Contaminated milk creates new liability regime

• electrical appliances that are not up to safety standards; and

• cosmetics which are not in compliance with hygiene standards, to name a few.

A manufacturer and any person knowingly selling such defective products which cause injury or where the sales revenue is over Rmb50,000 are subject to potential criminal sanctions. The severity of the sanctions depends on the nature of the criminal act, the nature of the defective products and the severity of the consequences caused. Possible criminal sanctions under the Criminal Law include:

• fines (ranging from not less than 50% and not more than twice the sales revenue in question);

• confiscation of property;

• detention;

• fixed-term imprisonment up to life imprisonment; and

• the death penalty.

When a company is held criminally liable for supplying defective products, the person in charge of the company (such as the chairman of the board or the general manager) or other relevant responsible person is subject to the criminal sanctions mentioned above. The company itself is only subject to a fine.

Although it is generally accepted that the Sanlu case is an extreme illustration of the application of product liability (as well as non-product liability) provisions under the Criminal Law, it does demonstrate that the courts are likely to impose tougher sentences in cases of large product liability incidents or incidents with wider consequences on society, given their potential negative effect on China's image, social order, and economic development. In some cases (as happened in the Sanlu case), punishment of individuals and corporate targets (rather than compensation) may become a priority for local governments and courts who will want to be seen taking a tough stance and to avoid being criticised. This in turn creates a more dangerous climate for the managers of companies who have investments or business operations in China.

Civil liability for product liability violations
China's product liability regime also imposes civil liability on manufacturers and sellers of goods, as well as enabling consumers to seek damages and compensation in product liability cases. Briefly, the principal laws under which consumers and affected parties may seek recourse are the following:

• the PRC Civil Law General Principles (中华人民共和国民法通则);

• the PRC Product Quality Law (中华人民共和国产品质量法); and

• the PRC Protection of the Rights and Interests of Consumers Law (中华人民共和国消费者权益保护法).

This civil liability regime enables parties affected by defective products to claim compensation for personal injury and damage suffered. Claims can be based on three grounds: (i) strict product liability; (ii) fault-based tort liability; and (iii) contractual liability.

A claim under the strict product liability head must show that there is a defect in the product, injury to a person, or damage to property other than the defective product, and an established causal link between the defect and the injury or damage.

Strict product liability for defective products rests on the manufacturer and/or the seller where the seller's mistake contributed to the defect, or, when the seller failed to identify the manufacturer against whom a consumer could bring a claim. Manufacturers include companies who have contracted the production of their products to third parties while the end products supplied are then sold by these companies using their own brand names, titles, trademarks or other distinguishable marks. Such production/sourcing arrangements are commonly employed by some of the world's biggest brand names.

As to fault-based tort liability, there is no definition of fault in the law, but should include the elements of “intention” and “negligence”. A breach of statutory obligations and a failure to act in accordance with an accepted industry or professional practice can also be considered an act of negligence for this purpose. Fault-based tort product liability can rest on anyone whose fault contributed to the injury or damage claimed.

A party can also claim product liability based on contract if there is a contract between the claimant and the defendant; and the delivery of a defective product constituted a breach of the contract. However, contractual product liability only rests with the party that has a contract with the party injured.

The key to a successful civil liability claim under the civil liability regime is being able to establish with sufficient evidence the casual link between the loss and the damage claimed and the defect in question. In many cases, this may not be an easy hurdle to overcome before Chinese courts. However, the position in China is improving, particularly as consumers are becoming more aware of their rights against manufacturers and sellers and are more prepared to exercise those rights before the Chinese courts.

China's new Food Safety Law
One significant development since the Sanlu case is the passing of China's new Food Safety Law by the National People's Congress on February 28 2009; it takes effect as of June 1, replacing the Food Hygiene Law which was promulgated in 1995. The new Law represents an important development in China's battle against increasingly critical food safety problems. It introduces new provisions that should strengthen regulatory scrutiny, and imposes more far severe penalties against manufacturers and sellers, including:

• criminal liability where a breach under the new Law constitutes a criminal act;

• confiscation of unlawful gains and property, including production tools and equipment;

• fines from Rmb2,000 to between five- and 10-times the value of the product in question; and

• more importantly, the entitlement for consumers to claim, in addition to compensation covering the damage they have suffered, damages up to 10-times the purchase price of the product in question from the relevant manufacturer or seller.

New provisions in light of Sanlu
In the wake of the Sanlu case, significant revisions have since been made to the new Law which are aimed at further strengthening and streamlining government supervision on food safety. These changes include a system for monitoring food production and:

• the establishment of a compulsory food safety standard;

• the establishment of a surveillance and risk assessment system;

• the abolition of the present exemption from government quality inspection, so that companies may no longer be able to rely on such preferential treatment (this will likely lead to additional quality control and costs for manufacturers); and

• a mandatory recall system for unsafe food products. (This appears to be consistent with similar requirements under the respective Administrative Regulations on Food Recalls and Toy Recalls issued by the State Administration of Quality Supervision, Inspection and Quarantine in August 2007.)

Benefits for consumers come with higher cost
The development of China's product liability law regime is still at its early stages. But the rise of consumerism in China, coupled with the Central Government's present efforts to protect its industries and raise its international profile on food and product safety are resulting in the present push to develop a more stringent regulatory framework for product liability in China.

The provisions contained in the new Food Safety Law should potentially benefit consumers. That said, they are also likely to increase the costs of doing business in China, and may pose personal safety issues for company officers working in China in case of serious product liability incidents similar to the Sanlu case. International companies operating in China should, therefore, closely evaluate their product quality practices to avoid potential criminal sanctions, fines and penalties, and adverse publicity that prosecution could bring. The Sanlu case is a good indication that the Chinese courts are more willing to take tough measures against offenders, particularly in the case of international companies who are generally seen to have more sophisticated compliance programmes and should generally be more responsible.

It would be prudent for these companies to ensure that they are now, and will continue to be, compliant with China's product liability laws, including implementing changes in anticipation of the new Food Safety Law. At a minimum, international companies should look to put in place an effective quality inspection and control system, a sound risk assessment system and a mandatory recall system. Companies should also closely and routinely re-evaluate these systems, and provide training to their staff, to ensure that they will work properly should a product liability occur. This should enable companies to identify problems at an early stage and take pre-emptive measures where necessary. In case of incidents, quick response time, effective reporting and being able to implement a product recall programme quickly should enable companies to take immediate action to fix problems without causing unnecessary delay and loss. This in turn should avoid liability (both criminal and civil) for the company concerned, and for its management.