The impact of the Chinese milk crisis on European business

30-Sep-2008 - Last updated on 01-Oct-2008 at 11:16 GMT

As the contamination of Chinese milk sends ripples through the global food industry, Eversheds lawyers Richard Matthews and Elizabeth Hyde lay out the due diligence procedures that food companies must go through when sourcing from outside the EU.

The ramifications of the melamine contamination incident continue to reverberate beyond China. The food sector is notorious for its complex, global supply chain networks.

Chinese milk products have been banned by various countries and there has been withdrawal of various chocolate products in Hong Kong and the UK. The European Commission has asked EU Member States to carry out checks on all products imported from China that contain over 15 per cent milk. Trace levels of melamine have been found in chocolate and biscuit products on sale in Indonesia.

Other companies are going to extreme lengths to protect their brands - for example a major food retailer took out a full page advertisement in Singapore’s Strait Times newspaper to reassure its customers that its biscuit products did not contain milk ingredients sourced from China.

China has a poor recent track record when it comes to product safety. Last year saw major international recalls linked to China involving lead paint in toys, toothpaste and pet food. The latest scandal will cause further embarrassment to China, all the more so because it arises as a consequence of deliberate contamination.

Necessary checks

What checks should food companies run when sourcing ingredients from outside the European Union? It is crucial that thorough due diligence is carried out on any foreign manufacturer or supplier.

This concerns not just understanding first hand the supplier’s quality control procedures, insurance arrangements and previous claims record, but also consideration of the experience and integrity of management.

Would the supplier be able to absorb the costs of any future changes to the quality procedures?

Does it have the assets to meet a significant claim arising out of a product incident?

Although all background sources of information should be reviewed, there is no substitute for a visit to the manufacturing site to meet the management and owners of the supplier and to understand the financial and technical risks involved.

Importers’ protection

Importers of food products or ingredients into Europe should also ensure that they have the necessary contractual protection. A detailed specification should be agreed, including the testing methodology to be undertaken.

Advance thought should also be given to areas of developing science – either in terms of identifying new contaminants or methodologies which detect substances at smaller concentrations.

However, the fact that a particular contaminant is not mentioned does not mean that the importer is without remedy.

Under English law, any product supplied must be of satisfactory quality and reasonably fit for purpose. In order to form the basis of a claim for breach of contract, the level of contaminant need not present a safety risk.

No importer would expect any level of melamine to be present in milk powder or, to take other examples in supply chain litigation in which we have been involved, trace levels of benzene or azo dyes to be present in food ingredients.

Nevertheless, the importer should seek an express warranty that the product complies with European food regulations and legislation in all Member States in which the end product is marketed.

The contract should also provide for a right to appoint a local agent or representative to conduct an audit of the foreign premises at short notice and a right to be informed in advance of any changes to the manufacturing process.

It should oblige the supplier to make available test results and batch information on demand. This is particularly important as companies which do not operate in the European Union are not caught by the General Food Regulations (Regulation No. 178 of 2002) which provides for one up, one down traceability and sets minimum food safety standards.

Risk of prosecution

It is the importer who is primarily responsible for compliance with food legislation and faces the risk of prosecution in the event that product is unfit for consumption.

Faced with a food prosecution, an importer would need to show that it had taken all practicable steps and exercised all due diligence to avoid commission of the offence.

In practice, reliance on a statement of conformity from a supplier is unlikely to suffice. Consideration should be given as to what tests can be carried out to corroborate test results on a periodic basis.

Where companies do not have in-house facilities, a full list of official UK Food Control Laboratories are set out on the Food Standards Agency website.

Carrying out these checks should not be seen as disproportionate as once lost brand loyalty and market share can be extremely difficult to regain.

Richard Matthews and Elizabeth Hyde are experts within Eversheds’ Food Sector Group. Eversheds has considerable experience in advising on product recalls. Richard Matthews heads Eversheds’ pan-European product liability practice and was involved in the claims arising out of the Sudan 1/Para Red and benzene in fizzy drinks contamination.