Disputes with Chinese companies are becoming increasingly common, yet they are not becoming any easier to resolve.
Mainland Chinese courts do not enforce U.S. judgments. Therefore, it is usually (but not always) a waste of time to bring a lawsuit in a U.S. court against a Chinese company that does not have assets in either the United States or in a country that enforces U.S. judgments. However, it is important that you research where the “Chinese” company is actually based because Mainland China, Hong Kong, Taiwan, and Macao are different jurisdictions entirely. China does enforce court judgments from many other Western countries, however, so it is critical you research judgment enforcement for the foreign country relevant to your case.
Jurisdiction of any dispute will usually be the first issue you will need to resolve in formulating your litigation strategy against a Chinese company. Suing a Chinese company in the United States requires the typical contact inquiry involved in suing any foreign company. See Asahi Metal Industry Co. v. Superior Court of California, Solano Cty., 480 U.S. 102 (1987); Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co., 284 F.3d 1114 (9th Cir. 2002).
If a U.S. court has jurisdiction over a Chinese company, suing that Chinese company in a U.S. court typically will differ from suing a domestic company on: service of process; discovery; litigation strategy; and the already mentioned enforcement of judgment.
SERVICE OF PROCESS
China is party to the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters. Thus, service on a Chinese company must comply with this Convention. Serving process in China under the Hague Convention on Serviceis effected through the designated Chinese Central Authority in Beijing, which is the Bureau of International Judicial Assistance, Ministry of Justice of the People’s Republic of China.
A U.S. company suing a Chinese company in a U.S. court must submit the following to China’s Ministry of Justice:
- A completed United States Marshal Form USM‐94.
- The original English version of the documents to be served. The summons must have the issuing court’s seal.
- The Chinese translation of all documents to be served. Because the USM-94 will not be served, that form does not need to be translated.
- A photocopy of each of the above documents.
Though China did not make a specific reservation regarding translations when it acceded to the Hague Convention on Service, China’s Ministry of Justice has advised the U.S. Embassy in Beijing that documents to be served in China must be translated into Mandarin Chinese. Since China’s Ministry of Justice is the government entity that effects service of process in China, it only makes sense to comply with its requirements.
China’s Ministry of Justice will send your service of process documents to the appropriate local court and that court will effect service. In our experience, Chinese courts are fairly slow (and getting slower) to send out service. If the Chinese company you are suing is a powerful local entity, service may be even slower. Repeatedly calling and emailing both the court itself and the Ministry of Justice usually expedites service. You should figure on service taking 12-16 months.
China formally objected to service by mail under Article 10(a) of the Hague Convention on Service and U.S. courts have held that objection valid. See DeJames v. Magnificence Carriers, Inc., 654 F.2d 280 (3d Cir. 1981), cert. den., 454 U.S. 1085; Dr. Ing H.C. F. Porsche A.G. v. Superior Court, 123 Cal. App. 3d 755 (1981).
Once you have served a Chinese company in a U.S. lawsuit, it will be bound by the court’s normal discovery rules. China, however, prohibits depositions on its soil, even if the deponent consents. In its declaration on accession to the Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters, China stated it would not be bound by those provisions granting consular officers the right to oversee depositions. In 1989, China allowed a deposition in U.S. v. Leung Tak Lun, et al., 944 F.2d 642 (9th Cir. 1991), but advised that its grant of authority for that particular deposition should not be considered precedent, and it has not permitted a deposition since. Conducting a deposition in China may lead to arrest or expulsion. Even a telephonic deposition of a witness in China likely violates Chinese law, and would not be a good idea for anyone planning to go to China.
The easiest way to depose a China‐based witness will usually be to have that witness go to the United States or to Hong Kong for deposition.
China has agreed to allow limited discovery of documents under the Hague Convention on Evidence. Articles 1 and 2 of that Convention provide for document discovery via a Letter of Request issued by the court where the action is pending and transmitted to the “Central Authority” of the jurisdiction where the documents are located. The Central Authority is then responsible for transmitting the request to the appropriate judicial body for a response. Article 23 of that Convention permits a signatory country to “declare that it will not execute Letters of Request issued for the purpose of obtaining pre‐trial discovery of documents as known in Common Law countries.” China has executed such a declaration, making document discovery permissible for trial purposes, but not merely to gather up information.
Though China has agreed to document discovery for trial, you should not expect the Chinese Central Authority will instruct a Chinese court to compel production in your case. The U.S. State Department made the following accurate summary of how China tends to respond to U.S. court document discovery requests:
While it is possible to request compulsion of evidence in China pursuant to a letter rogatory or letter of request (Hague Evidence Convention), such requests have not been particularly successful in the past. Requests may take more than a year to execute. It is not unusual for no reply to be received or after considerable time has elapsed, for Chinese authorities to request clarification from the American court with no indication that the request will eventually be executed.
Chinese companies are not accustomed to U.S.-style discovery, and they often consider compliance with the discovery rules optional.
U.S. companies hold many advantages over Chinese companies in U.S. litigation. American jurors generally view Chinese companies unfavorably. Chinese companies frequently try to skirt our discovery rules and bringing this to the court’s attention can cost the Chinese company credibility or force it to incur sanctions. Perhaps most importantly, Chinese companies generally underestimate the importance of U.S. trial court decisions, often holding back on vigorously defending a lawsuit until appeal. From Chinese Companies Court Disaster:
Appeals in China are usually de novo, meaning that if a trial court judge disagrees with your version of the facts, you can make another attempt to tell your side of the story at the appellate level. But in the U.S., appeals courts take as a given the trial court’s findings of fact and will hear only disputes about the trial judge’s interpretation of legal questions. This means that in America you rarely get more than one chance to put forth your version of the facts, so you had better do it right the first time. In China the fight often begins only once a case hits the appeals court.
U.S. JUDGMENTS IN CHINA
U.S. judgments have virtually no value in China. There is no treaty nor any reciprocal arrangement between China and the United States regarding recognition or enforcement of civil judgments. For these reasons, Chinese courts virtually always disregard U.S. judgments.
If the Chinese company you are suing has assets in the United States or in another country that generally enforces U.S. judgments (such as the United Kingdom, Canada, or South Korea), suing in a U.S. court may be the best way to proceed. Otherwise, the judgment of a U.S. court may end up being of little to no use.
It is important to note that China is legally required by treaty to enforce the judgments of many countries other than the United States, though its record for actually doing so is less than stellar.
ARBITRATION IN YOUR HOME COUNTRY
China is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, so its courts generally will enforce foreign arbitral awards from recognized foreign arbitral bodies. Chinese courts, however, are much 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.
ARBITRATION IN CHINA
China has some legitimate arbitral bodies, with the China International Economic Arbitration Commission (CIETAC) being the most prominent. Generally, China’s arbitral bodies allow little to no discovery and they oftentimes allow no live testimony either. Expect your case to be tried on the documents. It typically makes sense 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, 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, an American or European company usually faces no jurisdictional bar to suing a Chinese company in Mainland China. Articles 3 and 237 of the Civil Procedure Law of the People’s Republic of China grant Chinese courts jurisdiction over international cases involving a foreign plaintiff against a Chinese company. Though suing in China is usually possible, it obviously should not be done without a better understanding of what it will actually entail.
Second, 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 a company executes a contractual obligation poorly because of an incompetent or uncaring employee, 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 or severely limit the damages, believing it unfair to penalize a company for the incompetence of one employee.
Third, 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.
Fourth, Chinese courts base their rulings almost exclusively on documentary evidence, not testimony.
Fifth, settlement is rare in Chinese business litigation matters. The cost of litigating is almost always 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 as having been at fault.
Sixth, Chinese courts rarely issue large damage awards, no matter the case. 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.
Seventh, though the ability to collect on judgments in China is improving, it is still not near to the level of the United States or most of Europe. Chinese courts often lack the authority and fail to receive the assistance from other law enforcement agencies necessary to force 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.