Product liability exposures in China – supply contract, insurance and claims handling

- By:

Courtesy of

Article by:Clyde & Co LLP     Chris Harris     Yicheng Chen
Last Updated:2014-06-18
Updating Tips:According to the provisions under prevailing laws, this article does not need to be updated for the time being, for the latest legal information, please click Legal Update. Subject to the Disclaimer of this Website, the articles in Article Database will be updated according to the latest provisions of laws.
English textChinese translation
Product liability exposures in China – supply contract, insurance and claims handling

Non China-based food producers and/or manufacturers exporting to China commonly sell their produce via local distributors. When negotiating a supply contract with a local distributor, there are a number of issues for the exporter to consider.
First, the governing law of the contract ought to be agreed. Naturally, each party will prefer their domicile jurisdiction's law. The eventual resolution of this issue might be a reflection of the parties' relative commercial bargaining powers. However, parties may sometimes meet midway, for example, by applying Hong Kong law. Hong Kong, as a Special Administration Region of China, provides linguistic, cultural and geographical comfort to Chinese parties. At the same time, Australian manufacturers are likely to be more comfortable to have their disputes heard in a court or arbitral tribunal under a similar legal system to Australia. Alternatively, parties may apply the UN Convention on the Sale of International Goods, which provides a code for the parties' contractual rights and obligations.
Second, parties ought to contemplate a dispute resolution clause. This is especially important where there is a cross-border supply contract. As an alternative to litigation, a popular option is to elect arbitration, and an agreed seat, as the default dispute resolution mechanism. Broadly speaking, the enforcement of arbitral awards in another jurisdiction ought to be relatively straightforward as compared to enforcing a judgment handed down by a court in another jurisdiction. However, it can be problematic at times to enforce a Chinese arbitral award even within China itself. In May 2013, a Suzhou court refused, on procedural grounds, to enforce a Chinese arbitral award made in Shanghai. Nonetheless, China is a signatory state to the New York Convention – hence Chinese arbitral awards should be directly recognised and enforced in many countries including Australia. Again, parties may consider alternative neutral options. For instance, an Australian cattle farmer and a Chinese distributor may consider to arbitrate at the Singapore International Arbitration Centre.
Third, it is common for contracting parties to allocate some risk among themselves by using various contractual waivers and liability-shifting mechanisms. However, due consideration should taken to ensure that these mechanisms would not be void by the contract's governing law, or as a matter of Chinese law. For instance, under the Tort Law of the PRC, a non-Chinese manufacturer of dairy products would not be able to avoid liability should it be found that it was responsible for a product defect which caused personal injuries.
Considering insurance
Broadly speaking, it is unlikely that a non-Chinese manufacturer would need to purchase insurance from an insurer in China. This is assuming that the non-Chinese manufacturer is not a legal entity in China and that its business is not organised through a Chinese subsidiary. Nonetheless, the following paragraphs set out some important considerations.
It is common to find a territorial limit in an insurance policy. For instance a policy's cover will be limited to only the jurisdictions in which the insured's place of business is located or to a prior-disclosed trading pattern. One may pay additional premium to uplift the geographical coverage limit, so as to cover risks in China.
A non-Chinese manufacturer should also pay particular attention to its insurance policy's excess and whether or not it is defence costs inclusive. Defence costs associated with a product liability claim in China may be significant.
An insurance policy may provide coverage only for product recall costs incurred locally in the domicile jurisdiction. However, given China's population spread across its various provinces and municipalities, it is likely that product recall costs would be significant in China. In order to reduce potential recall costs, and to obtain affordable insurance, non-Chinese manufacturers should plan emergency recall measures covering the entire distribution chain.
Non-Chinese manufacturers should also be aware that class actions are permitted in China. As is often the case, should liability be found, total damages awarded in a sizeable class action are likely to be significant. Non-Chinese manufacturers should consider if they have adequate coverage on this aspect. Class actions which attract much media attention are likely to be handled with speed in China. Insurers should also be able to respond with applicable time frames in mind. An illustration is the Sanlu case. On 1 October 2008 parents of a one year old boy who was sickened by Sanlu's tainted milk powder filed a lawsuit against Sanlu Group. Within three months, the Intermediate People's Court handed down its decision, sentencing Sanlu Group's former chairwoman to life imprisonment and a number of producers and middlemen to death.
Dealing with a claim – jurisdiction and applicable law1
According to the Supreme People's Court's (SPC) official opinion, a major case involving non-Chinese elements is one which involves parties residing abroad. As such, a lawsuit brought against a non-Chinese manufacturer in China would come under the jurisdiction of an Intermediate People's Court. The Intermediate People's Court sits above only the Basic People's Court. Appeals from the Intermediate People's Court go to either the Higher Court or the SPC (the highest court in China).
The time limit for bringing a defective product liability claim is two years from the date when the plaintiff knew or ought to have known his legal rights and interests were infringed.2
There appears to be scope for a lawsuit brought against a non-Chinese manufacturer in China to apply Australian law. However, it is highly likely that a lawsuit brought against a non-Chinese manufacturer in China would be dealt with applying Chinese law. This is because the Chinese judiciary possesses subject matter jurisdiction. Further, article 11 of the Law of the Application of Law for Foreign-Related Civil Relations of the PRC states that:
An individual's capacity for civil rights shall be decided in accordance with the laws of the region where his/her habitual residence locates.
Broadly speaking, to try civil cases promptly is a legal requirement in the Civil Procedure Law of the PRC. A Chinese court should complete the adjudication of a case at first instance within six months after the case is accepted. Appeals should be concluded within three months of the appeal being accepted. In practice, the actual times vary between province to province.
Non-Chinese manufacturers may have heard about how the Chinese courts may refuse to hear a case – ie practising its 'gate-keeping' function. A reason could be to avoid handing down a judgment against a powerful individual or institution. However, there are no reliable figures on this issue. Further, recent 2013 amendments to the civil procedure law states clearly that a court has to consider a case within seven days and should it decide to reject it, it must release a ruling rejecting the case. The ruling is also open to appeal.
Further reading
Industry experts have estimated Australian dairy product export volumes to Asia will increase by 50 to 60% over the next decade, in response to significant demand led by China. Australian dairy producers, cattle farmers and non-Chinese manufacturers exporting to this market should be aware of the Chinese product liability risks they may face. To read more, please click here.
1 With acknowledgement to Victor Yang, Senior Associate, Clyde & Co, Shanghai
2 Product Quality Law, article 45. However, the right of claim shall be forfeited 10 years after the date on which defective product was delivered to the consumer, except where a clearly stated 'safe-use' period has not expired. china enterprise income tax
All rights reserved by the original copyright holder. The contents of this article are 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. chinese business license

Customer comments

No comments were found for Product liability exposures in China – supply contract, insurance and claims handling. Be the first to comment!