This article was first published in Asian Counsel

Product quality, after-sales service and product liability concerns have been receiving increased attention in the PRC. High profile cases, such as the recent milk scandal involving Sanlu, have highlighted product liability concerns and put pressure on national and local authorities to enact legislation and streamline administrative proceedings. PRC consumers are becoming increasingly aware of their legal rights and are willing to enforce them, if necessary, through court proceedings. Generally speaking, sellers, manufacturers, importers and parts producers may be held liable for losses resulting from defective products, and claims can be based on breach of contract, tort or product liability laws. Losses due to a defect can be limited to the product itself, or, in more complex scenarios, can extend to damage caused by its use. Also, when a defective part damages a larger product, such as a motor vehicle, damage to the end-product may give an additional claim.

Claims Based on Contract

The legal basis for contractual claims is the PRC Contract Law together with the underlying contract. If the condition of a product upon sale does not meet the required quality standard, the Contract Law grants the buyer the right to claim for repair, replacement, re-manufacture, exchange or reduction of the sale price (Articles 155, 111 and 113). Generally speaking, the quality requirements of a product are based primarily on the underlying contractual agreement (Articles 154 and 61). But, if the parties have not agreed on a quality standard, PRC courts can apply the relevant industry standard.

Contractual claims can only be considered if a contractual relationship exists. For example, everyday consumers generally do not have a direct contractual relationship with the manufacturer of consumer goods. The contractual relationship usually exists between the consumer and seller. Likewise, separate contractual relationships exist between the seller and manufacturer and between the manufacturer and parts producer. Despite the chain of contracts, a consumer does not have a direct contractual claim against a parts producer.

Claims Based on Tort

The new PRC Tort Law, which comes into force on 1 July 2010, is largely a compilation of existing legislation from the PRC Basic Principles of Civil Law, PRC Product Quality Law and other laws. Tort claims can be considered if a product causes further damage (for example, a defective battery damages other parts of the motor vehicle), damages the property of third parties or causes personal injury.

Claims in tort exist independent from any contractual relationship. Therefore, a consumer could bring a tort claim against the manufacturer of a defective part or product. A quasi-manufacturer -a company that appears to be the manufacturer because, for example, the product depicts its name or logo - may also be held liable. In contrast to claims based on product quality, tortious liability requires the defendant to be at fault. Generally, this means that the defendant must, at the very least, have acted negligently. The claimant is obliged to supply sufficient evidence of such negligent (or intentional) behaviour. The Tort Law, however, may drop the requirement to prove negligent or intentional behaviour under certain circumstances that involve matters such as product liability and environmental protection.

As the Tort Law is not yet in force, some questions about its application and interpretation will have to be answered by subsequent regulations and court practice.

Claims Based on Product Quality Laws

The PRC Product Quality Law as amended in July 2000 remains the legal foundation for product liability cases. Since then, however, many regulations have been enacted to strengthen the legal framework for product quality requirements, product recall measures and consumer action. Some of these are directed at product quality generally, while others are directed at specific industries.

Under the Product Quality Law, a manufacturer or seller is liable if a product is placed on the market that exhibits a design or manufacturing defect that injures a person or damages property. Certain defences against product liability claims are available to the manufacturer or seller.

The Product Quality Law defines products as all manufactured or processed goods intended for sale. Agricultural products, non-processed products and raw materials do not fall within its scope. Buildings are also expressly excluded from the scope of the law. However, this exclusion does not apply to parts of buildings or construction materials. According to the Product Quality Law, a product is defective if it exhibits a manufacturing defect or a product design defect, or if the instructions on its safe use are inadequate.

Both the manufacturer and the seller of a product can be held liable. The manufacturer faces so-called absolute (or strict) liability. This means that even manufacturers that have not acted negligently are liable for defects in the products. PRC legal experts disagree about whether strict liability also applies to sellers, or if they are only liable if they act improperly (tortious liability). The structure of the Product Quality Law indicates that sellers only face tortious liability, but this remains to be tested in court proceedings. On the other hand, a seller who does not provide relevant information on the manufacturer or supplier of a defective product is strictly liable. Lastly, a licensor who allows a third party to use the licensor's trademark, trade name or other distinguishing marks on the defective product may be liable together with the manufacturer and seller.

According to the current interpretation of the Product Quality Law, it appears that product liability claims can only be made against those who make, sell or license defective end-products. Product liability claims against suppliers and parts producers are not admissible. But a manufacturer of a defective end-product will undoubtedly attempt to limit its liability by suing (based on contract) a supplier of a defective part that caused the problem.

Another aspect of strict liability is a shift in burden of proof. PRC civil law generally requires the party claiming compensation to prove its claim. However, in a product liability case, the claimant need only prove that the product was indeed defective and that the defect caused the damage. The claimant need not prove that the manufacturer acted negligently, which could be difficult as the claimant would not usually be knowledgeable about the manufacturer's operations. Instead, according to Article 41 of the Product Quality Law, it is up to the manufacturer to substantiate a defence by proving, for example, that there was no defect when the product was placed on the market, or that the claimant grossly violated the safe use limits of the product, and that this contributed to the injury or damage.

With the proliferation of consumer protection laws in the PRC and the appearance of a more demanding public, manufacturers and sellers are bracing for more liability claims. Minimising liability involves carefully documenting the manufacturing and sourcing processes to show that an allegedly defective product was, in fact, in good working order. Even in cases of defective products, proper documentation can greatly assist to minimise costs and friction in connection with handling claims and, if required, product recalls.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.