China: What Constitutes Fraud Under China's Consumer Protection Law Regime?

Last Updated: 2 August 2019
Article by Catherine Guo

As the country leads the way in sales of cars, protection against dealership fraud is as important as ever, as a recent study of Chinese court judgments shows

China leads the way in sales of cars. The lifestyle of Chinese consumers is becoming more urban, and automobiles have become a necessity rather than a luxury. In 2018, China surpassed the second largest auto market^ the US, with sales surpassing 28 million in comparison with US sales of around 17 million.

As automobile products have become more closely tied to the Chinese lifestyle, these have increasingly become the subject of consumer disputes.

This article explores China's consumer protection law regime. It also examines the circumstances that give rise to consumer disputes, particularly the behavioural conduct of automobile sellers who commit fraud. This article also examines what conduct and under what circumstances Chinese courts have found and concluded that automobile sellers had committed fraud.

China's first comprehensive consumer protection law. Law of the People's Republic of China on Protection of Consumer Rights and Interests (consumer protection law)5 was passed in 1993, aimed at facilitating the development and operation of a market economy.

Also, China's product quality law was passed in the same year. Both laws established a level of consumer protection^ especially necessary when considering that during the late 1980s, the acquisition and ownership of consumer goods in Chinese households rose significantly.

Punitive damages

The current amended consumer protection law provides for punitive damages, and these new rules are known in China as 'punitive damages for sales fraud5 or 'refund one to pay three5.

Article 55 provides that consumers can claim compensation against business operators who commit fraud in the provision of goods or services.

Where the business operator knowingly furnishes defective goods or services to consumers which causes death or serious damage to the health of a consumer or other victim, the victim may seek both compensatory and punitive damages.

Case study

What constitutes 'fraud5 under the amended consumer protection law can be illustrated in a recent case decided by the Supreme People's Court in Beijing in November 2018.

The buyer claimed that the car dealer from whom he had purchased an imported vehicle had committed fraud. He alleged that the dealer had failed to disclose that certain repairs and repainting work were done on the left front door area of the vehicle which was previously damaged.

The dealer had stumbled upon the repair records two years later while performing routine maintenance on the vehicle. The buyer demanded a refund of the purchase price of RMB6m(£683,000) and of the taxes he paid; also, the buyer demanded punitive damages of RMB16.5m. At the trial before the court of first instance, the buyer prevailed.

Beware of the dealer

However, the Supreme People's Courts as the court of second instance, reversed the decision. The court found that the undisclosed repairs done to the vehicle were clearly minor, did not endanger the safety of the buyer when the vehicle was in daily operation^ and that the main functions and basic uses of the vehicle were unaffected.

The court had also found that when the dealer had signed the contract, the vehicle had not yet arrived at the dealership and it then had no knowledge about the existence of these minor potential repairs; only when learning about the prior minor damage did the dealer do necessary repairs as a part of pre-delivery inspection and recorded this in its system.

Thus, the court decided that the dealer had no intention to conceal the previous damage and repairs.

However, the court of second instance recognised that the dealer should have been clear and direct at informing the buyer of the existence of prior damage and repairs, and therefore awarded the buyer with compensation of RMB110,000 for a consumer's right to know.

We analysed 103 court decisions involving fraud claims asserted by consumers against car dealers. In 74 per cent of these cases, the court had decided that fraud was not committed by the dealers.

Originally published by The Lawyer.

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.

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