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Rights and Remedies: A Comparison of Consumer Law in China and Hong Kong

Kay Zhongjun Ch’ien, University of Pennsylvania, US Matthew Kennedy McCardell, Columbia University, US Helen Yu, University of Iowa, US

Summer Interns September 6, 2004


TABLE OF CONTENTS I. Introduction: The Need for Consumer Protections.......................................................... 3 II. Consumer Law in China: The Legislative Framework .................................................. 4 A. General Principles of Civil Law................................................................................. 5 B. Product Quality Law .................................................................................................. 5 C. Consumer Rights and Interests Law........................................................................... 8 D. Additional Laws....................................................................................................... 10 III: Consumer Law in China: Methods of Dispute Resolution ......................................... 11 A. Consult and Conciliate with Business Operators..................................................... 12 B. Request Mediation from Consumer Associations.................................................... 13 1. History of Mediation in China .............................................................................. 14 2. Is Mediation a Viable Alternative? ....................................................................... 17 C. Apply for Arbitration ............................................................................................... 19 1. The Current State of Arbitration in China ............................................................ 20 2. Arbitrating Consumer Disputes ............................................................................ 22 D. Litigation as the Last Resort .................................................................................... 23 1. A Sample Case: The Milk Powder Scandal.......................................................... 24 2. Reasons to Prefer Litigation.................................................................................. 26 3. The Civil Law Approach to Remedies.................................................................. 28 E. Judicial Mediation .................................................................................................... 37 1. Procedural Framework.......................................................................................... 38 2. Judicial Mediation as a Double-Edged Sword...................................................... 40 3. Judicial Mediation in Practice............................................................................... 40 F. Conclusion ................................................................................................................ 42 IV: Hong Kong’s Consumer Protection Regime .............................................................. 42 A. Hong Kong’s Consumer Council............................................................................. 44 B. Laws and Litigation in Hong Kong.......................................................................... 46 1. Deceptive & Unfair Trade Practices ..................................................................... 49 2. Litigation under Contract Law.............................................................................. 50 3. Litigation under Tort Law..................................................................................... 54 C. Conclusion................................................................................................................ 56 V. Conclusions.................................................................................................................. 57

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I. INTRODUCTION: THE NEED FOR CONSUMER PROTECTIONS Consumer rights are the cornerstone of any market economy.

Fundamental

economic assumptions depend on fair relationships in the course of transactions and an effective legal system is necessary to redress harms caused by unsafe products. With this in mind, the importance of securing these rights in China’s emerging market is unquestionable as it assumes its role among the largest and most complex economies in the world. The Chinese government has taken aggressive steps to assume international standards in consumer protection, from legal codes that draw heavily on developed civil law systems to promotion of consumer organizations created specifically to mediate disputes between buyers and sellers. However, problems such as counterfeiting and faulty goods plague domestic markets and threaten to undermine exports. Moreover, issues such as local protectionism and institutional incompetence—endemic to the Chinese legal system—prevent even the best-intentioned policies from being implemented effectively. In the last year alone, a number of incidents have increased awareness about the dangers of lapses in the regulation of product quality. Most notoriously, 17 children were killed and hundreds suffered from malnutrition when substandard milk powder produced in China was distributed and sold in seven provinces. Since then, product testing in Hong Kong as a result of the scandal has revealed a glut of quality deficiencies in Chinese imports, from unusable auto parts to soy sauce made from human hair.

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All of these incidents point to a fundamental development in consumer behavior: unlike in the past, when goods were produced and sold locally, development of commercial channels has led to a widening gap between the manufacturer and the purchaser. Therefore, while reputation alone served as an effective control of product quality in the past, a new infrastructure must be created to deal with unscrupulous entrepreneurs and prevent races to the bottom in the manufacturing process. Given the emphasis on cost-cutting in the Chinese manufacturing process, this could prove much more difficult than it might seem. This paper will examine the issues surrounding Chinese consumer law and its interaction with Hong Kong under “one country, two systems.” Hong Kong serves as an interesting contrast to China not only because of its political economy, which stands in stark contrast to the remains of Beijing’s Marxist-Leninist control, but also because it operates under the common law, a relic of 150 years of British rule. Thus, examined individually, the challenges facing each system present an interesting study in the development of consumer rights under two different regimes; examined together, on the other hand—as they inevitably must be since the 1997 handover—the dynamics of interaction between the systems demonstrate the profound and complex consequences of integration.

II. CONSUMER LAW IN CHINA: THE LEGISLATIVE FRAMEWORK Consumer legislation in China provides an extensive range of protections against fraud, poor quality goods, and questionable advertising practices. The PRC has gone to great lengths to ensure that consumer laws on the books represent a modernized, pro-

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consumer legal environment with room for remedies ranging from fines to criminal prosecution.

Executed effectively, the regime would compare favorably with most

developed countries.

A. General Principles of Civil Law The General Principles of Civil Law (GPCL) 1986 forms the basis of consumer protection legislation in the PRC. Article 106 of the GPCL lays the groundwork for civil liability in general, stating that “citizens and legal persons who breach a contract or fail to fulfill other obligations shall bear civil liability.”1 Provisions relevant to consumer rights include Article 122, which provides that a manufacturer or seller shall bear civil liability for substandard products that cause property damage or physical injury. Manufacturers may also claim indemnity against carriers or retailers if either are responsible for the injury.2

B. Product Quality Law The first piece of legislation to directly address consumer interests was the Product Quality Law (PQL) 1993. The general provisions of the law, contained in Chapter I, state that one of its primary objectives is to “protect the legitimate rights and interests of users and consumers.”3 It provides the consumer (or the user of a product) with a statutory basis for legal action in addition to any separate contractual basis and seeks to address major violations of consumer rights. Thus, Article 4 prohibits the 1

General Principles of Civil Law of the People’s Republic of China (1986) art. 106, available at http://www.qis.net/chinalaw/lawtran1.htm. [hereinafter GPCL] 2 Id. art. 122. 3 Product Quality Law of the People’s Republic of China (1993), art. 1, available at http://www.chinaconsulatesf.org/eng/kj/wjfg/t43949.htm. [hereinafter PQL]

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forgery of authentication marks and lying about the origin of a product or the name and address of the producer. The article also makes it illegal to mix impurities or imitations into products, pass a fake product off as a genuine one, or market a defective product as a high-quality one.4 A product defect is defined as an “unreasonable danger existing in a product which endangers the safety of human life or another person’s property; where there are national or trade standards safeguarding the health or safety of human life and property, defect means inconformity to such standards.”5 Chapter II provides for the creation of a state run system of supervision over product quality. Chapter III discusses the obligations of manufacturers and sellers. Article 14 states that manufacturers and sellers must ensure that their products are “free from unreasonable dangers that threaten human life or property,” and conform to national or trade health and safety standards.

Products should also possess the properties and

functions that they ought to possess, and conform to the product standards as marked on the product itself or its package. 6

Article 15 goes on to detail product packaging

requirements. Product packaging must contain: (1) a warranty that describes the quality inspection the product has passed; (2) the name of the product and the name and address of the factory that produced the product (both in Chinese); (3) the grade of the product, the main ingredients and their quantities; (4) production and expiry dates; and (5) warnings in Chinese for products which if used improperly may damage the products, or cause physical injury or damage to property. Unpacked food products and other nonpacked products which are difficult to mark are exempted from Article 15.7

4

Id. art. 4. Id. art. 34. 6 Id. art. 14. 7 Id. art 15. 5

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Chapter IV discusses consumer compensation for defective products. The seller must refund, exchange or repair a product if the product does not have the functions it is supposed to have or does not conform to its package description. However, the seller has the right to sue the manufacturer for indemnification if it is later found that the manufacturer is responsible for the defect. If the product has caused any loss outside of damage to the product itself, such as “damage to human life� or property damage, either the manufacturer and seller will be held liable, depending on who is responsible for the product defect.8 In the case of the seller, fault must be proved.9 The manufacturer, on the other hand, is strictly liable for product defects. Causation must be proved but neither negligence, recklessness nor intentional conduct is required for liability.10 Article 32 sets out the damages that an injured consumer may recover. When a product defect causes physical injury, the responsible party is liable for medical expenses, lost earnings, and a subsistence allowance if the consumer is disabled. If the defect causes death, the liable party is also responsible for funeral expenses, the pension for the family of the deceased and the living expenses of any other person(s) supported by the deceased before his or her death. If the product defect causes property damage, the property should be restored to its original state, or compensated for at the market price. If the injured party suffers any other serious losses, the liable party shall also compensate for such losses.11 The payment of damages for physical injuries is particularly important in China as the country has yet to develop an effective social security system.

While

damages for pain and suffering are not expressly mentioned in the PQL, it has been

8

Id. art. 29. Id. art. 30. 10 Id. art. 29. 11 Id. art. 32. 9

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suggested that they most likely fall under "damage to human life," which appears in Article 29.12 Chapter V sets out the penalties that may be imposed on offending parties. If producers or sellers deal in products that do not meet national or trade standards, they shall be ordered to stop production or sale. In addition, their earnings from the products will be confiscated, and a fine from two to five times the unlawful earnings will be imposed. The offender may also be investigated for criminal responsibility. 13

The

punishment for mixing impurities into products, selling invalid or deteriorated products, and passing off substandard products as high quality goods is the same.14 On the other hand, if a producer or seller forges authentication marks, the origin of a product or the producer’s name and address, she will not be subject to criminal investigation. Instead, she must publicly rectify the fraudulent claim. Any unlawful earnings will be confiscated, and a fine may be imposed.15 Chapter V also provides that producers or sellers who offer bribes and government officers who accept them will investigated for criminal responsibility.16

C. Consumer Rights and Interests Law The core of consumer rights legislation is the Consumer Rights and Interests Law (CRIL), which the Standing Committee of the National People’s Congress also adopted in 1993. While the PQL focuses on the obligations of business operators, the CRIL sets

12

Mark Williams, Foreign Business and Consumer Rights: A Survey of Consumer Protection Law in China, 18 UCLA PAC. BASIN L.J. 252, 262 (2001). 13 PQL art. 37. 14 Id. art 38. 15 Id. art 41. 16 Id. art 47-48.

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out in detail the rights of consumers. Like the PQL, two of the CRIL’s main objectives are to protect the “legitimate rights and interests of consumers” and to “promote the healthy development of the socialist market economy.”17 The law defines consumers as individuals who “buy or use commodities for purposes of daily consumption or those who receive services.”18 The CRIL grants consumers substantial rights, keeping in line with Chinese consumer rights legislation in general. Consumers are entitled to personal safety and safety with regard to their property. 19

They are also entitled to receive correct

information on the commodities they buy or the services they use.20 Consumers even enjoy the right to demand respect of their personal dignity and national customs and habits.21 In terms of enforcement of rights, the CRIL states that the industry and commerce administrations of all levels of government must adopt measures to protect the consumer rights set out in the CRIL.22 The CRIL also provides for the creation of consumers’ associations whose function is to protect consumers, assist government departments, and monitor businesses.

Disputes between consumers and businesses may be resolved

through several avenues. A consumer may hold reconciliation talks with the producer of the goods in question, request consumers’ associations to assist in mediation or file petitions with the relevant administrative departments. If the consumer and the producer

17

People’s Republic of China Consumer Rights and Interests Law (1993) art. 1, available at http://eng.cca.org.cn:801/page/xxbrowse.asp?db=falfgui [hereinafter CRIL]. 18 CRIL art. 2. 19 Id. art. 7. 20 Id. art. 8. 21 Id. art. 14. 22 Id. art. 28.

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or seller have an arbitration agreement, the consumer may also apply to arbitration bodies to start arbitration proceedings. Finally, the consumer may choose to litigate in court.23 Business operators’ obligations are similar to the ones set out in the PQL. Briefly, manufactures and sellers have to be honest about the quality and hazards of their goods. They may not use contracts of adhesion, shop notices or other means to avoid civil liability if they infringe on consumers’ rights. In addition, it is illegal for business operators to insult and slander their customers, search customers’ bodies or possessions, and detain customers.24 Interestingly, the law provides that business operators who are found to have committed fraud in providing goods or services shall, if demanded, compensate consumers double the amount the consumers originally paid for the commodities or services.25 This provision has been taken advantage of by a certain Wang Hai, a man who has achieved folk hero status in China. Since 1995, Wang, a peasant from Shandong, has been purchasing large amounts of goods from department stores which appear to be fakes. He then returns them and demands the double compensation guaranteed to him under the CRIL. If the store refuses to pay up, he threatens to sue the owners in court.26 (See below for a further discussion of Wang Hai.)

D. Additional Laws In the arena of consumer rights protection, China has, in addition to the PQL and the CRIL, the Law Against Unfair Competition (1993), the Advertisement Law (1994),

23

Id. art. 34. Id. art. 25. 25 Id. art. 49. 26 Williams supra note 12, at 266. 24

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the Food Hygiene Law (1982), the Standardization Law (1989), the Pharmaceutical Administration Law (1985), the Price Law (1998) and the Contract Law (1999). The Law Against Unfair Competition addresses both consumer protection and anti-trust issues, and makes illegal misleading advertising and claims.27 The Price Law provides that the prices of all products should be clearly marked and the seller cannot charge a price higher than the one displayed.28

The Contract Law’s provisions regarding the requirement of

good faith and fair dealing, along with its regulation of form contracts that attempt to exclude liability, are directly related to consumer protection.29

III: CONSUMER LAW IN CHINA: METHODS OF DISPUTE RESOLUTION Aside from the regulatory framework established in legislation and government administration, consumers have access to a number of different channels to recover for their losses after the fact. The China Consumer Association, citing Article 34 of the CRIL, lays out the following process for addressing consumer claims, in order of preference: (1) consult and conciliate with business operators; (2) make a request to consumer associations for mediation; (3) apply to arbitral organs for arbitration according to the arbitral agreement with business operators: (4) institute legal proceedings in the people’s court.30 According to official statistics, over 5 million claims have been settled

27

Law of the People’s Republic of China Against Unfair Competition (1993) art 5, 6, 9, available at http://www.jus.uio.no/lm/china.unfair.competition.law.1993. 28 Price Law of the People’s Republic of China (1998) art 14, available at http://us.tom.com/english/430.htm. 29 Contract Law of the People’s Republic of China (1999) art 5, 6, 52, available at http://www.chinaiprlaw.com/english/laws/laws2-1.htm. 30 Ding Shihe, Current Situation of China’s Consumers’ Rights Protection Movement, CHINA CONSUMERS’ ASSOCIATION (2004)

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through these first three processes in the last 15 years—without resorting to litigation—a success rate of over 90%.31 While this framework provides a promising view of dispute resolution, its practice is subject to many of the implementation challenges faced by the Chinese legal system in general such as local protectionism, lack of judicial independence, and difficulties enforcing judgments and arbitral awards.32 As a result, significant gaps are likely to exist between the process as laid out in Article 34 and practice, particularly in remote areas where consumer associations and legal institutions are relatively weak. For example, while the Consumer Association is quick to point out its success rate with claims that have been filed in its offices, there is no data on actual incidents of consumer issues despite common knowledge that fraud and low quality goods are everyday occurrences in markets from Beijing to Yunnan. Each step of the process will be briefly discussed below, along with the major issues that are likely to arise in execution and practice.

A. Consult and Conciliate with Business Operators The first possible remedy for infringements on consumer rights is obviously for the consumer to attempt to resolve the conflict with the seller directly.

Resolving

disputes in this manner reduces the administrative load while filtering out cases of misunderstandings and minor disagreements where parties—each with a stake in the transaction and resolution—might be inclined to settle the matter as quickly and quietly as possible. Additionally, seller-buyer conciliation minimizes economic transaction costs (borne by both the state and the individuals) as well as potential damage to reputation or 31

Id. For a detailed discussion of the current status of these issues see RANDALL PEERENBOOM, CHINA’S LONG MARCH TOWARD RULE OF LAW (2001) 32

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standing. Finally, by not involving authorities in the dispute all parties involved are able to avoid the uncertainty brought about by implementation problems endemic to the legal system. Of course, the biggest problem with conciliation as a means of dispute resolution is that if the interests of the parties involved diverge substantially it is unlikely that an agreement will be reached. External factors, such as social pressure or reluctance to invoke authority, might provide incentives for parties to compromise, but in general more serious disputes are unlikely to be resolved without some formal process. Furthermore, despite legislation on product quality (see above), actual standards vary dramatically from place to place, so that both the seller and buyer might be uncertain about their responsibilities and thus a determination of fault could be difficult to predict. In the end, conciliation as a means of dispute resolution is useful from an administrative perspective as a barrier to formal mediation procedures and practical from a common sense standpoint—after all, if disputes can be satisfactorily resolved between the parties in conflict they do not need to invoke any other means. However, for more serious disputes where differences are profound a resolution is unlikely to be reached without invoking authority.

B. Request Mediation from Consumer Associations Assuming that a dispute cannot be resolved through conciliation, the next recourse a consumer might seek is mediation through consumer associations. Consumer organizations have set up outposts in markets and initiated campaigns to increase awareness about consumer rights and to help mediate and resolve disputes as they arise.

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The CCA was created in 1984 through a mandate from the State Council and consists of a network of over 150,000 offices and contact points throughout China as well as 31 provincial departments. 33

Thus, assuming that a buyer has access to a branch of a

consumer organization, it would be possible to bring a complaint immediately after purchase or product failure to an authority familiar with the seller and common issues that arise in any given locality. This structure is effective for maintaining consistent enforcement of consumer protections at the local level—since the same authority deals with any problems that arise within their sphere of influence—and has the advantage of providing broad access to anyone who wishes to bring consumer complaints. The main benefit of mediation over conciliation is that it forces parties involved in the dispute to discuss the matter in contention and attempt to come to some resolution that will satisfy their interests. Therefore, it invokes some level of authority in the form of a mediator but does not take the additional step of entering into a formal process such as arbitration which will result in an externally-imposed resolution. 1. History of Mediation in China As many scholars point out, mediation has a long tradition as a means of dispute resolution in China.34 In pre-modern China parties involved in a dispute would seek out a village elder or local government official to hear their case. 35 Rather than decide a winner and a loser, the official would encourage the parties to come up with an organic solution by pushing each to compromise their position according to the concept of rang (“yielding”).36 Cases that could not be resolved through this mediation process would

33

Id. See, e.g., STANLEY B. LUBMAN, BIRD IN A CAGE: LEGAL REFORM IN CHINA AFTER MAO 23 (1999) 35 Id. 36 Id. at 24. 34

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result in costly and time-consuming litigation that often required paying significant costs and currying favor with influential members of the community to support each party’s version of the facts. In the end, decisions could very well depend more on an effective campaign than the merits of the original case, adding uncertainty and expense to an already complicated process.37 During the Mao era, the traditional emphasis on mediation as a means of dispute resolution was continued in the form of “people’s mediation committees”, albeit altered significantly in some respects under the influence of the rule of the Chinese Communist Party (CCP). 38

A need for ideological consistency in Mao’s outright rejection of

traditional values and institutions necessitated a significant level of discontinuity in the outward appearance of the mediation process, but the traditional preference for resolving disputes before they evolved into litigation remained. The role of the village elder was taken over by local party officials. The traditional emphasis on compromise, embodied by the concept of yielding, for example, had echoes of outdated values and was replaced by an emphasis on active conciliation out of concern for political ideology. The merits of a case, rather than based on broad understandings of fairness and equity, were often examined in the context of political orthodoxy, manifesting a significant advantage to “desirable” classes (i.e., workers and peasants) and their values over economic gain, property rights, and other bourgeois activities.39 Because the essence of the Maoist plight was class struggle, disputes were not only expected but embraced40 as means to achieve

37

For a full account of the difficulties with the imperial litigation process, see CH’U T’UNG TSU, LAW AND SOCIETY IN TRADITIONAL CHINA (1961) 38 LUBMAN, supra note 34, at 49. 39 For a discussion of the political goals behind mediation under Mao, see 2ND ALL-CHINA JUDICIARY CONFERENCE CONVENED IN PEKING, Xinhua, May 12, 1953. 40 In the sense that they promoted class struggle.

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social progress, provided that they were resolved in a way that reflected a MarxistLeninist sense of justice. In modern China, as the prominence of ideology is tempered by pragmatic concerns about certainty and predictability in the emerging market economy, the mediation process has retained its status as the preferred means of dispute resolution, but broadened its emphasis to accommodate a rapidly changing society.

Officially,

mediation is seen as an institution that combines traditional concepts of dispute resolution with Communist ideology, two influential forms of legitimacy in the modern Chinese state.41 Institutionally, mediation has changed significantly since the Mao era. By 1992, the state had trained upwards of ten million professional mediators42 and the ideology of dispute resolution moved away from Party politics towards concepts such as social morality and law.43 Professionalism in the mediation process has resulted in a heightened level of formality, standards have been established for mediators’ conduct, and outcomes are regularly reviewed by courts and legal authorities.44 In many cases, mediation is even handled as a part of the litigation process under the supervision of judges (see below for a discussion of judicial mediation). In terms of the methods of mediation, scholars assert that there are three broad styles of mediation: (1) emotion and reason, (2) law, and (3) a combination of feelings and law.45 The first style, emotion and reason, refers to an emphasis on social morality as

41

LUBMAN, supra note 34, at 220. JIANG YUE, THEORY AND PRACTICE OF THE INSTITUTION OF PEOPLE’S MEDIATION 1 (1994) 43 See Mediation Regulations (1989), articles 1-14. 44 Id. 45 Liu Guangan and Li Cunpeng, Civil Mediation and the Protection of Rights, in TOWARD A TIME OF RIGHTS: A PERSPECTIVE OF THE CIVIL RIGHTS DEVELOPMENT IN CHINA 288, 299 (Xia Yong, ed., 1995) 42

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the means of dispute resolution. As Stanley Lubman points out, this is not merely dispute suppression for the sake of social harmony, but instead a primary emphasis on restoring harmony with the solution itself a byproduct of the conciliation.46 The second approach resolves disputes through the straightforward application of the law.47 This approach emphasizes outcome over social harmony but suffers from the significant drawback that mediators are generally not legal professionals and are therefore not trained in applying the law. Finally, the combined approach of considering legal rules with emotion and reason seems attractive upon first glance but often leads to obscuring the law in favor of a harmonious resolution.48 Thus, a contract dispute might be resolved through compromise rather than through clarification of the legal rights of the parties involved and strict enforcement of the terms. Such compromising does little to enforce the standards of certainty and predictability so important in business transactions, obscuring rather than clarifying the duties of the parties involved for the transaction at stake and all future transactions.49 2. Is Mediation a Viable Alternative? Despite the attractiveness of importing foreign institutions to meet the needs of modernization, the traditional approach to dispute resolution had a number of advantages over a more formalized conception of civil law.

From the state’s perspective, this

reduced the burden of handling disputes before they evolved into more complex litigation, which would require more sophisticated fact-finding and possibly experts on law and enforcement. From the individual’s perspective this presented a number of benefits.

46

LUBMAN, supra note 34, at 231. Liu, supra note 45. 48 Id. 49 See also LUBMAN, supra note 34, at 232. 47

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Firstly, the final resolution was likely to be a compromise rather than the binary outcome expected in a common law court, which enables the parties to share the burden of the loss (perhaps to varying degrees). Secondly, because compromise is an agreement between two parties there is less of a sense of winning and losing, so that any social stigma associated with the result of a court case is significantly reduced. Thirdly, such an approach significantly reduces the considerable burden of the transaction costs borne by parties in a dispute—in the case of pre-modern China, this might include currying favor among officials and paying exorbitant fees to representatives. Additionally, some commentators have argued that the root of a preference for mediation is not necessarily cultural, but instead caused by the lack of any viable alternatives in the imperial system.50 Proponents of this view suggest that the decline in mediation and rise of litigation in modern China is simply an issue of development and that the economic need for a modern judicial system will drive improvement. Mediation might also be considered a coercive means of dispute resolution that lacks the independence of the judiciary or reliance on the rule of law characteristic of a developed legal system.51 Under this perspective, forced mediation through consumer organizations may have a net negative benefit on society by obscuring access to redress through legal institutions and thus undermining individual rights for the sake of the collective interest.

Such concerns are considerably exacerbated by implementation

problems since a fair resolution is dependent largely on unbiased and well-trained mediators.

50 51

See PEERENBOOM, supra note 35, at 168. See Donald C. Clarke, Dispute Resolution in China 5 J. OF CHINESE LAW 245, 294-295 (1991).

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Lubman predicts that as China develops, mediation will decline—as it did in Taiwan and other recently industrialized East Asian states. 52 Despite strong cultural preferences, he argues that the increasing complexity of disputes that arise out of the increasingly complex relationships brought about by the global economy and civil society will necessitate more formal methods of dispute resolution.53 After all, local authority— whether derived from party status or social prominence—has little or no bearing on such broad and complex issues as international transactions and human rights abuses. This assumes, of course, that institutions of mediation will be unable to evolve to meet the demands of more complex litigation by broadening their scope or appealing to an ever higher level of authority; nonetheless, there is no question that mediation in its current form will be hard-pressed to fulfill the needs of a fully developed Chinese state.

C. Apply for Arbitration Assuming the mediation process also fails to result in a satisfactory outcome, the next alternative for consumer disputes is arbitration. Despite the common belief that arbitration is a relatively new development in the Chinese state, dispute resolution in imperial China often required third-party arbitration where mediation failed to produce a satisfactory result. Therefore, the history of arbitration in China is closely linked with that of mediation: it was used as one more possible method of dispute resolution before the parties resorted to litigation.54 One scholar claims that arbitration in China can be traced back to Yao and Shun (about 2100-1600 BC), considerably earlier than the first

52

LUBMAN, supra note 34, at 234. Id. 54 JOHN SHIJIAN MO, ARBITRATION LAW IN CHINA 29 (2001) 53

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records of arbitration in Ancient Egypt of Greece.55 There is no doubt, however, that the modernization of arbitration institutions is a relatively recent phenomenon in China, only coming into existence in their current forms in 1995.56 1. The Current State of Arbitration in China In their current form, the arbitration laws of China are extremely complex in both their form and application. First of all, arbitration in any instance requires an agreement to arbitrate the claim, either in the form of consent after the fact or an arbitration clause in the original contract.57 Because consumer claims usually do not involve formal contracts, there is no automatic access to arbitration proceedings, so that either party’s withholding consent is sufficient to terminate an attempt to arbitrate a claim.58 Even granted that consent is given, a case must fit into the rigid structure defined by PRC legislation in order to be heard. The Arbitration Law of 1994 divides disputes eligible for arbitration into three exclusive, distinct categories governed by independent bodies of administrative law: (1) commercial disputes 59 , (2) labor disputes 60 , and (3) farming disputes and/or disputes involving collectively owned land.61 Of these three categories, only the first is relevant in the context of consumer transactions, but it is interesting to note that separate commissions exist with distinct sets of rules and procedures for the other two types of disputes. In addition to the horizontal divisions based on the nature of the dispute, arbitration law is subject to a number of vertical layers. According to one study, as many 55

XU CHUANBAO, TRACES OF INTERNATIONAL LAW IN PRIOR QING PERIOD 254-255 (1931) See ARBITRATION LAW 1994 57 MO, supra note 54, at 88. 58 For a full account of the procedural complexities surrounding submission to an arbiter, see MO, supra note 54, at 71-110. 59 ARBITRATION LAW 1994, art. 2 and 3. 60 Id. article 77 61 Id. 56

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as 14 independent statutory sources might govern arbitration proceedings.62 A broader approach recognizes five main categories of these laws: the Constitution, laws passed by the NPC (i.e., Arbitration Law of 1994), legislation passed by the State Council, provincial legislation, and local legislation.63 Therefore, determining the rules that apply for any given case before an arbitration committee—and filing a claim in the proper venue—requires either professional expertise or significant background in the arbitration process, a barrier that consumers might consider too formidable to make a claim worthwhile. Claims heard outside of framework described above run the risk of being considered “ad hoc arbitration” and a court may refuse to enforce the result.64 The legal status of ad hoc arbitration is unclear as it appears to be neither prohibited nor protected under the Arbitration Law of 1994, but recent opinions of the Supreme Court of Beijing indicate that awards resulting from ad hoc arbitration will be viewed negatively, at least in that jurisdiction.65 The status of foreign arbitration is another point of much confusion in China, with many awards at risk of being classified as the result of ad hoc arbitration. Except for recognized institutions, most notably the China International Economic and Trade Arbitration Commission (CIETAC) and the China Maritime Arbitration Commission (CMAC), the status of foreign-related arbitral awards is often difficult to determine.66 Awards granted under the New York Convention of 1958—to which China

62

See MO, supra note 54, at 32. Id. 64 MO, supra note 54, at 56. 65 See The Opinions Concerning a Number of Issues Arising from Applications for a Court Ruling on the Validity of Arbitration Agreement or for Setting Aside Arbitration Award (1999), available at http://www.bjac.org.cn/. 66 MO, supra note 54, at 58. 63

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is a party—are generally enforced 67 despite the fact that they do not fall under the Arbitration Law of 1994, and are thus officially classified as ad hoc.68 Other foreign arbitration institutions, however, are usually not granted such privileges and courts retain the power to set aside awards and/or refuse to enforce them.69 2. Arbitrating Consumer Disputes Although the use of arbitration as a means of dispute resolution shows great promise in China’s future business environment, a number of barriers exist for consumers wishing to have their claims heard. The CCA identifies three main problems with consumer complaints that may prevent them from being submitted for arbitration: (1) purchases do not typically include arbitration clauses; (2) arbitration organizations may not be readily accessible in remote locations; and (3) administrative and transaction costs might be greater than the amount in dispute.70 Underlying these problems is the specific and categorized nature of the arbitration system in China, which at present explicitly forces claims into one of three administrative processes, none of which is appropriate to resolve consumer disputes. Authorities are thus faced with two possibilities if arbitration is to be available to consumers: either adapt the nature of consumer transactions to fit with the current model or create a new framework to address consumer disputes. The CCA suggests that a combination of these approaches be utilized to create an effective consumer protection regime.

First, they recommend that China’s Civil

67

Id. at 57. Id. 69 For a complete discussion of the difficulties involved with enforcing foreign arbitral awards see Randall Peerenboom, The Evolving Regulatory Framework for Enforcement of Arbitral Awards in the People’s Republic of China, 1 ASIAN-PACIFIC L. & POL’Y J. 12 (2000) 70 Ding, supra note 30. 68

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Procedure Law and CRIL be “perfected” to accommodate alternative methods of dispute resolution for small claims. Second, they urge the creation of a special tribunal to be created through the legislative process in order to deal with consumer claims. Third, they seek to expand the presence of arbitration commissions into underserved areas so that a broader range of consumers have access to their services. Fourth, they want to institute a kind of default arbitration agreement, which would require domestic enterprises to include the right to apply for arbitration as a part of any commercial transaction. Finally, the CCA promotes consumer awareness and commercial compliance under its “March 15 Logo” campaign, which allows sellers to advertise their satisfactory compliance with the CCA’s dispute resolution methodology.71 Whether the CCA will be successful in their efforts to incorporate arbitration into the current Chinese arbitration system depends largely on the level of cooperation they are likely to receive from administrative authorities. The recommendations above show great dependence on significant changes at the legislative level and/or widespread reform in the existing system, neither of which is likely to occur unless the effects of such changes outweigh the potential costs and inertia against reform. Until then, arbitration is not likely to serve as an effective means of resolving consumer disputes.

D. Litigation as the Last Resort As stated in Article 34 of the CRIL, the last resort for parties involved in a consumer dispute is to bring their claim in court. Aggrieved consumers can generally sue under the Law Against Unfair Competition, the CRIL, the PQL, and the Food Hygiene Law. 71

Although the use of litigation to resolve consumer rights disputes is not as

Discussed in detail in Ding, supra note 30.

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prevalent as in western countries, it is increasingly used72, as consumer rights awareness has been greatly enhanced since the 1980s owing to the efforts of the mass media and consumer rights councils established all throughout China.73 1. A Sample Case: The Milk Powder Scandal A recent case that has caused social outcry is the “milk powder scandal” of Anhui Province. Since May 2003, over 200 babies in Fuyang City have suffered from high fever, diarrhea, edema, and stagnation in weight gain. The babies developed swollen heads and faces, abnormally large internal organs and short extremities. They were diagnosed with malnutrition, and the cause was the low cost milk powder their parents purchased in markets. Twelve babies died from malnutrition or other diseases related to malnutrition.74 Premier Wen Jiabao ordered an investigation committee to conduct a thorough investigation into milk powder quality in markets, and found that many brands of milk powder were of inferior quality, and that their nutritional content was at a level far below the standard set by the law. The investigation resulted in the arrest of more than two dozen suspects.75 Two commerce officials were sentenced to jail for filing false reports to conceal the death of a girl who had consumed the milk powder. Nine other officials, including Fuyang Mayor Liu Qingqiang and two of his deputies, have been

72

For a brief report on the increasing trend in litigation, please see Trish Saywell’s report on FEER. “Demanding Action.” FEER, May 1999. 73 Accurate statistics are difficult to come by, especially statistics that relate specifically to the number of consumer rights litigations. However, in Mark Williams’ article, he offered an estimate of a rise in “compensation cases” under the civil litigation estimates. 74 "Killer" milk powder probe continues, 31 arrested, http://en.ce.cn/National/Government/t20040517_861892.shtml 75 “Killer” milk powder suspects nailed. China Daily. http://www2.chinadaily.com.cn/english/doc/200405/11/content_329472.htm

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fired or disciplined for failing to detect and stop the sale of fake milk.76 The afflicted parents have also launched civil suits against various producers and retailers.77 The milk powder scandal in Anhui has attracted attention across the country due to the scale and scope of the injury. Moreover, the milk powder problem is not limited to Anhui alone. Litigation of cases with similar facts has begun in some other provinces, namely Jiangsu; a few cases have been settled through court judgment or court mediation.78 More details of these judgments and mediation results will be discussed in following sections on remedies and judicial mediation. While few consumer rights cases actually make it to litigation, sellers and manufactueres are occasionally brought before courts under criminal charges. In the Case of the Poisonous Cosmetics, angry complaints by consumers to the Consumer Association resulted in an investigation by the Public Security Bureau.79 Hwang claimed dark and yellow spots appeared on her originally light colored face after she began using a certain cosmetic lotion. After her complaint, the Consumer Association received more than two hundred similar complaints from other users of the same cosmetic product. Pursuant to Article 41 of the CRIL’s criminal liability provision and the clause of public welfare endangerment, the Court imposed criminal liability on the producer, ordering a jail time of eight years. All profits from the product were confiscated, and monetary compensation was awarded to all afflicted consumers. As noted above, some government

76

Two Officials Jailed Over Fake Milk that Killed 13 Infants. SCMP, August 13, 2004 77 Fake milk powder victims launches lawsuit. China Daily. http://www.chinadaily.com.cn/english/doc/2004-07/07/content_346015.htm 78 For a report on a case in Jiangsu, please see: 江苏首例“大头娃娃”索赔案审结 http://www.chinacourt.org/public/detail.php?id=119371&k_title=奶粉&k_content=奶粉&k_author= 79 The Case of the Poisonous Cosmetics, 中华人民共和国侵权与赔偿执法案例全书 中卷, p. 1012.

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officials, manufacturers and retailers of inferior milk powder were also brought before the law under criminal charges. The existence of consumer councils and other administrative agencies in China mean that consumers who do not suffer from grave bodily harm can generally be compensated through extra-judicial means. 80

Countries with a longer history of

consumer rights protections and greater accessibility to small claims courts than China see more consumer disputes litigated. However, even in those countries, owing to the characteristics of consumer rights disputes,81 “a lot of consumer litigation takes place in the lowest level courts and in alternative dispute resolution forums.”82

2. Reasons to Prefer Litigation a. Failure to obtain a satisfactory remedy through extra judicial means A number of the cases that we have surveyed show a familiar pattern of events leading up to litigation. Aggrieved consumers demand a refund or compensation directly from retailers or manufacturers of defective products. When these manufacturers or retailers refuse to compensate or if their offers are unsatisfactory to the consumers, a suit follows.83

80

According to the China Consumer Association, “China Consumer Associations [and] other consumer organizations are the preferred organs for the consumers to make their compensation claims, [they] have settled 5 million different cases of compensation claims with a settlement rate over 90% and helped the consumers to recover their compensation claims with a total amount of RMB three billion RMB.” Effectively Bringing to a Close the Outstanding Issue of Consumer’s Small-amount Compensation Claims is of Paramount Importance to the Perfection of the Compensation Claim Mechanism. 81 For a detailed discussion on the characteristics of consumer rights disputes, see Howell, pp. 7-8. 82 Howell, Geraint, Litigation in the Consumer Interest, ILSA Journal of International and Comparative Law, p. 48. 83 Examples abound, including: The Case of the Malfunctioning Air Conditioner, The Case of the Color Television Explosion, The Case of Substandard Pesticide, Food Poisoning of Water Pump Factory Workers, The Sale of Expired Goods in Nanjing, The Case of Coke Bottle Explosion etc. See generally, 中华人民 共和国侵权与赔偿执法案例全书 中卷

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b. A demand for justice Another scenario is in the case of grievous bodily harm or death caused by defective products. While there are many reasons for people to avoid courts, the judicial system is still seen as a way to demand justice.84 The Chinese courts often conduct an investigation into the facts before making a judgment, and this function of the Chinese courts can be favorable to plaintiffs whose cases needed scientific proof. In the Case of the Substandard Gas Stove,85 the Songs purchased a gas stove from a big mall in 1995. It exploded the first time they used it for cooking, despite the fact that they followed the instructions provided to them. As a result of the explosion, the couple suffered from serious burns and became permanently disabled. They brought suit against the mall and the manufacturer of the gas stove within a month’s time, and the court awarded RMB 247,109 (USD 30,889) after a thorough fact finding and investigation process. The amount awarded might not seem very high on its face, but it covered medical fees and lost earnings . There are no specifics provided in the case as to the location of the incident, but Song was a blue collar worker at a chemical plant, and thus the compensation amount should have been fair according to his living standards. Indeed, the two defendants took the case on appeal on the grounds that the compensation awarded was too high, but the decision was upheld by a higher court. c. Use the courts to test the law: the “Wang Hai Phenomenon” Since 1995, an interesting phenomenon has emerged in consumer rights protection. Some citizens have begun to use litigation as a private, nonsystematic and 84 85

In Chinese this mentality is called “tao hui gong dao” (讨回公道) The Case of the Substandard Gas Stove, 中华人民共和国侵权与赔偿执法案例全书 中卷, p. 1043

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even profitable way to “beat the fakes” (da jia). It all began when Wang Hai bought counterfeit products knowing that they were fake (zhi jia mai jia). He then relied on Article 49 of CRIL to demand double compensation from retailers, hence the “Wang Hai Phenomenon.” The first case that went to court with the intention of beating the fakes was the case of He Shan’s Xu Beihong paintings. In 1996, He Shan purchased two paintings from the Le Wan Da dealership. The store claimed that they were painted by renowned artist Xu Beihong, and stated so on the receipts they issued He Shan.. Suspecting that this dealership sold counterfeit paintings, He kept the receipts and brought a suit in a Beijing court claiming fraud. The court verified that these paintings were indeed counterfeit, and ordered the defendant to give a full refund of He’s payment (RMB 2,900), pay double compensation (another RMB 2,900) pursuant to Article 49 of CRIL, and pay all relevant legal fees. After winning the lawsuit, He Shan donated the double compensation to the China Consumers Association to set up a “beat the fakes” fund. The so-called “Wanghai phenomenon” has aroused considerable discussion in the society. Not only does it show that people understand and appreciate the effect of using litigation against fraudulent manufacturers, but it also reflects increasing awareness of consumer rights in China. 3. The Civil Law Approach to Remedies a. Remedy as Compensation According to civil law scholar Yang Lixin, in a civil law system, the basic objective of remedies is to compensate.

Theoretically speaking, the compensation

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amount cannot be smaller than the injury caused, nor can it be larger, 86 but sometimes it can be a little more than the actual damage caused.87 The categories of compensation in product liability cases are clearly set out in relevant provisions in the PQL and the CRIL. Many product liability cases that result in property damages are cases of defective agricultural products, which include seeds, pesticides and veterinary medicines. After establishing injury and causation, courts often compensate plaintiffs for their economic losses. In the Case of the Substandard Veterinary Medicine, a chicken farm suffered the death of 2001 chickens after using a certain brand of veterinary medicine.88 The chicken farm claimed damages of actual economic loss of RMB 40,959 RMB (USD 5,120), and loss in potential profits of RMB 33,960 RMB (USD 4,245), plus other miscellaneous fees such as transportation and laboratory costs.

The court awarded the plaintiff actual

economic loss plus the transportation fees, but denied the claim for loss in potential profit. The gist of the court’s ruling is that the compensation demanded must have a reasonable legal basis. While what is “reasonable” is left to the discretion of the judge, in cases involving property damage, it tends not to exceed losses already incurred.89 b. Awards adjusted for standard of living Article 41 of the CRIL outlines the kinds of compensation that a plaintiff can ask for in cases of bodily injury caused by defective products. Included in the law are medical expenses, rehabilitation costs, and lost earnings; in cases of where the plaintiff has become permanently disabled, the law provides for rehabilitation costs, living expenses, disability compensation and the living expenses of people who were supported 86

Yang, Lixin, 关于服务欺诈行为惩罚性赔偿金运用的几个问题, http://www.civillaw.com.cn/weizhang/default.asp?id=10078 87 Interview with Mr. Hao. 88 Case of the Substandard Veterinary Medicine, 中华人民共和国侵权与赔偿执法案例全书 中卷, p.1033. 89 Interview with Mr. Hao.

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by the disabled.90

The calculation of such expenses is closely connected to the living

standard of the disabled, thus resulting in significant difference for people living in different localities and for those who have different occupations.91 As mentioned above, courts take the awarding of damages seriously because of the inadequacies of the China’s social security system. The Case of the Gas Stove Explosion is a Beijing case that resulted in an unusually large compensation amount. In March of 1995, a gas stove exploded in a Beijing restaurant where Jia, a female high school student nineteen years old at the time, was dining with her family. Jia was burned in her face and hands. The injury rendered Jia 30% handicapped, with permanent scars that seriously affected her appearance. Jia sued the manufacturer of the gas container, the manufacturer of the stove and the restaurant jointly for medical expenses, treatment subsidies, nutrition fees, transportation expenses, future educational expenses, recovery treatment fees, cosmetic surgery fees and handicap compensation fees, totaling RMB 1,659,551.63 (USD 207,444). Among these fees, the handicap compensation fee demanded was RMB 650,000 (USD 81,250), and it was what common law countries know as damage for emotional distress. The Haidian People’s Court opined that the emotional distress Jia suffered from the accident was substantial, undeniable, obvious and compensable.92 However, it also reasoned that compensation amounts must keep pace with living standards, and that RMB 650,000 was too high. Moreover, there was no evidence showing that the restaurant was at fault, and therefore the court found the restaurant not liable to Jia for the accident. In

90

Article 41, CRIL. Interview with Mr. Hao. 92 See the Case of the Gas Stove Explosion, Court opinion, 中华人民共和国侵权与赔偿执法案例全书 中 卷, p.1063. 91

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the end, the court awarded RMB 273,257.83 (USD 34,157), of which RMB 100,000 was damages for emotional distress (the handicap compensation fee). The manufacturer of the gas container was liable for 70% of the compensation, and the manufacture of the gas stove had to pay the remaining 30%. Another case that resulted in a high compensation award was the Case of the Heater Explosion in Qingdao.93 Plaintiff Zhi was a worker at an engineering firm in Qingdao. He purchased a heater from his company for a low price. Despite quality problems with other heaters purchased by his coworkers, his company did not attempt to recall the heaters. In March of 1993, the heater exploded and caused a conflagration, seriously injuring Zhi and his family. 80% of Zhi’s body was burnt, and his wife also suffered serious injuries. They both had to go through prolonged treatments, including physical therapy, and were advised to rest for five to six years thereafter. Zhi demanded medical expenses, lost earnings, rehabilitation costs, living subsidies, support fees and property damages totaling RMB 104,903.13 (USD 13,113). The lower court awarded RMB 235, 550 (USD 29,444), and both the plaintiffs and the defendants appealed the amount.

The Qingdao Intermediate People’s Court awarded RMB 243,713 (USD

30,464). This amount was only a little lower than what Jia won in the Beijing courts, but it must be noted that this compensation was for three people (Zhi, his wife and his son), whereas Jia’s was for her only. c. Punitive damages—Article 49 in action Punitive damages are widely used in the U.S. as a deterrent of intentional, willful, wanton, and malicious activities. As the basic purpose of compensation in a civil law country like China is to compensate rather than to deter malicious behavior, the provision 93

The case of Heater Explosion, 中华人民共和国侵权与赔偿执法案例全书 中卷, p. 1029.

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of punitive damages in Article 49 of CRIL is of pioneering significance in China’s civil law.

The “Wang Hai Phenomenon,” briefly discussed in a previous section, best

illustrates the enforcement and problems of the double compensation clause. In early 1995, Wang Hai bought twelve “Sony” earphones from an electronics mall in Beijing.

He then took these earphones to the Department of Industry and

Commerce, where they were tested and confirmed to be counterfeit goods. He relied on Article 49 of the CRIL to ask the mall for double compensation based on fraud. After an eight month negotiation with the mall, Wang Hai finally received the compensation that he demanded. Meanwhile, he received double compensation through the same means from ten other malls, an amount totaling RMB 8000 (about USD 1,000).94 Wang’s initial efforts were extra-judicial. The fact that no litigation was involved showed that Article 49 had real teeth as a punitive provision. Of course, in other subsequent cases Wang had to bring suit in courts to achieve his objective, but he has been quite successful, though not without exceptions.95 The legislative intent of Article 49 is clear:

to deter particularly egregious

fraudulent behavior. However, this punitive provision generated a side effect—many “Wang Hais” started following suit, and as a result profited financially from the law.96 Some commentators have suggested that in order to preserve the integrity of Article 49’s punitive intent, protect the legislative goal of consumer rights laws and stop people from abusing the punitive provision, people like Wang Hai should not be considered as

94

Yang, Lixin, et al, 3•15”十周年:消费者维权经典案件点评, http://www.civillaw.com.cn/weizhang/default.asp?id=15442 95 For a case that Wang lost, please see very brief report by Sino….. “Wang Hai Meets Waterloo.” 96 Wang Hai used the compensation money he got from his crusade to set up a consulting agency that specializes in beating the fakes for consumers.

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“consumers” in the strict sense of the law.97 Indeed, a Beijing court has held that Wang Hai was not entitled to double compensation with this rationale.98 Another feature of Article 49 is that the amount of damage is clearly prescribed in the law— the seller or manufacturer must refund the money paid and in addition pay punitive damages equaling the purchase price.

In the Case of the Expired Beef Jerky,

plaintiff Wu bought some expired beef jerky from a food store. He demanded a punitive damage two times the price he originally paid. The store paid him the amount he requested, but refused to pay him again when he later bought a second batch of expired beef jerky. The court found fraud, but held that Wu’s demand of two times the purchase price had no legal basis, and instead awarded the amount set out in the law (return of purchase price plus punitive damage equaling the purchase price) 99 for all products purchased by Wu. While the previous case shows that consumers cannot ask for more than what the law allows, the following case shows that retailers are not permitted to compensate more than what the law allows either. In order to create good publicity, some malls put up the slogan “One Fake, Compensate Ten Times.” They promised a compensation amount that by far exceeded what the law provided for. The court ruled that the promise went against the law.100 Together, these two rulings suggest that courts see the double compensation as an invariable standard.

97

The CRIL, Article 2, defines consumers as individuals who “buy or use commodities for purposes of daily consumption or those who receive services.”. See previous discussion on the CRIL. 98 Wang Hai Meets Waterloo. 99 The Case of the Expired Beef Jerky, 中华人民共和国侵权与赔偿执法案例全书 中卷, p. 1060. 100 For a discussion on why this kind of voluntary punitive damages should be allowed based upon other theories of law, see Yang Lixin, 王海现象的民法思考: 论消费者权益保护中的惩罚赔偿金. http://www.civillaw.com.cn/weizhang/default.asp?id=12703

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Proving fraud is a prerequisite for establishing liability for punitive damages. Although the CRIL does not provide any definition for the term fraud, the Punishment of Fraudulent Behaviors Against Consumers, promulgated by the National Department of Commerce and Industrial Administration in 1996, provides that fraud against consumers occurs when in “providing products and services, sellers use false or inappropriate means to deceive or mislead consumers, such that the consumers’ legal rights are infringed.”101 However, this definition has not led to consistent results in courts. The following case shows that courts disagree on this very basic concept in Article 49. The facts in the two Qiu Jiandong cases were essentially the same. On December 31, 1996, Qiu made a phone call in the Wang Hanjin Phone Booth in the Xicheng District of Beijing. The call lasted for one minute. According to relevant regulations, night calls are charged a reduced price of RMB 1.1. The phone booth charged the full price of RMB 1.65, 55 cents more than the correct price. Qiu brought suit in Xicheng District People’s Court on January 2, 1997, and demanded double compensation. On January 1, 1997, Qiu made a long distance call at a rest house in Dongcheng District in Beijing. The rest house did not follow the half price regulation for holidays, and charged Qiu the full price of RMB 1.7, 55 cents more than what Qiu should have paid. Qiu brought suit in the Dongcheng District People’s Court, demanding double compensation of RMB 1.1, and RMB 100 for emotional distress and transportation costs arising from the litigation. The two courts came to completely different decisions regarding Article 49. In the first case, the Xicheng People’s court decided that Wang Hanjin Phone Booth’s failure to charge the reduced price was fraud, and ordered defendant to pay Qiu the RMB 101

Wang, Weiguo, 中国消费者保护法上的欺诈行为与惩罚性赔偿

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1.1 double compensation. In the second case, the Dongcheng People’s Court decided that there was no evidence supporting Qiu’s claim of fraud, but awarded transportation costs of RMB 582, ordered a return of the RMB 55 cents extra phone call cost, and denied the demand for compensation for emotional distress. Although the Dongcheng People’s Court awarded a much higher amount to Qiu than the Xicheng People’s Court, consumer rights advocates generally support the decision by the Xicheng People’s Court because of its recognition of fraud in that circumstance. The two opinions do not contain elaborate rationales on what the courts consider fraudulent behavior, but scholars have summarized two viewpoints of how fraud is proven based on the subjective mindset of the seller.102 The first viewpoint is that fraud is fault-based and intentional, but can be inferred from the facts. This was the approach adopted by the Xicheng Court.

The second viewpoint, adopted by the

Dongcheng court, is that the subjective fraudulent mindset of the wrongdoer must be proven. The second viewpoint of the law may be problematic for consumers because it is difficult to provide evidence on the subjective mindset of the service provider. d. Compensation for emotional distress Although there is a provision on compensation for emotional distress in the CRIL,103 it usually pertains only to cases of damage to reputation and infringement on personal freedom. The following case illustrates that different understandings of the concept can result in drastically different amount of compensation.

102

Yang, Lixin, 关于服务欺诈行为惩罚性赔偿金适用中的几个问题. http://www.civillaw.com.cn/weizhang/default.asp?id=10078 103 Article 43 states that, where sellers infringed upon consumers’ personal dignity and liberty, they should stop the infringing behavior, restore reputation, eliminate influence, apologize and compensate.

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In July of 1998, Qian, a female college student in Shanghai, was stopped by a Watson’s security guard because the store alarm went off as she exited the store.104 She was detained in the office and a female guard searched her body, taking her pants off in the process. The search yielded nothing and Qian was allowed to leave. She sued Watson’s in the Shanghai People’s Court. Claiming emotional distress, she demanded RMB 500,000 (USD 62,500) from the store. The lower court awarded RMB 250,000 (USD 31,250).

Watson’s appealed, and the Shanghai Intermediate People’s Court

awarded Qian 1RMB 0,000 RMB (USD 1,250) instead. Because it is difficult to put a price tag on mental sufferings, and also because awarding damages for emotional distress is not a common practice in the Chinese courts, it is difficult to estimate what courts are likely to do with claims of emotional distress. The important lesson to learn from these cases is that emotional distress is a compensable claim in China, as long as the damages demanded are deemed reasonable by the judge.105 e. Formal apology as part of the remedy Article 43 of the CRIL states that “sellers who have infringed on consumers’ dignity or personal liberty should…compensate and apologize.”106 Like other forms of legal redress, the formal apology is ordered by the court and is mandatory once awarded; unlike other remedies, this remedy has a strong moral undertone. There is no clear legal requirement on how the apology is to be carried out. Theoretically speaking, the apology should consist of five elements: (1) admission that the incident has happened; (2) admission that the incident was wrong; (3) admission that the wrongdoer was responsible;

104

Yang, Lixin, et al, 3•15”十周年:消费者维权经典案件点评, http://www.civillaw.com.cn/weizhang/default.asp?id=15442 105 Please also see the Case of the Wang Sisters, discussed in the following section. 106 See also similar provisions in the GPCL, Article 120.

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(4) admission of regret; (5) assurance that similar incident will not happen again.107 Yet the remedy is quite straightforward in practice. In cases where facts are relatively simple, an “I am sorry” expressed in public would suffice.108 Consumer cases that resulted in an award of a formal apology usually involve an infringement of the right to reputation and personal liberty. The Case of the Wang Sisters illustrates the enforcement of an apology remedy.109 One day in 1995, the Wang sisters went shopping at a mall. They tried on lipstick at a cosmetics counter. They put down the tubes of lipstick after trying them on, but as they were leaving, the salesperson claimed that the tubes were missing. The sisters were detained by security guards in the manager’s office. Two female employees searched their bags and found nothing. As the sisters were escorted from the mall, people watched and pointed, and the sisters were profoundly embarrassed and ashamed. Their parents sued the mall for emotional distress, and demanded an apology and restoration of reputation pursuant to Article 43. The Court ordered the mall to publish an apology notice in that city’s daily newspaper for three days, and awarded RMB 15,000 (USD 1875) for emotional distress.

E. Judicial Mediation Another means of dispute resolution that is playing an increasingly prominent role in the Chinese legal system is judicial mediation. Judicial mediation is the practice of voluntarily submitting to the judge as a mediator after litigation has commenced. The principles of judicial mediation are: that it is carried out according to the will of both 107

Wang, Lifeng, 民事赔礼道歉的哲学分析. http://www.civillaw.com.cn/weizhang/default.asp?id=13202 108 Wang, Lifeng, 民事赔礼道歉的哲学分析. http://www.civillaw.com.cn/weizhang/default.asp?id=13202 109 The Case of the Wang Sisters, 中华人民共和国侵权与赔偿执法案例全书 中卷, p. 1018.

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parties, it investigates the facts, it clarifies doubts and it is done according to law.110 Upon reaching an agreement by mediation, and with the approval of the People’s Court, the litigation is terminated. 111

In terms of procedures, there is not much difference

between judicial and extra-judicial mediation, but “the style of mediation [is] perhaps more intimidating to the parties, since the courts [wield] more power than neighborhood mediators.”112 In China, judicial mediation is most commonly used in family law, as it is a mandatory procedure in divorce proceedings. It is also used in simple tort cases (traffic accidents and industrial accidents), labor contracts, partnership agreement disputes, and small claims litigation.113 According to statistics, about 60% to 70% of cases that reach the basic level courts are resolved through judicial mediation.114 1. Procedural Framework Judicial mediation is done throughout all stages in litigation. For cases where the facts are straightforward, not contested by either party and have substantial evidentiary support, mediation can begin in the initial stage of the litigation. It is aptly named “mediation on delivery.”115 The term “delivery” refers to the delivery of the complaint at the beginning of the litigation.

With agreement by both parties and voluntary

renouncement of filing an answer by the defendant, mediation on delivery is simple and flexible, as it can be done right away at the court, over the telephone or at the residence of 110

Civil Litigation Law, Articles 85 and 88. 我国法院调解制度的不足及完善, http://www.chinajudge.com/0710/tjzddbzyws.htm 112 Lubman, p. 54. 113 Please see relevant provisions in “The Supreme People’s Court’s Several Regulations on Simple Procedures in Adjudicating Civil Cases,” Article 14. 114 中国法官协会调研组, 关于基层法院调解工作的调查报告. http://www.chinacourt.org/public/detail.php?id=124719 115 In Chinese, it is called “送达调”. 中国法官协会调研组, 关于基层法院调解工作的调查报告. http://www.chinacourt.org/public/detail.php?id=124719 111

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one of the parties. The next point where mediation is possible is after the defendant answers the complaint. The judge can mediate according to the allegations contained in the pleadings. If the defendant agrees, the plaintiff will be contacted to begin mediation at the court immediately. It is called “mediation of answers and defense.”116 In cases where both plaintiff and defendant appear at the court for the litigation, there can be an “immediate mediation.” 117

Before the arguments are presented in court, there is

“evidentiary mediation.”118 This is when evidence is gathered and exchanged. Then there is “courtroom mediation,”119 done when the court is in session. After the court session is over and before the judgment is delivered, there is “after courtroom mediation,”120 a last minute chance for parties to mediate before the judgment is passed down. Meanwhile, mediation can also be done outside the courts by lawyers, and it is known as “mediation outside the courts.”121 This mediation is the closest in format to mediation in Hong Kong or the United States.122 If mediation at any of the above stages fails, the litigation goes on until a judgment has been reached. Once the mediation is successful, the agreement must be signed by both parties before it becomes binding upon either side. Judicial mediation and litigation are intermingling strands that make up the fabric of formal dispute resolution. As discussed below, this system of dispute resolution has its own strengths and shortfalls.

116

In Chinese, “答辩调.” In Chinese, “即时调.” 118 In Chinese, “听证调.” 119 In Chinese, “厅审调.” 120 In Chinese, “厅后调.” 121 In Chinese, “厅外调.” 122 These different stages of judicial mediation was briefly discussed at中国法官协会调研组, 关于基层法 院调解工作的调查报告. http://www.chinacourt.org/public/detail.php?id=124719 117

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2. Judicial Mediation as a Double-Edged Sword Perhaps the most significant advantage and disadvantage of judicial mediation is the fact that the mediator is also a judge who has the final say in the matter if mediation fails. The major advantage of having the judge as the mediator is that he or she can give a reliable perspective on what the parties might end up with should litigation continue, thereby speeding up the process and facilitating judicial efficiency. Another advantage is the assurance of a result that reasonably comports with the spirit of the law. However, good results are not guaranteed. The judge’s double role elevates him to such a powerful position that it takes much intellectual capacity and practical experience to ensure fair play during the process. Moreover, the provisions in the Civil Litigation Law on judicial mediation only outline the principles of judicial mediation and do not include concrete procedures, thus allowing room for arbitrary maneuvering by the judge.123 One party may feel that it was stuck with a bad judge, that both the judicial mediation and the litigation were not fair, and therefore lodge an appeal, resulting in an enormous waste of resources. 3. Judicial Mediation in Practice A comparison of the remedies obtained from judicial mediation with those obtained from litigation show how judicial mediation works in practice. The various milk powder cases that have gone to court provide insight. The three cases that are chosen here come from Henan, 124 Jiangsu125 and Jiangxi.126 They all involve babies who suffered from malnutrition after drinking inferior milk powder. In the Henan case, the 123

中国法官协会调研组, 关于基层法院调解工作的调查报告. http://www.chinacourt.org/public/detail.php?id=124719 124 Central China 125 Southeastern China 126 Central Coastal

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parents demanded compensation of RMB 70,000 (USD 8,750). After mediation by the court, the case was settled for RMB 17, 500 (USD 2,188).127 In the Jiangsu case, the parents demanded RMB 55,240 RMB (USD 6,905). After mediation by court, the case was settled for RMB 10,240 (USD 1,280) and a formal apology by the defendant’s representative to the plaintiff.128 In the Jiangxi case, the judgment after litigation was RMB 12,987 RMB (USD 1,623.4). While the article did not report the amount the parents demanded, it notes that neither side appealed the amount awarded, implying that the parties were satisfied with the judgment.129 There is a significant gap between what the plaintiffs demanded from courts and what they actually won after the mediation. One explanation for the gap is that, in all three cases, the bulk of the compensation demanded was for emotional distress. Compensation for emotional distress was either not recognized by the court, or if it was recognized, it did not generate a substantial amount of compensation. In other words, the “actual loss,” the ones measurable in monetary terms like medical expenses, was what the compensation covered. The award in the Henan case is quite a bit higher than the Jiangsu one, but that could be attributed to the fact that the award demanded in the Henan case was much higher to start off with. All in all, the three cases came out with compensation amounts in the same range, and it is fair to say that cases of similar facts in other provinces will probably end up in the range of RMB 10,000 to RMB 15,000 — whether the route 127

巩义“大头娃”状告超市获赔 1.75 万http://www.chinacourt.org/public/detail.php?id=123616&k_title= 奶粉&k_content=奶粉&k_author= 128 江苏首例“大头娃娃”索赔案审结http://www.chinacourt.org/public/detail.php?id=119371&k_title=奶粉 &k_content=奶粉&k_author= 129 江西弋阳“大头娃”获赔一万二http://www.chinacourt.org/public/detail.php?id=125830&k_title=奶粉 &k_content=奶粉&k_author=

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chosen is litigation or judicial mediation. The amount of compensation awarded in the Anhui milk powder scandal (discussed earlier) was atypically large, and was most likely due to the national media coverage and attention from high level political leaders.

F. Conclusion China’s consumer legislation is relatively sophisticated but remains at the mercy of the government’s power to enforce the laws and provide an effective system to legislate claims.

This creates problems not only ex post for consumers seeking

compensation for injuries caused by faulty products but also ex ante since producers might not expect to have to pay for harm caused by shoddy goods. In part, this is a reflection of China’s transition from a simple market system where consumer expectations relied on things like local reputation but it also reflects a fundamental problem that must be resolved for effective market regulation of product quality. Only when producers must consider the consequences of harming consumers will the incentive to make money through the easiest and cheapest methods disappear. Therefore, reform of the legal system and the development of modern consumer protection organizations should remain a high priority for the Chinese government going forward.

IV: HONG KONG’S CONSUMER PROTECTION REGIME Hong Kong has a reputation for maintaining an extremely business-friendly environment, and this is reflected to some extent in the consumer law. Unlike China, which officially places great emphasis on protecting consumers through legislation—

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potentially to the detriment of business interests—Hong Kong generally relies on a combination of a powerful administrative dispute resolution system in its Consumer Council and application of common law principles. Hong Kong has produced relatively few product liability and consumer transactions lawsuits. The Law Reform Commission of Hong Kong speculates that this paucity is due to: (1) relatively minor injuries that can be solved more quickly and cheaply through non-judicial means; (2) the complexity of the law; (3) the costs of pursuing a lawsuit; and (4) cultural reasons.130 Given the large number of consumer complaints that are solved through non-judicial methods, perhaps it is the nature of the legal system rather than cultural characteristics that keep the number of product liability lawsuits low. Hong Kong has enacted substantial statutes and regulations to protect consumers against unsafe products, including the Consumer Goods Safety Ordinance, the Toys and Children’s Products Safety Ordinance, the Gas Safety Ordinance, etc. In the area of consumer transactions, there have been substantial improvements to the Sale of Goods Ordinance.

The Supply of Services (Implied Terms) Ordinance, the Control of

Exemption Clauses Ordinance and the Unconscionable Contracts Ordinance have also been enacted. However, there are still deficiencies in Hong Kong’s consumer protection law.

130

THE LAW REFORM COMMISSION OF HONG KONG PRODUCT LIABILITY SUB-COMMITTEE, CONSULTATION PAPER ON CIVIL LIABILITY FOR UNSAFE PRODUCTS 4 (1997).

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A. Hong Kong’s Consumer Council The time and expense that litigation requires often makes pursuing a case through the courts unattractive for consumers.

This circumstance pertains to both product

liability and trade practices cases, as the litigation costs are usually far higher than the loss caused by the purchase or the defective product. While the government should focus on amending existing legislation, consumers also need an effective instrument that can handle their complaints more efficiently and cheaply than the court system. Luckily for Hong Kong consumers, the Consumer Council has been quite successful in providing such a service. Generally, consumers will report a complaint to the Consumer Council Hotline. Council staff will make note of the details of the case, and determine whether the Council has jurisdiction over the transaction in question. For the Council to have jurisdiction: (1) the transaction must have taken place in Hong Kong; (2) the transaction cannot involve government services; (3) the transaction cannot have taken place between two commercial entities. Also, some cases might be out of the Council’s jurisdiction because they fall under the authority of relevant government departments. For example, the Council will direct complaints about restaurant hygiene to the Health, Welfare and Food Department and complaints about counterfeit goods to Customs. If the Consumer Council determines that it has jurisdiction, then it will write to the trader and ask her to participate in the Council’s mediation process. According to the Consumer Council’s Complaints and Advice department, 85% of all meritorious case are settled by mediation.131 Traders are generally willing to mediate because they respect the

131

Interview with Wing Kai Chan, Head of Complaints and Advice Division, Hong Kong Consumer Council, in Hong Kong.

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Council and they know that the government established it to handle consumer complaints. Most traders are also aware that if they are uncooperative the Council can resort to further measures, like naming. Naming involves the Consumer Council informing the press about the bad practices of the uncooperative company, and is a powerful weapon because it can have a serious effect on the sales of a business. If the parties cannot resolve their dispute through mediation, then the case will go to litigation or be taken on by other agencies. If litigation becomes necessary, the consumer has to sue themselves, as the Council cannot sue on the behalf of consumers. (One way of making consumer rights litigation more consumer friendly would be to change this policy.) What the Council can do is provide forms and assistance. Its officers may also attend the trial as witnesses and provide reports, but only if the judge summons them. The size of compensation amounts varies – surprisingly, sometimes consumers will receive larger amounts in mediation than in litigation. This situation occurs because traders may be antagonized by being dragged to court, and are more willing to play hardball and less willing to compromise. Sellers are especially angered if the consumer has informed the press about the case.132 The Council has generally been successful in helping consumers mediate their complaints. Of course, mediation is less damaging to a company than litigation, and Hong Kong companies that exist in a relatively litigation free environment may face less pressure to remedy safety defects than companies that may have to deal with potentially crippling class actions. The Council’s attempts to push the government to pass more

132

Id.

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consumer friendly legislation like an ordinance regulating advertisements have not met much success yet, perhaps because of Hong Kong’s business friendly environment.

B. Laws and Litigation in Hong Kong When the Consumer Council is not able to resolve disputes, parties must resort to the protections afforded to them by local legislation and the common law. The only relevant legislation for such cases is generally limited to the establishment of safety standards and criminal sanctions and thus is not an effective means of resolving individual consumer disputes ex post facto. Under common law, while it is possible to sue under tort or contract law, the absence of a statutory regime like that which exists in the United States makes barriers to success in consumer rights cases sufficiently high so that many claims are simply not brought to court. 1. The Consumer Goods Safety Ordinance The Consumer Goods Safety Ordinance imposes a duty on manufacturers, importers and suppliers of certain consumer goods to ensure that the goods they supply are safe and for intended purposes.133 Section 6 of the Ordinance states that a person shall not supply, manufacture or import into Hong Kong consumer goods unless they comply with the general safety requirement for consumer goods, or, where an approved standard applies to specific consumer goods, the approved standard. 134

The general

safety standard is an objective test that requires consumer goods to be reasonably safe with regard to all circumstances, including: (1) the manner in which the goods are marketed; (2) the purpose for which they are marketed; (3) the use of any mark, 133

Hong Kong Special Administrative Region Consumer Goods Safety Ordinance (1997) section 4, available at http://www.justice.gov.hk/eng/home.htm. 134 Id. section 6.

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instructions or warnings; (4) adherence to relevant reasonable safety standards published by a standards institute or similar body; and (5) the existence of any reasonable means (taking into account the cost, likelihood and extent of any improvement) to make the consumer goods safer.135 Defenses for the violation of Section 6 include: (1) the accused took all reasonable steps and exercised all due diligence to avoid committing the offence; (2) the accused reasonably believed that the goods would not be consumed or used in Hong Kong; (3) the accused supplied the goods as a retailer and neither knew nor had reasonable grounds for believing the goods did not comply with the general safety requirement; and (4) the consumer goods were not supplied as new goods.136 The Ordinance can create criminal liability, and a guilty party is liable to a fine and to imprisonment for 1 year upon first conviction, and a fine of HKD 500,000 and to imprisonment for 2 years upon subsequent conviction.137 While the Consumer Goods Safety Ordinance provides for criminal sanctions, consumers seeking compensation from retailers or manufacturers will find that the Ordinance does not create a civil claim for breach of statutory duty, unlike China’s Product Quality Law. Precedent shows that British and Hong Kong courts are reluctant to imply civil rights for victims. The rationale behind this development is that product liability legislation is for the protection of the general public, and not intended to create causes of action for individuals.138 If, like in the Consumer Goods Safety Ordinance, a civil cause of action for breach of statutory duty is not specifically provided for in the 135

Id. section 4. Id. section 22, 24. 137 Id. section 28. 138 THE LAW REFORM COMMISSION OF HONG KONG SUB-COMMITTEE ON CIVIL LIABILITY FOR UNSAFE PRODUCTS, supra note 30, at 7. 136

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legislation, the consumer has to sue in contract or in tort.

Most product liability

ordinances in Hong Kong, such as: (1) the Toys and Children’s Products Safety Ordinance, which sets out the safety standards for toys and children’s products; (2) Part V of the Public Health and Municipal Services Ordinance, which makes it illegal to sell food and drugs rendered injuries to health by the use of adulterants; (3) the Pharmacy and Poisons Ordinance, which controls the sale and possession of certain poisons and pharmaceutical products; (4) the Electricity Ordinance, which sets the safety standards for electrical products; (5) the Dangerous Goods Ordinance, which regulates the possession, manufacture, shipment, storage, sale and use of dangerous goods such as explosives, compressed gases, petroleum, poisonous or corrosive substances, etc.; and (6) the Nuclear Material (Liability got Carriage) Ordinance, which sets the safety standards for carriage of nuclear material protect consumers by establishing safety standards and creating criminal sanctions. However, out of the above, only the Nuclear Material Ordinance allows consumers to claim compensation through a civil action for breach of statutory duty.139 Most people, therefore, have to sue in contract or in tort to claim compensation if they are injured through the use of consumer products.

139

Hong Kong Special Administrative Region Nuclear Material Ordinance (1997) section 5, available at http://www.justice.gov.hk/blis_export.nsf/home.htm.

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1. Deceptive & Unfair Trade Practices Deficiencies also exist in Hong Kong’s laws governing trade practices in consumer transactions.

A Consumer Council study analyzing the 4,574 complaints

received in the last quarter of 2000 found that a substantial number of cases would be legally actionable if foreign trade practices laws were enacted in Hong Kong. The most prevalent sharp trade practices were: (1) misleading indication as to price; (2) false or misleading representation; (3) accepting payment without intention to supply; (4) bait and switch; and (5) undue harassment or coercion.140 Trade practices laws in Hong Kong tend to have large loopholes. For example, the Trade Descriptions Ordinance makes illegal misleading “trade descriptions” of quantity, method and place of manufacture, etc., but does not prohibit misleading price information.141 Moreover, the Ordinance does not appear to prohibit false or misleading representations that the seller makes while conducting a transaction. In comparison, the CRIL makes receiving accurate information on commodities and services a consumer right.142 A third major problem with the Ordinance is that it applies to goods but not to services, accommodation or facilities. The Ordinance does not cover businesses like banks, slimming centers, and travel agencies, etc. As Hong Kong’s economy is now largely service oriented, these gaps in the law have the potential to become gaping.143 Plaintiffs in civil suits will also find it very difficult to prevail in claims of false misrepresentation. Generally, plaintiffs have to prove not only that they actually relied

140

HONG KONG CONSUMER COUNCIL, REGULATING DECEPTIVE MISLEADING & UNFAIR PRACTICES IN CONSUMER TRANSACTIONS 3 (2001). 141 Hong Kong Special Administrative Region Trade Descriptions Ordinance (1997) section 2 , available at http://www.justice.gov.hk/blis_export.nsf/home.htm 142 CRIL art 8. 143 HONG KONG CONSUMER COUNCIL supra note 55, at 9.

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on the misrepresentations of the seller, but that their reliance was justified. Buyers may find it difficult to meet these legal requirements, especially in bait and switch scenarios.144

Prosecuting sellers for deceptive and misleading conduct under criminal

law is not easy either, as conviction under the Theft Ordinance requires the prosecution to prove dishonesty or intent to defraud. This burden of proof is heavy as an extensive investigation is usually required to collect evidence. 145 The Theft Ordinance is also relatively useless in terms of snaring sellers who use high pressure sales methods or nondisclosure of material information in order to sell their goods.146 2. Litigation under Contract Law Under common law, if a seller and a consumer are in privity of contract, the consumer may collect damages when the seller breaches an express or implied term of the contract. A contract for the sale of goods is formed when the seller transfers or agrees to transfer goods to the buyer for money consideration.147 The contract may be made in writing, verbally, or implied from the conduct of the parties.148 The seller would be liable for any breach of the contract even if she has exercised reasonable care and the product defect is not her fault, in other words, the seller is strictly liable. Legislation in the form of the Sale of Goods Ordinance and the Control of Exemption Clauses Ordinance has been enacted to supplement the protections that the common law provides consumers. These two ordinances deal with implied contract terms. Section 16 of the Sale of Goods Ordinance implies in contracts for the supply of

144

Id. at 9. Id. at 10. 146 Id. at 10. 147 Hong Kong Special Administrative Region Sale of Goods Ordinance (1997) section 3, available at http://www.justice.gov.hk/blis_export.nsf/home.htm. 148 Id. section 5. 145

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goods a condition that the goods are of merchantable quality.149 The 1994 amendment of the ordinance broadened the definition of merchantable quality, and now goods must be free from defects and reasonably safe.

Section 11(2) of the Control of Exemption

Clauses Ordinance protects this right to goods of merchantable quality by stipulating that sellers cannot waive liability for breach of the implied condition.150 Section 16 also provides that where the buyer expressly or by implication, makes it known to the seller that the goods are being purchased for a particular purpose, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose. 151 Once the court has satisfied itself that: (1) there is a contract and (2) the seller has breached an express or implied term, it will then determine if the relationship between the breach and the damage sustained by the buyer is adequately proximate. The common law rule concerning remoteness of damage was set out in Hadley v. Baxendale, 156 Eng. Rep 145 (1854). In Hadley, which involved delayed delivery of equipment resulting in work stoppages at the plaintiffs mill, the court held that: The damages ‌ should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach. If the court finds that the harm caused is not too remote, and that the buyer has fulfilled her duty of taking reasonable steps to mitigate loss, the court will award damages. The general common law rule regarding compensation is that it should put the

149

Id. section 16. Hong Kong Special Administrative Region Control of Exemption Clauses Ordinance (1997) section 11(2), available at http://www.justice.gov.hk/blis_export.nsf/home.htm. 151 Id. section 16. 150

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injured party in the position she would have been in had the contract been performed. In Hong Kong, the party injured by a breach of contract may collect damages for injury to person, damage to property and mental distress.152 The Law Reform Commission of Hong Kong points out two drawbacks to suing under contract law in consumer rights actions. First, due to the doctrine of privity of contract, contract law usually protects only the buyer in consumer rights actions. Under the doctrine, a person cannot acquire and enforce rights under a contract to which he is not a party; and a person who is not party to a contract cannot be made liable under it.153 Courts and lawyers have generally regarded the second rule as just and sensible. However, the first aspect—that a third party cannot acquire rights under a contract to which he is not party—has come under criticism.154 As a result, contract law does not protect a buyer’s family, or passersby and donees. In some cases, such plaintiffs have argued that the actual buyer was their agent. Agency is a legal relationship where one person (the agent) may act on behalf of the other (the principal). In an agency situation, although the principal is not a party to the contract, the principal acquires rights and incurs liabilities under the contract made by the agent on her behalf. However, courts have strictly limited the sorts of circumstances that allow for the inference of agency.155 In Priest v. Last, 2 K.B. 148 (1903), the court held that a mother purchasing goods for her child could not be considered the child’s agent. In that case, a defective water bottle purchased by a mother burnt her young child. The court 152

THE LAW REFORM COMMISSION OF HONG KONG SUB-COMMITTEE ON CIVIL LIABILITY FOR UNSAFE PRODUCTS, supra note 30, at 9. 153 Id. at 14. 154 The LAW REFORM COMMISSION OF HONG KONG PRIVITY OF CONTRACT SUB-COMMITTEE, CONSULTATION PAPER ON PRIVITY OF CONTRACT 2 (2004). 155 THE LAW REFORM COMMISSION OF HONG KONG SUB-COMMITTEE ON CIVIL LIABILITY FOR UNSAFE PRODUCTS, supra note 30, at 14.

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held that the child could not recover for pain and suffering, but would have to sue under negligence instead. Only the mother could collect compensation, which would be for any loss caused to her by the injury of her child, e.g. costs of taking care of an injured child.156 The Law Reform Council has suggested that the doctrine of privity of contract be adjusted.

In a recent consultation paper on the topic, the Council recommended that a

detailed legislative scheme be used to reform the privity doctrine. Unfortunately for consumers, however, the recommended reforms may not have a significant impact on consumer rights. The Council suggested that third party beneficiaries attain rights under a contract only if: (1) the contract expressly provides that she may attain such rights; or (2) a term of the contract purports to confer a benefit.157 Another drawback to contract law is that it may require a multiplicity of litigation. Since contract law creates strict liability on the part of the retailer, it may be necessary for each party in the chain of distribution to claim against her immediate supplier. If there are several distributors between the manufacturer and the retailer, a multiplicity of litigation may appear. Unfairness may result if exemption clauses come into play. Or, an insolvent manufacturer could leave a less culpable retailer responsible for all the damages.158

156

Priest v. Last, 2 K.B. 148 (1903) The LAW REFORM COMMISSION OF HONG KONG PRIVITY OF CONTRACT SUB-COMMITTEE supra note 45, at 42. 158 THE LAW REFORM COMMISSION OF HONG KONG SUB-COMMITTEE ON CIVIL LIABILITY FOR UNSAFE PRODUCTS, supra note 30, at 14. 157

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3. Litigation under Tort Law If an injured party finds that she has no contractual tie with the person who supplied her with the goods, she may choose to sue under the law of tort. Typically, the plaintiff has to prove that the supplier of the goods was negligent. The claimant must show that there was a duty of care, the seller breached the duty, and the breach caused the loss or injury. Whether a duty of care exists is set out in Caparo Industries plc v. Dickman, 2WLR 605 (1990): “there should exist … a relationship characterized by the law as one of ‘proximity’ or neighborhood’ and that the situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope on the one party for the benefit of the other.” Examples of relationships where a duty of care exist include landlord-tenant, retailer-customer, parent-child. The test for whether there was a breach of duty, or negligence, is a reasonableness test. The question is one of law, not fact, and the court will ask whether the defendant behaved as a reasonable man would have. Causation is also a question of law, not fact, and the plaintiff will have to show that the breach and the damage caused are adequately proximate. If a defective product causes death, a plaintiff can bring a tort claim for compensation under either the Fatal Accidents Ordinance or the Law Amendment and Reform (Consolidation) Ordinance. Under the two ordinances, dependents can bring actions for: (1) damages for bereavement, (the sum of which is fixed at HK$70,000); (2) pecuniary loss, such as funeral expenses; and (3) wealth the deceased would have accumulated. In the last case, the court would examine established saving patterns,

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deceased’s lifestyle, thrift, age at death, and family, financial and employment situation.159 One of the main problems of suing in tort is that negligence may be difficult to prove. Buyers with cases involving complex technical products or chemicals will find themselves in particularly difficult positions.160 Litigation can become a duel between expert witnesses, and consumers may find financial constraints a difficult obstacle to surmount as compensation is by no means certain. In certain cases, plaintiffs may use the doctrine of res ipsa loquitor - Latin for “the thing speaks for itself” - to their advantage. Res ipsa loquitor was first put forth in Bryne v. Boadle, 2 H & C 722 (1863), a case involving a barrel of flour falling out of a window onto a passerby. Under this doctrine, the burden of proof shifts to the defendant who must produce evidence to rebut the inference of negligence. To hold for the plaintiff, the court must find that: (1) the harm would not ordinarily have occurred without someone's negligence; (2) the instrumentality of the harm was under the exclusive control of the defendant at the time of the likely negligent act; and (3) the plaintiff did not contribute to the harm by his own negligence. The rationale behind the doctrine is that in certain cases, asking the plaintiff to prove negligence is difficult to the point of unfairness. While plaintiffs in certain cases can use res ipsa loquitor to their benefit, other aspects of tort law disadvantage consumers. For example, plaintiffs suing in negligence normally cannot recover for pure economic loss, that is, loss that does not result from

159

Hong Kong Special Administrative Region Fatal AccIdents Ordinance (1997) section 6(1) , available at http://www.justice.gov.hk/blis_export.nsf/home.htm; Hong Kong Special Administrative Region Law Amendment and Reform (ConsolIdation) Ordinance (1997) section 20(2)(b)(iii), available at http://www.justice.gov.hk/blis_export.nsf/home.htm. 160 THE LAW REFORM COMMISSION OF HONG KONG SUB-COMMITTEE ON CIVIL LIABILITY FOR UNSAFE PRODUCTS, supra note 30, at 10.

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damage to person or property, like loss of business profits.161 Another restriction is that compensation for damaged property does not include the defective good itself. Therefore, if the negligently manufactured good was an expensive item, the consumer would have to swallow a relatively large loss.162 Finally, the plaintiff must already have suffered the damage. In the Hong Kong case Sunface International Ltd. v. Meco Engineering Ltd., 2 HKLR 193 (1990), the plaintiffs were owners of houses who sued their subcontractor under tort law for defective installation of electrical wiring. The plaintiffs had discovered the defects and replaced the wiring at considerable cost, as the process involved demolishing certain structures. The court reasoned that as the plaintiffs had yet to suffer any damage, allowing them to recover the cost of replacing the wiring would be the equivalent of granting a warranty of quality, a province of contract law. The court went on to hold that, as a result, the plaintiffs could not recover their wiring replacement costs because they had sued in tort.163

C. Conclusion To make consumer rights litigation more consumer friendly, the Hong Kong government should consider some amendments to existing consumer rights legislation. For example, class actions do not exist in Hong Kong. Unlike in the United States, a group of consumers cannot use this legal device to spread legal costs and make litigation more feasible and less risky.

161

THE LAW REFORM COMMISSION OF HONG KONG SUB-COMMITTEE ON CIVIL LIABILITY FOR UNSAFE PRODUCTS, supra note 30, at 11. 162 Id. at 12. 163 Sunface International Ltd. v. Meco Engineering Ltd., 2 HKLR 193 (1990)

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The Law Reform Commission of Hong Kong suggested in a paper published several years ago that the government expand the law regarding compensation for product liability cases beyond its current contract and tort law forms. The Commission proposed a new form of liability, based on a defect approach, with a product being regarded as defective “if it [did] not meet the standard of safety that persons generally are entitled to expect.” In this new scheme, any person who suffered a loss due to a defective product would be able to sue for compensation. The plaintiff would not have to be a party to a contract, and could be a bystander or a donee. The producer of the goods would be allowed a defense if “the state of scientific and technical knowledge at the time of supply did not enable the defect to be discovered.”164 More generally, Hong Kong lacks a general consumer protection statute, like China’s CRIL. Hong Kong also needs a specific law which legislates against bad sales practices, as well as a competition law.

Finally, Hong Kong needs a misleading

advertisements law. Currently, companies can advertise in any way. The Consumer Council may write to an advertisement agency advising them that their actions are inappropriate, but the Council has no legal recourse.

China, in contrast, has an

Advertisements Law, and the Competition Law also makes misleading advertising and claims illegal.165

V. CONCLUSIONS Hong Kong and Mainland China have taken various approaches to protecting consumer rights, some different, some similar. Neither has managed to implement a 164

THE LAW REFORM COMMISSION OF HONG KONG SUB-COMMITTEE ON CIVIL LIABILITY FOR UNSAFE PRODUCTS, supra note 30, at 66. 165 The People’s Republic of China Against Unfair Competition (1993) supra note 27, art 9.

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regime that does a completely effective job of both ensuring product quality and providing sufficient remedies after injury has occurred. China, with its legacy of concern about the negative effects of capitalism, has instituted strict protections but has trouble enforcing them. Hong Kong, with its structurally enforced pro-business bias, looks to solve most consumer problems administratively, perhaps at the expense of full compensation for harmed consumers.

However, it must be said that Hong Kong’s

consumer protection system is, at the moment, far more developed than China’s. More interesting than the deficiencies in the current systems, however, is the great potential for improvement. The two systems are not only complimentary, but the 1997 handover ensures considerable overlap – economic, legal, and political - that will make problems like counterfeit goods and consumer fraud issues for both regions’ economies. Hong Kong is often cited as one of China’s most valuable assets in the quest for modernization, and there is no question that the PRC would be well-advised to embrace its influence; China might prove equally helpful to Hong Kong in the creation of a more consumer-friendly environment. While achieving a high level of consumer protections is not inevitable, both China and Hong Kong are taking steps in the right direction. Barrister Denis Chang points out that, while some political leaders would like to, it is impossible to separate politics from economics. The presence of dangerous and shoddy goods in consumer markets speaks to systemic problems which encompass judicial independence, rule of law, and corruption. Currently, there are active movements in both China and Hong Kong to address these issues, which are particularly pressing on the Mainland.

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The volatile political situation between Hong Kong and the PRC makes predictions about the future of either system difficult.

Political cooperation would

certainly make sharing ideas and institutions easier; a tense political environment, on the other hand, could have negative implications for both regions.

Progress would be

compromised just as the product flow between the Mainland and Hong Kong reaches a critical proportion and regulation of cross-border commerce becomes a vital issue. After all, without enforcement agreements, even the most progressive consumer protection regime is unhelpful to a citizenry that imports most of its goods. Regardless of the obstacles presented by integration in the near future, the outlook for consumer protection in Hong Kong and China appears positive. Both the PRC and the government of the Hong Kong Special Administrative region seem to recognize the benefits of providing a commercial environment conducive to fair exchange. Whether for the purpose of promoting the individual’s right to be protected from harm or to improve information and thereby foster rational decision-making, consumers should expect the current troubles to be temporary, as political and legal institutions race to catch up to rapidly developing market conditions.

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