As China’s relationship with the outside world deteriorates, legal disputes between Chinese and foreign companies are increasing. When a company’s future is clear, lawsuits tend to be viewed as distractions. But in uncertain times, lawsuits are viewed as a way to generate profits. My law firm’s China litigation and arbitration lawyers have never been busier. This post explains how to sue a Chinese company and the strategies to employ should you do so.
Even if you are not expecting to sue a Chinese company, you should still read this post. The more you know about suing Chinese companies, the better your chances of avoiding litigation and of prevailing should litigation prove necessary.
1. How to Sue a Chinese Company
What is the best way to sue a Chinese company?
Since Mainland Chinese courts do not generally enforce foreign court judgments, it is usually (but not always) a waste of time and money to bring a lawsuit in a foreign court against a Chinese company that does not have assets in your country or in a country that enforces your country’s judgments. See China Enforces United States Judgment: This Changes Pretty Much Nothing. You should, however, be sure to research where the “Chinese” company is actually based because Mainland China, Hong Kong, Taiwan, and Macao are different jurisdictions entirely and each of these jurisdictions has their own laws and treaties on enforcing foreign court judgments.
2. Arbitration versus Litigation
When my law firm is retained to sue a Chinese company the first thing we do is look at the relevant contract. We do this to see whether there is an agreement mandating the forum in which disputes between the parties must be resolved. If the contract requires arbitration, we generally must arbitrate. For contracts that are silent on arbitration, we generally must sue in a court somewhere. If the contract requires litigation be in a particular court, that is usually the only court in which we can sue.
Jurisdiction will usually be one of the first issues needed resolution before formulating a litigation/arbitration strategy against a Chinese company.
Suing a Chinese company in the United States requires the typical contact inquiry that comes with 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).
There are typically no jurisdictional bars to suing a Chinese company in Mainland China. Articles 3 and 237 of the PRC’s Civil Procedure Law grant Chinese courts jurisdiction over international cases involving foreign plaintiffs against Chinese companies. Though suing in China is usually possible, it should never be done without a good understanding of what that actually entails.
If your own country’s court has jurisdiction over a Chinese company, suing that Chinese company in that court will typically differ from suing a domestic company regarding service of process, discovery, litigation strategy, and the above-mentioned enforcement of judgment.
4. Service of Process
China is party to the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters. This means serving a Chinese company with a lawsuit filed outside China will usually require compliance with the Hague Service Convention — unless the country in which you filed is not par“1ty to that convention. Service under the Hague Convention is 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 company suing a Chinese company in a U.S. court typically 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 all the above documents.
Most other countries have similar requirements.
China’s Ministry of Justice will then send your service of process documents to the appropriate local court to effect service. In our experience, Chinese courts can be slow and even random in sending out service, especially if you are suing a powerful Chinese company. We are usually able to speed up service by having one of our lawyers fluent in Chinese repeatedly call and email both the Chinese court itself and China’s Ministry of Justice.
You should expect your Hague Service of Process on a Chinese company to take at least six months, assuming you did everything related to service correctly. It is not uncommon for the Chinese court or Ministry of Justice to wait months to tell you that they will not be serving your papers and you need to start all over with your service request.
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).
5. U.S. Discovery against Chinese Companies
Once a company succeeds in serving a Chinese company in a U.S. lawsuit, discovery can begin. Because the Chinese company is now a party to a U.S. lawsuit, it is bound by the normal discovery rules of the U.S. court in which it is the defendant. However, discovery in China can be difficult/impossible. Apart from the restrictions placed on discovery by the Chinese government, few Chinese companies are accustomed to American style discovery, and they often consider compliance optional.
a. Deposition Discovery against Chinese Companies
China prohibits even voluntary depositions from being taken on its soil. In its declaration on accession to the Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters, China stated that it would not be bound by Articles 16‐22 of the Convention, portions of which would grant consular officers the right to oversee depositions. In 1989, China permitted a limited deposition in U.S. v. Leung Tak Lun, et al., 944 F.2d 642 (9th Cir. 1991) but advised the United States that its grant of authority for that one deposition should not be regarded as precedent and there has been no subsequent record of China permitting a deposition. Conducting a deposition in China can lead to arrest, detention, or expulsion. In other words, don’t even think about it.
The best way to depose a China‐based witness is to have that witness to come to the United States. But if the witness is unable or unwilling to do so, there are additional options available. One common method is to fly the potential deponent to Hong Kong or to a neighboring country and conduct the deposition there, either in person or by video or telephone from the United States. Deposition by written questions is yet another option.
b. Document Discovery against Chinese Companies
Under the Hague Convention on Evidence, China agreed to allow limited discovery of documents. Articles 1 and 2 of that Convention provide for document discovery via Letters of Request issued by the court in which the legal action is pending. The court/judge should transmit its document discovery request to the “Central Authority” of the jurisdiction where the discovery is located. The Central Authority is then responsible for transmitting the request to the appropriate judicial body for a response. However, Article 23 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 and so document discovery for trial purposes is permissible, but broad US-style discovery is not.
Yet even for the document discovery authorized in China, it is unlikely the Chinese Central Authority will instruct a Chinese court to compel production. Though it is possible to request compulsion of evidence in China pursuant to a letter rogatory or a letter of request, these requests are rarely granted.
6. Litigation Strategies
Companies that sue Chinese companies in their home country courts usually will have many advantages over the Chinese company defendant. This is particularly true in countries (like the United States) where juries can hear your dispute. Jurors (and even judges to a lesser extent) generally view Chinese companies unfavorably and that is truer today than it has ever been. See e.g. U.S. Views of China Turn Sharply Negative Amid Trade Tensions.
Chinese companies frequently try to skirt foreign discovery and court rules and bringing this to the court’s attention often can cost the Chinese company credibility or force it to incur sanctions. Perhaps most importantly, Chinese companies generally underestimate the importance of foreign trial court decisions, often holding back on vigorously defending a lawsuit until appeal. In an article I wrote for the Wall Street Journal, Chinese Companies Court Disaster, I discussed Chinese company problems in foreign courts:
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.
7. Foreign Court Judgments In China.
U.S. judgments usually have little value in China. There is no treaty nor a reciprocal arrangement between China and the United States regarding recognition or enforcement of civil judgments. For these reasons, Chinese courts usually disregard U.S. judgments. See China Enforces United States Judgment: This Changes Pretty Much Nothing. This Chinese court lack of enforcement is not true of all country’s judgments, especially those from the approximately forty countries that have an enforcement of court judgments treaty with China. China also generally enforces court judgments on a reciprocal basis from countries that clearly enforce Chinese court judgments.
a. Enforcing Your Foreign Court Judgment in China.
If you have a foreign country court judgment you want enforced in China, your Chinese court application to enforce that judgment must include the following documents, all in or translated into Chinese:
- A written application for enforcement.
- Your identification certificate or business registration certificate. If your company is a foreign business, you must must also produce the ID certificates of your authorized representative or primary responsible person.
- A power of attorney.
- An original copy of the foreign judgment or ruling or its certified duplicate and its translation into Chinese.
- For default judgments, a certificate that the party that failed to show up at the hearing/trial was legally summoned to the hearing
Chinese courts accept only certified translations and most Chinese courts have a list of the translation agencies whose certified translations they accept.
The judgment or ruling and the legal summons must be notarized by a local notary and apostilled in the foreign country where the relevant documents were generated. And they then must be certified by the correct Chinese consulate or the Chinese embassy in that country.
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, Taiwan, Canada, or South Korea), suing in a U.S. court may be the best way to proceed. If that is not the case, it usually makes sense to sue somewhere else, if you can. See Enforcing US Judgments in China. With other countries, research into the likelihood of China enforcing your judgment should be undertaken before you sue, not after.
8. Arbitration Outside China.
Since China is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards its courts generally enforce foreign arbitral awards from recognized foreign arbitral bodies. But like courts pretty much everywhere, Chinese courts are less likely to enforce default awards against a Chinese company that never showed show up for its arbitration.
Chinese companies know that Chinese courts are reluctant to enforce arbitration awards against Chinese companies that fail to show up for a foreign arbitration so they often fail to show up for a foreign arbitration they know they will lose. This allows them to argue against enforcing the foreign arbitration award on the grounds that they never got notice of the underlying arbitration and/or that the method by which they were given notice was improper
Chinese courts also sometimes stall foreign arbitration award cases for years as a way to avoid enforcement without hurting their enforcement numbers. This stalling is more likely to happen with arbitration awards against powerful Chinese companies or with awards that appear inequitable. Also, China’s signing of the New York Convention on arbitration was limited to enforcing only awards from another New York Convention state that arose from a commercial legal relationship
a. Procedure for Enforcing Foreign Arbitration Awards.
If you prevail in an arbitration outside China and you want to enforce that award in China, your next step is usually to go to the appropriate Chinese Intermediate Court (usually the one in the location where your defendant resides) with the following:
- A written application requesting it enforce your award by converting it to a court judgment.
- An apostilled and consularized original of your arbitration award.
- The original agreement that contains the arbitration provision that allowed you to pursue arbitration. This too should be apostilled and consularized.
- Chinese translations of the above documents and whatever else you will be submitting to the Chinese court.
The Chinese court can deny your request to enforce your foreign arbitration award 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 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. It is fairly easy for a Chinese court to come up with good grounds for not enforcing an arbitration award. We estimate Chinese courts enforce maybe 90 percent of foreign arbitration awards, and some of the ten percent of awards not enforced are due to the company seeking enforcement having not done everything correctly.
9. Arbitration in China.
China has many legitimate arbitral bodies. See Arbitration in China and CIETAC Arbitrations: U.S. Companies Can Win. China’s arbitral bodies tend not to allow 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.
10. Suing in a China Court.
If suing a Chinese company in your home country court does not make sense, pursuing litigation in China may. Though China’s court system differs from those in most Western countries, it is relatively easy to navigate and there are many excellent (and terrible) Chinese litigation attorneys who can help.
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 generally focus more on the overall context and “fairness” of the case and less on legal technicalities than their Western counterparts. For example, if an incompetent low-level employee caused its employer company to violate a contract, a U.S. court would likely find the company liable for the breach. Whereas a Chinese court might not find liability or might severely limit damages, believing it unfair to penalize the company for its employee’s incompetence.
Second, Chinese courts do not typically allow discovery. This means you should have your proof ready to go before you sue in China, 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 be prepared to win or lose your case based on the documents. This also means you should have your documents ready before you sue. This also means that if you are sued in China, you should get your documents ready as quickly as possible. Getting your documents ready usually means getting them properly apostilled and consularized.
We cannot stress enough the need to move quickly to get your documents apostilled and consularized for a Chinese trial. Our international litigation lawyers are often asked for help in appealing a Chinese lawsuit a foreign company lost because “they were not able to get critical documents documents apostilled and consularized soon enough to be admitted into evidence by the Chinese trial court.
Fourth, settlement is rare in Chinese business litigation matters. The cost of litigating in China is considerably lower than in North America or the EU 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 settle and be viewed by its employees and customers as having done something wrong.
Fifth, Chinese courts rarely issue large damage awards. Chinese courts are loath to harm a functioning business or cause employee layoffs. In particular, Chinese judges are hesitant to award damages for lost profits or for pain and suffering. This is one reason why our China transactional lawyers put liquidated damages provisions into most China contracts they draft. See China Contract Damages Done Right.
Sixth, Chinese courts often lack the authority and fail to receive the assistance from other law enforcement agencies necessary to enforce collection on their judgments. You therefore should consider the collectability of your judgment before you sue.