By: Steve Dickinson
This post comes from a column Steve wrote for Jongo.com, which column can be found here.
I have just returned from a visit to the United States, and I am now in Dalian attending a trial for a British client. For me, litigation in China is a standard part of my legal practice. Yet, when I spoke with attorneys while in the U.S., I was surprised to find many of them still believe litigation in the Chinese courts is not generally available. China’s court system is actually a very effective tool for defending the rights of foreign businesses, especially in the developed zone along China’s east coast. The courts are used extensively by Chinese companies to resolve disputes and the level of expertise in the commercial field is high. I find many foreign companies are given bad advice on whether to take action in the Chinese courts. Because of this, they abandon good claims simply because they come to believe there is no alternative.
To make effective use of the Chinese court system, it is essential to establish a proper basis for action. Consider the situation of a foreign company that purchases products from Chinese suppliers or sells products to Chinese suppliers. This type of business is the source of many disputes relating to payment, quality and delivery. The recent U.S. incidents concerning melamine in pet food are a notorious example of such issues.The goal of every foreign company trading in China should be to set the proper basis for quick and effective action in the Chinese courts if a problem arises. The key is to be able to act quickly. Delay in China is usually fatal.
Unfortunately, we find that many foreign businesses have not set the proper basis, preventing them from effectively using the Chinese court system. To make effective use of the Chinese courts, four basic things must be done:
1. Be sure the Chinese side of the transaction is a well established, legitimate business entity. Very often we are asked to file suit against a Chinese company that has taken payment for product but has not made any delivery. When we investigate, we frequently find it is not worth filing suit. The most common reasons are:
- the seller does not actually exist
- the seller is merely a trading company that did not actually manufacture the product
- the seller has no assets, so filing a suit is a waste of time
The first step in any business transaction here in China is to ensure that the party with whom you are dealing is a legitimate business with the financial ability to pay on any claims. In other words, do your due diligence.
2. You must have a written contract. Many purchase and sale transactions in China are conducted with no contract at all or on the basis of a simple purchase order. Though this approach is common in international commerce, it is a very bad approach for China. It is essential in China that there is a basic written agreement that sets out all of the basic terms of the transaction. Chinese judges are professional bureaucrats. They know little or nothing about business. The judges are very good at taking the terms of a written agreement and applying them to a specific situation. They are not good at supplying contract terms based on commercial practice and common business sense.
3. The written contract should be in English and Chinese. It is true that English language contracts are legal and enforceable under Chinese law. However, a contract solely in English or any other foreign language will need to be translated and interpreted by the court. This can cause substantial delay in the court case, to the disadvantage of the plaintiff. Moreover, the court will often insist on using its own translator, which can result in a translation inconsistent with the intent of the parties. Such problems are eliminated when the original contract includes a Chinese translation agreed to by the parties.
4. The contract should be subject to Chinese law and should provide for litigation in China. If you want to enforce your contract rights against a Chinese company, you almost always will need to take action in China. A lawsuit in the United States or Europe against a Chinese company with no assets there is of no benefit because such foreign judgments are not enforceable in China. We review many contracts that provide exclusive jurisdiction for litigation is in some court in the United States. This is a disaster. If the contract contains such a clause, the Chinese courts will refuse to hear the action. In this case, the foreign party is essentially left without any remedy. In the same light, Chinese law typically should be provided as the basis for the contract. Many U.S. parties insist U.S. law should control. They believe this provides “certainty”. The opposite is true. It is permissible for a Chinese contract to provide that it is controlled by foreign law. However, in the litigation setting, the foreign law must be proved, since the Chinese court has no knowledge of such law. This will result in delays in the legal proceeding and much uncertainty, since the Chinese court’s interpretation of foreign law is unpredictable. The effect is therefore the opposite of what is intended.
It is absolutely essential that foreign businesses operating in China ensure that they will have access to the Chinese courts to defend their rights. Most cases that we find where the court system is not effective or not available arise from the failure of the foreign company properly to prepare. Companies that follow the four basic steps outlined above will find that the Chinese court system is surprisingly effective in resolving normal commercial disputes.
