this defence, there is no ground for recourse against its suppliers. Insofar as the OEM is held liable, it will typically try to take recourse action against the supplier. In a legal dispute with an OEM, it would benefit a supplier to show it had appointed a PSR. Regarding the civil liability of a PSR, this becomes practically relevant if the automotive supplier tries to take recourse against its employee for the damage. Like other employees, the PSR is generally only fully liable to its employer in the case of intent or gross negligence, and proportionately liable in the case of ordinary negligence, in accordance with case law principles around internal compensation of damages.
Hoffmann: Assigning responsibility for product safety to a PSR may serve as a defence for a supplier in regulatory and criminal proceedings for product-related violations. If a faulty product leads to the injury or death of consumers, negligent bodily injury or negligent homicide is regularly considered, but intentional bodily injury or even manslaughter cannot be ruled out immediately. This kind of individual criminal liability usually falls on the supplier’s legal representatives but can also include the PSR if criminal law is violated within the scope of the representative’s duties. The company itself is not individually criminal liable. Nevertheless, it can be fined for management misconduct.
FW: What essential advice would you offer to automotive players across the supply chain in terms of ensuring the safety and regulatory conformity of their products after being placed on the market?
von Bodungen: Players in the automotive industry need to think much more holistically and across the entire product lifecycle. For instance, cyber security and software update management processes prescribed at the international level by their very nature extend beyond the point of placing a vehicle on the market. There is also a tendency for the legal specifications of components in connected and automated vehicles to no longer only focus on the time when the product is put into circulation. In this vein, the new law on autonomous driving in Germany requires manufacturers to demonstrate to the competent authorities over the entire operating period of a self-driving vehicle that its electronic and electrical architecture is secured against hacking. Finally, it is worth noting that the increasing availability of vehicle data in real time means suppliers and OEMs may be able to identify potential causes of damage in advance. This in turn forces them to take preventive measures if they want to avoid liability for breaching their product monitoring obligations.
“Designating a PSR may have an impact on a manufacturer’s civil liability within the supply chain toward the OEM.”
FW: In your opinion, what safety and liability issues are likely to shape the automotive sector in the years ahead? What is the direction of travel for related legal trends?
von Bodungen: Vehicle connectivity and automation will increasingly shift the focus toward cyber security, which, at the same time, will become more and more essential to the competitiveness of suppliers and automakers. From a liability law perspective, the arrival of new players from the IT and software industry is putting traditional approaches to liability in the automotive industry to the test. The ever-increasing interconnectedness of components in a vehicle, in the backend or even in the cloud, creates novel but still unsolved issues from a liability law perspective, when it comes to localising the root causes of damage and assigning responsibility. Another problem is that, according to the prevailing view, not all software products are covered by the European Product Liability Directive. In this respect, ongoing revision of the Directive may result in appropriate changes. Finally, the EU is currently establishing a legal framework for artificial intelligence (AI) products in general. Connected and automated vehicles could potentially be included in this regulation, which would raise serious follow-up questions if established liability concepts in the automotive industry fall victim to a general liability regime for all AI products.
Miriam Richter is a counsel in the commercial and automotive teams of Bird & Bird in Munich. Working on commercial law matters with major clients from the automotive supply industry, she is specialised in contract and product liability law and represents clients in upstream and downstream supply chain matters, including warranty, termination, supply, price increase and cost recovery disputes. She has a particular focus on disputes in relation to global recall and field actions, and the recourse along the supply chain. She can be contacted on +49 (0)89 3581 6510 or by email: miriam.richter@twobirds.com.
As a partner and a member of Bird & Bird’s commercial and automotive teams in Hamburg, Florian Hoffmann advises international and domestic clients on a wide range of commercial law matters. He represents clients with regard to complex commercial contracts, trade and distribution law and commercial dispute resolution. Mr Hoffmann’s major focus is on product liability and supply chain issues. He can be contacted on +49 (0)40 46063 6000 or by email: florian.hoffmann@twobirds.com.
As a partner in the finance and financial regulation practice group of Bird & Bird, Professor Dr Benjamin von Bodungen has extensive expertise in the cross-border financing and collateralisation of mobile equipment. His practice also encompasses national and international transport, traffic and logistics law, with a special focus on type-approval and liability aspects of autonomous driving. He can be contacted on +49 (0)69 74222 6000 or by email: benjamin.von.bodungen@twobirds.com.
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