When is Executive Management liable?

Time and again, innumerable and huge recalls show the dramatic impact that faulty products can have on a company. The company also has to consider the legal consequences of this. Attorneys-at-Law Daniel Wuhrmann and Niklas Weidner explain whether and when the managing director of a limited liability company is liable under civil law.

One thing is certain: The manufacturer is responsible for a product’s safety. In general, manufacturing companies are aware of this. This begs the question: What does liability mean for a company’s executive management? In many cases, there are still huge areas of uncertainty here. If the product does not meet expectations and standards, can the management team be held personally responsible for this by the user?

The hallmarks of a limited liability company are that they are built on a policy of directors’ and officers’ liability and the principle of separation. According to this, the entirety of the company’s assets are liable. The management’s personal liability, however, only comes into consideration under other, very specific circumstances. Personal liability for faulty products is, in principle, not provided, neither contractually nor non-contractually. Paragraph 43 of the German limited liability company Act regulates the central liability of the managing director. This states that the management must act “with the care due of a prudent business person” when acting within company affairs. This means that they must ensure that the company is organized and supervised in such a manner that the company does not infringe upon any laws. If the managing director fails to comply with specific obligatory duties, claims are made on the company if damages are incurred as a result of this. In terms of the external third party, the managing director does not bear any liability as their obligations are only tied to the company.

Should damages be caused to a person as a result of a faulty product, then the person is entitled to compensation under the German Product Liability Act, and the manufacturer must provide this. The manufacturer bears strict liability for damages to life and limb of the customer. This means that the manufacturer is liable, without any fault, deliberate or as a result of negligence, being established on their part for the design, manufacturing or usage instructions for their product. The reason for this obligation to assume liabilities, in the form of strict liability, is the cause of risk in creating an unsafe product which the manufacturer has introduced into legal relations. Such a form of liability also exists for damage to other objects which have been caused by the manufacturer’s faulty product. The manufacturer of the product is always liable here. The manufacturer is the entity that has produced the end product, or a basic material or subproduct of it, but also the entity that has declared themselves the manufacturer by placing their name or brand on the product. As a rule, this is usually the limited liability company. Personal liability of the managing director is therefore irrelevant. Furthermore, the German Civil Code (BGB) regulates the “Manufacturer’s Liability”, which extends further than product liability. Where product liability only includes manufacturing, design and instruction errors, manufacturer’s liability also establishes product monitoring obligations. This means that a manufacturer must monitor their product within the market and is also responsible for its safety when it comes into contact with other products. However, in contrary to liability under the Product Liability Act, it is necessary to establish that the manufacturer is at fault. Where a fault is successfully proved, it is however presumed that the manufacturer is at fault, meaning that the manufacturer must provide proof which exonerates them in this instance. However, manufacturer’s liability only concerns the limited liability company as a manufacturer and not its managing director, just like product liability.

Personal liability of the managing director can, as a result of the aforementioned separation principle, only be justified if the managing director themselves has committed the elements of offence for manufacturer liability. In addition to objectionable behavior from the managing director, this must also have caused infringement of a legally protected interest, and have caused damage. Behavior that can be considered objectionable and for which the managing director can be charged is failure to carry out correct organization and control of the company, in the instance of faulty products. However, such failure only then justifies liability if the managing director takes on guarantor status in relation to the claimant. Guarantor status is considered to be present when executive management is legally responsible for preventing infringement upon a protected interests of the claimant, i.e. the user. The German Federal Court of Justice (Bundesgerichtshof) requires that personal obligations to protect the users who have experienced the damage were made in order to establish guarantor status of the management, and these must result from the law. The obligations for monitoring and controlling the company, however, only appertain to the corporation. Liability for faulty products with respect to third parties cannot be derived from the sole notion that executive management can exert an influence upon the company’s manufacturing process.

Under the German Civil Code, liability is equally placed on the entity that violates protection law. The German Product Safety Act states a protection law to this effect. According to this act, a product may only be made available on the market if it does not pose a risk to the health and safety of persons. This means that management could be obliged to organize and monitor the organization in such a manner as to ensure that it only produces safe products. Once again, the Product Safety Act primarily addresses manufacturers. Thus, the obligation to place safe products on the market applies to the limited liability company as a manufacturer, but not to its executive management personally. Executive management is only obliged to ensure appropriate organization and monitoring internally. Thus they cannot be made liable to third parties for unsafe products through this act.

The managing director is thus, generally, under civil law, not liable to third parties for the limited liability company faulty products. The separation principle and directors’ and officers’ liability policy ensure this. The managing director’s duty to ensure appropriate organization and control only applies vis-a-vis the corporation. Executive management having guarantor status in view of the claimant constitutes personal liability of the management. This liability can only arise from circumstances which oblige executive management to have prevented injury or damage to the claimant. The limited liability company thus remains the primary entity bearing liability. If the corporation has evidence that the managing director has violated their obligations arising from internal terms, then the corporation may be able to make the managing director liable for this in turn. Beyond civil law matters, however, the managing director may be held criminally liable and prosecuted in cases where there are faulty products.