Issues relating to misrepresentation and fraud in the consumer goods sector - CWG

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Jin Xiao
King & Wood Mallesons, Beijing
xiaojin@cn.kwm.com

Yue Dai
King & Wood Mallesons, Beijing
daiyue@cn.kwm.com

Tianren Li
King & Wood Mallesons, Beijing
litianren@cn.kwm.com

Whilst the emergence and rapid spread of the Covid-19 pandemic has had a significant negative impact on the market of consumer goods within the People’s Republic of China (PRC), the short-term economic decline could also give rise to a strong rebound in purchasing. Taking the Middle East Respiratory Syndrome (MERS) epidemic in South Korea in 2015 as an example, the MERS outbreak happened in June 2015, during which time retail sales in South Korea collapsed to their lowest levels. Nevertheless, as the situation improved, private consumer behaviour quickly rebounded and even briefly exceeded its pre-epidemic level in October 2015. Similarly, such a ‘V’ shaped consumption curve was observed during Japan’s Fukushima nuclear disaster in 2011. The rebound effect of consumer behaviour, however, is often accompanied by an increase in disputes over consumer rights. It is, therefore, of great practical significance to re-examine consumer rights’ issues of arising from the rebound in consumer behaviour, in particular issues relating to misrepresentation and fraud in the sales of consumer goods.

Introduction to key legal concepts

Misrepresentation

As an act that breaks the principle of good faith, disrupts market order, and undermines consumers’ rights and interests, misrepresentation is governed by a number of laws and regulations within the PRC legal regime, including the Anti-Unfair Competition Law, the Advertisement Law, the Law on the Protection of Consumers Rights and Interests, and even the Criminal Law. However, instead of setting out a specific definition of ‘misrepresentation’, the current PRC legal regime only provides a general description of this unlawful act. For example, article 20(1) of the Law on the Protection of Consumers Rights and Interests provides that: ‘Business operators shall provide consumers with true and complete information on the quality, performance, use, and useful life, among others, of commodities or services; and shall not conduct any false or misleading promotion.’ As a result, the determination of misrepresentation is often conducted on a case-by-case basis, and Chinese courts tend to make findings based on the specific acts at issue.

Despite the lack of a legal definition for misrepresentation within the PRC legal regime, the act of ‘misrepresentation’ can nevertheless be conceptualised by examining the legal principles commonly used by Chinese courts in adjudicating disputes. Viewed in this way, misrepresentation can be characterised an act in which the business operator provides false information that has misleading effects on consumers and will possibly cause consumers to develop misunderstanding about the products offered. In examining whether it is possible for the information at issue to cause misperception, Chinese courts tend to employ the standard of an ‘average reasonable person’, that is, whether an ‘average reasonable consumer’, in light of their life experience and attention paid to the information, can tell if the information is truthful. For instance, if an advertisement for a cosmetic product used clearly exaggerated statements such as ‘our product can turn a woman of 20 into a girl of 18’, such an advertisement would not be regarded as ‘misrepresentation’ because it could not lead to misperception by an ‘average reasonable consumer’.

Fraud

The act of fraud is more clearly defined under the PRC law as including four elements:^[1]

• whether the alleged perpetrator provided false information or concealed true information;

• whether the alleged perpetrator intentionally committed the act;

• whether the alleged perpetrator’s act caused the consumer to develop any misperception; and

• whether the consumer wrongly expressed his or her will based on the misperception.

Therefore, in determining whether an act constitutes fraud, apart from taking into account the nature of the conduct, one should also consider the relationship between the conduct and the consumer’s misperception from the perspective of the specific consumer involved in the case.

The legal standard for determining fraud arising from misrepresentation

Article 55(1) of the Law on the Protection of Consumers Rights and Interests stipulates:

‘Business operators who fraudulently provide goods or services shall increase their compensation for consumers’ losses at the request of the consumer. The increase in compensation shall be three times the amount paid by the consumer for the goods purchased or the service received, or RMB500 [approx. US$70] if the increase as calculated is less than RMB500.’

This provision explicitly imposes the liability of paying punitive damages on business operators who committed fraud. As a result, in practice, a large number of consumers have argued that the business operator’s misrepresentation constitutes an act of fraud in order to claim triple punitive damages.

‘Misrepresentation’ and ‘fraud’ are similar in form, but not necessarily equivalent. Under the PRC law,^[2] an act of misrepresentation has legal consequences of its own and the punitive damages for fraud are not necessarily applicable. In practice, in determining whether an act of misrepresentation constitutes fraud, Chinese courts tend to focus on the element of causation, that is, whether the alleged perpetrator’s conduct has caused the consumer to develop a misperception, which ultimately resulted in the consumer wrongly expressing their will.

Legal liabilities

Legal liabilities for misrepresentation

Legal liabilities arising from misrepresentation include civil and administrative liabilities. Civil liabilities include compensation to both consumers and other business operators for damages caused by misrepresentation. From the perspective of consumers, misrepresentation undermines their legitimate rights and interests, and in essence constitutes an act of infringement of their civil rights. In practice, a business operator found conducting misrepresentation is liable for compensatory damages to consumers; in other words, it should compensate the consumers within the scope of the losses suffered as a result of the misrepresentation. On the other hand, from the perspective of maintaining market order, a business operator who conducted misrepresentation also undermines the right to fair competition of other business operators in the market. Therefore, in accordance with law, it should also assume civil liability for damages to other business operators.

Given that misrepresentation is a typical act of disrupting normal business order in the market, the perpetrator is also subject to administrative liabilities. Depending on the nature and subject matter of the misrepresentation, different government departments may have the power to regulate and enforce the administrative penalties. For instance, as the market regulatory authority is in charge of advertising supervision and administration, it will enforce the administrative penalties applicable to false advertising.

Legal liabilities for committing fraud

The main legal liability arising from an act of fraud is civil liability, as fraud is an act through which the business operator maliciously mislead consumers. Moreover, given that an act of fraud is committed intentionally, results in misperception by consumers, and leads the consumer wrongly to express their will, the legal liabilities arising from such an act are also set with a view to having the perpetrators face more serious legal consequences. In this regard, PRC law provides for the possibility of changing the legal effects of the relevant legal act as a remedy for a contracting party that suffered from losses due to the act of fraud. Specifically, both the General Provisions of the Civil Law^[3] and the Contract Law^[4] stipulate that a contracting party shall have the right to revoke a legal act or a contract if the counterparty has committed an act of fraud. Moreover, in order to punish such malicious business practices, the Law on the Protection of Consumers Rights and Interests further provides that a business operator found to have committed the act of fraud shall be liable for punitive damages three times the price of goods or the service fee. In this way, legislators intend to discourage business operators from committing fraud by increasing the cost incurred by the perpetrators for this illegal conduct.

Conclusion

Misrepresentation and fraud are inevitable negative side effects in the development of a market economy. Nevertheless, it is also important to give high priority to addressing these two types of illegal acts, considering their devastating effects of disrupting the market and undermining consumers’ rights and interests. We are confident that as the judicial system of China accumulates practical experience in adjudicating these disputes, and as the regulatory framework improves, these issues will be addressed more effectively, leading to a more healthy and orderly business environment for all in China.