Chinese Litigation: Why We Like It

international litigation

When we draft contracts for China, our foreign company clients usually instruct us to have the contract be governed by foreign law and for any disputes to be decided by arbitration, preferably outside China. This is often a mistake. One major reason is that when any form of arbitration is required, the plaintiff has no access to the very effective prejudgment remedies available within the Chinese litigation system.

A recently completed matter shows how this can work. A very internationally savvy Japanese client recently sought help from my law firm to resolve a contractual dispute. A Chinese company owed our Japanese company a substantial sum, but the amount was not documented by a clear contract and the exact sum owed was nowhere clearly specified in writing. We were able to convince the Chinese side to enter into a new agreement where the Chinese company agreed to an exact payment amount and a precise payment date. In our initial drafting of this agreement, we provided that the agreement would be governed by Chinese law with jurisdiction in the Chinese court where the Chinese defendant had its home office. The client resisted, making the usual arguments: Chinese law is unclear and Chinese courts will favor the local party. In the end, we convinced the client to follow our approach.

As we expected, the Chinese party did not pay on the due date. We then filed a  lawsuit in the hometown of the Chinese defendant to seize assets from the Chinese defendant in a prejudgment writ of attachment. This required our client post a money bond, which we had arranged in advance using our contacts in the local bonding community. Within three weeks of our filing suit, the Chinese defendant paid all amounts owing, together with interest, court costs and attorneys’ fees. The Chinese defendant indicated the primary reason it paid so promptly was to get its assets out from under our seizure. The local court never had to hear the case; it was needed only to cooperate with the asset seizure, which it did without regard to the home country of either plaintiff or defendant.

If we had gone along with our client’s initial inclination to provide for application of Japanese law with arbitration in Hong Hong, we would never have been able to achieve this successful result. Instead of our being able to move quickly and forcibly against the Chinese defendant and its assets, we would have been forced to proceed outside China in a slow and expensive arbitration proceeding. In the end, we likely would have received nothing more than an arbitrator’s order to pay, which we would have had to bring back to China for enforcement in the same court we used for the debt collection litigation. Most importantly, we would not have been able to use the Chinese court’s effective prejudgment attachment procedure, which put the defendant in the mood to comply with our payment request.

It also bears mentioning that the contract between our Japanese client and the Chinese defendant was in Chinese to ensure that it be the only agreement seen by the Chinese court — not some translation of an English language contract. This not only helped to clarify content, it also made sure we did not spend precious time waiting for a court translation, which might not even be accurate.

Chinese language contracts in a Chinese court? We like that.

7 responses to “Chinese Litigation: Why We Like It”

  1. So the law works and there’s no such thing as officials influencing, or overriding, the process? There are a number of other possible explanations, though this would be the most optimistic. Let’s hope it becomes a trend.

  2. Thanks Steve, for such an insightful post. This is exactly the kind of practical first-hand advice that ought to make for an entire book. As China continues to become more fully integrated into the global economy, more and more foreign entrepreneurs will want to conduct business from within the borders of Mainland China, and they will certainly be in great need of such a collection of cases from which to draw lessons from.
    Regards,
    MAJ

  3. Damn skippy! Use the local law to get that preliminary injunction and they’ll pay up nine times out of ten without you having to take things any further. If you’re afraid of bias against foreigners in the local courts, how do you think they’re going to treat someone trying to enforce a decision made in arbitration outside China on a contract electing foreign jurisdiction?

  4. What the heck is a lawyer doing giving such practical advice? Shame on you, Steve! You’re gonna get kicked out of the lawyer’s club!
    Seriously, excellent advice. This is something you guys should consider doing, though, kind of a “Conventional Wisdom says this, but you should actually be doing this.” We certainly have enough history of these types of things to make good case studies. And the knee-jerk mistrust of the Chinese legal system – though, in some cases, justified – needs to change and a more nuanced view such as this is incredibly helpful.
    Now get back to REAL lawyering, OK? You keep giving practical advice and, pretty soon, they will start demanding the same of consultants!!

  5. Thank you very much for your article. I picked up a lot of useful information from it. I am a lawyer by profession and I am so interested in things like these.

  6. Dear Steve, this is Hansen Zhao, a litigation partner to Martin Hu & Partners Law Firm located in Shanghai, China. I worked in Shanghai court as court clerk for 5 years. Our law firm is dedicated to providing legal services mainly for international compaines including many Fortune 500 international compaines.
    I am totally with you. During our legal services for international companies, they think that Chinese law is unclear and will favor for local company. But I have to say, now the Chinese law has been making a great progress, more and more new laws and regualtions come into effect. The requirement for the education background of Chinese judges has been raising, for example, in Shanghai, there are one high court and two intermediate courts. Now most of new judges have been asked for at least having master degree. Many of new judges have doctor degree.
    So many times, filing a litigation in Chinese court and applying to Chinese law is an effective and very economic way to protect interests of international companies when they are going to fix legal disputes with Chinese clients through litigation or arbitration.
    I am writing an article about litigation in China. I would like to share the knowledge of litigation in China with foreign lawyers and foreign people.

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