I INTRODUCTION TO THE PRODUCT LIABILITY FRAMEWORK
In China, a combination of laws, regulations and rules issued by administrative departments together form a complicated legal framework for product liability with civil, administrative and criminal dimensions.
Product liability in a civil context concerns situations where defective products cause loss or harm to another, and the manufacturers or sellers, or both, bear responsibility for infringement of the victim's rights. The key laws on product liability include:
- the General Provisions of the Civil Law (the General Provisions);2
- the General Principles of the Civil Law;
- the Tort Liability Law (TL);3
- the Product Quality Law (PQL);4 and
- the Laws on the Protection of Consumer Rights and Interests (PCRI).5
These laws set up a legal framework governing issues such as how to determine whether a product is defective, how to commence product liability litigation and who bears responsibility for product liability.
Additionally, the Supreme People's Court has issued a series of judicial interpretations in relation to specific issues that have arisen in product liability cases. One such example is the Interpretation of the Supreme People's Court of Some Issues concerning the Application of Law for the Trial of Cases on Compensation for Personal Injury,6 which sets out the levels of compensation for a personal injury incurred by a defective product.
In addition to civil liability, the PQL and the PCRI also set out the approaches and powers of the administrative authorities to supervise product liability and to issue administrative penalties. Furthermore, the Chinese legislative institution has issued laws and regulations regarding the manufacturing and circulation of certain products to ensure their safety and quality, such as the Food Safety Law7 and the Pharmaceutical Administration Law.8
In China, product liability may also give rise to criminal liabilities. Chapter 3 of the Chinese Criminal Law9 contains a section titled 'Crimes of Manufacturing and Selling Fake and Shoddy Goods'. This specifically provides strict criminal penalties in respect of manufacturing and selling fake or defective products that severely infringe the consumers' interests. These provisions in the Criminal Law seek to safeguard and reinforce product safety in China.
As China is a civil law country, the principle of stare decisis does not apply in product liability litigation proceedings. However, judges may still be guided by precedent cases previously decided by courts, particularly if there are judgments of the Supreme People's Court or other superior courts addressing similar facts or legal issues, or if the area of law is unsettled.
II REGULATORY OVERSIGHT
Following the 2018 State Council's institutional reform in China, the newly established State Administration for Market Regulation (SAMR) has become the regulatory authority responsible for regulating a wide range of products, including but not limited to automobiles, children's toys and food. See Section V for further information.
Under the current regulatory system in China, manufacturers and sellers of products bear the obligation to continuously pay attention to possible defective products. If the product is discovered to be defective after it has entered into circulation, the manufacturer and the seller are obliged to take proper measures to remedy the situation, such as issuing warnings or recalling the product. If they fail to take appropriate measures in a timely manner or provide insufficient remedies, thereby causing damage, the manufacturer and seller will be liable for tort. Since the formal implementation of the Measures for the Administration of the Recall of Defective Consumer Goods on 1 January 2016, the product recall system is more complete, with protection for consumers and supervision over manufacturers and sellers having been enhanced significantly. At present, SAMR and its attached agency, the Defective Product Administration Centre, oversee product safety and product recalls in China. In the first half of 2018, SAMR published 109 automotive product recall notices and recalled over 4.8 million defective automotive products. For other consumer goods, SAMR published 352 recall notices and recalled 36.25 million defective goods.
The China Consumers' Association and other consumer associations play important roles in protection of consumer rights. The consumer associations are social organisations with Chinese characteristics, which are established across the country and pursuant to the laws and regulations to conduct public supervision over products and protect consumer rights and interests. The consumer associations can perform many community duties such as:
- providing consumption information and advisory services to consumers;
- participating in formulation of laws, regulations, rules and mandatory standards relating to consumer rights and interests;
- participating in supervision and inspection of goods and services by the relevant administrative authorities;
- accepting consumer complaints and carrying out investigations and mediation regarding the complaint matters;
- for acts that harm legitimate consumer rights and interests, supporting aggrieved consumers to file lawsuits or filing lawsuits by itself pursuant to the law; and
- public advocacy regarding acts that may harm legitimate consumer rights and interests.
III CAUSES OF ACTION
Under Chinese law, a manufacturer or seller, or both, will be liable for tort if they have manufactured or sold a product that has caused harm to a person's life or property. 'Product' refers to property that is manufactured for sale. Real estate does not fall within the scope of the term 'product'. In general, product liability contains three elements:
- the issue of whether the product is defective;
- the damage or loss suffered; and
- the causal relationship between the defective product and the damage.
The most important element is whether a product is defective. Product defects are categorised as design defects, manufacturing defects and inadequate warning or instructions. According to Article 46 of the PQL, there are two tests to determine product defects, namely, the statutory standard and the unreasonable danger standard. Under the statutory standard, a product will be defective if it fails to meet the applicable national or industrial standards in respect of the safety and sanitation of that product. However, meeting statutory standards does not necessarily mean that the product is without defects. Chinese courts will still apply the unreasonable danger standard to determine whether the product unreasonably endangered the life or property of the consumer, or both. Hence, even if a product meets the relevant national or industrial standards, it still may be considered defective if it does not meet a reasonable person's expectations regarding product safety.
Apart from the tort liability, a consumer can also bring a warranty claim in respect of product flaws. Under Chinese laws,10 a product must conform to the quality standards or specifications as presented by the manufacture and seller. If a product fails to conform to these warranties, the consumer can sue the seller for breach of warranty even if the product might not constitute a defective product under the product liability law.
In addition to the tort liability discussed above, administrative penalties might also be imposed on manufacturers and sellers of defective products. For example, if the product manufactured or sold is not in conformity with the national and industrial standards regarding the safety or sanitation, the regulatory authorities can stop the manufacture and sale of defective products, confiscate the defective products, impose fines on the manufacturer and seller and even revoke their business licences. In addition, the manufacturer and seller might also be administratively penalised if they do not perform their obligations to recall the defective products. For instance, where a car manufacturer breaches the Administrative Regulations on the Recall of Defective Automotive Products (ARDAP), for example, for failing to stop manufacturing the products, selling or importing defective auto products, withholding information of the defects or refusing to implement a recall as ordered, the regulatory authorities will order it to make correction, impose a fine between 1 per cent to 10 per cent of the monetary value of defective auto products and confiscate any illegal income of the manufacturer. Furthermore, the regulatory authorities may revoke the manufacturing licences of the manufacturer if the circumstances of violation are serious.11
Last, the Criminal Law contains nine crimes relating to the manufacture and sale of defective products. As a result, the manufacturers and sellers will face criminal penalties in severe cases.
In accordance with Article 47 of the PQL, when there is a civil dispute regarding product quality, the parties may resolve their dispute by negotiation, mediation, arbitration or litigation. In practice, the most common forum is litigation.
In the Chinese civil system, there is a two-tier trial system, under which a party has the right to appeal a decision at first instance to an appellate court. In general, the second instance judgment is final and binding. However, under special circumstances, a party may also apply for a retrial. However, the standards to be met to initiate a retrial are very strict, and a request for a retrial is granted at the court's discretion. In practice, it is very rare for a court to grant a retrial.
If a product liability dispute is relatively simple and with a small amount in dispute, a summary procedure or small claims procedure may apply to the litigation. These two types of procedures are more flexible and quick, and the small claims procedure does not allow the parties to appeal.
In civil litigation proceedings, a party may also resolve the dispute by negotiation or settlement. A settlement judgment issued by the court has the same effect as a civil judgment. If one party fails to perform its obligations under the settlement judgment, the other can apply to court for enforcement.
In China, any contractual or other disputes over property rights and interests between citizens, legal persons and other organisations can be submitted to arbitration. Since arbitration procedure relies on the parties' agreement, it may be more applicable to a seller's contractual disputes arising from defective products, rather than product liability disputes.
ii Burden of proof
In product liability proceedings, the plaintiff has the burden of proving:
- the product is defective;
- damage or loss owing to the defective products; and
- a causal relationship between the defect and the damage suffered.
However, in practice, the plaintiff, as an individual, usually has limited technical knowledge about the product in dispute. As a result, courts do not generally impose too stringent a burden of proof on the plaintiff. As long as the plaintiff has prima facie evidence (such as the inspection report from a professional inspection institution) that the product has problems, the burden of proof will be shifted to the manufacturer or seller. The manufacturer or seller will then have to prove that the product does not have any defects. It will thus have to prove that the product meets the national and industrial standards (if any), and will neither present any reasonably foreseeable danger to a person's health nor will it damage a person's property.
In practice, the inspection procedure plays an important role in determining whether the product is defective. A party may apply to a court for inspection to determine whether a product is defective (in particular, whether there is a design defect or manufacturing defect). The inspection will be conducted by inspection institutions with appropriate qualification or by judicial inspection institutions. The parties may agree to appoint a specific inspection institution; if not, the court can appoint one. Furthermore, even if the parties do not apply for inspection, if necessary, the court may itself decide to appoint an inspection institution to determine whether the product is defective.12 The inspection fees are relatively high and the process is time-consuming, and there may be technical issues that are beyond the expertise of certain inspection institutions, which may present some obstacles for the plaintiff.
Furthermore, it may be difficult to prove that there is a causal relationship between the defect and the damage incurred. In general, a court would not require the victim to prove that the injury or damage was in fact caused by the defective product. The victim only needs to prove that there is connection between the injury or damage and the defective product. Last, courts usually take a 'presumptive approach' when determining whether there is a causal relationship. This means that, if a product is defective and other possible causes of injury have been ruled out, the causal relationship is therefore presumed to be established.
Under Chinese law, defences include procedural defences and substantive defences.
Relying on a statute of limitations is a procedural defence. There have been discussions on the limitation period to be applied in product liability cases. After the amendment of the PQL on 29 December 2018, the limitation period remains at two years, which still differs from the three-year limitation period provided in the General Provisions. We will have to wait to see what changes are effected in judicial practice to see which limitation period shall prevail.
In relation to substantive defences, there are three statutory defences under which a manufacturer may avoid liability.13 First, a manufacturer may avoid liability if the products have not been put into circulation. For example, this defence may be available if a manufacturer is about to destroy some defective televisions stored in the warehouse; however, a thief steals one and then sells it to a person who is subsequently injured when using it. Notwithstanding the person's injury, the person could not claim compensation from the television manufacturer. Second, a manufacturer may avoid liability where the defects do not exist when the products are put into circulation. In other words, the manufacturer could demonstrate that the defect was caused by the victim. Third, the scientific and technological standard at the time the product was put in circulation has not reached a level to enable the manufacturer to discover the defect in the product. The manufacturer will bear the burden of proving the above three statutory defences.
As outlined above, the plaintiff has to meet its burden of proving three elements in a product liability claim (i.e., defects, injuries or damage and causal relationship). If a defendant successfully challenges the plaintiff's proof in respect of any of these three elements, the defendant will not be found liable. Of these three elements, the defendant usually challenges the 'defects' and 'causal relationship'. For example, if the explosion of a microwave oven caused injuries, if the plaintiff wants his or her claims for compensation to be supported, the plaintiff shall prove that the microwave oven was defective resulting in the explosion; the plaintiff was injured owing to the explosion; and there was causal relationship between the injury and the defects. In this case, the defendant might challenge the existence of the defects on the basis that the microwave oven's design and manufacture satisfy the relevant compulsory national or industrial standards. The defendant might deny the causal relationship by proving that the plaintiff improperly used the products.
iv Personal jurisdiction
The PQL applies to all manufacturing and marketing activities within the territory of China.14 Accordingly, the PQL regulates both manufacturers and sellers with businesses operating within China, including a seller who imports products manufactured outside China and sells the products within China. Any violation of provisions in this law may lead to aforementioned civil, administrative and even criminal liabilities.
In accordance with the Civil Procedure Law, as a tort case, product liability claims are under the jurisdiction of the court at the place where the tort occurs or at the place of domicile of the defendant.15 The place where the tort occurs includes the place where a tortious conduct is committed and the place where the consequence of a tortious conduct occurs.16 If the manufacturer and seller are domiciled in China, the Chinese courts will without doubt have jurisdiction over the proceedings. Even if the manufacturing and selling were committed outside China, if the damage occurs within China, the manufacturer and seller outside China may still fall under the jurisdiction of the Chinese courts.
v Expert witnesses
The Chinese legal system recognises the role of expert witness in disputes. Any party can apply to a Chinese court for an expert to testify at court on certain issues of fact that are within his or her expertise. Where an application of a party is permitted by a Chinese court, the party making the application will bear the costs of the expert witness' attendance. The judge hearing the proceedings or any party may cross-examine the expert. Where permitted by the court, experts may address each other during proceedings in relation to issues arising in the proceedings.17
Contrary to the common law jurisdictions, there is no general process of discovery in Chinese civil litigation. Except where the burden of proof has shifted (as outlined above), each party has the evidentiary burden of proving its claims.18 However, if there is evidence that a party and its representative are unable to collect, the party may apply to the court for investigation and collection.19 For example, if a vital inspection report regarding product defects was kept by the product manufacturer, and the consumer is unable to obtain it, the consumer could apply to the court to collect this evidence from this manufacturer. In addition, there may be a situation in which there is evidence demonstrating that a party possesses certain evidence, but that party refuses to provide it without any proper justification. In such cases, if the other party claims that the evidence is unfavourable to the party that possesses it, a court may infer that the claim is established.20
Where any harm is caused by a defective product, the victim may seek compensation from the manufacturer or the seller. That is, for the victim, both the manufacturer and the seller assume liability. Between the manufacturer and the seller, after any party assumes liability, this party may be entitled to be reimbursed by the other. However, when a manufacturer seeks reimbursement from a seller, it will have to provide evidence that the product's defect was caused owing to the fault of the seller.21
viii Mass tort actions
To date, the Chinese legal system does not provide for class actions as they exist, particularly in the United States. However, where the subject matter of action is same or is of the same kind, courts may allow the parties to hear the case concurrently.22 However, 'collective action' is uncommon in product liability cases. In addition, where the subject matter of a claim is of the same kind in nature, but the number of potential plaintiffs is unclear when the claim is initiated, courts may publish a notice to describe the case and claims and notify right holders to register with the court within a certain period. The parties that have registered with the people's court may recommend a representative or representatives to participate in the litigation. The judgment or ruling issued by the court will bind all right holders that have registered with the court. The judgment or ruling will also apply to actions instituted during the statute of limitations by right holders that have not registered with the court.23
Under Chinese law, where a defective product causes any harm to another person, the manufacturer or seller, or both, will assume tortious liability.24 Where a person suffers personal injury owing to a defective product, damages will often include medical treatment expenses, funeral service fees, compensation for mental distress (if applicable) and other economic compensation. Where a person suffers damage to his or her property owing to a defective product, a court will often order the tortfeasor to remedy the damage or pay compensation in an amount equal to the remediation costs.25 Where the defect of a product endangers the personal or property safety of another person, the victim shall be entitled to require the manufacturer or seller to assume tortious liability by removing the obstruction or eliminating the danger.26
In addition, there is punitive compensation under Chinese law. Under the TL, where a manufacturer or seller is aware that a product is defective and continues to manufacture or sell the product, and the defect causes death or serious damage to the health of another person, the victim may be entitled to obtain punitive compensation.27 Under the PCRI, business operators that fraudulently provide commodities or services will, as required by consumers, increase the compensation for consumers' losses. The increase in compensation will be three times the payment made by a consumer for the commodity purchased or the service received or it will be 500 yuan if the increase calculated above is less than 500 yuan. Where business operators knowingly provide consumers with defective commodities or services that cause death or serious damage to the heath of consumers, the victims have the right to claim punitive compensation of no more than two times the amount of losses incurred.28 Under the Food Safety Law, in addition to claiming damages, a consumer may require a manufacturer of a food product that fails to meet food safety standards or a trader knowingly dealing in such food to pay an indemnity of 10 times the price paid or three times the loss. If the amount of the additional compensation is less than 1,000 yuan, it will be 1,000 yuan, except for a defect in the labels or instructions on the food that does not impair food safety or mislead consumers.29
V YEAR IN REVIEW
China amended its Pharmaceutical Administration Law in 2019 and updated its pharmaceutical legal framework in overall aspects. As a key part of the update, a series of accountability mechanisms have been introduced, notably a pharmaceutical marketing authorisation holder system for pharmaceutical management, which covers pharmaceutical development, manufacturing, distribution and use activities.30 A pharmaceutical traceability system has also been established to ensure pharmaceutical quality and manage risks in the whole process.31
The 2019 amendment adjusted the definition and scope of fake pharmaceuticals and pharmaceuticals of inferior quality, and further made a clear distinction between them,32 which reflects a change in the legislation as to the standard to determine the category of a problematic pharmaceutical product and the nature of an illegal act. The focus of the standard goes beyond mere quality considerations.
The provisions on criminal, civil and administrative liabilities have experienced significant changes as well. Specifically, criminal liability was placed the first in the section of legal liability, which delivers a powerful message and indicates the position of the legislation on the violations and crimes endangering pharmaceutical safety.33 Administrative penalty rates for various violations have been raised drastically, in both the amount of the fines and in other forms.34 With respect to civil compensation, the idea of punitive damages has been introduced to the current legal framework.35 Moreover, an overseas enterprise as defined as a pharmaceutical marketing authorisation holder and its agent in China shall undertake joint liability for damages.36
To address real issues and meet actual demand, the 2019 amendment of the Pharmaceutical Administration Law is problem-oriented, adopting a strict approach. It presents a high standard of regulation.
1 Ariel Ye is a senior partner, Yue Dai and Xinyu Li are partners and Tianren Li is a senior associate at King & Wood Mallesons.
2 Effective as of 1 October 2017.
3 Effective as of 1 July 2010.
4 Effective as of 1 September 1993, amended on 29 December 2018.
5 Effective as of 1 January 1994, amended on 25 October 2013.
6 Effective as of 1 May 2004.
7 Effective as of 1 June 2009, amended on 29 December 2018.
8 Effective as of 1 December 2001, amended on 25 August 2019.
9 Effective as of 1 October 1997.
10 See Article 148 of the Contract Law (effective as of 1 October 1999), Article 40 of the PQL, Articles 40(1) and 48 of the PCRI.
11 See Article 24 of the Regulation on the Administration of Recall of Defective Auto Products (effective as of 1 January 2013).
12 See Article 76 of the Civil Procedure Law (effective as of 9 April 1991, amended on 27 June 2017).
13 See Article 41(2) of the PQL.
14 See Article 2 of the PQL.
15 See Article 28 of the Civil Procedure Law.
16 See Article 24 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China (effective as of 4 February 2015).
17 See Articles 122 and 123 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China.
18 See Article 64 of the Civil Procedure Law.
19 See Article 94 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China.
20 See Article 75 of the Some Provisions of the Supreme People's Court on Evidence in Civil Procedures (effective as of 1 April 2002, amended on 16 December 2008).
21 See Article 43 of the TL, Article 43 of the PQL.
22 See Article 52 of the Civil Procedure Law.
23 See Article 54 of the Civil Procedure Law.
24 See Articles 41, 42 of the TL.
25 See Article 16 of the TL; Article 44 of the PQL; Article 49 of the PCRI.
26 See Article 45 of the TL.
27 See Article 47 of the TL.
28 See Article 55 of the PCRI.
29 See Article 148 of the Chinese Food Safety Law.
30 See Articles 30–40 of the Chinese Pharmaceutical Administration Law.
31 ibid., Articles 7, 12, 36, 39.
32 ibid., Article 98.
33 ibid., Article 114.
34 ibid., Articles 115, 116, 117, 118, 120, 122, 123, 129, 133, 138, 141, 142.
35 ibid., Article 144.
36 ibid., Article 38.