Litigation In China For Foreign Investors

The People’s Courts

Chinese courts rely on a legal system more akin to continental Europe than the common law system of the UK, Canada, or the United States, yet there are distinctively Chinese characteristics. Get a good local lawyer before litigation in China - only Chinese nationals working for mainland Chinese law firms may appear in court.

Local Bias – Although there are a number of examples of foreign investors prevailing in Chinese courts against state-owned enterprises and other well-connected local parties, results vary drastically with location (big cities being considered among the safest bets for foreigners), and it is often difficult for the foreign party to enforce favorable judgments.

Jurisdiction and Forum Shopping- Lower courts in China operate on a regional basis, and the Supreme People’s Court is the court of last resort. Jurisdiction rules must be complied with - a corporate defendant must usually be sued in the jurisdiction where its headquarters are located.

Procedure

Some of the key features of the People’s Courts include:

lGreat emphasis on formal documentation over witness testimony

lA lot of attention to the production of powers of attrney, authenticated original documents, notarizations, and seals

lRelatively low-cost, high speed procedures, at least compared with the glacial speed of litigation in the United States

lStrict limits on ability to compel the production of evidence (discovery procedures), probably the greatest disadvantage of litigating in China

lLenient treatment of perjury

lLack of emphasis on precedent – judicial precedent is not binding in China, although higher courts do issue detailed legal interpretations to guide lower courts

lLower damage awards - damages awards are low by US standards, and it is more difficult to prove the amount of loss than in Western countries

lDifficulty in enforcing injunctions, seizure of assets, and specific performance - large bonds are often required before a temporary restraining order will be issued.

Administrative action (bypassing the couret system) is often available in cases or intellectual property infringement or counterfeiting.

Appeals – Dissatisfied claimants ar usually entitled to one appeal, whci is usually granted and executed speedily. However, some judgments are effectively unappealable.

Enforcement

Domestic judgments can be difficult to enforce. Local authorities may fail to assist the enforcement a judgment that is seen as damaging to local economic interests. Furthermore, the People’s Courts have a reputation of being vulnerable to the “Enron Effect” – they seldom bother to trace and seize assets deliberately hidden by defndants through the use of complicated corporate structures.

Foreign judgments are enforceable in theory but difficult to execute. Enforcement is generally based on the principle of reciprocity, meaning that China will only enforce judgments originating from jurisdictions that enforce Chinese judgments. However, since China is signatory to a number of relevant bilateral enforcement treaties, the principle of reciprocity is subordinated to treaty requirements. Of course the best way to enforce a foreign judgment is to locate overseas assets of the defendant in a jurisdiction willing to recognize the judgment and seize assets.

Judgments from Taiwan, Hong Kong and Macau - Judgments from Taiwan have long been enforceable on the mainland, and judgments from Macau have been enforceable since April 2006, in both cases subject to certain conditions. Nevertheless, expect difficulties in actual practice. Surprisingly, judgments from Hong Kong are currently unenforceable in the mainland except in cases where the judgment was rendered pursuant to an exclusive jurisdiction clause in a contract, and even this provision is subject to exceptions.

International tribunals

Other alternatives for foreign investors include adjudication by the World Trade Organization (WTO) or the International Centre for Settlement of Investment Disputes (ICSID). Both of these tribunals have serious drawbacks, however – the WTO because foreign investors cannot sue directly (the plaintiff must be a state), and ICSID because jurisdiction is based on consent and unless you are Dutch, German or Finnish, your country has not entered into a bilateral investment treaty with China that would authorize ICSID jurisdiction (although this situation may be about to change).