China’s New Tort Laws

On July 1, 2010, China will be getting a new Tort Law. This law has been in in the works for nearly a decade and its arrival represents the completion of China’s civil code. The Tort Law is the mechanism by which individuals can defend the rights enshrined elsewhere in the code. This is a big step towards China creating a civil society.

This law is the culmination of 25 years of legislation, case law and judicial explanation that has created a vast body of legislation. The Tort Law makes no effort to replace these existing laws, rather it is the capstone on a huge edifice, intended to bring some order to an unwieldy system and to resolve certain critical technical legal issues that had remained unclear or in dispute before its adoption.

Tort litigation already dominates China’s legal system. Over 40 statutes are in some way concerned with tort law. In 2007, about 870,000 tort actions were initiated in the Chinese courts. In 2008, the number rose to one million. This equates to about one third of all cases heard nationwide.

What does this mean for the foreign investor in China? In my experience, most foreign investors are surprised to learn China even has an active tort system. As a result, they often fail to plan for dealing with the real risk that their activities can expose them to significant legal liability.

More important, many foreign investors are under the misapprehension that only the position of the local and national government officials and regulators matters in their activities in China. As long as the government is not threatening fines or other administrative sanctions, they believe they are “safe.” However, the essence of the tort system is that it gives power to the private person (business or individual) to take action — the government’s position on the issue should be irrelevant. If a private person has grounds to sue, they can sue.

All tort law is a balance between encouraging business activity and protection of the injured persons, and this latest piece of legislation — like many recent Chinese statutes — falls very much in line with favoring individual interests over business. Chinese tort law is heavily weighted towards protection.

The risk to foreign investors is illustrated by the torts singled out for separate treatment in the Tort Law. The most important are those that involve strict or “no-fault” liability where the plaintiff need only show damage and causation and is not required to prove negligence on the part of the defendant. These special torts arise in the following areas: product liability; environmental protection; high risk and dangerous activities (explosives, poisons, radioactive material); and damage to property or personal injury arising from construction. These are activities in which foreign-owned businesses are increasingly active in China. Where social constraints may discourage injured parties from filing lawsuits against locally owned businesses, no such constraint operates to prevent suits against foreign owned businesses.

There is already a trend towards “rights consciousness” in China and the adoption and promotion of the Tort Law will accelerate it. Chinese citizens are becoming ever more willing to defend their rights in court and should a foreign company find itself subject to a civil action in China, the experience could prove to be a costly one. The Tort Law takes an expansive approach towards damages, allowing recovery for economic damage, emotional damage, and also punitive damages in some cases. The notion of a Chinese court imposing punitive damages after a pollution or product recall incident should give all foreign investors reason to take notice.

The risk is real and the solution is prevention.

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