Foreign manufacturers are expecting to see a surge in product liability litigation following the introduction of the "Statute on the Choice of Substantive Law in Foreign-related Civil Relationships” in China in April 2011. A section of this new law expressly concerns product liability lawsuits and claims. It was conceived and enacted for civil courts to respond properly to the steadily growing legal challenges posed by both individual and large scale defect-related accidents in the recent years, such as the milk-powder scandal, Toyota recalls, and cases of contaminated toys. It also aims to provide plaintiffs with more effective means of redress in such cases.
Previously, there were no specific provisions regulating the choice of substantive law in foreign-related product liability cases. The new statute provides a set of rules favorable to the injured person, facilitating a victim's access to Chinese civil courts and providing plaintiffs with the choice of flexible means of redress in complex cross-border product liability litigation.

Key features of the new law

Previously, plaintiffs in a product liability case before a Chinese People’s Court could only choose to apply the law of the place where the tort had occurred. Now, a plaintiff (Chinese or foreign) can choose to have the Chinese People’s Court apply to his case either:

• the substantial law of the place where he has his habitual residence; or
• the law of the place of business of the defendant; or
• the law of the place where the tort has taken place.

Danger of higher compensation claims

Where the defendant has no relevant business operation at the habitual residence of the plaintiff, the latter can only choose between the law of the place of business of the defendant or the law of the place where the tort has taken place. The apparent intention of the legislator was to favor the plaintiff with the choice of the Chinese law in cases with a foreign defendant with business operations in China.
However, the rules allow the plaintiff to freely choose the substantive law most favorable to their case.
Consequently, manufacturers and sellers face increased exposure to higher levels of compensation. For example, if the manufacturer is an American company, then it may be in the Chinese plaintiff's interest to apply US law in order to obtain much higher damage compensation or more favorable foreign provisions concerning the discharge of the burden of proof.

Influence of the new provisions on civil proceedings

It is too early for sufficient case law to help in predicting how civil courts will interpret key provisions of the new statute.  There is some debate about whether Chinese judges will understand the norms on the burden of proof to be matters of procedural law and therefore not subjected to the statute. It is also predicted that there will be notable problems for the Chinese judges in the interpretation and correct application of foreign norms.
Considering that Chinese civil courts do not follow “precedents”, it is likely that for the time being they will develop and rely upon their own internal guidelines for interpreting both laws.  In turn, this may lead to inconsistencies among the different territorial jurisdictions. For these reasons, we expect a period of uncertainty for parties who do find themselves embroiled in product liability litigation, until binding guidelines and interpretations have been issued by the Supreme People’s Court.Furthermore, the norms under examination may add to the costs and duration of civil proceedings. Chinese courts will indeed face new complex legal challenges when interpreting foreign substantive laws and parties are likely to engage in long disputes on these preliminary procedural and substantial matters, prolonging the duration and increasing the costs of proceedings. Translations will also add to increased costs and duration of the proceedings.

The future of product liability law

Product liability already constitutes a serious risk factor for multinationals doing business in China.  This has been demonstrated by the ever increasing administrative investigations into product safety, such as the recent Johnson & Johnson baby shampoo administrative investigation, the Chrysler and Toyota recalls.  In addition, companies face negative campaigns run by consumer protection bloggers and awareness groups, such as the public slandering of Siemens refrigerators in Beijing in November 2011.These risks will now be increased further, by a potential surge in product liability litigation which will threaten foreign manufacturers together with their business organization and partners in China. Plaintiffs will soon become aware and make use of the remedies afforded by the new tort law and by the statute on choice of law and begin suing foreign manufacturers together with their distribution and retail partners in China. Foreign manufacturers are therefore advised to take account of these new risk factors when investing in China and allocate adequate resources to face the upcoming legal challenges in the product liability field.

Dr Paolo Beconcini is the managing partner of law firm CBM International, Beijing.