Warning for manufacturers over Chinese legal change - Rise in personal injury and product liability claims expected

SHANGHAI, 26 July 2010 - Manufacturing businesses across a broad range of sectors, including consumer goods, life sciences and automotive industries, should take note that they could face increased personal injury and product liability claims in China after the country enacted new laws that took effect on 1 July 2010.


The PRC Tort Liability Law, which has been under discussion for nearly seven years, was originally passed in December 2009, and has now come into force. It is intended that the legislation will consolidate various statutory provisions, administrative regulations and judicial interpretations related to tort liability which previously existed. 


The Law introduces or emphasises several new concepts in liability that may cause concerns to manufacturers, notably: a new obligation to conduct recalls of defective products, uncapped punitive damages, and emotional distress damages.  At the same time, the scale of any regime change will be tempered by how the courts and administrative agencies in China actually enforce the new legislation.


Eugene Chen, Counsel in the Product Liability practice at Hogan Lovells, says:


"While various commentators have pointed out the benefit to be gained from bringing together the patchwork of regulations that exist in this area, all kinds of businesses will need to look carefully at the new rules and re-assess their liabilities accordingly.


Most concerning for in house counsel will be the fact that the law introduces the concept of punitive damages and does not put a cap on awards. I don't anticipate that this will lead to huge awards in the near future, but it could mean an upward trend in payouts in the longer term. Businesses with operations across the People's Republic of China will need to carefully re-evaluate their compliance programmes and consider how they will respond to an almost inevitable increase in claims. Similarly, insurers may find both opportunities for growth in coverage balanced with increased risk for existing policy holders."


Specific types of Tort Liability Outlined


The PRC Tort Liability Law is comprised of 12 chapters and 92 provisions, with generally applicable tort principles, as well as provisions governing seven specific types of tort liability:


(a)   Product liability: producers are subject to strict liability for injuries suffered from defective products; sellers may also be subject to strict liability if they are unable to identify the identity of the producer or supplier of a defective product;


(b)   Motor vehicle accident liability: insurance companies assume liability to the extent drivers are insured under mandatory motor vehicle insurance policies; the parties involved assume any remaining liability as per the PRC Road Traffic Safety Law;


(c)   Medical liability: medical institutions assume liability for themselves and their staff on a fault basis;


(d)   Environmental pollution liability: polluters are subject to strict liability;


(e)   Liability for injuries caused by highly dangerous work/activities: tortfeasors are generally placed under strict liability except under limited statutory conditions, e.g. where injuries are caused as the result of willful conduct or fault on the part of the injured parties;


(f)    Liability for injuries caused by unruly animals: owners are subject to strict liability unless they are able to establish that injuries were caused as the result of willful conduct or gross negligence on the part of the injured parties;


(g)   Liability for injuries caused by physical objects: tortfeasors are generally subject to strict liability except under limited statutory conditions, e.g. where the tortfeasors are able to establish that they are not at fault;


Notably, the new Law does not replace existing laws that address the same subject matter, such as the PRC General Principles of Civil Law, which governs civil liabilities and obligations generally, or other laws of specific application such as the PRC Product Quality Law in relation to product liability.  Rather, the PRC Tort Liability Law provides that if any other laws set forth specific provisions on tort liability, those provisions shall be allowed, effectively leaving potential conflicts to be resolved through the traditional rules of statutory interpretation.


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