My firm has been gearing up for a couple of CIETAC commercial arbitrations against Chinese companies and one thing we can state with near certainty is that neither will settle. The reason for this is Chinese companies virtually never settle their in-country litigation matters. In the United States, something on the order of 97% of all cases in the United States settle or are otherwise resolved before trial.  I actually think the settlement numbers are even higher on business litigation matters, but I am not aware of any study on this.  Nearly every litigation matter settles in the United States because the costs are so huge for litigating a case through trial and both parties usually have a pretty good idea of how the court or arbitral body is going to rule.

Neither of these things hold true in China where so many of its laws are too new to have clear Supreme Court decisions on them.  Without clear and established law, nobody knows how a court will rule.  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.

Adding to this is that many cases in China do not require an outside lawyer (this is also true of CIETAC arbitration) so Chinese companies often fight their lawsuits without having to pay for any lawyer at all.  Chinese courts rarely award the winning party its attorneys fees and they are also slow to award much in interest, further reducing the risk of going to trial and further reducing the incentive to settle.

On top of all this, even when one company prevails in a China lawsuit, collecting from a Chinese defendant company is typically anything but easy.

We hear that around 90% of the business cases filed in China actually go to trial. So if you are going to sue in China, you must be prepared to participate in the litigation for the long haul.

All of this only increases the need to have a well-written (preferably in Chinese) clear-cut contract with clearly set out liquidated damages provisions for breaches.  Such a contract will not only decrease your chances of ever needing to litigate, the certainty it will bring will make settlement of any dispute far more likely.  A contract that is so clearly written that both sides will have an easy time predicting how the court will rule increases the chances of settlement.  A contract provision that requires the losing party pay the winning party’s attorneys’ fees also helps, but such a provision may not always make sense.

China litigation. Have fun with that.

For more on litigating against Chinese companies, check out the following:

  • Twofish

    Harris:  A contract that is so clearly written that both sides will have an easy
    time predicting how the court will rule increases the chances of

    I don’t think that is true, since I don’t think lack of predictability is a major factor in settlement

    The factors that are:

    1) Chinese trials are fast.  One problem with US trials is that they can take a long period of time.  Also a lot of Chinese court proceedings are “ministerial”.  Which is to say that there is no dispute over the contract, you just need a court to rubber stamp a document that orders someone to do something.

    2) There are cultural factors at work.  To settle means to admit defeat, whereas getting a court ruling means that the state has determined that you are in the right, and this has some impact on other cases.