The Wall Street Journal Law Blog did a post the other day touting Chinese drywall as the next big mass tort action in the United States. The post is entitled, “Does the New Product-Liability Boom Lie . . . Inside the Walls?” and to the extent it hints at a “yes” answer, it is likely going to be dead wrong. It is going to be wrong because it ignores one critical point. The US plaintiffs are not likely going to be able to collect anything from the Chinese defendants by suing in them in the United States and collecting from the German defendants is likely to prove difficult as well.
WARNING: I am going to have to get rather technical in this post as there is really no other way to handle a subject as legalistic as enforcing a judgment overseas.
Near as I can tell, the US drywall plaintiffs are mostly suing the Chinese manufacturers of the drywall and the name most often mentioned for that Knauf Plasterboard Tianjin Company. Additionally, the plaintiffs are also naming Knauf, a German company that appears to be the base for the Knauf empire worldwide.
I have written many times on how US judgments are of virtually no value in China. Put simply, Chinese courts simply do not recognize them for anything. They cannot be converted to a Chinese judgment and they are not even evidence of anything. For example, see “Enforcing Foreign Judgments in China — Let’s Sue Twice” and “Taking Judgments To China (And Korea), Let’s Not Sue Twice.” Nothing has changed and I cannot see how a US judgment against a Chinese drywall manufacturer will have any value, unless the Chinese drywall manufacturer has assets in the United States or in some third country that will enforce the US judgment.
It all reminds me of the melamine in pet food cases. I actually called one of the plaintiff’s lawyers who was suing a Chinese pet food company and asked him how he planned to collect on any eventual judgment. His response: “to be honest, I haven’t thought of that yet. I figured I would get the judgment first and then deal with it.”
Even if the plaintiffs succeed in finding Knauf Germany liable, they will still face some of the same issues in terms of taking the US judgment over to Germany to get it enforced. My law partner, Nadja Vietz, who is a licensed German (and Spanish) attorney, wrote a cover story on this just last month for the Washington Bar News. Her article is entitled “Will Your U.S. Judgment Be Enforced Abroad?” and it focuses on how to get US judgments enforced in Europe.
Nadja starts the article describing an all too typical scenario:

My law firm is frequently contacted by U.S. lawyers with judgments they are seeking to enforce overseas. The lawyer is seeking our assistance to enforce its U.S. court judgment against a foreign company that did business with the lawyer’s U.S.-based client. The procedural history is nearly always the same. The litigator served the defendant and, several months and many dollars later, he or she now has a U.S. judgment. When the foreign company refuses to pay even pennies on the dollar on the judgment, the litigator realizes the judgment will need to be taken overseas for enforcement. Only then (and usually not until we relay this information) does the litigator realize very few countries will enforce U.S. judgments. To have a chance at collection, the case often must be tried anew, only this time in a far less sympathetic forum.

Nadja then offers some suggestions on how to avoid these problems through better contract drafting, “emphasizing European and, particularly, German legislation.” The problem with the drywall cases, however, is that there almost certainly is no contract between the homeowners and the German or Chinese drywall companies and the contracts between the US contractors and the drywall companies were probably not written with these sorts of cases in mind.
Nadja explains how foreign courts do not even like US judgments:

The United States is not a party to any bilateral treaties or multilateral international conventions governing reciprocal recognition and enforcement of foreign judgments. The reasons for the absence of such agreements seem to be that foreign countries perceive U.S. courts (particularly U.S. juries) as granting excessive awards (particularly in tort cases and particularly with respect to punitive damage awards) and as too often asserting extraterritorial jurisdiction and disregarding international law. Absent a treaty, the question of whether the courts of a foreign country will enforce a U.S. judgment is governed by the local rules of the foreign country and by international comity.

Most countries do not enforce US judgments and they particularly do not like tort judgments, as they view US tort damage awards (which would most likely be the sort of award the plaintiffs in the drywall case will receive) as excessive:

Generally, U.S. judgments cannot be enforced in a foreign country without first being recognized by a court in that foreign country. The recognition and enforcement of U.S. judgments depend not only on the domestic law of the foreign country, but also on the principles of comity, reciprocity, and res judicata. Foreign courts generally do not recognize U.S. money judgments unless: (1) the U.S. court had jurisdiction; (2) the defendant was properly served; (3) the proceedings were not vitiated by fraud; and (4) the judgment is not contrary to the public policy of the foreign country. Most European countries have similar code provisions, setting forth something along the lines of these four rules, but enforceability of U.S. judgments still varies widely from country to country, even within Europe. Some countries tend to enforce U.S. judgments, and some countries virtually never do. It can generally be said that non-default judgments not involving tort claims or punitive damages are more likely to be enforced.

Nadja then sets out the three most common reasons for European courts refusing to enforce a US judgment: “when the U.S. court lacked jurisdiction, when the defendant was not properly served, or when there are public-policy concerns.”

U.S. Court Jurisdiction
European courts will not recognize U.S. judgments if the U.S. court lacked jurisdiction. Special attention needs to be paid to the fact that for purposes of recognizing foreign judgments, jurisdiction must be determined by the law of the European country, not by U.S. law. For instance, under the so-called “mirror-image principle,” German law projects its own jurisdictional rules on the foreign court, which is then treated as having international jurisdiction if a German court would have had jurisdiction had the situation been reversed.

It can hardly be said to be clear that a German court would assert judgment over a US company that owned a Chinese company that sent drywall into Germany and so it is also quite possible a German court would deny enforcement of any US judgment against the German defendant in the US drywall cases.
Surprisingly, US plaintiffs oftentimes fail to properly serve foreign defendants as well. They frequently just assume that personal service of the company at the company’s main office will be sufficient, even though this usually is not the case. I will not go into the various service mistakes my firm has seen in those cases where we have been retained by other law firms to try to enforce a US judgment overseas, but I estimate that service has been done improperly in about half those cases.
The German courts will also likely at least hesitate to enforce a drywall judgment on public policy grounds as well. Nadja sets out what is meant by “public policy” when it comes to European courts enforcing US judgments:

Public Policy.European countries will not recognize foreign judgments where doing so cannot be reconciled with their own laws. Enforceability will be denied if major principles, such as the violation of fundamental rights or fundamental principles of local civil procedure or the like, were disregarded by the foreign court that granted the judgment.
Since punitive and treble damage awards are generally regarded as excessive and contrary to the public policy of most European countries, these almost always should be removed from the U.S. judgment before taking it to Europe for recognition and enforcement. Our experience is that the U.S. federal courts are quite willing to give a new judgment with these damages removed, so as to make their judgment more likely to be enforced overseas.

My concern in the drywall cases is that the US law legerdemain that will likely need to be employed to find the German company liable for what the Chinese company apparently did will be the exact kind of thing that a German court will find violative of Germany’s public policy.
Maybe I should call this lawyer and ask him to show me the money………..

  • One other point is that often US lawyers will look at the Chinese legal system and assume that any differences are unique to China, and then assume that China should adopt “international standards” and make their system more like the US.
    What one finds in looking at comparative law is that sometimes in turns out that it is the US system that is unique and different. This is particularly the case in things like tort law, where the way that the US handles things is quite different from how other countries handle things. For example, the idea of using large punitive awards as the major means of consumer protection is something that most other countries have rejected.

  • jg

    Great post. Great info. Thanks for covering this. It needed so much to be done.

  • Dan

    TwoFish,
    So true. I cannot tell you how many times companies come to me after messing up in China acting as though China’s laws are somehow so crazy that they were absolutely right in just assuming the laws there are the same as in the US. They really want me to agree with them that the laws make no sense, but at least half the time I have to tell them that China’s laws are really pretty much like those in the rest of Asia and in Europe and, really, both the US and China’s laws make sense.
    The reality is that most laws make sense and one of the most important things about laws is that they be clear and China’s commercial/business laws are relatively clear.
    The key is to work WITH the system in which you find yourself and not worry so much about how good it is or how much it differs from whence you came.

  • Fascinating post – thank you.

  • Justin

    Dan,
    This is truly a great post and it is the first I have seen which really lays out how tough it is going to be for the plaintiffs in these cases. But isn’t it also true that there are US companies that can and are being sued?

  • Joe

    What a mess. I don’t think anyone will see a cent from China.

  • In the case of tort liability, German law sees tort as an example of “delict” in which if you violate someones rights, then this creates a legal obligation (something like a contract) between you and the person that that violated your rights.
    The problem with large punitive damage awards is that the purpose of to protect society against bad behavior by the defendant, but in a German legal framework, the court role isn’t to arbitrate between the defendant and society, but rather the defendant and you. It may well be the case that the defendant should be punished and fined, but why should the plantiff get the money from the punishment? And what do you do about the next plantiff?
    Also contingency fees is which the lawyer gets a fraction of the recovery is something that make lawyers in a German law system go crazy since it looks to them like only slightly better than bribery and corruption.
    You usually end up with workable systems, because what happens is that you end up with an obvious problem in one system, and since it is basically impossible to start from scratch, that problem gets patched, and so in the end you usually end up with something workable.
    What is interesting is to look at a lot of different legal systems, and see where people have come up with similar solutions, and very, very different solutions.
    For example, if the melanine milk case had happened in twenty different countries, I think that each of the countries would have handled it differently.

  • Didion

    In China, sometimes legal system is not so independent from politics and government. In some areas, economic development is of the first importance. Government feels a reponsiblity to protect those major tax sources in its region. Judgers also feel such presure.
    China has so called over 5000 years of civilized history. However, when talking about democracy or modernization, I have to remind you that just approx. 100 years ago China is still in feudalism and some places in China such as Tibet is till with slavery even 60 yrs ago. Hence, don’t ask too much about China. It takes time.

  • Dan Bryson

    What about hiring a Chinese lawyer and suing Knauf in China?