[According to the Law of Expediency] 73. Series on Cosmetic OEM/ODM Contracts Part 2: Liability for Product Defects

*This content was translated by AI.

For cosmetic brands, defective batches are not merely inventory losses.

Home shopping broadcasts are halted, and reviews are flooded with malicious comments. Yet, in reality, it is difficult to have all damages recognized by a court.

In an incident where the contents of a UV-blocking functional cosmetic hardened, halting sales, expert analysis confirmed that the cause of the defect was due to the manufacturer's incorrect formulation ratio. A lower court acknowledged liability for breach of contract but calculated the damages based solely on the value of the defective inventory at approximately 332.51 million won, then limited the compensation to 160 million won after considering various circumstances. Indirect manufacturing costs and damages from brand image deterioration were not recognized at all.

The burden of proof is even higher. In a case where a client provided both the contents and containers, while the manufacturer was only responsible for filling and packaging, a mold-related claim arose. The court ruled that merely proving the existence of a defect is insufficient; the client must also prove that the defect originated from the manufacturer's work. The client's own test results were deemed lacking in neutrality, and since fungi were detected even in the contents provided by the client, the client's claim was dismissed.

However, if the manufacturer's process flaw is clear, the outcome differs. In a case where improper tube sealing caused leakage that contaminated outer cartons, the manufacturer's liability was recognized, and compensation covered the costs of producing tubes and cartons as well as manufacturing the contents. As this involved an export transaction, the final buyer's full inspection results became key evidence proving the defect. Including a clause in the contract that recognizes third-party inspection results as definitive proof of defects can significantly reduce the burden of proof in such situations. Another approach is to explicitly specify in the contract the scope of compensation for ancillary costs such as recalls, remanufacturing, and air freight charges.

Regarding product defects, victory or defeat hinges not merely on whether a defect existed, but on who can prove its cause. Preparation for such proof must begin not after an incident occurs, but on the day the contract is drafted. Specific tasks should also be defined at the contracting stage. It is advisable to actively consider imposing obligations on the manufacturer to inspect and notify of non-conformities upon receipt of raw materials, predefining procedures and cost-sharing for expert appraisal when the cause remains unclear, and requiring quality inspection certificates by batch number as a delivery condition.

And one more point: a clause stipulating predetermined damages. Proving brand value depreciation after an incident is practically impossible. It is far more realistic to predefine specific monetary figures for actual costs incurred in recalls, disposal, and rework, as well as losses from sales suspension periods. Additionally, manufacturers' contracts often include clauses limiting liability; these must be carefully reviewed. A single line stating that liability is capped at the value of the goods may, in some cases, block claims even if they involve tortious conduct.

However, considering that it is practically difficult for clients to successfully negotiate all clauses favorably against large manufacturers, it would be advisable to prioritize only essential clauses and reflect them in the contract.

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*This content was translated by AI.