Header graphic for print
China Law Blog China Law for Business

Litigating in China

Posted in Legal News

The China Daily recently did an article, entitled, “Business lawsuits in sharp increase,” on how lawsuits involving foreign companies are up ten percent in the last year.  The article ascribes this increase in litigation to more foreign companies coming into China and to the economic downturn. Both of those things may be true but I also think that the increase is due in part to companies getting more comfortable with the fact that it is possible to come out ahead on Chinese litigation.

I am tired of hearing people (including lawyers) tell me that there is no point to litigating in China because it will be so expensive and “they have no laws there anyway.” Wrong.  And Wrong. Litigating in China is typically costs less than litigating in the United States and China does have laws. Mind you though, the laws and the judicial decision-making will be different.

Let me explain.

On the most basic level, the decision to litigate in China is really no different than the decision to litigate anywhere else. Is it worth spending approximately X dollars to pursue a lawsuit in which you have a Y percent chance to win and likely collect Z dollars? The answer will depend on the X, Y and Z variables and it is those that I am going to analyze in this post.

The X Variable. Litigation Costs.

Litigating in China is quite different from litigating in the United States. Under China’s civil law system, a plaintiff generally must have the evidence it needs to prevail before it files suit.  This is the case because it is rare to be able to get evidence from the defendant through American-style discovery.  This means that you will not have to pay the massive costs of American-style discovery and this also means that your case likely will go to trial much faster than if it were in the United States.

One thing I have found though is that once you sue a Chinese defendant, the chances of them settling are quite low. I have heard many explanations for this but I will save those for another day. Suffice it to say though that you should not sue a Chinese company in China unless you are prepared to take your case all the way through trial.

Chinese courts typically require that documents generated outside China be notarized and then authenticated/appostilled by the Chinese embassy or consulate. Securing an appostille on documents is not terribly difficult for those who have done it before, but it can slow things down a bit and also can raise costs if there are a lot of documents requiring this.

Foreign lawyers and foreign law firms cannot litigate in Chinese courts. There are plenty of excellent Chinese litigators but if you are going to require your lawyer be both excellent and fluent in English, you almost certainly will need to pay considerably more.

One of the biggest unexpected costs of litigating in China is the court fees, which you should figure will run you at least 2.5% of the amount of your claim.  American litigants tend not to be aware of fees like this and this causes them to get into trouble.  I once helped represent an Americna defendant in a Korean case (Korea too requires the plaintiff to pay a portion of its claim as a litigation fee) where the American plaintiff (in an American lawyer kind of move) asked for something like $30 million dollars even though its chances of getting anything more than $2 to $3 million were pretty much zero.  I cannot remember any fee numbers but what I do remember is that the $30 million sought by the plaintiff required it pay a large amount in fees and that led to the plaintiff’s American law firm firing the Korean law firm for not having explained how all of this works.

If you are the plaintiff in a China case, you may also want to spend money to try to freeze (or preserve) the defendant’s assets to prevent the defendant from dissipating them to prevent you from collecting on any judgment you might get. Securing a preservation order typically requires a large deposit, generally based on the amount you are seeking to freeze. It is sometimes possible to use a bonding company for the deposit.

Very generally speaking, the prevailing party in China gets much of its costs back but none of its attorneys’ fees.

The Y Variable.  Chance of Winning.

It is very difficult to speak generally about the chances of prevailing in a Chinese lawsuit so I will keep this section mercifully brief by commenting on three things that I have noted about Chinese courts.

One, they tend to base their decisions less on the law and more on the equity than do US courts.  This is not necessarily good or bad, but it is something you should fully understand before bringing a lawsuit in China. If you are suing a Chinese company that said it would pay you a million dollars and then it did not, you will probably win. If you are suing a Chinese company that said it would do A but then was unable to do A because the price of doing so tripled and if it had done A it would have meant having to terminate 100 employees to cut costs, your chances of prevailing just went down.

Two, politics and corruption are typically going to be less of a factor than you think, particularly in places like Beijing and Shanghai. Your $1 million contract dispute is just not going to draw any political attention unless there is something very unusual about your case.

Three, your case is going to depend on the documents way more than on testimony.

The Z Variable. Amount You Are Likely to Collect.

Again, it is difficult to generalize here, but there is one thing that bears mentioning. Chinese courts are far less comfortable issuing large verdicts than American courts and this is particularly true when it comes to lost profits.

For more on suing Chinese companies, check out the following:

  • Twofish

    Harris:  One, they tend to base their decisions less on the law and more on the equity than do US courts.

    This isn’t true at all, and reflect a difference between the US system which comes from England, and the Chinese system which comes from Germany.  Because of medieval English legal history. English-based courts have two legal system.  One is based on specific principles of law, and the other is based on general abstract principles of equity.  These two systems end up being used in different situations, so American lawyers having to make different types of arguments based on the specific legal situation.  Contract interpretation is an issue of law.  What to do in case of a breach of contract can be a issue of “law” or an issue of “equity.”  If you ask for damages that’s “law”.  If you ask for an injunction or restitution, that’s “equity.”  The rules are considerably different for the two situations.

    China has a different system in which there isn’t a division between “law” and “equity.”  When you make a case before a Chinese judge, you must always point to the specific legislative or judicial act that is the basis for your legal argument.  So it simply will not work if you go before a Chinese judge and argue unfairness.  You have to point to the specific law that says that contracts must be fair (namely Article 5 of the Contract Law).  If you want to argue that a contract should be invalidated because of unforeseen circumstances, then you need to mention Article 26 of the Second Interpretation of the Contract Law, and if possible mention the further guidance on the interpretation…..

    http://www.chinalawinsight.com/2010/11/articles/corporate/new-provision-could-change-contract-law-in-china-but-judges-remain-conservative/

    Referencing the law is going to be important because the other side is going to try their hardest to convince the judge that your situation *isn’t* covered by this interpretation.  For example, based on the interpretation, they could try to argue that the bad thing that happened was an ordinary commercial risk or that it was foreseen at the time of contract formation in which case, the contract would still hold even if was unfair.

    So it’s not the situation that Chinese judges prefer equity over law, but rather that the Chinese legal system (and the German system that it’s based on) has a different relationship between “law” and “equity” than the US/English system.  It’s important to make this point, because otherwise one gets the impression that Chinese judges make stuff up when in fact Chinese judges are in many ways more constrained by the law than US judges.

  • Goldhawk

    Further evidence that if you need to litigate in China, its best to use a firm in-country and not rely exclusively on US counsel.  

  • Twofish

    For Chinese litigation, you don’t have a choice but to use local counsel.  Foreign lawyers cannot represent clients in Chinese courts.  What foreign lawyers can do (and this was part of the WTO agreement) is to provide business consulting services and legal advice involving transnational cases, but all of the filings have to be done by Chinese lawyers, who must be citizens of the PRC.

    One other big difference is the role of judges.  In the US, judges are appointed (or elected) from practicing lawyers after years of legal experience.  In China, judges are trained as judges in college, and immediate start working as judges.  The judges particularly at the lower levels can be “rookie judges” fresh out of school with no legal experience.  This changes how decisions are made.  In the US, judges make decisions on their own without outside consultation, whereas in China, the junior judges will consult with more experienced judges, and you can see them as something akin to supermarket clerks at the bottom of the judicial bureaucracy.  This has disadvantages, but it also has advantages.  One reason Chinese lawsuits are fast is that unlike the US where it’s very hard to add judgeships and appoint judges, it’s easy in China to appoint judges.  Another thing is that having the judge be something like a supermarket clerk in fact helps them to resist political pressure.  If a local official tries to pressure the judge, then what can happen is that the judge will tell that official to “see his boss” and then the argument takes place at a higher level.  It is true that all legal and political institutions answer to the Communist Party, but one important aspect of the system is that judges answer to a *different* set of officials than local administrative officials with different interests.  This can be extremely important and useful if Beijing has decided that things should be done one way, and you are trying to get local officials to comply with directives from the Central Government.

    Finally, this influences the way that you argue in court.  In the US, you can be reasonably sure that the judge understands the law, whereas in China because the judge may be “fresh out of school” and may not in fact understand the law, so you have to be explicit in your arguments.  At the same time, if you are arguing in US federal court, your court filings usually have to be long and detailed, and most cases that end up in federal court involve some tricky bit of law since simple cases are usually settled.  When arguing in a Chinese court, you *don’t* want to make a detailed complex argument, because if you do, then the judge may get confused and start consulting with more senior judges.  This vastly slows the process and annoys people, and it also adds unpredictability to the system, because at that point the case is decided by people that you’ve never met.  So Chinese court filings need to be very simple and direct, and Chinese court opinions are also simple and direct.

  • js

    This is my first time posting. I tried to be objective as possible when addressing the points from Mr. Harris’ article using my current experience in the Chinese legal system without devolving into a frothing-at-the-mouth rant.

    Point 1: “I am tired of hearing people (including lawyers) tell me that there is
    no point to litigating in China because it will be so expensive and
    “they have no laws there anyway.” Wrong.  And Wrong.”

    I agree. All of our friends (local and
    foreign), co-workers and family all expressed severe doubts about the possibility
    of winning when my friend and I brought civil suit against our ex-employer in the spring
    of 2009. It’s a good thing my co-plaintiff and I didn’t listen to them. It’s
    been a tough battle, but it is almost over-we keep telling ourselves. We
    utilized the services of local counsel recommended to us who has previous
    experience working with foreigners (and won in those cases,too).

    Point 2: The Z Variable. Amount You are Likely to Collect

    Shouldn’t
    this be called the E Variable, as in ‘Enforcement’? In our case we won at the
    original trial and, then again, at the appeal (Intermediate level court). The judges gave us everything we asked for in our claim. I suppose it is different with companies, but I’m not a lawyer so my familiarity with legal nuances is limited.

    The problem
    is enforcement. It is the actual act of collecting which is an onerous task in
    itself.  In this case we’ve even had to
    hire a PI to track down the defendant after they fled from their office as the
    enforcement judges arrived to apprehend the defendant during the first instance
    of enforcement.

    During
    a second instance of enforcement the defendant was caught. After a long
    afternoon and evening of negotiations, nothing was moving. Once the handcuffs were brought out, then the defendant
    finally capitulated and agreed to a court approved payment plan. We told the judges
    that the defendant couldn’t be trusted. The defendant’s mother and wife also
    signed the plan as guarantors (Yes, we even received copies of the document
    with their thumbprints and signatures on it. See Point 3 below). An initial payment was made that
    night. The rest were supposed to occur in September, November and January.

    Guess
    what happened? Yes, even the court approved payment plan was ignored by the
    defendant and the two guarantors to the contract. We were flat out told by our responsible enforcement judges that the defendant had developed a ‘special relationship’ with their boss. Thus, no enforcement.Since then, there has been a reshuffling of those responsible for our case. This week we filed for a third instance of enforcement after the enforcement court decided it was ready to deal with us. Read what you will into that
    situation.

    The waiting is the hardest part. It’s a game of attrition. The real question is: How strong
    is your willpower?

    Point 3: ‘Three, your case is going to depend on the
    documents way more than on testimony.’

     

    I agree that documents are more important
    than testimony, but with all due respect to Mr. Harris, I think he gives
    documents short shrift. “Documents! Documents! Documents!” is the
    mantra you should always be keeping in mind while here on the mainland. I think
    my total time of testimony in all of the proceedings is probably no more than
    ten minutes. Everything went back to documents from trial to appeal through
    adjudication.

     

    In my current ongoing
    experience in the Chinese legal system, it was the sheer amount of documents
    with official ‘chops’, signatures, dates and times that ended the defendant’s
    chances of winning. The defendant even went so far as to fabricate their own documents in
    Photoshop which the judge dismissed; and the defendant blatantly lied directly
    to the judge’s face about the signature on a certain document not being their
    signature. The individual went on to
    sign court documents that day with the exact same signature. Having so much documentation made a world of difference. You simply have to
    decimate the other side with more paperwork; and make sure it is detailed!

    I’ve also been keeping very detailed notes
    about everything that has happened in the case including phone calls to the
    court, judges, every visit-everything. Paper trail!

     

    To sum it all up, the law works here. However,
    it can be glacially slow, infuriatingly opaque and the biggest cost-in my
    opinion-is your time (and maybe some of your sanity). I hope some of my experience can help you avoid some of the similar problems I have faced. 加油!

    JS

    Full disclosure: I’ve used much of the information provided by this website in my case. Thank you, Mr. Harris.