Your Company Can be Sued in China and That Matters

Got an email from a veteran China consultant who is very prominent and very good at what he does. His email was essentially bragging about how he had managed to pull one over on the Chinese factory that had hired him. Here is his email, with anything that might identify anyone having been deleted or changed.

I am giving you this “hypothetical” because I am curious to get your opinion on this.

Imagine that I owe nearly $2 million to a China factory for business I did with them. Now imagine I didn’t pay this factory because I learned it was paying kickbacks to be able to inflate its prices. I am having to keep this debt on our books and it is preventing us from getting a needed loan. I reached out to the China factory today to try to buy off our alleged debt for pennies on the dollar and they told me they have just sued me in China, which really surprised me.

Fortunately, we don’t even have a contract with them as we have always operated with purchase orders as a way to prevent just this sort of thing.

My immediate reaction to that was “go ahead – you’re welcome to do so but if you win a judgment against me you’ll never be able to collect that from us.” We don’t have a bank account in China, an office in China or any real presence at all there (other than buying some other goods from a couple other Chinese supplier and I’m okay if I’m told I can never travel there again (I’ve been to China more than 100 times in the past 16 years). Am I right that this China factory cannot collect a judgment against us? Is there a simple answer here? I met with my lawyer here [in a mid-sized US city] and he assured me no US court would ever enforce the judgment and so the Chinese company can never collect against us. Consider this a posting on your blog. How would you respond to a hypothetical such as this?

I’m really curious to hear your opinion on this. and I appreciate your taking the time to read.

My response was as follows:

You are mistaken.

This company can sue your company in China and then win in China and then bring that judgment to a US Court and convert it to a US Judgment and then start seizing your company’s assets. My own law firm actually took a Chinese judgment to California and got it enforced and we have done the same thing with Russian and Korean and Taiwanese and Mexican and Spain and Netherland and UK and Canada judgments. We also have on multiple occasions represented US companies sued under circumstances similar to what you describe and we settled all those cases to avoid the substantial risk of the judgments being enforced in the US.

I do not understand why you think your not having a contract will help you here when all that does is sow confusion and give the Chinese company free reign to sue you in either China or the US, which gives it another good argument for why a US Court should enforce the judgment. I mean, if the Chinese company can sue you in the US if it wants, why should a US court not enforce the judgment from another country?

The other thing of which you need to be aware is that whatever settlement agreement you enter with this Chinese company should be in both Chinese and in English and written so as to truly end things in BOTH countries. These agreements are not simple and they require certain tried and true buzzwords to work. We often hear from American and European companies that think that they have settled with a Chinese company only to learn their settlement agreement was defective and in fact they have not and they learn this only after having just been sued by a person (usually in an employment case) or entity with whom they thought that they had settled. The international litigators at my law firm then review the “settlement” agreement and give the bad news that it either is not valid or may not be valid.

The American Bar Association Journal just came out with an article, Chinese companies doing business in the US build barriers to legal remedies, propagating the same mistake. I came across this ABA Journal because it quotes me on how Chinese courts will not enforce judgments from US courts, but then quotes another lawyer saying “never in history has a US Court enforced a Chinese judgment”:

A Chinese court can enforce a foreign judgment, according to Davis. “But never in history has a Chinese court enforced a [U.S.] judgment against a Chinese firm.”

Conversely, he says, “no U.S. court will recognize a Chinese judgment against a U.S. firm.”

Wrong, wrong, wrong. First off, it is my understanding (based on one conversation I had with an international family lawyer years ago and the fact know this to generally be the case regarding other countries) that US courts generally enforce Chinese family law and custody decisions. Second, there is the case of Hubei Gezhouba Sanlian Indus. Co. v. Robinson Helicopter Co., which Ted Folkman wrote about in US Courts For Chinese Litigants. The Year In Review [Link no longer exists]:

Everyone knows that US judgments are not readily enforceable in China, but the converse is not true, as Hubei Gezhouba Sanlian Indus. Co. v. Robinson Helicopter Co., 425 Fed. Appx. 580 (9th Cir. 2011) shows. Hubei first sued Robinson in Los Angeles, but Robinson, perhaps planning a “boomerang litigation” and thinking that a US court would never enforce a Chinese judgment, successfully sought dismissal on forum non conveniens grounds. But the Chinese court entered a default judgment against Robinson. Robinson appealed, arguing, among other things, that the judgment should not be recognized because China does not recognize US judgments.

The court gave that argument short shrift. Reciprocity or lack of reciprocity simply is not one of the grounds on which a court may refuse recognition or enforcement under the Uniform Foreign Money Judgment Recognition Act or similar statutes. It’s noteworthy that neither Robinson nor the court took the view that there were any systematic problems with the Chinese judiciary that precluded recognition of a Chinese judgment. There is a growing recognition in the US of the increasing maturity of the Chinese judiciary. And it’s interesting that neither Robinson nor the US court raised the issues of lack of finality that have caused courts in the Hong Kong SAR to question whether mainland Chinese judgments are entitled to recognition and enforcement.

There is indeed no treaty nor any reciprocal arrangement between the U.S. and China that mandates U.S. courts enforce China judgments. However, Thirty-Two US States have adopted the Uniform Foreign Money Judgments Recognition Act, which generally requires signatory state courts to enforce judgments that are final, conclusive and enforceable under the law of the jurisdiction in which it was rendered. There is no “China exception.”

Third, my law firm recently took a Chinese judgment and secured its enforcement in the United States, with pretty much no hassle. I have to remain somewhat mum on this because we intend to use that judgment to seize the assets of a Chinese company, but I have always been of the (minority?) view that it really just isn’t that tough to get Chinese judgments enforced in the United States, even though the opposite is pretty much impossible. I have been involved in about a dozen cases involving the enforcement of foreign judgments in the United States — on both sides of the issue — and of those cases, the foreign judgment was enforced every single time. In maybe five of those occasions, the foreign judgment came from Russia. If the US courts will enforce Russian judgments, I just don’t see why they won’t enforce Chinese judgments as well.

In the case obliquely referred to above, we took a Chinese judgment obtained by an American company and we converted it to a Washington State Court judgment, without the Washington State Court raising any issues regarding its ability to do the same. As I recall, the court did make us jump through a number of hoops in terms of translating and explaining the Chinese court decision, but it never raised any issues regarding the propriety of a US Court enforcing a Chinese court judgment. We subsequently took the Washington State Court judgment and converted it to a California Court judgment. The California court never batted an eye. I should note though that this judgment was against a Chinese company, but I do not see that as necessarily making a legal difference.

The very first day my law firm first set up its website I got a call from a company in Mississippi that had been sued by a Chinese company for allegedly having provided that company with millions of dollars in factory equipment that did not work. This MS company had been sued in a Chinese Court by the Chinese company to whom the MS company had provided the allegedly defective equipment and the MS company’s MS lawyer had told it that it need not defend the case in China because “the Chinese courts do not have jurisdiction over you and nobody would ever enforce any of its rulings.” The MS company asked me if this was true and our conversation then went something like the following [I was so shocked by the call based solely on our website that I actually have a pretty good recollection of our conversation]:

Me: Have you ever sold your equipment to a company in another US state and then been sued in that state for the product you supplied?
MS Company: Yes. Multiple times.

And in those cases did you ever argue that the company suing you in its home state needed to be suing you in Mississippi instead.
MS Company: At the beginning we did, but eventually after losing every time we stopped making that argument.

Right. And we should at this point just assume that China will be the same way. In other words, why shouldn’t a Chinese court have jurisdiction over your company when your people went to China to market your equipment and when you regularly sell and even service your equipment there. [He had told me these facts, and he also mentioned that his company even had a brochure in Mandarin]

Okay, so now we know that you have to at least consider that you can be sued in China. And has the Chinese company complained to you about your equipment in the past?
MS Company:  Yes, pretty much from day one and I have to admit that much of their problem stems from our own people having installed it incorrectly.

So are you saying that the Chinese company’s claims against you have some merit.
MS Company: I don’t remember at all what he said at this point, but I do remember the essence of it was that the installation had been bad and some of the Chinese company’s complaints about the product were valid, some might be valid and some were not valid. But to summarize, the Chinese company had brought a legitimate case.

I then confirmed with the MS Company that it had been given plenty of notice about the pending China case against it as it had just begun. I then asked him if his company wanted to continue doing business in China and he emphatically said yes. At which point I noted that even though I thought his company would be at serious risk (based on the facts above) of a US court enforcing any China court judgment against his company, his wanting to continue doing business in China meant a Chinese court judgment could be enforced against his company’s operations there and that would be a really bad thing.

Bottom Line:
Foreign companies should not bet on the courts in their home country not enforcing Chinese court judgments.