How to Sue a Chinese Company, Part 4

This is Part 4 of this series on how to sue a China company. Part 1, How to Sue a Chinese Company: The 101,  was on how to effect service of process on a Chinese company under the Hague Convention Service of Process rules and on the jurisdictional issues involved in suing a Chinese company. Part 2 dealt with conducting discovery (or not) against a Chinese company you have sued outside China — mostly in the United States. Part 3 discussed litigation strategies against Chinese companies and how to enforce a foreign judgment against them — again, mostly in the United States. This Part 4 is on how to sue Chinese companies in Chinese courts and in arbitration. We are writing this series on suing Chinese companies now because our international litigation and arbitration lawyers have seen a massive uptick in disputes between foreign and Chinese companies and both the China-based litigators and international litigators with whom we talk are seeing the same thing.

Arbitration in the United States. China is a signatory to the 1958 New York 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. However Chinese courts (like courts all over the world), however, are considerably less likely to enforce foreign arbitral awards obtained by default. Default arbitration awards typically occur when the arbitration panel issues an award against a party that has failed to show up for the arbitration. Chinese companies know that their courts are reluctant to enforce arbitration awards against a Chinese company that fails to show up for a foreign arbitration and so it is not uncommon for them to fail to show up for a foreign arbitration and then argue against the foreign arbitration award being enforced on the grounds that they never got notice of the underlying arbitration and/or that the method they were given notice was not proper.

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 of your arbitration award if the Chinese courts consider your award to be inequitable or if it is against a powerful company in a small town.

So yes, Chinese courts are required by international treaty to enforce arbitration awards but getting that done is not 100%.

In addition to a general reluctance (perhaps distate would be a better word) to defer to foreign arbitral bodies, China’s signing of the New York Convention on arbitration was limited to enforcing only the awards from another contracting state that result from commercial legal relationships considered commercial under Chinese law.

In addition to having signed the New York Convention on arbitration, China has the following separate agreements regarding the enforcement of Hong Kong, Macau and Taiwan arbitration awards:

  • SPC Arrangement on the Mutual Enforcement of Arbitral Awards by the Mainland and the Hong Kong Special Administrative Region.
  • SPC Arrangement on the Mutual Acknowledgement and Enforcement of Arbitral Awards by the Mainland and the Macau Special Administrative Region.
  • SPC Directives on the Enforcement of Arbitral Awards Rendered in Taiwan Region. This directive is relatively new, having come out in 2015.

Procedure for Enforcing a New York Convention Arbitration Award. If you prevail against a Chinese party in a New York Convention arbitration outside China, you generally should go to the appropriate Chinese Intermediate Court (usually the one in the location where your defendant resides) and submit the following to that court:

  • A written application requesting it enforce your award by converting it to a court judgment.
  • An apostilled and consularized original of your arbitration award.See China Notarizations, Legalizations, Consularizations, Apostilles, and Powers of Attorney, Oh My.
  • The original agreement that contains the arbitration provision that allowed you to pursue your claim in arbitration. This too should be apostilled and consularized.
  • Chinese translations of the above documents and whatever else you will be submitting.

The Chinese court can deny your request to enforce your foreign arbitration award against the Chinese company on the following grounds:

  • Lack of a valid arbitration agreement.
  • The Chinese company was not served with the arbitral proceeding or given notice of its opportunity to appoint an arbitrator, or it did not have the opportunity to present a case for reasons not of its own making.
  • The arbitral tribunal or the conduct of the arbitral procedure was not in line with the arbitration rules.
  • The matter that was arbitrated was not arbitrable or was outside the scope of the arbitration agreement.
  • Enforcing the arbitration award would be contrary to China’s social and public interests.

If you think some of the above provisions are vague or broad enough for a Chinese court to drive a proverbial truck through, you would be right. In real life, if a Chinese court does not want to enforce your arbitration award it will nearly always be able to come up with good grounds for not doing so. In terms of how often this happens, we have seen and heard various different statistics, but generally it would be fair to say that with the typical award, your chances of getting a foreign arbitration enforced is upwards of 90 percent and some of that ten percent is no doubt due to foreign companies that simply failed to follow all of the rules.

Arbitration in China. China has some legitimate arbitral bodies, with the China International Economic Arbitration Commission (CIETAC) and the Beijing Arbitration Commission probably being the most prominent and reputable. See Arbitration in China: It’s Just Fine, Thank You and CIETAC Arbitrations: U.S. Companies Can Win. China’s arbitral bodies tend to 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. In part 5 of this series we will go into the weeds in discussing dispute resolution clauses for your contracts with Chinese companies.

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 do not typically allow for any 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 apostilled somewhere outside China and then consularized by the appropriate Chinese Consulate or Embassy.

We cannot stress enough the need to move quickly to get your documents apostilled and consularized for a Chinese trial. Twice in the last year, American companies have called one of our international litigation lawyers asking how they could appeal Chinese lawsuits they lost because — in their own words — they were not able to get critical documents documents apostilled and consularized soon enough to be admitted into evidence by the Chinese court for the trial. Losing at the lower court level and then appealing with the argument that you were unfairly blocked from getting your documents into evidence at the lower court is generally not a good way to go. If you are planning to sue in a Chinese court (or even arbitration) or have just been sued, you should immediately start getting your documents ready for 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.

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