How To Sue Chinese Companies, Part 4

This is Part 4 of this series on how to sue a China company. This is the final post explaining what you can do to try to secure redress against a Chinese company that owes you money or has wronged you. Part 1 dealt with jurisdiction and on Hague Convention service of process. Part 2 was on conducting discovery against a Chinese company. Part 3 discussed overall litigation strategies and how to enforce a judgment against a Chinese company. This final post will focus on arbitrating against Chinese companies in the United States and in China and on litigating against Chinese companies in China’s courts.

Arbitration in the United States. China is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This means that its courts generally enforce foreign arbitral awards from recognized foreign arbitral bodies. Chinese courts, however, are considerably less likely to enforce foreign arbitral awards obtained by default. Chinese courts also sometimes stall foreign arbitration award cases for years as a way to avoid enforcement while making their enforcement numbers look better than they really are. You will find this most likely to be true if your award if the Chinese courts consider your award to be inequitable or if it is against a powerful company in a small town.

Arbitration in China. China has some legitimate arbitral bodies, with the China International Economic Arbitration Commission (CIETAC) probably being the most prominent. China’s arbitral bodies allow little to no discovery and they oftentimes do not even allow live testimony. Even if live testimony is allowed, you should expect your case to be won or lost on the documents.

If your contract with your Chinese counter-party is going to call for arbitrating disputes in China, it will typically make sense for you to provide for English language arbitration and as many foreign arbitrators as your Chinese counter-party will accept.

Suing in a China Court. If suing a Chinese company in the United States does not make sense (see Part 3 as to why it usually does not), pursuing litigation in China may. Though China’s court system is very different from that to which American lawyers are accustomed, it is more navigable than many American lawyers believe it to be. Foreign companies can and do win cases against Chinese companies in Chinese courts. Before suing in a Chinese court, though, it is important to understand some basics about its court system.

First, though Chinese courts will enforce the law prescribed in a contract, Chinese judges place more emphasis on the overall context and “fairness” of the case and much less on legal technicalities than their American counterparts. For example, if an incompetent or uncaring low-level employee causes a company to violate its contract, a U.S. court would almost certainly hold the company liable for all damages arising from the breach. A Chinese court, on the other hand, might either not find liability at all or severely limit the damages, believing it unfair to penalize a company for the incompetence of one employee.

Second, Chinese courts prohibit nearly all discovery. Companies suing in China without a strong case at the outset seldom prevail. This also means that you should have your proof ready to go before you sue, especially since the time from filing to trial is usually less than a year.

Third, Chinese courts base their rulings almost exclusively on documentary evidence, not testimony. So as we said about arbitration in China, you should be prepared to win or lose your case based on the documents. What this also means is that you need to have your documents ready before you sue or if sued, you had better get your documents ready as soon as possible. This is critical because oftentimes “having your documents ready” means that they have been appostilled somewhere outside China and then consularized by the appropriate Chinese Consulate or Embassy.

We cannot stress enough the need to move quickly in getting documents appostilled and consularized for a Chinese trial. Twice in the last year, American companies have called one of our China lawyers asking how they can appeal Chinese lawsuits they lost because — in their own words — they were not able to get critical documents documents appostilled and consularized soon enough to be admitted into evidence by the Chinese court for the trial.

Fourth, settlement is rare in Chinese business litigation matters. The cost of litigating in China is typically much lower than in the United States, and once a complaint has been filed, settling a case is often viewed as losing face. The Chinese company you are suing may prefer to lose the case and blame it on the judge than to settle and be viewed by its employees and its customers as having been at fault.

Fifth, Chinese courts rarely issue large damage awards, no matter the case and no matter the plaintiff. Chinese companies generally operate at low margins and Chinese courts are loath to badly harm a functioning business or to cause layoffs. In particular, Chinese judges are hesitant to award damages for lost profits or for pain and suffering. Chinese courts simply do not award the sort of damages available in a U.S. court. This is one of the reasons why we so often put liquidated damages provisions into our China contracts. See How To Write A China Contract. Liquidated Damages.

Sixth, though the ability to collect on judgments in China is improving, it is still not near the level of the United States. Chinese courts often lack the authority and fail to receive the assistance from other law enforcement agencies necessary to enforce collection on their judgments. In addition, Chinese companies sometimes find it more cost effective to avoid a judgment by shutting down and re‐opening under a new name. In other words, just as is true in the United States, you should consider the collectability of your judgment before you sue in China, only more so.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.