In December 2009, the Standing Committee of the National People’s Congress (“NPC”) passed China’s first Tort Liability Law. The law, which took effect on July 1, 2010, presents important issues for both domestic and foreign businesses operating in the Chinese retail sector.
While the new law is, in large part, a restatement of existing Chinese tort rules, the law adds to the existing framework and fills several gaps in what was previously a decentralized area of the law. The following is a brief summary of the pertinent changes in the Chinese tort framework.
Joint & Several Liability
Following the collapse of a building and death of a worker in Shanghai last year and several complex product liability cases, lawmakers revised the existing draft tort law to cover situations where multiple parties share responsibility for an injury. Previously, joint and several liability was a concept exclusive to the product liability area; however, under the new law, this concept extends to all aspects of business.
Essentially, where a defective product or service causes an injury, all parties in the supply chain can be held liable for the assessed damages.
The articles of Chapter II of the new law cover a variety of situations where multiple parties are found to have acted negligently. Under these articles, the damages assessed against multiple parties are to be based upon the degree to which each party is deemed to be responsible for the injury.
However, as is the case with these rules in many common law jurisdictions, where one party is unavailable or unable to make a compensatory payment, the remaining parties are responsible for the entire amount of the assessed damages.
The likely result of this change is that nationally recognized businesses with large numbers of smaller, independent suppliers would become the primary targets of tort litigation.
A second important change, particularly for retailers, is the inclusion of punitive damages in product liability cases. Chinese law typically does not permit the assessment of punitive damages; however, following the tainted milk scandal of 2009, it is clear that Chinese lawmakers seek to clamp down on consumer abuse in the retail and manufacturing industries.
While Article 47 provides for punitive damages where a product defect causes “serious harm or death,” the specific methodology for calculation of these damages is not laid out in the new tort law. Clarification is expected through subsequent regulations and circulars.
Articles 65 through 68 of the new tort law target environmental damages. The most important changes with regard to environmental torts are a shift in the burden of proof and liability for the acts of third parties.
Typical Chinese tort claims require the government or other claimant to first allege a prima facie case against the defendant and then allow the defendant to present rebuttal evidence to refute this case. However, under the new tort law, alleged polluters carry the burden of proving that they were not responsible for the alleged damages. This shift in the burden of proof signals a key policy shift toward heightened environmental enforcement and is likely to increase the volume of environmental tort claims.
In addition, Article 68 of the new Tort law provides that principals may be responsible for pollution caused by third-parties. While the mechanics of third-party liability are yet unclear, this provision is likely to cover agency issues that often arise in situations where subcontractors are employed. This change is particularly important for businesses that employ third-parties for waste disposal, transport, cleaning, maintenance, and other secondary services.
Expanded Product Recall Requirements
Under the existing tort law framework, product recall is limited to automotive, pharmaceutical, food products, and toys. Article 46 of the new tort law expands recall requirements to all products.
The new tort law provides that if any product defect is discovered after distribution, all parties involved in the manufacture and distribution of the product are required to take remedial measures, including the issuance of consumer warnings and timely product recalls. Failure to do so at any link in the manufacturer-to-consumer chain will result in liability. Again, the updated joint and several liability rules will apply.
It is important to note, however, that product defects that are undiscoverable due to current scientific limitations will not trigger recall liability. Businesses are, however, expected to maintain current and effective quality control standards, incorporating the latest technologies and industry best practices.
While the Supreme People’s Court has held employers liable for the actions of their employees, this rule was not codified under Chinese law. Article 34 of the new tort law explicitly states the vicarious liability rule, which mimics the well-established common law concept of respondeat superior: “Employers are responsible for the tortuous acts of their employees while they are acting under the direction of the employer.” The new tort law does not, however, detail the scope of employment activities covered; therefore, pending clarification, it should be interpreted to apply to a broad spectrum of employee activities.
While the tort law is now official, it is uncertain whether it will take immediate practical effect. Current Chinese tort law is quite fragmented and complex. The new law seeks to condense this amorphous body of law, representing decades of rulemaking, into a 25-page document. Courts may be slow to supplant their existing tort rules and, as always, a substantial lag in implementation procedures may delay application of the new law.
Nevertheless, the consolidation of Chinese tort law and expression of several new tort policies requires the careful attention of parties conducting business in China. In the near future, tort reform and public awareness is likely to lead to a rapid expansion of litigation in this field.