A couple weeks ago, an American company contacted us about representing them before the China International Economic and Trade Arbitration Commission (CIETAC) in Beijing.  The American company claimed to be owed hundreds of thousands of dollars by a Chinese company that had failed to make final payment on a large piece of industrial equipment.  The Chinese company was contending the equipment did not work as it should.

The American company was absolutely convinced that if we brought the arbitration, the Chinese company would settle quickly.  We insisted the exact opposite would likely be the case.  I know we are right, and here is why:  Chinese companies almost never settle their in country litigation matters.

In the United States, something on the order of 97% of all cases settle.  Indeed, Houston based mega-firm, Fullbright & Jaworski concluded that 60% of the cases it took to trial settled before a verdict could be reached.  I actually think the settlement numbers are even higher on business litigation matters, but I am not aware of any study on this.  The reasons usually given for nearly every case settling are the huge costs of litigating and that both parties usually have a pretty good idea of how the court is going to rule.  I agree with both these reasons and neither usually apply in China.

Chinese lawyers often complain to us how cases in China almost never settle.  They attribute this to the newness of so many of China’s laws and so few Supreme Court decisions on them.  Without clear and established law, nobody knows how a court will rule.  We hear that around 90% of the business cases filed in China actually go to trial.

Adding to the problem is that many cases in China do not require an outside lawyer (this is also true of CIETAC arbitration) so Chinese companies can and do fight their lawsuits without having to pay anything at all.  Because Chinese courts rarely award the winning party its attorneys fees and are slow to award much in interest, there is little incentive to settle quickly.

So using the American company’s breach of contract case as an example, one can quickly see a smart Chinese company defendant in this case being very reluctant to settle.  First off, the Chinese company will probably choose to handle the case without a lawyer, so its costs will be minimal.  The American company, on the other hand will, ideally, use an American lawyer who speaks Chinese.

Secondly, it is likely the Chinese company will either fully prevail or lose entirely, depending on whether it can convince the arbitrator(s) the product was bad.  If the Chinese company prevails, it will owe nothing.  If it loses, it will almost certainly owe the full amount of the claim.  But, is it not better to fight until the bitter end and at least gain the time value of the money?

Thirdly, even if the American company prevails, there is still the very sticky matter of collection.  The Chinese company might shut down and form a new company.  The Chinese company may just shut down.  And, even if it keeps operating, it very well might take a lot of time and even more money on legal fees to get them to pay.  In the meantime, if it wishes, the Chinese company could initiate settlement discussions.

The Hoaran blog [link no longer exists] recently did a post commenting on the thrills and the agonies of how everything in China is “in progress”:

living in china is like peeking behind the scenes of how things work. nothing is finished and everything is “in progress”. because of this, you get to see the infrastructure of a society and see how it functions – its built environment and transportation infrastructure, its economy, its legal system, its workplaces and schools, its shopping malls.

on the surface, you are confronted first with endless construction. in fact, i don’t think there is a person living in Beijing who is not within a block of a building site. so if you observe, you see how a field is cleared for construction, how the foundation is laid, the concrete structure established, the scaffolding erected, the worker’s temporary housing built, etc.

at the workplace, you see basic filing systems and h.r. policies being set up. management strategies, business processes and procedures, consistency between offices and other basic systems are still being figured out.

The Hoaran blog is written by an attorney and he sees this same “in progress” situation in the legal arena as well:

in the legal system, practicing judges, lawyers and customs authorities are being trained in basic legal issues. laws are being adjusted all the time. cases are constantly being tried for the first time with no predictable outcome because there is no precedent, no body of legal theory, and no previous experience to rely on

Parties in the United States can settle cases because they essentially agree on the likely outcome.   There is always a 10% chance of an aberrant verdict either way, but within the 80% of expected rulings, the numbers are usually close enough so that both sides can reach agreement at some number near the top of the bell curve.  But since China cases have no bell curve and no 80%, settlement is as much of a gamble as trial.  Since going to trial often costs only marginally more than not going to trial, there is little incentive to do anything but see the case through.

Bottom Line: A good contract can not only help prevent the need to litigate, but it can make settlement of any dispute more likely.  A contract that is so clearly written that both sides will have an easy time predicting how the court will rule increases your chances of an eventual settlement.  A contract that requires the losing party pay the winning party’s attorneys’ fees also helps, but may not always make sense.  A contract calling for mandatory arbitration without appeal and requiring the posting of a bond will often also make sense.