Litigation and Arbitration

China lawyersDoes the Chinese company with which you are doing a deal have a United States subsidiary? Does this mere fact make you feel better about doing a deal with its China parent company? Why? Do you not realize that it is likely to be legally irrelevant?

The always excellent, always informative, Hague Law Blog (by Aaron Lukken) wrote about this in the context of service of process in its post, You can’t simply serve a U.S. subsidiary. Aaron starts out by discussing how you need a compelling reason to “pierce the corporate veil” of a subsidiary company to each through and assert claims against its corporate parent since “the whole purpose of a corporation is to be a separate entity, a separate being from its owners, shielding the owners from liability if they didn’t have a part in wrongdoing.”

A couple years ago I was retained as an expert on corporate veil piercing for a case in Korea. As part of my work on that case, I researched the current state of corporate veil piercing and since that time I’ve probably stated something like the following to fellow lawyers at least a dozen times: “You know how difficult it is to pierce a corporate veil, well it’s even more difficult than you think. It seems that courts are now pretty much uniformly of the view that everyone now understands that Limited Liability companies and corporations protect the owners of those entities and corporate veil piercing is now nearly impossible unless there has been real fraud somewhere along the way.” Or to put it in non-legal terms, it ain’t gonna happen.

And yet again and again really smart in-house lawyers seem to ignore this when doing deals with big Chinese companies with U.S. subsidiaries. I cannot even count the times where such a lawyer has told me that they are not terribly worried about being able to pursue the big Chinese company on the other side of their deal because “we can always go after them here in the United States.” Wrong. Wrong. Wrong. Unless the U.S. subsidiary is a party to the contract or a guarantor on the contract, to go after that subsidiary you need to be able to pierce the corporate veil and that ain’t gonna happen. When I tell them this, they then talk about how they still can seize the Chinese companies ownership interest in that U.S. subsidiary as if that is no big deal. But the problem is that is a really big deal and any Chinese company worth its salt has structured its ownership of its U.S. subsidiary through various levels of Hong Kong and Cayman Island and Virgin Island companies. So yes, if you are willing to spend hundreds of thousands of dollars investigating the corporate trail and engaging in discovery on just this one issue, you might succeed. But really?

Our China lawyers see the result of this thinking with contracts between American and Chinese companies that call for disputes to be resolved in a U.S. court. At least once a month, one of our China attorneys will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays. As we have so often written, this will not work:

After we tell the American lawyers how difficult it is to collect on a U.S. judgment against a Chinese company (note that I say difficult and not impossible — it is possible to employ “other methods” to collect on such a judgment), they will sometimes explain that is okay because they can still go after the U.S. subsidiary of the Chinese company with which they have the contract. But as stated above, that is expensive and difficult and may or may not lead to a good result.

Aaron’s post focuses on how service of process on a foreign company’s U.S. subsidiary does not constitute service on the parent company and he uses Chrysler Motors as an example:

Take Chrysler, for example. When you sue Chrysler over a defective Jeep, you’re pretty solid in just serving the Michigan outfit. But if you allege liability on the part of the parent company, Fiat Chrysler Automobiles, N.V. (which we’ll just call FCA here– and I don’t mean the Fellowship of Christian Athletes), serving in Michigan ain’t gonna cut the mustard. You have to go abroad to get FCA on the hook. You can’t just hit Chrysler and assume that FCA is in the case, too.

The corporate veil doesn’t get pierced just because it hangs overseas.

Which means that if you want to serve Chrysler Automobiles N.V. you must do so in the Netherlands, where it is based. Again, it’s because the subsidiary is not the equivalent of the parent and vice-versa and as much as you may wish it otherwise, it ain’t. The same holds true for your China contract.

 

China employer social insuranceChinese law mandates employers provide their employees certain mandatory benefits, including social insurance. China has five types of social insurance: pension, medical, unemployment, maternity and work-related injury insurance. The specific types of social insurance employers must provide and their contribution formulas vary depending on the employer’s location. Many foreign employers in China do not realize that failing to make full payments on required social insurance gives their employees the legal right to unilaterally terminate the employment agreement without providing any prior notice and then turn around and sue the employer for damages.

Just to make things more complicated for China’s employers, China has several forms of social insurance violations. You obviously violate the law if you don’t pay any social insurance at all, but the violations by foreign employers in China I most commonly see are more subtle and complicated than that. We see violations when employers fail to pay social insurance for the entire term of employment. This violation often happens when the employer thinks it need not pay social insurance during an employee’s probation period. We also see violations involving employers failing to pay for all five types of social insurance. And with rising wages in China, we have lately been seeing a rash of employer problems arising from paying social insurance based on a lower salary than is actually being paid, either because the employer failed to update the salary amount or because it intentionally reported a lower salary so as to reduce its employer contribution. These are the sorts of things we constantly look out for in our HR audits.

Employees may consent to the employer claiming a lower salary but that is irrelevant once caught or even once reported by the employee who consented. In a fairly recent case out of Jiangsu Province, the court reinstated the employer’s obligation to pay for all required types of social insurances at full rates the entire time. I am simplifying the facts for this post, but basically the employee’s monthly salary was higher than 7000 RMB, and the employer only contributed social insurance as though the salary had been 2200 RMB. The employee terminated the employment relationship and sued the employer for severance, arguing that he had been forced to leave his job because the employer failed to pay mandatory social insurance. The case went from labor arbitration, to trial, to appeal and then the employer petitioned for re-consideration by the Jiangsu Province High People’s Court. The employer lost every single step of the way (which really should have been no surprise to any experienced China employment lawyer, sorry!) and was required — among other things — to pay the employee for statutory severance.

Each step of the litigation process, the employer made the following three (futile) arguments. One, the employee never objected to the arrangement of the employer misstating the employee’s salary and therefore underpaid the employee’s social insurance. Two, because the employee never voiced any objection to the social insurance payment arrangement, the parties essentially agreed on a different base for social insurance payments. Three, the employer’s failure to contribute the full amount of social insurance was not the same thing as failing to make any contributions at all, so the employee was not entitled to statutory severance. The Jiangsu Province High People’s Court rejected all arguments and explicitly (and rightly) stated that the laws on social insurance are clear and the employer’s failure to contribute the full amounts based on the employee’s actual wages entitled the employee to terminate the employment contract and receive statutory severance pay from his employer.

To reiterate what is becoming a fairly regular theme of my China employment law posts, most China employment laws cannot be contracted away and an employee’s written consent does not change that. An employee’s written acknowledgement that he or she specifically asked for a particular employment arrangement also does not change that.

As a foreign company doing business in China, you are under a microscope and you will be treated differently than domestic Chinese companies. This means that you are both more likely to get caught on employer violations and more likely to get called out and treated harshly when caught. In our experience, if the labor authorities are not pursuing you for non-compliance, your employees almost certainly will either before or certainly after they leave. This brings me to another point. If your employee tells you she is leaving her employment and alleges she has been forced to quit because of employer wrongdoing (or even just provides inconsistent stories about why she is leaving), you should immediately work on resolving those problems (which is exactly what they are) before she takes you to court.

 

Terminating a China-based employeeChina employment law. China employment lawyer. is never easy, but unilateral termination is possible without having to pay severance when the terminated employee has committed a serious breach of the employer rules and regulations (aka employee handbook). For your termination to work, you as the employer need a set of rules and regulations that include a legally enforceable provision on which you can rely. “Enforceable” generally means a reasonable provision that does not violate any Chinese laws.

Let’s take absenteeism as an example. This is a fairly straightforward misconduct and there is nothing in the law prohibiting an employer from disciplining an employee for absenteeism. The question is whether your company rule is reasonable. Suppose your Rules and Regulations provide for immediate termination of any employee absent from work for half a day without good reason. Will such a provision be upheld as enforceable simply because it doesn’t violate any laws? Almost certainly not. As with almost everything regarding China’s employment laws, the answer could depend on the employer’s locale. But most China labor boards and courts will refuse to enforce this provision as too harsh. What about three days of absences without good reason? Would that be enough to allow immediate termination? Probably yes, but we still need to check the local rules and check in with the local labor authorities to confirm local practices. The line between what is considered harsh and what is not is often fuzzy, so it is important the termination provisions in your handbook be both clear and enforceable.

But what if you do not even have a set of Rules and Regulations or your Rules and Regulations are silent on absenteeism and you want to terminate an employee who has been absent from work for 3 consecutive days without any justification? Can you discipline or terminate that employee without having to pay any severance? Again, it will depend on where you are, but in most places, the answer is no. If your Rules and Regulations do not list out the misconduct you want to use as your basis for an employee’s termination, you typically cannot terminate the employee on that basis. This is yet another reason why having a set of Rules and Regulations is so important and why it should be an evolving document. If you are finding your employees engaging in misconduct not addressed in your Rules and Regulations, you should update it to add provisions that address that misconduct.

Speaking of how China’s employment laws can vary so much depending on the locale, Shanghai is an employer-favorable outlier to much of the above. In Shanghai an employer that can show its employee acted in bad faith and thus violated his or her basic duties as an employee can usually terminate an employee without justification based on a particular provision in its Rules and Regulations. Despite this Shanghai difference, you still will be on firmer ground for an employee termination that can be justified by a provision in your Employer Rules and Regulations.

 

China lawyersJust read a post over at the China Law Prof Blog on what Professor Clarke rightly calls “an interesting case in which a Chinese court (the Nanjing Intermediate-Level People’s Court) enforced a Singapore court judgment.”

Professor Clarke then goes on to explain how Chinese courts “may enforce foreign judgments that are not fundamentally offensive in some way under two circumstances: (1) there is a treaty with the foreign country calling for mutual enforcement of judgments; or (2) on the basis of reciprocity, which has been interpreted to mean that the foreign country has a practice of enforcing Chinese judgments, or at least has done so before.” This has been the law in China for quite some time.

Clarke then states that there is no Singapore-China treaty calling for mutual recognition and enforcement of judgments, which is my understanding as well. But — and this is the kicker — the Nanjing court nonetheless decided to recognize and enforce the Singapore judgment because in 2014 a Singapore court had enforced a Chinese judgment. And get this: the judgment the Chinese court enforced was a default judgment against a Chinese corporate defendant. I say “get this” because courts everywhere are far more reluctant to enforce default judgments (typically given out because the defendant failed to appear or defend) than to enforce a judgment on the merits of the case.

Professor Clarke does not know if this is the first foreign judgment Chinese courts have enforced on the basis of reciprocity and I too do not know whether that is the case. Professor Clarke does add though that he thinks “it’s fair to say that such cases are pretty thin on the ground.” To which I will add, yes that is for sure.

Now here’s the million (actually probably billions) dollar question this case raises: does this mean China will start enforcing U.S. judgments? I mean U.S. courts have enforced Chinese judgments (my law firm haas secured such an enforcement order) so does this mean Chinese courts might do so if the case is right? Professor Clarke has this to say on this question:

But if I were trying to enforce a US judgment in a Chinese court, I’d certainly bring it up. To the best of my knowledge, Chinese courts have not yet enforced a contested US money judgment. (I’m attaching those qualifications because they may, for example, have recognized a US divorce decree for some purpose.)

Just a few months ago, in Enforcing US Judgments in China. Not Yet, I said “no way”:

At least once a month, one of our China lawyers will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays.

As we have consistently written, nope, nope, nope.

I then went on to talk about how my firm’s China lawyers are often called upon to conduct research on this very issue (oftentimes for lawyers or companies wanting to prove to their insurance company or to a court that it would be futile for them to pursue enforcement of their United States judgment in China) and I pulled a large section from the latest of our memoranda on that topic, and I do so again below.

Article 282 of the PRC Civil Procedure Law, requires all of the following conditions be met for enforcement of a foreign judgment to be recognized in China:

The foreign judgment has taken legal effect in the jurisdiction in which it was rendered.

The country where the deciding court is located has a treaty with China or is a signatory to an international treaty to which China is also a signatory or there is reciprocity between the countries.
The foreign judgment does not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Though China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it is not a signatory to any international treaty on the recognition and enforcement of foreign court judgments. There is no bilateral treaty between China and the U.S. on recognition and enforcement of foreign court judgments. There also is no bilateral treaty between the two countries on civil or commercial judicial assistance.

Even judgments from countries that have an enforcement treaty with China, are oftentimes not enforced in China. For example, China and Australia entered into an agreement on reciprocal encouragement and protection of investments in 1988 that mandates both countries promulgate laws recognizing and enforcing each other’s judgments. But in response to a 2007 request by the Guangdong Province High People’s Court for instructions regarding an application by an Australian plaintiff for recognition and enforcement of an Australian court judgment, the Supreme People’s Court of China (the “SPC”) rejected enforcement since there was no international treaty to which China was a signatory nor any treaty between China and Australia on mutual recognition and enforcement of court judgments, nor any reciprocity between the two countries, the application should be rejected.

Since China is not a signatory to any international treaty on recognition and enforcement of foreign court judgments nor is there any treaty between China and the U.S. regarding judgment enforcement, the only possible way to get a U.S. judgment enforced in China would be if there were reciprocity between the two countries, but there isn’t.

In considering the question of reciprocity, a Chinese court will consider whether there is any precedent indicating reciprocity. In other words, the court will seek to determine whether there are any prior cases where a U.S. court recognized or enforced a Chinese court’s decision. If there are no examples of a U.S. court having enforced a Chinese judgment, the Chinese court will almost certainly rule against enforcing the U.S. judgment because the reciprocity requirement will not have been met.

In 1994, the Dalian Intermediate People’s Court considered a Japanese party’s application to recognize and enforce a Japanese judgment and two rulings. The application was eventually referred to the SPC for guidance and the SPC held that given that there was no multilateral or bilateral treaty governing such matters between China and Japan and given that the two countries had not established reciprocity, the Japanese judgment would not be recognized or enforced by a Chinese court. This case confirms China requires factual reciprocity, not presumed reciprocity.

But are there any examples of a U.S. court enforcing a Chinese Judgment? On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the Uniform Foreign Money Judgments Recognition Act and in 2011, the Ninth Circuit Court of Appeals affirmed the district court’s decision. The plaintiffs in that case were Hubei Gezhouba Sanlian Industrial Co. Ltd. and Hubei Pinghu Cruise Co. Ltd., two PRC companies located in Hubei Province. The plaintiffs won a judgment against Robinson Helicopter Company Inc., a California corporation, at the Higher People’s Court of Hubei Province. The United States District Court for the Central District of California held that the PRC judgment was final, conclusive and enforceable under PRC laws and the plaintiffs were therefore entitled to an issuance of a domestic judgment in the amount of the PRC judgment.

This was the first time a U.S. Court recognized and enforced a PRC judgment, but it does not necessarily mean a Chinese court will automatically invoke the principle of reciprocity and recognize and enforce a U.S. court judgment. First, the enforcing court in that case is in California (though it was federal court), and the laws usually differ from state to state in the U.S., so it’s uncertain whether a Chinese court will deem the U.S., as a country, to have established a reciprocal relationship with China. Second, since the enforcing court was a federal court, it’s also not clear whether a Chinese court will deem a state court’s judgment enforceable in China. Third, the enforcing court is not the U.S. Supreme Court, thus, a Chinese court may not deem it to amount to reciprocity at the highest judicial level between the two countries. Finally, that case involved a U.S. defendant who had previously argued that only China had jurisdiction over the case, so it hardly could be deemed unfair for a U.S. court to rule on enforcing the Chinese judgment.

Chinese courts tend to be more willing to recognize and enforce foreign divorce judgments involving Chinese citizens so they don’t have to initiate a separate divorce proceeding. However, since this is not a divorce case, it almost certainly is not relevant.

We have not been able to find a single instance where a Chinese court enforced a U.S. non-divorce judgment.

This memorandum does not address the possibility of your suing the Chinese company directly in China and there are times where doing so makes sense.

In conclusion, a U.S. court judgment against ______________ will almost certainly not be recognized or enforced in China. Unless ___________ has assets in the U.S. or in some country other than China that enforces US judgments, a US judgment will probably not be collectable against this company in any way.

I find it hard to believe that this decision regarding the Singapore judgment did not receive a thorough vetting from on high and maybe it does signal a change in enforcement of foreign judgments in China. I for one would love to test it out, but I would want to do it with the perfect case, or something close to it. The perfect case would be a Chinese defendant company that is a real bad hombre (sorry to use a Trump line, but I just cannot help it) who cheated someone in a commercial dispute and then got sued in a U.S. federal court and fought and lost on the merits. Ideally the judgment is for millions of dollars and the Chinese company has the wherewithal to pay it. I know it is asking too much but if the Chinese defendant appealed the lower court’s ruling and lost on appeal also, well that would be the icing on the cake.

Who’s in?

P.S. Many years ago, our firm was representing about 25 companies that were together owed maybe $20 million tied to a Russian vessel that had fled to North Korea to avoid being seized for the debt. I really really wanted to be able to claim title to being the American lawyer (maybe any lawyer) to successfully arrest a ship in North Korea and so I offered to take it on for what I saw as a ridiculously low flat fee but still could not get any (or at least enough) takers. I see some similarities in trying to enforce a U.S. judgment in China. But if anyone does try, please, please, please report your results to us.

China employee non-competeChina employee non-compete agreements agreements and provisions are an often-litigated area. Many employers (wrongly) assume that they cannot prevail in such a dispute because employees usually win. This belief is not only wrong, but also risky. It is wrong because Chinese courts do not automatically side with the employee; those rare employers that have done things the right way actually usually win. It is also risky because employers with this attitude and approach tend to do an even poorer job of making sure they have a well-crafted contract, complying with the law and preserving good evidence, which are keys to employer success in any employee dispute.

Let’s look at a fairly recent case in Guangdong. The employee was hired as a brand manager and was then promoted to project manager. The employee’s monthly base salary was low: he started at RMB 3000 per month and it was then raised to RMB 4000 per month, plus commission. The employee signed a three year employment contract and he also executed a confidentiality agreement stating that if he violated any term of the agreement, such as competing with his employer in any way, he would be liable for contract damages of twice his total income during the preceding 12 months before termination. There was no agreement on any non-compete compensation. A few months before the employee left his employment, he formed his own company with essentially the same business scope as his employer, and in the same city. The employee was the legal representative of that new company. A few months later, the employer eventually fired the employee and he then sued his former employer, demanding unpaid salary and commissions and double severance for wrongful termination.

The procedural history is somewhat messy (with multiple labor arbitrations and lawsuits), but essentially the employee lost in the lower court and then appealed and lost again. The employee then petitioned to the Guangdong Province High People’s Court for retrial and lost again.

The primary arguments set forth by the employee were as follows: (1) He was not paid any compensation for not competing, so the non-compete should not be upheld. (2) He was a low-paid ordinary employee with no access to confidential information so the non-compete was never valid in the first place. (3) The contract damages in the confidentiality agreement were grossly disproportionate to his salary, so requiring him to pay such a large amount would be greatly unfair.

The court decided against the employee on all counts, finding that: (1) The employee had a duty not to compete with his employer during his term of employment and the employer was not required to pay employee any compensation for preforming the non-compete obligations during such period. (2) The employee signed a confidentiality agreement binding him not to disclose his employer’s confidential information and not to compete with his employer. (3) The employee failed to present any evidence proving the contract damages were so high as to be unfair.

The employee was ordered to pay around 130,000 RMB to his previous employer per the agreed contract damages provision, an amount nearly 33 times his monthly base salary.

There is much to be learned from this case about China employee non-competes, including the following:

  1. A non-compete with a fairly low paid employee can be enforceable. The key is more the position than the pay.
  2. Generally speaking, an employer is not required to pay non-compete compensation during the term of employment.
  3. It is possible to enforce a contract damages provision in an employee non-compete. If you want your non-compete provisions to have real teeth, consider adding an appropriately crafted contract damages provision to your employment contracts that contain a non-compete provision or to your non-compete agreements.
  4. Proving actual damages in a non-compete dispute is usually difficult and this is all the more reason why you should have a contract damages clause in your employment contracts with non-compete provisions or in your non-compete agreements. See China Contract Damages: More Art than Science, for why contract damages are critical to most China contracts and for how to determine the proper amount of damages to put into your contract.
  5. Lastly, before you hire any new employee make sure your potential candidate is not violating a non-compete agreement with his or her previous employer because the last thing you want is for your company to be sued by that previous employer. These sorts of lawsuits are becoming increasingly common in China and the Courts are often quick to favor them.

China arbitrationThe below is a summary of recent decisions impacting China arbitration.

Anti-monopoly disputes are not arbitrable in China

In August 2016, the Jiangsu Provincial Higher People’s Court held that anti-monopoly cases involve the public interest and therefore such disputes cannot be arbitrated between private parties. The court was hearing a case where the plaintiff had entered into a distribution ggreement with a manufacturer that contained an arbitration clause. The plaintiff sued the defendant in Nanjing Intermediate People’s Court accusing it of abuse of market dominance. Defendant alleged the court lacked jurisdiction as there was an arbitration agreement between the parties. The court not only rejected the jurisdiction objection but it also rejected the request for arbitration becuase the agreement designated more than one arbitral institute which made the arbitration agreement invalid.

The Jiangsu Provincial Higher Court affirmed the Intermediate Court’s ruling on appeal and listed the following three reasons why anti­monopoly cases may not be arbitrated:

  1. Relevant laws and judicial interpretations expressly provide for civil litigation to resolve civil monopoly disputes.
  2. Public policy considerations favor litigation over arbitration.
  3. Anit-monopoly cases involve the public interest, third­-party interests and consumer interests and therefore override the preference of the parties for private dispute resolution under the arbitration clause.

Failing to Specify The Arbitral Seat in An Arbitration Clause May Result in an Unenforceable Award: 

In Wicor Holding A.G. v. Taizhou Haopu Investment Limited the Taizhou Intermediate People’s Court refused to enforce an ICC arbitration award because the arbitration clause in the Joint Venture Agreement was invalid for having failed to specify the arbitral body for the arbitration. The Joint Venture Agreement mandated that the parties’ disputes be arbitrated “in accordance with ICC mediation and arbitration rules“ but the Court found this did not clearly specify that the ICC be the arbitral body and without a clear choice for the seat of arbitration, the arbitration provision was deemed invalid. The Supreme People’s Court upheld this ruling and since the ICC award was improperly rendered on the basis that the arbitration agreement was valid, enforcing the award would contradict the social and public policy of China.

Editor’s Note: The clear lesson from this decision — and one we have many times emphasized on these pages, is that there is a right way and a wrong way to write an arbitration provision and you will pay the price if you write one incorrectly. We estimate that around half of the China contracts our China lawyers review or see contain arbitration provisions with readily identifiable errors.

SCIA Updates its Rules to Hear Investor-State Arbitrations.

The Shenzhen Court of International Arbitration (SCIA) published updated rules that will enable it to hear investor-state disputes and to administer arbitrations under UNCITRAL rules. These updated rules went into effect in December 2016 and they make SCIA the first arbitral body in mainland China to administer investor-state disputes.

* This post was guest-written by Chris Campbell, a foreign legal consultant who graduated from Tsinghua University with an LLM in Chinese law and international arbitration. Chris has worked on various projects related to trade and International Arbitration in mainland China, Hong Kong, and East Timor.

 

International litigation versus international arbitration
International litigation versus international arbitration?

If you have any interest in international litigation or arbitration and all that entails (things like service of process, enforcement of foreign judgments or awards, gathering up evidence from a foreign country), you should be reading the Hague Law Blog, written by my good friend Aaron Lukken.

The Hague Law Blog recently did a post extolling the virtues of arbitration for international disputes. The post is entitled, Arbitration– a bright idea for international dispute resolution and it very nicely sets out a whole host of reasons to consider arbitration for your international disputes, including the following that I view as the big three:

  • It’s far cheaper than litigating a dispute.
  • Decisions are made by specialized neutrals selected by the parties.
  • Arbitral awards are more acceptable to foreign courts if the losing party doesn’t pay up. Awards won in U.S. litigation… much harder to enforce.

The post makes clear that arbitration is not always the best way to go for your international disputes and it even calls out an article I wrote on why it usually (but not always!) does not make sense to arbitrate against Chinese companies:

Now, to be sure, it isn’t always the way to go. Dan Harris argues, quite lucidly and from much experience, that arbitration clauses are a waste of time in Chinese contracts. Despite China’s accession to the New York Arbitration Convention , they don’t follow through on their obligations to enforce awards. Accordingly, Dan continues, the best thing you can do in China is choose (1) Chinese courts as the venue, (2) Chinese law as the controlling doctrine, and (3) Chinese as the operative language of the contract.

The post then rightly notes that China is just one country and then makes the point that our [the United States] biggest trading partners—China excepted—believe in arbitration, and their courts are far more likely to compel a losing party to pay on an arbitral award than on a verdict.

Yes, but.

My firm’s international lawyers always tell our clients that we need all sorts of information before we can decide on the best method of dispute resolution. At minimum, we need to know the countries involved, the nature of the contract, our client’s goals (both with respect to the contract and enforcement) and information regarding the counter-party. And then we decide on the best method for resolving potential disputes.

Arbitration is usually not the best way to go when dealing with Chinese companies, but sometimes it is. And though I agree with the Hague Law Blog that arbitration is usually the best way to go when dealing with most companies from most other countries, oftentimes it isn’t, and here are two common reasons why:

  1. Arbitration is not always less expensive than litigating. Sometimes it is way, way, way more expensive. It would be far cheaper to litigate a case in Vietnam or in Thailand than to arbitrate it before three arbitrators in London or in Geneva. Like maybe 50 times cheaper. Sometimes it makes sense for our clients to have dispute resolution be incredibly expensive (like if they believe they are more likely to get sued than the reverse) but sometimes the exact opposite will make sense. It really must be reviewed on a case by case basis.
  2. There are countries where getting a US court judgment enforced is super easy. Canada, England and South Korea immediately spring to mind. Enforcing a US judgment in those three countries is barely more difficult than enforcing a California judgment in New York. So again, these issues must be examined on a case by case basis.

Arbitration or litigation? It’s case by case.

China employment lawyerIn yesterday’s post, China Employee Terminations and The New Two Child Policy, I discussed how the laws vary in China regarding whether an employer can terminate an employee for having violated China’s family planning laws. In this post, I address whether an employee’s violating China’s family planning laws allows the employer to refuse to provide the extra protections normally provided employees during pregnancy, such as no overtime or an adjustment of workload?

As is nearly always the case with any China labor law issues, the answer varies by locale, but generally speaking, a pregnant/nursing employee who violates China’s family planning laws should be treated the same as other pregnant/nursing employees while on the job. However, other benefits after childbirth, such as paid maternity leave can generally be withheld from an employee who has violated the family planning laws, though this too varies by location.

I should emphasize how important it is not to try to remove an employee’s legal protections by having them sign a contract that purports to do so. A fairly recent case out of Shanghai (a fairly employer friendly city) makes this clear.

In this case, an employee entered into an employment contract with her Employer on her first day: March 1. This employee was required to fill out an employee form before she officially started. As she was not married at that time, she checked the box for “single” on the form. The Contract expressly provided that if any information provided by the employee was untrue, the employer would have the right to void the contract and unilaterally terminate the employee. The employer’s handbook contained similar provisions and also required its employees update the employer within 10 days if any personal information, such as marital status had changed. The Employee became pregnant a few days after her first day and started going to checkups but she never informed her employer about her pregnancy until October.

The Employee married in May and her employer approved her marriage leave. A couple of months before her expected due date, the employee provided her employer with a doctor’s note saying she would need to go on maternity leave because she would need to rest before her scheduled C-section. The employee requested paid maternity leave, but her employer immediately terminated her because she had “deceived” them by not providing accurate information about her personal situation. The employer then brought a labor arbitration claim against the employee seeking to declare her employment contract void. The employee filed counterclaims demanding her salary during her sick leave and maternity leave, as well as double statutory severance for unlawful termination and reinstatement of her position.

The employer lost on most of the claims and was ordered to pay the employee her salary during her sick days and during her maternity leave and also to pay for her social insurance until the last day of her extended maternity leave. The court acknowledged that the employee should have updated her employer on her marital/pregnancy status sooner, however, nothing she had done justified her unilateral termination. The labor arbitration committee did not discuss the employee’s claim for double statutory severance for unlawful termination and because the employee withdrew her claim for reinstatement of her position and did not argue for unlawful termination severance at the court level the court did not discuss those claims either.

The court stated in its first sentence of its decision that “employees’ legal interests are protected by law” and female workers “giving birth is a natural and legal right and must be accorded full protection.” Though this case was decided before China’s new two-child policy and though some of the legal aspects of this case have changed, what has not changed is that it is simply not possible to remove most worker protections via contract. Most importantly, what also has not changed is the importance that you as a China employer should know and follow all of the relevant laws and regulations and rules (national, regional, and local down to your specific district within your city) before terminating or even penalizing one of your employees.

China lawyersIn yesterday’s Quick Question Friday, China Law Answers, Part XXXV, I posed what is probably the single most common question our China lawyers get from our fellow lawyers: “What should we put in our dispute resolution provision in the contract we are drafting with a China company.” And then I very briefly explained how there is no one fits all answer and that the right dispute resolution clause should be determined based on a totality of the circumstances. I also promised to expound on that answer today, and so here goes, part I of how to draft the right dispute resolution clause for your particular situation.

The dispute resolution provision you put into your China contract may be the most important provision in the contract. If you put in a dispute resolution provision that makes sense, your Chinese company counter-party with whom you are contracting will be afraid to breach the contract. Conversely, if you put into the contract a dispute resolution provision that will not work, you are signaling to your Chinese company counter-party that it can breach its contract with you with impunity. Yes, it really is that important.

In fact, whenever I am asked to review a contract between a US company and a China company, the first provision I look at is the dispute resolution clause. Far too often when I am asked to review such a contract, it is by a new client who did not use one of the China attorneys at my law firm to draft the contract and I am now being asked to review the contract because something has gone wrong and the new client wants to know what it can do.  I review the dispute resolution clause first to see if there is even any point in determining the strength or the weakness of the US company’s claims against the Chinese company. If the contract calls for litigation in the United States, before a US Court and the Chinese company has no assets in the United States, the quality of the case just went way down.

China does not enforce US court judgments. It just doesn’t. Since China will not enforce any judgment that you receive from the US court, your winning in the US court will likely be meaningless.  Getting a US judgment against a Chinese company with assets only in China is of no use.  Getting a US judgment against a Chinese company that has assets in the United States or in some other country that will enforce a US judgment (Korea and Canada spring immediately to mind) might have some value. This means though that if you have an existing contract that requires disputes between you and your Chinese counter-party be resolved in a US court, you probably have a contract that does not work and you should be seriously considering trying to negotiate a new contract.

Way back in 2006, in Enforcing Foreign Judgments In China — Let’s Sue Twice, we wrote about how a typical phone call goes when someone calls us for help enforcing their US judgment in China:

Caller:  I have a two million dollar judgment against Chinese company X in China, can you help me enforce it?

Me:  Is it a default judgment here in the United States?

Caller:  Yes.

Me:  Chinese courts do not enforce United States’ judgments and they don’t give any credence whatsoever to United States default judgments. Did you discuss this possibility with your U.S. lawyer before you sued here in the United States?

Caller:  [long silence] …. Yes.  He told me getting a judgment here couldn’t hurt?

Me:  Did your lawyer charge you to get it?

Caller:  Yeah.  I had to pay him and I had to pay all sorts of people to get that company served in China.

Me:  Sorry.

So much of the time in your China contracts, it will make sense to draft a dispute resolution clause with your Chinese counter-party that calls for disputes to be resolved by a Chinese court (or sometimes by arbitration in China or outside of China).

In the next post in this series, I will discuss the pros and cons of using arbitration outside China (foreign aribitration) to resolve your contract disputes.

China Attorneys

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One of the more common questions (by far) we receive from our fellow lawyers is something like the following:

I have just drafted a contract between my client and its China-based licensee. I am planning to use a AAA arbitration clause because I have heard that China enforces formal arbitrations. Does this make sense to you?

My answer (and that of the other China attorneys in my firm) is usually something like the following:

I have no idea what will make sense for your client on this particular contract because I have never seen this contract and I have no idea what your client’s goals are nor do I know anything about what is being licensed or about the Chinese company on the other side. Without all of these things (and more), there is no way that I can opine on this.

I then sit back and wait for the “fun part,” which comes maybe 40 percent of the time and looks something like this:

Right, but if I wanted to be safe and make sure that I am not getting my client into any major problems, would you agree that arbitration in an international contract is the way to go?

My typical response to this is to say that it is not clear to me whether you are seeking my views on international contracts in general or this one in particular but since I do not know enough to opine about this one in particular I will opine about international contracts in general and to that my answer is no.

In tomorrow’s post, I will explain why when contracting with a Chinese company it is so important to do the right thing on your dispute resolution provisions and why there is never one answer on what to choose. Most importantly, tomorrow’s post will set out some of the factors we frequently use in making this decision and it will also rail against those (and there are many) who just assume choosing arbitration is the “safe” or “default” choice.