A civil action

Another piece has fallen into place in China’s legal jigsaw, and its significance will be felt all the way from Politburo to the man on the street.

The Tort Liability Law, which was adopted by the People’s Congress at the end of last year and comes into effect on July 1, 2010, has been in the works for nearly a decade. Its arrival represents the completion of a civil code for China, effectively making it the responsibility of the legal system to define and protect the rights of ordinary citizens. No small achievement for a country that as recently as 1979 had basically no law and no civil law tradition.

The Tort Law is more than just part of civil legislation – it is the glue that holds everything together, the mechanism by which individuals can defend the rights enshrined elsewhere in the code. Without it, the code has little value. With it, China has made a big step toward creating a civil society.

Bringing order

At the same time, this law is not a beginning. It is the culmination of 25 years of legislation, case law and judicial explanation that has created a vast body of legislation. The Tort Law makes no effort to replace these existing laws. Rather, it is the capstone on a huge edifice, intended to bring some order to an unwieldy system and to resolve certain critical technical legal issues that had remained unclear or in dispute prior to the adoption of the law.

The need is clear, since tort litigation plays a dominant role in the Chinese legal system. Over 40 statutes are in some way concerned with tort law. In 2007, about 870,000 tort actions were initiated in the Chinese courts. In 2008, the number rose to one million. This equates to about one-third of all cases heard nationwide.

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

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

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

The risk to foreign investors is illustrated by the torts singled out for separate treatment in the Tort Law. The most important are those that involve strict or "no-fault" liability – the plaintiff merely needs to show the fact of damage and is not required to prove negligence on the part of the defendant. These special torts arise in the following areas: product liability; environmental protection; high risk and dangerous activities (explosives, poisons, radioactive material); and damage to property or personal injury arising from construction.

These are activities in which foreign-owned businesses are increasingly active in China. Many of these businesses falsely believe that China has no applicable tort law.

Day in court

Where social constraints may discourage injured parties from filing lawsuits against locally owned businesses, no such constraint operates to prevent suits against foreign owned businesses. There is already a trend toward "rights consciousness" in China and the adoption and promotion of the Tort Law will accelerate it. Even in case of government indifference or outright opposition, Chinese citizens are becoming ever more willing to defend their rights in court.

Should a foreign firm find itself subject to a civil action in China, the experience could prove to be a costly one. The Tort Law takes an expansive approach toward damages, allowing recovery for economic damage, emotional damage and also punitive damages in some cases.

The notion of a Chinese court imposing punitive damages after a pollution or product recall incident should give all foreign investors reason to take notice. The risk is real.