Litigation and Arbitration

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.

China IP litigationIn China’s Patent-Lawsuit Profile Grows, the Wall Street Journal wrote about how China is increasingly becoming the venue of choice for foreign company patent litigation.

Thats right. China.

The WSJ article starts by focusing on a recent patent-licensing lawsuit brought in China wholly by choice by a Canadian company, WiLAN Inc., versus Japanese electronics company Sony Corporation:

Ottawa-based WiLAN Inc., which earns revenue by licensing its patents, filed a suit against Sony last week in a court in the eastern Chinese city of Nanjing, alleging that the Japanese company’s smartphones violated its wireless-communication-technology patent, according to the filing reviewed by The Wall Street Journal.

According to the article, WiLAN’s lawsuit “is an indication of how China is becoming a more attractive place to seek legal action for companies that accumulate patents for litigation and licensing purposes.” China is becoming a good venue for such lawsuits for two salient reasons. One, such lawsuits in China “are less time-consuming and less costly than in the U.S. and the country’s courts have developed rapidly over the past several years.” And two, “if an injunction is granted in China, it wouldn’t only apply to products sold in the country using the patent in question, but also to the exports of such goods made in China, giving the plaintiff a possible bargaining tool for a licensing deal.”  Let’s break all of this down.

  1. China is a good place for patent lawsuits because lawsuits there move quickly. Absolutely true, and something we have been screaming from the rooftops (not literally) for many years. We made this point back in 2013, in Litigating in China. What You Need to Know, when we stated that “the advantages for a plaintiff include a fast docket (typically less than a year to trial) and generally lower overall attorney’s fees (than the United States) due to a lack of discovery.” Back in 2011, in What you Should Know About Litigating in China, we made a similar point by noting that “once a case begins in a Chinese court, things move fast. Very fast.” Way back in 2007, in Enforcing Contracts In China. Way, Way Better Than You Think, we touted China as a great venue for litigating your contract disputes, beginning by noting how “Chinese courts do very well at enforcing clear written contracts” and noting how the World Bank (and this was back in 2007!) ranked China at number 18 in enforcing contracts, higher than the United Kingdom at 23 and Japan at 21. Because lawsuits move quickly in China, lawsuits there cost far, far less than in the United States.
  2. China’s “courts have developed rapidly over the past several years.” True, and also something we have been saying for quite some time. In How To Sue A Chinese Company. Part IV. Arbitration In The U.S. And Suing In China we noted how it often makes sense to sue even Chinese companies in Chinese courts because China does not enforce United States court judgments (or the court judgments of most other Western countries) and because China’s court system “is more navigable than many American lawyers believe it to be” and “foreign companies can and do regularly win cases against Chinese companies in Chinese courts.” Our China lawyers often tell our clients is that they can generally expect a fair shake in commercial lawsuits against private companies in China, especially in China’s more international cities. See also our 2006 post, China’s Courts are Fair. So yes, even suing Chinese companies in China’s courts often makes good sense. And when it comes to IP litigation, China has specialized IP courts whose judges tend to be well versed in intellectual property matters, both factually and legally. And unlike in the United States where IP litigation often involves a battle of the experts with a jury ultimately deciding, in China, the IP  Court judges usually bring in their own experts to help them with more complicated intellectual property issues.
  3. “If an injunction is granted in China, it wouldn’t only apply to products sold in the country using the patent in question, but also to the exports of such goods made in China.” Ponder this for a minute. If you can win an IP lawsuit in China, it may serve as the equivalent of winning an IP lawsuit for the entire world. If you make your XYZ widget in China and if your competitor makes its XYZ widget in China and if China is the only place in the world that can make XYZ widgets at a competitive cost and your prevailing on an IP lawsuit in China can block your competitor from making its XYZ widgets in China, your prevailing on an IP lawsuit in China could very well have the effect of completely blocking your competitor from the XYZ widget market worldwide. This is why we are constantly begging foreign companies to register their trademarks and their patents in China. Because if they do not, they run the very real risk of someone else doing so and blocking them from manufacturing in China. See China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents. We issued this warning just yesterday, in Having Your Product Made In China: The Basics on Protecting It and You.

According to the Wall Street Journal article, China is becoming a patent litigation hub, along with the United States and Germany:

Traditionally, the U.S. has been the global hub for such lawsuits, but in recent years patent-licensing firms are looking for new places to bring lawsuits, lawyers and legal scholars say. While Germany is already becoming a popular venue for patent lawsuits because of its sophisticated and efficient court procedures, some potential litigants are also starting to consider filing their cases in China.

Lawsuits in China: coming soon to a foreign company near you. Do you agree?

 

Softwood lumber disputeI recently spoke on the U.S. Canada softwood lumber dispute at an American Chamber of Commerce in Canada event. I was subbing for my colleague Bill Perry who could not make it because he was in China. My talk focused on the history of the dispute, its key issues, and most importantly, what will likely happen if new AD/CVD petitions are filed and investigations initiated. This post builds off my presentation and it focuses on how China will affect the next round of the US-Canada Lumber wars, expected to start this week.

For the past ten years, the United States and Canada have abided by a 2006 agreement that regulated Canadian lumber imports into the United States with a system of export fees and quotas triggered by specified average US market price points. That 2006 Softwood Lumber Agreement is set to expire this week and with that expiration, a coalition of U.S. lumber producers is expected to immediately file a fifth round of antidumping (AD) and countervailing duty (CVD) petitions seeking US government investigations to determine whether Canadian lumber is unfairly dumped or subsidized and is injuring the U.S. domestic lumber industry.

Many of the issues in this fifth round of the US-Canada Lumber trade war likely will be the same or very similar to issues raised in the previous four rounds. US lumber producers will likely allege that Canadian lumber producers benefit from a wide array of government grants, loan guarantees, tax preference schemes and other subsidies provided by the Canadian federal and provincial governments. The US lumber producers will contend that these subsidies give Canadian lumber an unfair competitive edge.

The primary issue remains whether Canadian lumber is unfairly subsidized by the Canadian system of “stumpage rates,” which is the price paid for the right to harvest lumber from provincial land. Since most Canadian forests are on “crown” land controlled by the Canadian provinces, Canadian stumpage rates are primarily set by each province. Since most US lumber is harvested from privately owned land, US stumpage rates are primarily market determined through competitive auctions. US lumbers producers are unhappy with the benefits Canadian lumber producers allegedly receive from the provincial stumpage system.

This next round of lumber dispute will likely be more than just a simple replay of previous lumber investigations since there have been a significant developments since the last round was settled in 2006. Two China-related developments in particular could have significant impact.

First, China has been the most targeted country for US CVD investigations; the US Department of Commerce (“DOC”) has conducted about forty CVD investigations against China since 2008. In many of these CVD cases against China, the DOC calculated very high subsidy margins, often based on aggressive interpretations of CVD laws and regulations. The CVD investigation practices developed by the DOC in these Chinese cases will likely be applied in the next Canadian lumber CVD investigation. The DOC will no doubt conduct its CVD investigation against Canadian lumber mindful of how it might affect on-going and future Chinese CVD cases. Unlike past Canadian lumber CVD determinations where CVD margins never exceeded 20%, the DOC could very well calculate a much higher than expected CVD rate in Lumber V.

The other significant post-2006 China-related change is the growth Canadian lumber exports to China. In 2006, 82% of Canadian softwood lumber exports went to the United States. By 2011, the United States received only 53% of Canadian softwood lumber exports. China in particular became a significant market for Canadian lumber, much of which was from British Columbia.

In addition to developing alternative export markets (like China), a number of Canadian lumber producers have developed alternative production options by acquiring US lumber mills. As of 2015, major Canadian lumber producers (such as West Fraser, Canfor, and Interfor) now own more sawmills in the United States than in Canada, and they are now also among the top ten largest U.S. lumber producers.

Canadian lumber producers that now have the option to ship their lumber within the US from their US sawmills and to export their Canadian lumber to China are going to be well-positioned to withstand settlement terms demanded of them by the US lumber industry. At a minimum, the new cadre of Canadian lumber producers with China and/or internal US options will almost certainly make it harder for Canadian lumber producers to unify around a common negotiating position against their US counterparts.

China’s influence on even Canada-US timber relations will no doubt be felt.

 

 

China corporate litigation
China company litigation: think tough shot, not slam dunk.

Our China lawyers have been getting an influx of cases from investors and their lawyers wanting our help in suing Chinese companies in U.S. courts for corporate governance violations. Nearly every time their plan is to sue the Chinese company for having violated their “minority shareholder rights” or for breaching fiduciary duties owed to them as fellow investors.

First, as we discussed in The China Stock Option Scam, it is not possible under Chinese law for a Chinese domestic company (as opposed to a WFOE or a Joint Venture) to have foreign shareholders. Second, even if — as is often the case — we are not dealing with a true case of foreigners purportedly owning shares in a Chinese company, the duty owed to the foreigners is going to be based on Chinese corporate governance laws, not those of the United States. When we tell our potential clients (and even their lawyers) this, their response is usually to say something like, “but our contract calls for disputes to be resolved in a U.S. Court. We thought we had a slam dunk.”

So what? A contract provision calling for disputes to be resolved in one country’s court should and does have little to no influence on the law that court will apply to the case. Most importantly, it is difficult to imagine a thoughtful American judge applying U.S. corporate governance law to a transaction that took place wholly in Mainland China and that involves Chinese entities.

I thought of these corporate governance cases today after reading a really nice analysis (by Dorsey lawyers Lanier Saperstein and Jeremy Schlosser) of the Second Circuit’s recent decision in the big Vitamin C Antitrust Litigation, holding that U.S. courts must “defer to a foreign government’s interpretation of its own laws.” In their analysis, these lawyers opine that this decision should hardly be a surprise and yet note how it will likely have far-reaching implications:

That should hardly be a controversial proposition, but up until now, lower courts have treated the interpretations of foreign governments regarding their own laws with varying degrees of deference, ranging from strict deference to outright skepticism. But now, the Second Circuit has put litigants on notice that the principles of international comity have to be applied in cases implicating the laws of other sovereign nations.

The Second Circuit’s ruling will affect a wide spectrum of legal issues facing foreign companies and financial institutions, ranging from subpoenas to asset restraints, and from enforcement actions to discovery requests, as well as substantive matters such as antitrust law, intellectual property, and securities laws.

Without going into the Vitamin C case facts and the Second Circuit’s legal ruling, I will just say that if any lawyer still believes that a U.S. court will apply U.S. law in sorting out a China-related corporate dispute, they are just wrong. If you are going to do a transaction in China that involves your getting equity or even profit-sharing from a China-based entity, China law is going to apply to any subsequent dispute you might have against that China-based entity. And this will be true regardless of whether or not your contract (or something else) entitles you to bring your dispute in a U.S. court.

So if you are going to do a deal involving getting equity in or profits from a Chinese company, you should at least know that China’s corporate governance laws put more value on the contracts you sign and less on  shareholder protection laws than the United States or Europe. What this means is that unless your contract explicitly provides you with protections, you probably have no protections. What this means in real life is that most of the time when American or European lawyers come to us with a China corporate case they are calling a “slam dunk,” it is anything but.

See also: China Contracts: Why Choice of Foreign Law is so Often a Bad Idea.

China contract lawyerOur China lawyers have been getting an influx of cases from investors and their lawyers seeking help in suing Chinese companies in U.S. courts for corporate governance violations. Nearly every time their plan is to sue the Chinese company for having violated “minority shareholder rights” or for breaching fiduciary duties owed to fellow investors. There are usually two big problems with these proposed lawsuits.

First, as we discussed in The China Stock Option Scam, it is not possible under Chinese law for a Chinese domestic company (as opposed to a WFOE or a Joint Venture) to have foreign shareholders. Second, even if — as is often the case — we are not dealing with a true case of foreigners purportedly owning shares in a Chinese company, the duty owed to the foreigners will be based on China corporate governance laws, not those of the United States. When we tell our potential clients (and even their lawyers) that China law will apply to their corporate governance issues, their response is usually something like, “but our contract calls for disputes to be resolved in a U.S. Court” or something that indicates that just never occurred to them.

A contract provision calling for disputes to be resolved in one country’s court has little to no influence on the law that court will apply to the case. Most importantly, it is difficult to imagine a thoughtful American judge applying U.S. corporate governance law to a transaction that took place wholly in Mainland China and that involves Chinese entities.

I thought of these corporate governance cases today after reading a really nice analysis (by Dorsey lawyers Lanier Saperstein and Jeremy Schlosser) of the Second Circuit’s recent decision in the big Vitamin C Antitrust Litigation, holding that U.S. courts must “defer to a foreign government’s interpretation of its own laws.” In their analysis, these lawyers note that this decision should hardly be a surprise and that it will likely have far-reaching implications:

That should hardly be a controversial proposition, but up until now, lower courts have treated the interpretations of foreign governments regarding their own laws with varying degrees of deference, ranging from strict deference to outright skepticism. But now, the Second Circuit has put litigants on notice that the principles of international comity have to be applied in cases implicating the laws of other sovereign nations.

The Second Circuit’s ruling will affect a wide spectrum of legal issues facing foreign companies and financial institutions, ranging from subpoenas to asset restraints, and from enforcement actions to discovery requests, as well as substantive matters such as antitrust law, intellectual property, and securities laws.

Without going into the Vitamin C case facts and the Second Circuit’s legal ruling, I will just say that if you still believe U.S. courts will apply U.S. law in sorting out China-centered corporate disputes, you are going to be wrong. If you are going to do a transaction in China that involves your getting equity or even profit-sharing from a China-based entity, you should just assume that Chinese law is going to apply to any subsequent dispute you might have against that China-based entity. And this will be true regardless of whether or not your contract (or something else) entitles you to bring your dispute in a U.S. court.

This means that in doing a deal involving equity in or profits from a Chinese company, you should at least know that China’s corporate governance laws put more value on the contracts you sign and less on shareholder protection laws than does the United States. Minority shareholder protections in Chinese companies come pretty much entirely from the agreements executed by the parties. There is no paternalistic government sitting above the transaction providing legal protection for shareholders who do not protect themselves.

This is why we advise our clients in this area (as in all other areas of Chinese law) not to rely on default provisions of Chinese law for protection. You must protect yourself with a clear written contract that sets out exactly what is intended. Chinese courts are quite good at enforcing clear contracts. Chinese courts are not good at protecting naive shareholders from their own failure to protect themselves.

The deeper issue with the Vitamin C case is that it explodes a common myth about litigation in the U.S. Many people mistakenly believe that if they provide for litigation in the U.S. that the U.S. court will then apply U.S. law to a transaction otherwise governed by foreign law. This is simply not true.

Take an obvious example. Say the transaction involves transfer of real property. Does anyone seriously think a U.S. court sitting in New York state would apply New York law to determine whether real estate was properly transferred in a province in China? Far too many times, our China labor lawyers have had to explain to companies that a provision in an employment contract with a China-based Chinese employee calling for application of U.S. law is going to be completely ignored by 100 out of 100 Chinese judges that see that. The same applies to the area of corporate governance and to any other area where the substantive law of a foreign country completely controls the transaction.

For this reason, foreign parties who believe that using contractual provisions requiring litigation in their home country can replace what they see as “unfair” Chinese laws are simply making a mistake. What will actually happen is that the parties will be required to prove Chinese law in a U.S. court, a difficult, time consuming and expensive process. This is usually exactly the opposite of what the U.S. party assumed would happen in this situation.

For more on choosing your dispute resolution jurisdiction, your choice of law, and your ability to enforce U.S. judgments in China, check out the following:

China Employment LawEvery employer in China should have its own set of Rules and Regulations because without one you will have an extremely tough time terminating a China employee.

Many companies doing business in China have learned the hard way that terminating a China employee is not easy. Recognizing this many foreign employers in China now have a Rules and Regulations document and most have even translated this document into Chinese for their China employees. This is a good start but it may not be enough. Here are a few additional basics you should bear in mind if you are going to employ anyone in China.

Your Chinese-language Rules and Regulations need to be a lot more than just a mere translation of the employee manual you use in the United States, Australia and/or Europe. It needs to be tailored for your China employees in your business. And just as is true for any legally important document, literal translations  do not work. You need a document that all your employees could understand as the Rules and Regulations usually apply to everyone in the company, not just to your expat employees. This is not just about being culturally conscientious: the Chinese language version of your Rules and Regulations needs to be clear enough to form the basis for your being able to terminate your employees.

You need to make sure your employees actually receive a copy of your Rules and Regulations and that you have prove that they did so. If you ever get into a dispute with one of your Chinese employees, there is a good chance he or she will claim never to have received a copy of your employer Rules and Regulations. Your best counter to this argument will be to provide the arbiter with a Chinese language signed acknowledgement of receipt form, proving that your employee got a copy of your Rules and Regulations.

If we could only name one section that you absolutely must have in the Rules and Regulations, it would be the section on disciplinary actions. What employee misconduct triggers punishment? Make sure your Rules and Regulations make clear the grounds for terminating an employee. Think hard about the misconduct that could be committed by your employees and put those actions in your Rules and Regulations as being subject to discipline or termination. Without this section, your employee can do terrible things that harm your business and yet you will likely find yourself without a basis to discipline or terminate the offending employee.

Far too often foreign employers make the mistake of filling their Rules and Regulations with mission statements and incentives and things they encourage the employees to do. This is all nice to have, but it misses the point of having Rules and Regulations, which should have very different goals from an employee handbook. Your Rules and Regulations should set forth the rules on how you manage and oversee your employees. It is the governing law for your organization. This is why Rules and Regulations are generally negative in tone; it sets forth what you do not want your employees to do so that you can discipline them if they do these things.

But not only do you need a china-focused set of Rules and Regulations, you also need to give your employees opportunities to comment on or question your Rules and Regulations and stay on top of addressing those comments and questions. If you fail to address an employee’s concerns about your Rules and Regulations, or even if you fail to clarify those Rules and Regulations in response to a question, you can be at risk for your actions being deemed unreasonable and disproportionate. Your action can more easily be called into question, which could lead a court to order you to pay some statutory severance to your terminated employee or, even worse reinstate the employee.

If the time comes where you need to discipline one or more of your employees pursuant to your written Rules and Regulations, you now need to make sure that your discipline is pursuant to your own Rules and Regulations and that your employee knows that he or she has been disciplined. It is not uncommon for China employees to claim that they never received your discipline decision. This is of particular importance when your employee commits a minor wrongdoing and then starts escalating with his or her offenses. If you cannot show that you previously disciplined your employee for his or her past offense(s), you may not be justified in terminating the employee for being a repeat offender? Put it on paper every time you issue a warning. We advice our clients to hand deliver their discipline notices to their employees with a witness there to record it. In addition, use email and require confirmation and/or an outside courier service that requires a signature for the delivery. If you have an internal procedure for appealing disciplinary actions, follow that procedure.