Background
The People’s Republic of China (the “PRC”) has been faced with booming economic growth and, in this context, there have been a number of product liability episodes in the last few years, ranging from infant formula tainted with melamine to escalators unexpectedly reversing direction. Such product liability issues have prompted stronger governmental oversight and harsher punishment for those responsible.
Understanding the PRC product liability framework is crucial for companies manufacturing products to be sold in the PRC (“Producers”) or selling products in the PRC (“Sellers”).
Relevant Laws
The PRC has addressed product liability issues through two primary product liability related laws that govern both Producers and Sellers: the Product Quality Law and the Tort Liability Law.
The Product Quality Law lays out the groundwork for the notion of product liability in the PRC. It states that products must be free from unreasonable dangers, conform to product quality standards and contain the necessary warnings to prevent damages.
The Tort Liability Law unifies the product liability law framework. It defines when Producers or Sellers are held responsible for damages arising from a failure to live up to an obligation as well as extends such damages to include punitive damages.
Criteria for Product Liability
Product liability arises when a defective product is placed on the market, and the defect in such product gives rise to damages to a person or property.
Producer Responsibility for Product Liabilities
In general, a Producer holds the primary responsibility for product liabilities arising from a defective product, where the product poses unreasonable danger to personal safety or property, or does not meet national or industry standards.
However, a Producer is not liable where it proves that it did not put the product on the commercial market. If it did put the product on the commercial market, it is still not liable if the product defect did not exist when the product was put on the commercial market, or the defect was not perceptible by existing science or technology when the product was put on the commercial market.
Seller Responsibility for Product Liabilities
Sellers are liable where the product defect arises from the fault of the Seller or the Seller cannot locate the Producer of the defective product.
Third Party Responsibility for Liabilities
Under the Tort Liability Law, third parties other than the Producer or Seller may also be held responsible for a defective product if their role in the distribution chain caused the product defect. Additionally, a third party that allowed the use of its name, trademarks or other distinguishing marks on the defective products is liable along with the Producer and the Seller.
Joint and Several Liability
Under the Product Quality Law, an injured party can pursue a claim against either, or both, the Producer or the Seller of the defective product. Additionally, under joint and several liability, if the Seller ultimately pays the damages to an injured party but the Producer is responsible for the defective product, the Seller may then pursue the Producer to recover its losses.
Damages
Product liability claims brought against a liable Producer or Seller may result in compensatory damages and punitive damages.
Compensatory damages are paid to an injured party to cover the immediate and actual damage to the party’s person or property resulting from the defective product. For instance, if the injured party suffers personal injury as a result of the product defect, the liable party is responsible for all medical expenses, nursing fees, lost income, and disability compensation. If the defective product causes damage to property, the liable party must restore the property to its original state or pay compensation according to the market price. With respect to the defective product itself, the liable party is responsible to replace, repair, or refund the product.
Under Tort Liability Law, the injured party has the right to punitive damages if the producer knowingly produced a defective product and made it available on the commercial market. Importantly, the Tort Liability Law does not place a limit on such punitive damages.
Other Potential Liabilities
In addition to compensatory damages and punitive damages, liable Producers and Sellers may also face mandatory product recalls and criminal liabilities.
According to Tort Liability Law, injured parties may request that the liable party eliminate a hazard when products endanger persons or property. Thus, the injured party may ask the court to require a product recall, which is potentially more costly than paying compensatory or punitive damages.
If a producer or seller knowingly sells a product that violates the safety of a person or property, the abusing party can be held criminally liable. The criminal penalties can range from a fine of 50-200% of the defective product sales to a term of imprisonment beyond 5 years for consequences that are deemed particularly serious.
Implications for Producers and Sellers
The extent of potential product liabilities for Producers and Sellers is an important aspect to take into account when operating in the PRC. Any company producing or selling in the PRC should allocate sufficient resources towards monitoring product quality and establishing effective product distribution channels to mitigate the risk of such liabilities arising. Such companies should also have plans in place for product recalls, product liability litigation and even for public relations crisis management.
Additionally, Producers and Sellers should be especially vigilant of exposure to product liability in connection with joint and several liability. Warranties, guarantees and disclaimers in sales or purchase contracts should be carefully considered. Further, such companies should ensure that any company in its product distribution chain has sufficient product quality measures in place.
©2012 All content of this article is the property and copyright of China Solutions Inc and may not be reproduced in any format without prior express written permission. The content of this article is intended to provide a general guide to the subject matter and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.
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