In 2009, China tried the biggest product liability scandal in its history – melamine – contaminated milk involving Sanlu Group that claimed the lives of six babies and left almost 300,000 people with lingering health problems. And the verdicts handed down by the courts were unprecedented in their scale – two capital punishments, one suspended penalty and three life imprisonments.

Yet while the Sanlu case is one of the most talked-about, it’s one out of a very long list of tort-related cases in China. The country has experienced a significant increase in the number of tort-related cases in recent years, with the courts reportedly hearing 980,000 new tort cases in 2007 and more than 1 million in 2008.

China’s increasing tort-related litigations and the government’s desire to dispel negative perceptions, undoubtedly spurred the Standing Committee of the National People’s Congress to move to effect passage of the new Tort Liability Law (Tort Law) in December 2009. While the final version, due to come into effect from 1 July this year, was approved just three weeks after the period for public comment closed, one would be wrong to assume that the legislation was hastily conceived. The final approval comes more than seven years after the release of the first draft of a comprehensive tort law, in 2002.

The Tort Law sets out to unify tort related liabilities which were previously scattered across more than 40 different pieces of legislation. “In the past, there was a gap with respect to tort. We used to base our tort advice on the principles of the civil law and other legislation.

Now the new rules are codified, it has the force of law and carry a lot more weight than what we used to work with,” says Zou Weining, a partner at Jun He.

Consisting of 12 chapters and 92 separate provisions, the new law covers a wide range of subject matters including product liability, environmental pollution, automobile accidents and medical malpractice.

The new Tort Law also promulgates general rules regarding causation, burden of proof, damage calculations, and joint liability. In addition to damages, the law provides for specific performance remedies including injunction orders, removal of unlawful obstacles, property restoration and public apologies.

Innovative civil protection
With a better foundation for private actions where one has suffered damage and wants to seek redress against another, many legal professionals have commended the new law’s innovative facets. The Tort Law takes on new grounds, encompassing clauses and terms which have never been recognised in Chinese legislation before. For the first time in legislative history, civil protection recognises the independent right to privacy; a previously elusive luxury that now extends to many other sites like the Internet and medical institutions where an individual shares personal information.

For example, medical institutions are required to treat patients’ personal information with extreme confidence, as the law prohibits any disclosure of such information without the authorisation of the patient. Contents posted on the Internet can also be held against ISPs where a website operator acknowledges that a party’s rights are being infringed, and fails to take the necessary corrective measures.

Offenders are subjected to tort liabilities including paying damages for actual losses and compensation for emotional harm, if applicable. The incurrence of tort liabilities by an ISP is good news for companies like banker DBS (China). According to Janet Lin, the in-house legal head of DBS in Shanghai, the new rules give the bank the roots and channels to better protect their IP rights and business identity.

“In the past, pursuing a suit against a counterfeiter on the Internet was very complex, because it is often very difficult to locate the true owner of a website,” she says. “But now via ISP channels, the mere URL of a website is sufficient for a suit to stand for infringement. And bearing in mind the punitive damages an offender might incur, the number of potential counterfeiters will also decrease.”

Apart from ISPs, parties involved in environmental businesses are also facing the heat of increasing liability. While the plaintiff in a tort litigation case originating in the US bears the burden of proving that the defendant’s action caused the damage suffered by the plaintiff, China’s new law shifts this burden to the defendant. This makes it easier and less costly for a plaintiff to bring a tort claim and increases the difficulty and cost for defendants.

What will be the main driving force for more legal work under the new law? Most would attribute that to the “most prominent clause” of the Code – punitive damages. This notion could potentially be the fuel for China becoming one of the world’s most litigious countries. In the past, damages used to be awarded based on how much a product was worth, the model seems to have changed under the new legislation. While the Tort Law has yet to set forth the standard or methodology to calculate punitive damages, lawyers imply the monetary range of compensation will most likely start off reticent.

“My guess is that punitive damages would start off relatively modest,” says John Grobowski, managing partner of the Shanghai office at Faegre & Benson. “There is an apparatus for trying to make sure there are common policies formed by the court. One of the things that often happen in China is that the Supreme People’s Court, which is very much under the control of the Communist Party, might decide at some point that it wants punitives to be handled in a certain way, or with limitations of some sort, and will hence start to issue some guidance rules for the courts.”

A litigious goldmine
The clauses of the Tort Law aim to empower individuals and with more motivating remedies available, the country will in all likelihood become an even more contentious jurisdiction.

“The locals are now very willing to sue. That somehow, is proof that the legal enforcements pertaining to private actions are working. People are starting to realise that it is worthwhile bringing a case to court since many have gotten respectable compensation out of their claims,” says Jun He’s Zou.
Intel China’s general counsel Laurence O’Laughlin concurs. “With China’s increasing sophisticated legal environment, consumers and companies will turn to courts to obtain redress for their grievances. With the new tort law, companies should be prepared for an increase in litigation suit brought by consumers.

With more litigation, in-house counsels will need to be knowledgeable in the domestic litigation process and in effectively managing the litigation process,” he says.

With international lawyers out of their competitive ambit, PRC litigators are keyed up about setting precedents, as are their clients’ in-house experts.

“Punitive damages will be the impetus for more litigation cases, because plaintiffs will want such monetary compensation to be added to their damages. Defendants, in particular, will therefore need more legal help in terms of defending their rights,” says Zou.

What is most notable is that the Tort Law is now much harder on defendants than similar laws in most places around the globe, including the US and Europe. China’s version creates liability are keyed up about setting precedents, as are their clients’ in-house experts. “Punitive damages will be the impetus for more litigation cases, because plaintiffs will want such monetary compensation to be added to their damages. Defendants, in particular, will therefore need more legal help in terms of defending their rights,” says Zou.

What is most notable is that the Tort Law is now much harder on defendants than similar laws in most places around the globe, including the US and Europe. China’s version creates liability principles and evidentiary rules that are more stringent than either prior environmental legislation and court interpretations.

New business concerns; proactive actions triggered
It has become more important than ever for companies in China to not only understand the potential for increased liability, but also to proactively revisit many of their previous contractual and regulatory systems before the law’s official commencement.

According to lawyers, many key existing clients have already raised their concerns; they are looking at new clauses and trying to decide what they need to do on a daily basis in order to protect their interest more. “With a higher level of liability, clients are now more concerned about getting into trouble. They are looking at potential liability as something that they would have to deal with more regularly – as opposed to before where it was relatively rare and they just worry about it when it happens,” says Grobowski.

Especially so for industries like product manufacturing, pharmaceutical and natural resources, there is an imminent need for companies to be up to speed on how to take action to protect themselves, now they can be held responsible even if they have been compliant to legal regulations. And on a wider scale, the new rules opens doors for both local and foreign lawyers who work in other practices – including legal risk management, contract, regulatory and compliance.

For example, at the most basic level manufacturers will need legal help to establish an effective quality control system and product recall plans. Lawyers can advise manufacturers on how to identify potential issues before they become liabilities, and take appropriate pre-emptive action when and where necessary.

Some law firms are banking on such preliminary-type legal work and are already proactively providing advice on legal risk management, regulatory and compliance advice. According to O’Melveny & Myer’s Shanghai-based counsel Xu Kaichen, the firm is already playing an advisory role for existing clients who are concerned about how the new rules will affect them. MWE
China is one such firm. “The new law will definitely affect our practice areas – including compliance and risk management – positively. MNCs pay a great deal of attention to their product and environmental liabilities. We are already receiving inquiries and have started reviewing compliance strategies with in-house teams,” says David Dai, a Shanghai-based partner with the firm.

Faegre & Benson, which reports seeing a lot of preliminary advice going out to its existing key clients, is also keeping up to speed by preparing to reshuffle staff. “We are starting to give more advice on the new Tort Law on a proactive basis, to see it that takes hold. Once there is more demand, we will bulk up and add specialists to meet that demand,” says Grobowski. The firm is placing extra attention on clients who are in manufacturing businesses. “We will be providing more legal risk management advice to manufacturers. Foreign firms are very used to giving that kind of legal advice because we can pull in information from our international offices,” he adds.

The road ahead
The new Tort Law is a significant step towards the creation of a comprehensive civil code - and few in China would contend otherwise. The legislative changes are the latest legal development representing a fundamental shift in government policy, which will prompt companies operating in China to reassess their risk exposures and risk management plans.

No one knows yet how Chinese courts will interpret the new tort liability laws, but what is predictable is the significant financial ramifications for companies doing business in China.

Those companies will experience increased liability exposure and higher potential defendant costs, regardless of their compliances with the new rules and regulations. While plaintiffs enjoy their new rights and powers, defendants mull over the costs that potential liabilities will create. All of this is, of course, good news for China’s growing legal industry. ALB