Archives: Suing a Chinese company

“When you ain’t got nothing, you got nothing to lose.’
Bob Dylan, from Like a Rolling Stone

 

Got the following email the other day (which email I have modified so as to strip it of any identifiers):

I need some help with a problem I have with a Chinese company I have made an order with.   The order is around the $35,000 mark, I have paid for a product and for the shipping.

I have a signed contract from the company that goods will be delivered by a certain time, they have failed to do this and keep coming up with excuses to as why the product isn’t ready.

How much notice do you have to give a Chinese company before you can sue them?

And how would I go about it? I am from Canada and paid the company directly. The Chinese company is owned by a Canadian citizen but it operates out in China.

Could you please help.

We probably get some variation of this email pretty much every week and my response is virtually always rapid and pretty much the same:

I’m sorry but we can’t help because I have no idea what the contract says about where to sue nor do I have any idea where this Chinese company has its assets. I will tell you though, that unless your contract is in Chinese AND was sealed by the Chinese company AND calls for disputes to be resolved in a Chinese court AND was incredibly specific about delivery deadlines AND has a liquidated damages provision for being late, you probably will be wasting your time pursuing this.  If your contract does include most of these things, than I suggest you contact a Chinese licensed lawyer based in China to see about pursuing this.  I will note again though that suing a Chinese company is seldom easy and if your ducks are not well lined up before you do so, there usually is not point.

So to reiterate, if you want to maximize your chances of being able to pursue a Chinese company for breach of contract, your contract should be in Chinese (in most cases), should be sealed by the Chinese company, should call for disputes to be resolved in a China court (in most cases), should be incredibly specific regarding what the Chinese party is required to do to comply with the contract, and should include a liquidated damages provision setting forth the exact amount of damages to which you are entitled for the Chinese company’s failure to comply.

For more on what should go into your China contract, check out the following:

Got it?

Been a bit consumed preparing for a China seminar I am co-hosting.  Today I spoke with Sage Brennan, one of the consumer products panelists and we ran through some possible questions.  I threw out the following question as a possibility:  “What are some of the most pervasive myths you see about the Chinese consumer.”  Sage’s response was that would take him at least an hour to answer.  I then said in mock surprise: so you mean all the headlines about China’s consumers are not accurate.  We laughed.  I told him it was the same way in law and that there are certain things that are viewed almost as gospel and they are just flat out wrong.

My favorites follow:

1.  There is no point in having a contract with a Chinese company because they will just violate it anyway.  For a rebuttal of this, check out  China Contracts Make Sense.

2.  There is no point in registering your intellectual property in China because it will get stolen anyway.  For a rebuttal of this, check out China: Do Just One Thing. Trademarks.

3.  Corruption makes China impossible.  For why this is not exactly true, check out China Corruption By The Numbers.

4.  For some of the reasons set forth above, there is just no point in suing a Chinese company in China.  For a rebuttal of this, check out Litigating in China.

What myths about China are there in your industry?

Spoke the other day with a company that was contemplating suing a Chinese factory regarding bad product. This company bought about $300,000 in product that it simply cannot use. When it told its Chinese supplier of this and then held back its final ~$100,000 payment, the Chinese company said it planned to sue.

This company was referred to us by another company going through the exact same thing.  Our phones are ringing off the hooks with these cases and they are not good.

Let me explain.

Chinese factories, particularly in certain industries like clothing, shoes, gifts/tchotchke, are hurting in China right now. For those of you who always angrily write me whenever I even hint at a downturn in China, I suggest you instead read this New York Times article, entitled, “In China, Sobering Signs of Slower Growth.” What this means is that many of these factories are cutting corners.  Much of the bad product in these cases is not due to bad production, but rather to bad components. The factory that makes the sweaters is using lesser wool to save costs and that doesn’t work. The factory that makes the shoes is using a lower grade leather and that doesn’t work. The factory that makes the plastic toy is using a lower grade plastic. And on and on and all of this without giving any advance notice to the American buyer. Make no mistake, for the first time in a long time, quality fade seems to be on the rise in certain sectors in China.

But it gets worse.

In the old days when a Chinese factory provided bad product, they would usually eventually admit it, and blame it on either a subcontractor or a supplier.  Now they deny it and threaten retribution if they are not paid whatever is still “owed” by their American buyer.  I wrote about this way back in February, 2006, in a post, entitled, China OEM The Smart Way:

Good Chinese suppliers are usually very busy and they often subcontract out to lower quality suppliers. We have handled many cases for foreign companies that received bad product from their previously reliable suppliers and in well over half of these cases, the product quality problems stemmed from the supplier having subcontracted out the manufacturing.  The supplier usually freely admits to having subcontracted the work and sometimes even boasts that the problems otherwise would never have occurred.  The supplier admits legal responsibility for the quality control problem, but then almost always proposes remedying it by giving a small discount on future orders until the damages from the bad product have been covered. The foreign company is usually in no mood to continue doing business with the offending supplier and wants only a monetary remedy.  However, because the profit margins at most Chinese manufacturers are so low, they often simply cannot pay all of the damages caused by the bad product and a standstill results that can only be resolved through litigation.

Those were the good old days.

Today, the tactic is to threaten to prevent the American company from “ever doing business in China again” or, more specifically, to seize the American company’s product at the border.  We take these threats very seriously and they have altered our approach to these sorts of cases.

In the past, if an American company was seeking $200,000 in damages from a Chinese company for bad product, we would most of the time seek to dissuade them from even bothering to pursue litigation. Our thinking was that unless they had a kick-ass written (preferably in Chinese) OEM Supplier Agreement that made crystal clear the quality expectations and the penalties for not meeting those expectations, suing in China would just not be worth the time, money and hassle.  And suing in the United States typically made even less sense.  For an explanation as to why this is usually the case, check out “Why Suing Chinese Companies in the United States is Usually a Waste of Time” and “Suing Chinese Companies in US Courts.

But the strategy changes if the Chinese company threatens to close you down. We have dealt with cases where US companies were unable to buy from any Chinese supplier without paying 100% upfront because their alleged failure to pay had caused China’s export insurance agency to refuse to insure payments from the US company. We have also dealt with way more than our share of cases where someone or something from our client was held hostage in China to secure payment. For more on the hostage issue, check out “China Hostage Situation. Now IS A Good Time To Pay Your Debts” and “China Business. China Jails. China Hostages.

If a US company is facing the situation above, our advise is that they sue the Chinese company somewhere, usually in the United States. Being able to show the Chinese insurance company, the Chinese police, or the Chinese border patrol agents, that you have sued can be invaluable. Your complaint against the Chinese company shows that the situation is not as simple as the Chinese company is making it out to be. Your complaint shows that the Chinese company is not necessarily owed anything at all and that you are not clearly someone who does not pay your debts.

Of course, if your company has no intention of continuing to do business with China and your personnel will not be going there again, then the best strategy probably would be to just walk away, just as in the old days.

Yesterday, I participated in a phone call with a client and another lawyer in my office. We were discussing a draft of a worldwide software licensing agreement the counter-party had provided to our client. Fairly late in the discussion, I asked what law the agreement was calling for and then noted how that is oftentimes not as important as it is often made out to be. As I put it, “as far as I know, in every country in the world, if you clearly say you will do something in a contract that is important to the contract and then you don’t, you are liable for breach.” I then talked a bit about how important it can be that we choose the right location for any dispute.

In a previous post, entitled, “Arbitration In Your China Contract. Adult Supervision Required,” I talked a bit about my obsession with dispute resolution clauses:

With sushi restaurants, it’s the yellow fin.

With new houses, it’s the windows.

With international contracts, it’s the dispute resolution provision.

The “it” I am talking about is the one easiest, fastest, most accurate, way to judge whether something is good or not. And the way I judge international contracts is by heading straight to the dispute resolution provision. The well crafted provision is, above all else unambiguous. If it calls for litigation, it says where it will be and what law will apply. And it says who will pay for it and under what circumstances. If it calls for arbitration, it says where it will be, how many arbitrators will be required, how the arbitrators will be chosen, the language of the proceedings, and the law that will apply. And it says who will pay for what.

The above are minimums.

I am heartened to see I am not the only blogger obsessed by these provisions. My friend, Santiago Cueto, of International Business Law Advisor, recently did his own post on international dispute resolution clauses, entitled, “7 Ways to Bulletproof Your International Arbitration Agreement.” [link no longer exists]

My “problem” is that I have had to tell far too many companies (mostly American, with a smattering of European) that even though they have a great case based on the facts, the way their dispute resolution provision has been written will mean that pursuing their case will either be too expensive or too unlikely to succeed in actually collecting on any winnings.

Hence the obsession.

My firm is always handling international litigation and international arbitration matters. We are one of the few firms that takes such cases on a contingency fee or mixed fee basis, but we probably immediately turn down nine out of ten such cases referred to us and one of the most common reasons for our rejecting a case is because the dispute resolution provision has made actually collecting money too time consuming or difficult.

One of the things we love about pursuing litigation in China is the speed at which those cases usually proceed. We have handled (always using locally licensed Chinese counsel, of course) relatively complicated Chinese cases where we have been able to sue in China and get a judgment within three months. This on cases that would take three years in the United States.

I very recently discussed the differences between litigation in China and litigation in the United States in a Wall Street Journal article I wrote, entitled, “Chinese Companies Court Disaster” and in much greater depth in an article for Bloomberg Legal, entitled, Suing Chinese Companies: The New Wave.” [subscription required] For the full Bloomberg article, in serialized form, check out the following:

I am always marveling at how quickly litigation moves in China and I am often tout it as the fastest and best (and many times only) solution for obtaining injunctive relief against a Chinese company. Then again, we had one really big case in China where the judge obviously did not want to rule and for years, he just kept telling my client and the opposing party to settle it.

A recent China Blawg Post, How Long Can a Litigation Proceeding Be in China? does a nice job pointing out how foreign company litigation in China can move really quickly, but definitely does not always.

Under China Civil Procedure Law, a domestic case is generally tried and completed within six (6) months for the trial of first instance starting from the date of successful filing of the case with the court, and within three (3) months for the trial of second instance (appellate court). However, for a foreign-related case, the Civil Procedure Law simply provides that such cases are not subject to such time limits as applicable to domestic cases without further prescribing how long such proceedings in respect of such foreign-related cases should be. In practice, such provisions are interpreted as that such lawsuits can be an open-ended proceedings.

Indeed. Very frequently, I am approached by international clients complaining that they get trapped in China courts due to prolonged legal proceedings with no idea when it comes to an end. And there are cases in which I represent foreign parties that have lasted much longer than six (6) months even though the case appeared not difficult. This has led to grievances on the part of foreign parties that often find that institution of a lawsuit in China has added salt to their own injuries.

The post then posits the solution in most situations to be to “choose arbitration for dispute resolution in lieu of litigation in courts.” The post then notes, however, that i”t is not that every foreign-related case has been protracted indefinitely. Courts in those big metropolitan cities in China, such as Shanghai, Beijing, may prove to be quiet efficient in some cases.”

And that is the point.

The point is that in writing a contract, one must always think ahead in writing its dispute resolution clause and in each case, focus on what will likely be the best solution for the client. There is no one size fits all.

I gave a speech the other day to the International Association of Outsourcing Professionals meeting on the legal issues involved in outsourcing to an emerging market country. In that speech, I had this to say about choosing the forum for your disputes:

How about putting in your contract that you can sue your Vietnamese vendor in the United States? You’d get your $3 million from them easy if you could sue here, right? Wrong. If you sue here, you might very well get a U.S. judgment for $3 million, but will you ever collect on it? Vietnam, China, Russia, even Japan: none of those countries will just take a U.S. judgment and turn it into a domestic judgment in those countries such that you will be able to enforce it against your vendor there.

My firm constantly gets calls from American lawyers wanting to retain us to collect on a U.S. judgments they have received against Chinese or Russian companies. The American lawyers have usually charged their clients a pretty fair sum and they think all that is left for them to do is to take that judgment to a Chinese or Russian court. There, they think, they will get their U.S. judgment automatically converted into a Chinese or a Russian judgment and then they will get their money.

But it doesn’t work that way. Your United States judgment pretty much has zero value in either China or Russia, and in most other places in the world as well.

In fact, Chinese and Russian companies love it when you put a United States litigation requirement in your contract with them because they know that their own courts won’t enforce against them whatever judgment you may get. And even if you later realize that suing in the United States is not the way to go and you choose to sue the Chinese or Russian company in its home country, the court there will almost certainly toss your case out for being in the wrong jurisdiction because you signed a contract agreeing to sue in the United States.

So you have to be very careful not to write a contract that essentially blocks you from ever suing on it. And of course, on the flip side, if you put the United States in your contract as the jurisdiction for disputes, the foreign company can easily sue you right here.

Arbitration is oftentimes your best option and should in many cases go into your contract. Almost every country is a signatory to the New York Convention on Arbitration Awards, which means it will enforce U.S. and other foreign arbitration awards.

But arbitration has its shortcomings and sometimes you are better off putting a foreign court as your venue for resolving disputes. For example, if your biggest fear is your outsourcing company running off with your IP or your trade secrets, the fastest and best way to stop that is usually through the courts in the country in which your outsourcing company is based. Choosing the venue oftentimes comes down to figuring out the worst thing that could happen to you and then choosing the best venue for dealing with that.

You can read that entire speech here.

So what then is the answer as to what your contract with a Chinese company should be saying regarding where to pursue disputes? Chinese courts? The courts in your own country? Arbitration?

It depends….

This is part II of our series on how to sue a Chinese company. This series of posts addresses what to do should you want to seek redress against a Chinese company that owes you money or has wronged you. It is based on an article I recently had published (along with one of my law firm’s new associates, Rebecca Carlson) in Bloomberg Law Reports [one week trial subscription required] and on an article I wrote for the Wall Street Journal, entitled,” Chinese Companies Court Disaster.” Please note that instead of using footnotes, this post use brackets, [], instead.

Part I focused on how to effect service of process on a Chinese company pursuant to the Hague Convention and on the jurisdictional issues involved in suing a Chinese company. This part II focuses on how to conduct discovery against a Chinese company.

Discovery

Once a U.S. company succeeds in serving a Chinese company in a U.S. lawsuit, discovery can begin. Because the Chinese company is now party to a U.S. lawsuit, it is technically bound by normal discovery rules. However, discovery in China can be difficult. Apart from the restrictions placed on discovery by the Chinese government, Chinese companies are not accustomed to U.S.‐style discovery, and they often consider compliance to be optional.

Deposition Discovery

China prohibits even voluntary depositions from being taken on its soil. In its declaration on accession to the Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters, China stated it did not consider itself bound by Articles 16‐22 of the Convention, portions of which would grant consular officers the right to oversee depositions. In 1989, China permitted a limited deposition in the matter before the U.S. District Court for the Northern District of California. U.S. v. Leung Tak Lun, et al., 944 F.2d 642 (9th Cir. 1991). However, China advised the United States that the particular grant of authority for that deposition should not be regarded as a precedent. Indeed, there is no subsequent record of China permitting a deposition. At worst, conducting a deposition in China may lead to arrest, detention, or expulsion.

Instead, the best way to depose a China‐based witness is for the witness to come to the United States. However, if the witness is unable or unwilling to do so, there are several additional options available. One common method is to fly the potential deponent to Hong Kong or to a neighboring country and conduct the deposition there, either in person or telephonically from the United States. [telephonic depositions require court approval from the U.S. court under Federal Rule of Civil Procedure 30(b)(4)] Another possibility is to conduct a telephonic deposition of the witness in China. But because even a telephonic deposition technically occurs entirely within China, it almost certainly runs afoul of China’s prohibition.

Document Discovery

Under the Hague Convention on Evidence, China has agreed to allow some limited discovery of documents. Articles 1 and 2 of that Convention provide for document discovery by means of a Letter of Request issued by the court where the action is pending and transmitted to the “Central Authority” of the jurisdiction where the discovery is located. The Central Authority is then responsible for transmitting the request to the appropriate judicial body for a response. However, Article 23 permits a signatory country to “declare that it will not execute Letters of Request issued for the purpose of obtaining pre‐trial discovery of documents as known in Common Law countries.” China has executed such a declaration and, therefore, document discovery for trial purposes is permissible. The “fishing expedition” discovery for which the United States has become known, however, is not.

Yet even for the document discovery authorized in China, it is unlikely that the Chinese Central Authority will instruct a Chinese court to compel production. The U.S. State Department made the following accurate summary of how China tends to respond to U.S. court document discovery requests:

While it is possible to request compulsion of evidence in China pursuant to a letter rogatory or letter of request (Hague Evidence Convention), such requests have not been particularly successful in the past. Requests may take more than a year to execute. It is not unusual for no reply to be received or after considerable time has elapsed, for Chinese authorities to request clarification from the American court with no indication that the request will eventually be executed. See “China Judicial Assistance” by the U.S. Department of State.

Part III of this series will focus on litigation strategies when suing a Chinese company and enforcing U.S. judgments against such companies. Part IV will discuss arbitrating against Chinese companies and suing them in China.

 

The above excerpt comes from an article originally published by Bloomberg Finance L.P. and has been reprinted with permission. The opinions expressed are those of the author. © 2010 Bloomberg Finance L.P.

I hate when I have to be vague for attorney-client reasons, but at the same time, I also hate not writing on something really pressing and important. The problem is that the times I have to get vague often correspond with those times when I have important and current information. This is one of those times.

There has in the last year or so, been an uptick in the number of lawsuits in the United States against Chinese companies. I do not have hard numbers to back this up, beyond the numbers of my own small law firm, but I have no reason to believe these are unrepresentative. This is happening for the following reasons, among others:

  •  There has been an increase in business between U.S. and Chinese companies;
  •  Lawsuits do not usually happen immediately after business relationships have been  established. They usually happen years after that, when business has reached a level  worth suing over, when the relationship has soured, and when it has become clear there  will be no resolution without court intervention.
  •  Economic downturns tend to increase the likelihood of relationships souring and litigation  ensuing.
  •  More Chinese companies are doing sufficient business in the United States so as to  make collection of a United States judgment far more likely. I see this as the key  reason.

Many of these lawsuits involve trade secrets and/or intellectual property. A good example is a lawsuit recently brought by Motorola against Huawei Technologies Co., “alleging a plot to steal the U.S. company’s trade secrets.” In an article entitled, “Motorola’s Suit Poses Challenge for Huawei’s Success,” the Wall Street Journal talks of how this case “could complicate years of largely successful efforts by the Chinese telecommunications-equipment giant to demonstrate itself as an innovator in the industry.”  Of course it could.

A Virginia Federal Court appointed my firm (really, one of my partners, Steve Dickinson, who lives and works in Qingdao, in Shandong Province) as a sort of special counsel to assist a Shandong, China, company with its document production. I just learned today that the Virginia Court ended up finding that Chinese company liable for USD $26 million in damages, based on a finding of copyright infringement. For more on that case, go here.

In one way or another, my firm is also involved in a number of similar cases involving Chinese companies being sued for breach of contract or IP infringement. Just last week, we filed a U.S. federal court case against a Chinese company, asking the court to recognize and enforce a Chinese court judgment here. That’s right, we filed a case in the United States asking a U.S. court to enforce a Chinese court judgment against a Chinese company.

Our judgment enforcement case probably best crystallizes why there has been (and will continue to be) such an increase in cases against Chinese companies in the United States. We brought this case in United States because we deemed the likelihood of success to be more favorable here than in China because the Chinese company against whom our client has the judgment ships millions of dollars of product into the United States every month.

In many respects, the United States is a great place to bring a lawsuit. Though cases here can be expensive, our federal court system usually works very well and reasonably quickly. Many years ago, the Yomiuri Shimbum interviewed me for their story on the “Americanization of International Law,” [link no longer exists] and I had this to say about the popularity of American courts:

The Americanization of Global law is also leading to a huge increase in foreign companies seeking to have their disputes resolved by using American lawyers or even bringing lawsuits in American courts. Dan Harris, a Seattle, Washington, based international lawyer told us about a case he recently successfully handled on behalf of a Russian Far East helicopter company. This Sakhalin Island helicopter company retained Mr. Harris to bring a lawsuit on its behalf in a Seattle Federal court to recover three helicopters taken from the Russian company in Malaysia.

“I am constantly contacted by foreign companies wanting to pursue their lawsuits in the United States,” says Mr. Harris. I think the reason for this is that the American courts (along with those in England) are probably the most respected in the world. People know American lawyers are well trained and they know the American justice system is fair.” Mr. Harris, whose firm’s work is about 90% international (Russia, Korea, Japan, China, Vietnam, etc.) says he is most frequently asked by companies in emerging market countries to bring their lawsuits in the United States. Mr. Harris attributes this to the belief that they will be treated more fairly and get a quicker resolution in the United States than they would in either their home countries or in the countries of their adversaries.

Chinese companies have become relatively easy marks in United States litigation because they typically have no clue how to handle a United States litigation matter. Just as these companies so often run their businesses outside of China just as though they are in China, so too do they tend to handle their U.S. litigation.

American litigation is nothing like litigation in China and here are some of the salient differences:

  • Litigation moves fast in China. Really fast. It is not uncommon to file a lawsuit and have the trial and verdict within three months. In the United States, it is more like three years.
  • Generally speaking, in the United States, everything hinges on the witnesses. Documents are, of course, critical also, but you generally need a witness to get a document into evidence. In China, documents pretty much completely trump witness testimony.
  • In the United States, one often files a lawsuit and then garners evidence through discovery from the other side to help prove it. In China, you are to a large extent stuck with the hand you have before you file your lawsuit.
  • Forget about trying to bribe a U.S. federal court judge. Forget about it. In China, one always has to at least consider the “influence” of a particular party.
  • In China, collecting on a judgment can be very difficult and once the court issues its decision, it does not have a lot of power to aid in collection. China Hearsay just this week did a nice post on this, entitled, “Enforcing China Court Decisions, Help Is On The Way?” This is not true of United States courts, who do not take at all kindly to defendants they believe are skirting their obligation to pay. United States courts have all sorts of powers to enforce their judgments and they do not hesitate to use them.

All of these things tend to cause Chinese companies to throw up their hands and treat U.S. litigation as they treat Chinese litigation, which means they tend to engage in the following conduct, which can be detrimental to their cases here:

  •  Failing to understand the time and money needed to engage in litigation in the United  States.
  •  Failing to understand the importance of complying with the discovery rules.
  •  Failing to understand that just because you have a well-known lawyer, you are not  necessarily guaranteed to prevail.
  •  Failing to understand that U.S courts enforce their judgments and that engaging in    convoluted efforts to avoid paying on a judgment is a great way to bring down the wrath  of the court against you.

The bottom line is that if Chinese companies are going to be doing business internationally, they are going to have to get used to the idea of being sued outside of China and they are going to have to start realizing they are not in Canton (I know Canton is now Guangzhou but I wanted to pick a place that sounded as much like “Kansas” as possible) any more.

What more can I say….