China’s laws have not kept pace with its rapidly evolving retail sector. After 20 years, on October 25, 2013, the Standing Committee of the National People’s Congress of the People’s Republic China passed the first significant overhaul of consumer protection legislation with the Revision of the Consumer Rights Protection Law of the People’s Republic of China (the “Revision”).
In short the Revision basically changes everything for consumers in China. As always, only time will tell as to how it is implemented but the intent is clear – consumers will be given greater protection.
There any many reasons that reform was due (or even overdue). The Revision which took effect on March 15, 2014 – fittingly the next World Consumer Rights Day – provides PRC consumers with better standards of protection. These amendments addressed the rapid emergence of online retail, tightened protection of consumers’ personal information, increased penalties for violations of consumer rights, established a consumers’ public interest litigation system and re-adjusted the burden of proof in consumer transactions.
Protection is Needed – Chinese consumers have legitimate concerns in respect of product safety and quality. The State Administration for Industry and Commerce (SAIC) itself has noted that RMB 3.8 billion worth of poor quality products were sold in China between 2010 and 2013. Consumers need protection from threats as varied as tainted food to exploding electronics. Also in the news in 2012 were serious breaches of citizen privacy.
Unfair Practices – the Chinese authorities have been very active in 2014 in relation to alleged anti-competitive practices by international and domestic companies alike. The actions were as varied as infant formula to spirits and from luxury cars to pharmaceuticals. In addition the Chinese media was very sensitive to cases where international companies allegedly applied a double standard to the Chinese consumer.
China Retail has Changed – China’s previous consumer laws were promulgated prior to the advent of e-commerce. As a result, the current legal framework does not address numerous consumer concerns related to online shopping. China’s rapid approach to being the world’s largest online market coupled with it often being at the vanguard of online shopping innovation means that this law was long overdue.
The main advancements for consumer protection include:
1. Regulating transactions made via internet, television, phone and mail
China’s online retail boom has been the hottest market worldwide in recent years. The Ministry of Commerce reported online sales gross revenues of RMB 1.3 trillion for the first three quarters of 2013. To put this impressive figure in context, gross revenues in 2006 were an underwhelming RMB 26.3 billion. Further this boom is unrelenting. China’s anti-Valentine day, November 11, shattered previous records with a whopping RMB 35 billion in sales just for the Alibaba group.
Understandably, the law was unable to keep pace with the development of online sales but the Revision acknowledges the growing importance to protect consumers in China’s online sector. The Revision will, for the first time, specifically regulate transactions made via internet, television, phone and mail.
Online returns policy - In a major blow to online vendors, the Revision provides indecisive shoppers with greater protection (Article 25 of the Revision). The new Article provides that a consumer purchasing goods via internet, television, phone or mail will have the right to return goods for a refund within seven days from the date of receipt without needing to specify a reason. The only protections for the vendors will be that the returned goods must be in ‘good condition’ and (very importantly) that the consumer and not the vendor will bear shipping expenses. The shipping expenses issue in particular, will be crucial for overseas retailers.
In addition, the Revision does provide that certain products are not suitable to be provided with an unconditional return and refund policy. These include custom-made goods, fresh and perishable goods, digital products that have been downloaded online, audio-visual merchandise with removed packaging and newspapers/delivered periodicals. In addition, there are some areas for the vendor to stretch this exemption, for example, if the consumer confirmed that there is no right of return at the time of purchase due to the nature of the goods.
Provision of information by online business operators -The provision of information to online consumers varies greatly from seller to seller. The Revision provides (Article 28) that business operators providing goods or services via online platforms, television, telephone or mail order must disclose relevant information to consumers. Such details include its business address, contact details, quantity and quality of goods or services, pricing, performance period and method, safety precautions and risk warnings, after-sale services and civil liability.
Consumers are able to seek compensation - China’s online market is dominated by several major platforms. A major impact for these platforms is that if a consumer’s rights or interests are impeded following a purchase made via an online trading platform, then the Revision (Article 44) provides that consumers can seek compensation from either the seller or service provider. If the online trading platform is unable to provide valid contact details for the sellers using their network, then consumers can seek compensation from the online trading platform directly. This is a major change from the previous position where trading platforms were shielded from actions by sellers. The online trading platform can then recover compensation from the seller. This change heralds a shift in the burden from the consumer to the trading platform. It is understandable that the trading platform will be in a far better position to recover compensation from the seller than the consumer – who previously was often left without a remedy.
2. Protecting consumers’ personal information
Anyone who has received unsolicited and unwelcome SMS, emails and phone calls from vendors in China will warmly welcome the efforts (Article 29) to protect consumer personal information. The Revision requires business operators to ‘adhere to the principles of legitimacy, bona fide and necessity’.
More specifically, business operators must first obtain a consumer’s consent and explicitly explain the purpose, form and scope of information use before collecting and using a consumer’s personal information.
The Revision also provides that personal information must be kept strictly confidential by business operators and their staff, and they shall not leak, sell or illegally provide such information to others. Appropriate measures to safeguard a consumer’s personal information must be adopted and in the event of disclosure or possible disclosure, remedial measures must also be adopted.
Furthermore, business operators are prohibited from sending commercial messages to consumers without their consent or in cases when the consumer has expressly rejected such messages.
3. Standard clauses must be highlighted prominently to consumers
Business operators using standard clauses in their business must ensure information, which is of significance to consumers, is highlighted in a prominent manner and can be further explained upon a consumer’s request. The significant issues include pricing, safety precautions, risks, after-sale service and civil liability.
In addition, the Revision (Article 26) restricts businesses from imposing unfair conditions upon consumers or using unfair standard clauses or compelling transactions by technical means. Such provisions will be considered invalid.
4. Safety protection obligations
Although one is not immediately struck by unsafe business premises being a major issue in China, the Revision (Article 18) does require that operators of business premises owe a safety protection obligation towards consumers. Examples of premises falling within the ambit include hotels, restaurants, airports and theatres. An operator who fails to perform this obligation and this failure consequently results in harm to a consumer will bear tortious liability.
5. Random sampling by relevant authorities
To further protect the interests of consumers, the Revision (Article 33) provides that administrative authorities will conduct random spot checks of goods and services and publicly announce such findings. Goods or services found to be defective may be subject to warnings or even recalls.
6. Increased penalties
It is often the case that new regulations increase the ambit of protection but the penalties are such that the regulators and courts lack the big stick to drive business operators towards compliance. The new Revision provides for higher compensation for consumers and imposes heavier fines on business operators who violate consumer rights.
Punitive Damages – The Revision expressly opens the door to punitive damages which have to date been exceedingly rare in China. A new paragraph under Article 55 of the Revision stipulates that if a consumer dies or suffer a serious health issue as a result of using a faulty product and if the dealer was aware that the product was of substandard quality, then in addition to economic and psychological damage, the business operator may also be liable for punitive damages up to a maximum of twice the amount of loss.
Further, if the business operator has committed fraud, then compensation for loss may be up to three times the price of the goods or services. Moreover, Article 51 opens the door for consumers to seek compensation for mental anguish.
Administrative Penalties Upgraded – The original Article 56 has been revised and provides a number of circumstances where business operators will bear civil liability and may be fined by relevant administration authorities. The weight of the fines have been revised and significantly increased. In cases of illegal income, fines given may be up to ten times the illegal income obtained – a significant increase from the former maximum fine of five times the illegal income. Where there is no illegal income, a maximum fine of RMB 500,000 can be imposed – also a considerable increase from the former maximum fine of RMB 10,000. In addition, a new amendment has been added which states that any business operator which commits certain acts (i.e. providing goods or services that do not satisfy the requirements for protection of personal safety and property security, forging or altering the place of origin of goods or quality marks such as certification marks or manufacturing dates, providing false or misleading advertisements) may be blacklisted and such information can be announced to the public.
7. Burden of proof and public interest litigation
The Revision also opens up business operators to greater accountability as business owners will now have the burden of proof in disputes where consumers find fault in durable goods within six months of purchase (Article 23).
Further, a potentially far reaching amendment is the establishment of public interest litigation (Article 47). This change allows the China Consumers’ Association (CCA) and its provincial branches to initiate litigation on behalf of groups of consumers in a class action against retailers. This potentially drastic change towards class action cases is very much tempered by the fact that the Chinese authorities are unlikely to entertain widespread spurious cases or allow them to spread, but this will give the CCA a means by which to take action if it considers necessary, especially if there is a large public outcry.
Little that is contained in the Revision is likely to surprise international retailers. For the most part, the Revision has merely provided a framework for much needed protection for Chinese consumers. Although the Revision does increase the obligations and potential liability on the part of vendors, for the most part, the Revision also provides practical safeguards that prevent matters from getting out of hand. Yes, online retailers will face a no questions asked returns policy, BUT the transport costs will need to be borne by the consumer (this should practically stop many spurious claims). Yes, the door for class actions is opened, BUT will be done only via the CCA, which may or may not initiate a case. Yes, imposition of punitive damages is possible, BUT is capped. Both international and domestic retailers should consider how certain aspects may need to be reflected in their current contracts and practices, but for the most part, the Revision only requires that Chinese consumers be treated in a fair manner.