Keeping an eye on product liability

(i) the existence of unreasonable danger which endangers bodily safety or the safety of the others' properties, or

(ii) the incompliance with national or industrial standards for safeguarding personal health, bodily safety and property safety.

This means that in pursuing product liabilities under the Tort Law as well as under the existing Product Quality Law, the existence of a defect and the causation between such a defect and the respective damages will first need to be proven. In practice, such proof will usually require the involvement of a neutral party (for example, a special inspection institution engaged by the administrative authorities or the court). A court precedent in August 2000 involving Mitsubishi in a car accident indicates that any failure to involve such competent inspection institution accepted by the court may lead to disadvantageous results in terms of burden of proof.

Chinese compulsory safety standards are less developed in comparison to those of Europe and North America. A product liability case involving a well-managed foreign company is less likely to be launched based on incompliance with compulsory national or industrial standards. Instead an “unreasonable danger” case which is more dependent on the subjective view of the Chinese court will expose a foreign company to potential risks.

Taking out appropriate product liability insurance both in the home country and in China is one way of mitigating the risks of a product liability. Product liability insurance covering the risks of personal injuries and property damages is generally available in China. However, product liability insurance might not be available in certain areas involving extraordinary risks, for example, for automotive parts, in particular those related to the safety of motor vehicles.

Manufacturer's liability

As under the existing Product Quality Law, the Tort Law imposes a strict liability on a foreign company which manufactures products for the Chinese market. If a product is proven to be defective and thereby causes bodily harm or property losses, the manufacturer will be held liable to compensate irrespective of any fault (negligence or intention) on the manufacturer's side.

On the other hand, a manufacturer's liability may be reduced in the event of fault on the aggrieved party's side. Further liability exemptions may potentially be available under the Product Quality Law if the manufacturer can prove that (i) the products were not put into circulation; or (ii) the defects did not exist when the products were brought into distribution; or (iii) that the defect could not have been detected based on the scientific and technical means available at the time when the products were brought into distribution.

Uncertainties under the Tort Law still remain with regards to product liability of a supplier of parts to a final product. If it is proven that damage was caused by a defect in such parts, the supplier could in general qualify as a “manufacturer” and be subject to strict liability under the Tort Law. Such broadened interpretation seems to be in the mind of the Chinese legislators. One example is the draft Regulations on Supervision and Administration on Recall of Automotive Products (汽车产品召回监督管理条例) issued on July 2 2010 for public comments which clearly define the term “automotive products” to cover both automotives and the safety-related key parts. If the same interpretation is adopted by Chinese courts for other products under the Tort Law in future, this would improve the end user's legal position and give him choices. He could either choose to directly pursue the parts supplier by treating the parts as a defective “product”, or to jointly sue both the supplier and the manufacturer of the complete product based on the existence of defects in both the parts and the complete product. In the latter case, the manufacturer of the complete product could potentially claim for reduction or exemption of liabilities based on the principle that the liability shall be assumed by the responsible third party.

Before the promulgation of the Tort Law, a company which did not manufacture but labelled a product with its name, trade mark or other distinguishable sign could also qualify as a “manufacturer” in a product liability case. A reply from the Supreme People's Court (SPC) to the Beijing High Court dated July 11 2002 involving General Motors explicitly confirmed this concept of “quasi-manufacturer”. Though the Tort Law is silent in this aspect, it is expected that the same principle will continue to apply to the new Tort Law. For foreign companies, this will mean that not only those real manufacturers, but also the brand owners which subcontract the manufacture of their branded products to Chinese manufacturers under respective licence agreements, might be exposed to product liability risks in China.

Seller's liability

The seller's product liability will not change too much under the new Tort Law. The previous tort liability under the Product Quality Law and the Civil Code were repeated under the Tort Law, such as selling products on the Chinese market can result in product liability if such products are defective and cause damage.

Unlike the strict liability applicable to a manufacturer, the seller's tort liability is generally subject to the existence of fault. The Tort Law grants an optional right for the injured end user to either sue the seller or the manufacturer. If the end user chooses to sue the seller, the non-existence of fault will only grant the seller a recourse right against the manufacturer. In this aspect, the Tort Law further imposes an obligation on the seller to identify the manufacturer or the source of the defective products in a defect case and failure to do so by the seller will lead to tort liability.

Different from the Product Quality Law which keeps silent on the liability of other third parties in the supply chain, the Tort Law also grants the seller a right of recourse against logistics and warehousing service providers if the defects in products have been caused by their faults.

Foreign business operators should note that product related liability in a sales scenario will not only arise under the Tort Law subject to the existence of fault on their side. Liabilities can also arise on a contractual basis which does not require the existence of fault.

New challenges

The new Tort Law will substantially increase a foreign business operator's potential exposure due to product liability claims in the Chinese market, sprouting mainly from the general recall system and the severe concept of “punitive damages”.

Through administrative regulations, a product warning and recall system has already been implemented in several sectors including the automotive, pharmaceutical, food and toys industries. The Tort Law now establishes a general recall system applying to all kinds of products. Under this system, a manufacturer and a seller are both obliged to take remedial measures such as warnings and product recalls if any defect is discovered to be existent in the products supplied to the market. Tort liability will arise if they fail to implement such remedial measures in time or only implement them in an insufficient way.

The Tort Law further introduces the concept of “punitive damages” which goes beyond the actually suffered damages or losses. If a manufacturer or seller already had knowledge of the existence of defects but still continued to manufacture and sell the products which caused death or serious health harm, punitive damages can be claimed by the aggrieved party. With regard to product quality, this concept debuted under the new PRC Food Safety Law (中华人民共和国食品安全法) which came recently into effect on June 1 2009 but was limited to an amount of 10 times of the foods' sales prices. How Chinese courts are to implement this new concept and whether or not the aforesaid 10-time limitation may be exceeded based on the more general principle of the Tort Law remain to be seen.

Looking ahead

The new Tort Law solidifies the existing legal framework for product liability. The general liability principles are very similar to those applicable in developed jurisdictions. The expanded product recall system and the new punitive damages concept will substantially increase a foreign company's potential exposure to product liability.

Certain concepts regarding product liability under the Tort Law are still vague and need to be substantiated by future legislation. How to harmonise the Tort Law with existing legislation which addresses similar issues also remains an open question. Based on past experience, ambiguities and open questions will very likely be addressed in future judicial interpretations of the SPC and be substantiated by court judgements. Although the SPC just issued its first interpretation regarding the Tort Law on June 30 2010, this short interpretation only touches upon applicability issues and does not shed light on existing ambiguities. It is widely expected that there will be more SPC interpretations of the Tort Law.

To be better prepared for the new challenges in this regard, it is advisable for foreign companies to keep a constant eye on legislative developments and to take necessary measures such as product quality control, after sales services and insurance arrangements.

Michael Tan and Yimin Chen, Taylor Wessing, Shanghai