Consumer protection laws extend royal treatment to Chinese shoppers

In the past year China has seen a surge in the number of consumer complaints filed with regulators, particularly in relation to online shopping. As a result, consumer protection has become an area of concern and focus for the Chinese government. Compensation or damages for losses caused by the purchase of sub-standard or defective products is not always possible, particularly when the purchase is made online where sellers can close their accounts and quickly open new ones under a different name, making it difficult for consumers to track them and seek compensation for defective products.

In March 2015 the Consumer Protection Bureau of China's State Administration for Industry and Commerce (SAIC) issued the Opinions on Improving the Systems of First Approach and Advance Compensation Payment of Business Operators of the Consumption Stage to Duly Protect the Lawful Rights and Interests of Consumers (Opinions).

Customer refunds

The Opinions seek to elaborate on the current "first approach system" (as it is referred to in the rules) under the existing consumer protection laws (namely the Law on the Protection of the Rights and Interests of Consumers and the Product Quality Law), and to introduce an "advanced compensation payment system". These systems enable consumers to (among other things) seek compensation directly from the operators of online trading platforms and trade fairs through which they purchased the relevant goods or services. The scenario envisaged by the Opinions is one where such business operators merely provide a "space" to enable consumers and sellers to purchase and sell products. In these circumstances, the online trading platforms are not in any way involved in the sale and purchase transaction, and they cannot be regarded as such sellers' of the products themselves. Paipai.com, eBay or Etsy are examples of such online platforms.

The effect of the Opinions is that e-commerce operators who only provide the means for which sellers may sell their goods or services may now be liable to consumers for sub-standard or defective products sold by third parties on their platform.

First approach system

The overriding principle is that the seller or service provider is ultimately responsible to the consumer for the goods or services they provide. They cannot "pass the buck" in respect of responsibility and liability. This is equivalent to the common law principle of privity of contract, where the parties to an agreement are bound by the terms and cannot impose contractual obligations on third parties. So the seller, as a party to the sale and purchase agreement entered into with the consumer, is liable under the contract.

The Law on the Protection of the Rights and Interests of Consumers (Second Revision) (Consumer Protection Law), which became effective on March 15 2014, broadened the rights of consumers who have purchased goods or services:

(i) through an online trading platform;
(ii) at a trade fair; or
(iii) from a leased counter,

where the operator of the trading platform, organiser of the trade fair or lessor of the counter, are not the direct sellers or providers of the goods or services to the consumer. Instead, these business operators merely provide the means by which goods or services may be purchased by a consumer directly from the relevant seller or service provider.

In circumstances where defective goods or services are purchased through an online trading platform (or at a trade fair or leased booth), a consumer's ability to obtain compensation from the seller can be a tricky and lengthy process. For example, all communications with the seller may have been through the online trading platform, and the consumer may not have access to the seller's direct address and contact details.

The Consumer Protection Law introduced the first approach system, which allows consumers (under certain circumstances) to require platform operators to compensate them on behalf of the seller, and for the operator to then seek recovery of the same from the seller. This enables compensation to be passed "up the chain". Therefore, while the seller will still remain ultimately responsible and liable to the consumer for any defective products or services, the consumer can forgo directly pursuing a claim against the seller (in situations where it is not practicable), and instead pursue a claim against the operator, who will then be responsible for obtaining a reimbursement from the seller.

A consumer may demand compensation directly from a platform operator if:

(i) the consumer's lawful rights or interests are prejudiced in relation to any goods or services purchased via an online trading platform, and the operator of the platform is unable to provide the true name, address and valid contact information of the seller; or
(ii) the consumer's lawful rights or interests are prejudiced in relation to any goods or services purchased at a trade fair or leased booth, and the consumer's claim is made after the end of the trade fair or expiry of lease of the booth (i.e. where it is difficult to trace the seller).

The Opinions reiterate the first approach system as specified in the Consumer Protection Law, but provide further guidance. The Opinions require the platform operators to establish an internal procedure, consistent with the first approach system, to handle consumer dispute settlements and claims for compensation. The details of the procedure must be posted conspicuously at the operator's place of business or otherwise made public. A dedicated department or designated person within the platform operator must also be given the specific responsibility for handling consumer complaints.

Advanced payment system

The Opinion encourages the following types of operators, who merely provide the "platform" or "space" to enable sellers to sell their products, to enter into an agreement with the sellers concerning the advance payment of compensation to consumers:

(i) operators of significantly sized malls (Malls);
(ii) wholesale markets or markets with a large number of stalls (Markets); and
(iii) online trading platforms or television shopping platforms (Platforms).

Under the terms of an advanced payment system, the Mall, Market or Platform must agree to first pay compensation to consumers for an infringement of their lawful rights and interests by the seller, if:

(i) the seller deliberately delays handling the related complaint or refuses to pay compensation without cause; or
(ii) the seller has vacated the relevant premises or has otherwise made it impossible for the consumer to obtain compensation.

Once the Mall, Market or Platform reimburses the consumer, it may then recover the compensation from the seller.

The principle behind the advanced payment system, as recommended in the Opinions, is to protect consumers whose lawful rights and interests have been violated, but unable to recover compensation from the seller. For example, if a consumer used a platform to purchase defective goods online from a seller, and the seller subsequently closes its account with the platform, the consumer could be left with no recourse or would otherwise have to spend significant time and effort to get reimbursed. Under the advanced payment system, the consumer may instead require the platform to pay on the seller's behalf. The platform may then seek reimbursement from the seller.

Procedure

Consumers must satisfy, at the very least, the following requirements before being compensated under the advanced payment system:

(i) produce the invoice or proof of purchase of the goods or service;
(ii) provide evidence that their lawful rights and interests have been prejudiced in some way (except where burden of proof is reversed under various specified defective transactions specified in Article 23 of the Consumer Protection Law);
(iii) bring the complaint within the statutory limitation period (which is generally two years, but one year in certain cases); and
(iv) demonstrate they are unable to recover compensation from the seller due to the latter's deliberate delay in handling the complaint, its refusal without cause to pay the compensation or having vacated the premises.

The consumer must first try to obtain compensation directly from the seller. It is only if he is "dissatisfied with the manner in which the [seller] handled the matter", that he can lodge a complaint with the relevant Mall, Market or Platform.

Burdensome implications

Although operators of Malls, Markets and Platforms can try to recover any compensation paid to consumers from the seller, the Opinions and Consumer Protection Law now place a new burden on operators and, in particular, online trading platforms who have a large number of sellers trading on their websites regularly. The problems faced by consumers in recovering compensation from the sellers will essentially be passed on to the operators, who may find it impossible to locate and pursue an action against the sellers to seek reimbursement of the compensation paid. One likely development may be that the terms of the business with sellers may include a request for a "liability deposit" to be paid to the Mall, Market and Platform operators.

While the first approach system is a statutory right granted to consumers under the Consumer Protection Law, the Opinions simply serve as a practice direction insofar as they provide guiding principles in relation to China's consumer protection laws. Any non-compliance with the Opinions will likely be taken into account by the Chinese authorities when assessing a business operator's compliance with the consumer protection laws.

Platform operators in Hong Kong

There is no equivalent legislation in Hong Kong laws that imposes the same types of obligations on intermediaries (such as platform operators). There is no legislation stipulating that online trading platforms, malls, etc., must pay compensation to consumers on behalf of the sellers. In general, unless the loss was directly caused by the intermediary platform (e.g. the online trading platform), consumers would need to bring an action directly against the seller if the goods or services purchased by them are defective and in breach of applicable laws.

Hong Kong recently passed the Contracts (Rights of Third Parties) Ordinance (CRTPO). The date for when the CRTPO will come into effect has not yet been set. Once it comes into operation, contracts between sellers and platforms (who are not themselves selling the products), could potentially confer rights on consumers, even though they are not a party to the agreement. Online trading platforms should be careful to ensure that no right to bring a claim against them is granted to consumers under the platform's agreements with the sellers.

Precautions to take

While the new Consumer Protection Law and the Opinions have significantly increased the recourses available to consumers, they have also opened up the potential liability of online trading platforms (as well as operators of trading fairs, etc). These operators will have to bear the liability of the sellers in certain circumstances, and will also be left with the difficult task of recovering the amount paid by them from the seller.

Operators of online trading platforms and trading fairs should ensure that they have robust measures in place to:

(i) limit the circumstances in which consumers will need to bring a claim against them, e.g. because they are unable to provide consumers with accurate contact details of the seller; and

(ii) be able to recover from the sellers the compensation paid to consumers. For example, the operators should:
a. ensure that they thoroughly verify the identity of the seller and obtain verification of their identity and their office address;
b. require the seller to pay a deposit, which the operators can use to set off against any claims made by consumers; and
c. include an indemnity in the agreement with the sellers requiring them to reimburse the operator on demand in the event that the deposit is insufficient.


Gabriela Kennedy and Karen HF Lee, Mayer Brown JSM, Hong Kong