China Law Blog

By Steve Dickinson

When we draft contracts in China, our foreign company clients usually instruct us to have the contract be governed by foreign law and for any disputes to be decided by arbitration, preferably outside of China. This is often a mistake. One major reason is that when any form of arbitration is required, the plaintiff has no access to the very effective prejudgment remedies available within the Chinese litigation system.

A recently completed matter shows how this can work. A very internationally savvy Japanese client came to us for help resolving a difficult foreign trade dispute. A Chinese company owed our Japanese company a substantial sum, but the amount was not documented by a clear contract and the exact sum owed was nowhere clearly specified in writing. We were able to convince the Chinese side to enter into a new agreement where the Chinese company agreed to an exact payment amount and a precise payment date. In our initial drafting of this agreement, we provided that the agreement would be governed by Chinese law with jurisdiction in the Chinese court where the Chinese defendant had its home office. The client resisted, making the usual arguments: Chinese law is unclear and Chinese courts will favor the local party. In the end, we convinced the client to follow our approach.

As we expected, the Chinese party did not pay on the due date. We then hired a local lawyer to file suit in the hometown of the Chinese defendant and as we usually do in commercial litigation, we had the local lawyer seize assets from the defendant in a prejudgment writ of attachment. This required our client post a money bond, which we had arranged in advance using our contacts in the local bonding community. Within three weeks of our filing suit, the Chinese defendant paid all amounts owing, together with interest, court costs and attorneys' fees. The Chinese defendant indicated the primary reason it paid so promptly was to get its assets out from under the seizure. The local court never had to hear the case; it was needed only to cooperate with the asset seizure, which it did without regard to the home of either plaintiff or defendant.

If we had gone along with our client's initial inclination to provide for application of Japanese law with arbitration in Hong Hong, we would never have been able to achieve this successful result. Instead of our being able to move quickly and forcibly against the Chinese defendant and its assets, we would have been forced to proceed outside of China in a slow and expensive arbitration proceeding. In the end, we likely would have received nothing more than an arbitrator's order to pay, which we would have had to bring back to China for enforcement in the same court we used for the debt collection litigation. Most importantly, we would not have been able to use the effective prejudgment attachment procedure, which put the defendant in the mood to comply with our payment request.

It also bears mentioning that the contract between our Japanese client and the Chinese defendant was in Chinese. This ensured that the agreement we wanted all along would be the agreement seen by the Chinese court (and not some translation). This not only helped to clarify content, it also made sure we did not spend precious time waiting for a court translation.