China’s dairy industry has been hit hard by the discovery that certain suppliers were routinely adding the chemical melamine to their milk to increase its apparent protein content, leading to illness (and some deaths) among consumers. For most, the implications will be commercial, as they struggle to overcome negative perceptions about any food manufactured or produced in China. However, the scandal should also remind producers to avoid legal liability and potential reputational damage by ensuring that they, and their suppliers, conform with all relevant food safety requirements.

Most significantly, People’s Republic of China (PRC) law imposes strict liability, and possible criminal prosecution, on any entity and its responsible officers involved in selling contaminated products that cause damage to consumers – including entities who enter the supply chain only after the defect is caused and regardless of whether they were aware of the contamination.

The scandal has also prompted the PRC government to impose more mandatory product recalls and to tighten food inspection regimes by closing longstanding loopholes.

Product liability for contaminated food

Under PRC law there are four types of product liability for contaminated food: contractual liability, tortious liability, administrative liability and criminal liability.

Contractual liability 

Under PRC law, a provider of food is considered to give an implied warranty to its customers that the food it provides is safe and edible. If the food is ‘unsafe’ or ‘dangerous’, the provider may be found liable for breach of contract and required to compensate the customer for any foreseeable damages suffered (whether for personal injury or loss, direct or indirect).

PRC law does not allow parties to exclude liability for personal injury or death and any contractual provisional to that effect will be invalid.

Tortious liability

A consumer who suffers loss or personal injury as a result of consuming contaminated food may also bring a claim in tort against the manufacturer or seller of the food.

Unlike other tort claims, strict liability applies to consumer products. In other words, even if the manufacturer or the seller can prove that it did not know or have reason to believe that the food was contaminated, it will still be liable unless it can make out a valid defence. The available defences are either: (1) that the contamination causing the damage did not exist when the product was put onto the market; or (2) at the time when the food was made available to the public, the level of science and technology was such that it was not possible to detect the contamination.

A manufacturer or seller which is found liable in tort will be required to compensate the customer for loss suffered. In serious cases, there may also be liability for moral losses (similar to the concept of ‘pain and suffering’ under common law) up to RMB100,000 (approximately US$12,821).

Administrative liability

If the manufacture or sale of contaminated food results in disease or injury to its customers, the manufacturer and seller may be ordered to stop the manufacture or sale and to recall the food sold. Currently, they may also be liable to a fine of up to five times the income generated from the sales of the contaminated food product or, if there is no such income, of up to RMB50,000 (approximately US$6,410). In serious cases, their permits to manufacture or sell food products may also be revoked.

However, the PRC has recently promulgated for public consultation a new draft Food Safety Law, which substantially increases the penalties imposed on manufacturers and sellers of contaminated food. Under the draft law, such manufacturers and sellers would be liable to a fine of up to RMB100,000 (if the total value of contaminated food is less than RMB10,000 (approximately US$1,282)), or of up to 20 times of the value of the contaminated food (if the total value of contaminated food is more than RMB10,000). The new Food Safety Law is expected to be adopted by the Standing Committee of the People’s Congress in 2009.

Criminal liability

PRC criminal law imposes severe criminal penalties on those responsible for the manufacture or sale of contaminated food, as set out in the table (please see original document).

China’s product recall regime

China established its food-related product recall regime in July 2007. Under the current regime, food manufacturers are obliged to prevent contaminated food from coming to market and to recall those contaminated food products which have already been placed in the market.

The recall regime applies to three categories of contaminated foods:

  • food that harms consumers’ health ?? or causes death;
  • food that may harm consumers’ health; and
  • food that may cause harm to a specific group of consumers and which does not carry a clear warning of that harm.

The following factors must be considered in determining

  • whether a batch of food should be recalled: 
  • whether it conforms to the relevant legal safety requirements, regulations and standards; 
  • whether it contains non-food raw or supplementary materials or non-food additive chemicals;
  • the size and composition of the relevant consumer group; and
  • the quantity of contaminated food and how widely it has been distributed.

Manufacturers may recall contaminated food products voluntarily. If they fail to do so, the PRC government may order a compulsory recall. Voluntary recall will not release the manufacturer from liability but will mitigate any administrative or criminal liability.

Tightening of China’s food inspection regime

The Chinese Food and Drug Administration (FDA) has the right to inspect plant and equipment used in the manufacture of food as well as the food itself. To avoid excessive interference with manufacturing business, in December 2001 the PRC government established a system of exemptions from inspection. If a product (including food products) successfully passed three consecutive inspections, the manufacturer of the product was entitled to apply for a three-year exemption from inspection, which was renewable on application.

This inspection exemption system has attracted a great deal of criticism in the wake of the recent milk scandal. On 17 September 2008, therefore, the PRC government cancelled the inspection exemption for food products.

Since then, all food products will be inspected by the FDA at least every two years, or more frequently at the FDA’s discretion.

Conclusion

The dairy scandal, like similar recent scandals in the food and toy industries, highlights to anyone involved in manufacturing in China the importance of ensuring strict compliance with all applicable safety requirements, and the need for vigilant quality control of supply chains, in order to avoid falling foul of the PRC’s far-reaching and multi-faceted product liability regime and facing potential reputational damage.