What product liability exposure comes with buying a business?

Product liability is the risk that someone is hurt or loses property because of a product the business made or sold. When you buy the business, the question is which of those claims, including ones about products sold before closing, can land on you. The answer starts with how the deal is structured.

Shares versus assets

Treadstone Law, an Ontario law firm, writes that in a share purchase, claims tied to pre-closing conduct are generally claims against the corporation you now own, and that in an asset purchase the general rule is that liabilities not expressly assumed stay with the seller. It also writes that courts have, in some circumstances, allowed claims to reach a buyer who continues a seller’s product line, even where the deal was structured as an asset purchase. It stresses that this is not a bright-line rule and depends on the facts. The article addresses Ontario; other provinces apply their own law, so have counsel confirm yours.

Duties that attach to you after closing

Under the Canada Consumer Product Safety Act, s.13, anyone who manufactures, imports, advertises, sells or tests a consumer product for commercial purposes must prepare and maintain documents and keep them until six years after the end of the year to which they relate, or any other prescribed period. Section 14(2) requires a person who manufactures, imports or sells a consumer product for commercial purposes to give the Minister and, if applicable, the person from whom they received it all the information in their control about an incident related to the product within two days after the day they become aware of it. Under s.31(1), if the Minister believes on reasonable grounds that a consumer product is a danger to human health or safety, the Minister may order a person who manufactures, imports or sells it for commercial purposes to recall it. For food, the Canadian Food Inspection Agency publishes recall-procedure guidance linked to the Safe Food for Canadians Regulations.

What to check before you sign

• Ask for the seller’s insurance policies, and ask whether coverage responds to claims about products sold before closing.
• Search the Government of Canada’s recalls, advisories and safety alerts site for the seller’s products and suppliers.
• Ask for the seller’s complaint, incident and recall records.
• Ask your lawyer how representations, warranties and indemnities in the agreement allocate pre-closing product claims, as the Treadstone Law article also notes.