Litigation and Arbitration

China lawyers
Hague Service of Process in China

Just read an excellent post over at the Letters Blogatory blog. The post is entitled Service of Process and the Unauthorized Practice of Law and it is on how service of process companies so often mess this up to the detriment of their clients. It also asks whether these companies are engaging in the unauthorized practice of law and hints that they are.

The post starts out talking about the lawyer-blogger’s recent experiences with international service of process botched by service of process companies:

I have come across several cases recently where a plaintiff, or more likely the plaintiff’s lawyer, had hired a “vendor” or a contractor to serve process abroad, and where it seemed clear to me that the “vendor” had given the client bad advice or where the vendor had not done a good job effecting the service. For example, I’ve seen vendors submitting requests for service to a foreign central authority and then, after the client asks why service hasn’t been completed, informing the client that service in the country in question might take a year. The client then moved for leave to serve by alternate means, which is perhaps what the client should have done in the first place with its money. Or else I’ve seen a vendor lash out at a foreign central authority’s refusal to execute a request for service rather than try to understand the legal basis for what the foreign central authority is saying.

Ditto for the international lawyers at my firm as we too have recently seen a quasi-onslaught of bad or delayed service of process attempts on Chinese companies. We typically see these sorts of things at about year one of failed service when the client-company  turns to its lawyer and says: “it’s taken more than a year and we are nowhere in effecting service, would you please find someone who can help us on this?”

The post then starts asking questions about whether these service of process vendors may be operating outside the law by practicing law without a license: “To what extent do the things we do in international service of process constitute the practice of law? Or conversely, to what extent are the “vendors” doing things they shouldn’t be doing unless they are lawyers?”

Good theoretical questions, to which I will eventually provide a very practical “answer” below. The post then posists how the serving of process is not the practice of law when it consists of little more than going to someone’s house and handing them court papers. I 100% agree because as the post notes, this does not involve any “real legal judgment.” But as noted in the post, “the decision of what form of service to use, especially in cases of service abroad, is most certainly a decision that requires legal judgment, at least in many cases”:

Suppose you say you want to serve via the foreign central authority. There are some logistical questions about how long the process will take, what fees must be paid, etc. But there are other more significant questions for the lawyer: Will the methods of service the foreign state is likely to employ satisfy due process requirements in the US? Does the case seek the kind of relief, e.g., punitive damages, or is it the kind of dispute, e.g., a tax dispute, that will lead certain foreign states to refuse to execute the request? And if you want to use an alternate method of service permitted by the Convention, similar questions arise.

To we China lawyers, the “money” portion of the post is when it discusses a vendor who spends a long time trying to effect service, only to mention after getting paid and after having submitted the service of process request to China’s central authority how incredibly long service of process is now taking on Chinese companies. See Serving A China Company Under The Hague Service Convention: Have Fun With That where we said service takes one to five months. Those were most certainly the good old days, however, as it is taking a year or more now. There is also the very real issue in any United States case against a Chinese company as to whether the case is even worth pursuing, because so often it is not. See China Enforces United States Judgment: This Changes Pretty Much Nothing

Now for my practical answer on the unauthorized service of law question. The real issue is not so much whether these service of process companies (which are typically great for serving process domestically) are engaged in the unauthorized practice of law or not. To me the issue is whether you as a company want to entrust your multi-million dollar (or even $200,000) case to a non-lawyer to figure out the best way to effect service that complies with the Hague Convention, the requirements of the court in which your lawsuit is pending and the foreign country in which the defendant is going to be served. And if you are a domestic litigation lawyer facing these same issues, do you a year down the road want to explain why you used what is essentially a specialized messenger service to effect complicated international service? I sure wouldn’t.

China arbitration clause
Oh no, yet another bad jurisdiction clause

Our China lawyers see a lot of contracts with China companies written by lawyers outside our law firm and by one of the parties themselves. We mostly see these contracts when someone writes us to see if they have a viable lawsuit against their Chinese counter-party. Unfortunately, it is the rare instance where their contract has set up the foreign company (usually an American or European company) for a good lawsuit. Truth be told, very few law firms know how to write good contracts for China and pretty much no non-lawyers do.

Typically, the most obvious and easily spotted flaw is in the jurisdiction clause and boy have we seen some doozies on that front, especially lately. Over the years, our China attorneys have dealt with the following, the facts of which have been modified so as to negate any possibility of anyone recognizing the specific matter:

1. Tokyo Jurisdiction. A company comes to us after learning its Chinese manufacturer has started producing for itself and selling (very successfully) the company’s newest version of its core product. I read the contract and one provision in particular to expressly state that any future iterations of the core product would belong to the Chinese company and I mentioned this to the potential client. The potential client then told me that when it had complained to its Chinese manufacturer about IP theft, the Chinese manufacturer cited to the same provision and said the product now belonged to them. Ugh.

To make matters worse, the contract called for all disputes to be resolved in “Tokyo Superior Court.” I asked the potential client how the heck it was decided Tokyo Superior Court would be the venue for any disputes and the potential client explained it as follows:

The Chinese company asked for disputes to be resolved by arbitration in Beijing and my lawyer said that we wouldn’t stand a chance there and so we refused. The Chinese company then proposed Singapore or Hong Kong arbitration and my lawyer countered with Tokyo Superior Court because it was the opposite [both with respect to the type of forum — arbitration versus court — and the location] as what the other side wanted.

Ugh. I then explained how no country other than China will allow for a lawsuit in its courts that has zero to do with its country and because this case would involve a US-based company going up against a China-based company on an issue with zero relevance to Japan, there is just no way a Japanese court will allow itself to be a free (or nearly free) public forum for this dispute. I did not even bother to mention that there is no such thing as the Tokyo Superior Court or that even if the US company sued in Tokyo, got its case heard in Tokyo (which will never ever happen) and then won in Tokyo, no court in China would ever enforce the judgment because the Tokyo court had no and should never have asserted jurisdiction. Ugh. The US company might be able to convince a Chinese court to take the case, but I doubt it, simply because China very much tends to enforce contracts no matter how silly they may be and I would guess most Chinese courts would toss the case for not having been filed in Tokyo as per the contract.

2. Toronto Jurisdiction. This is one of my favorites. I get an angry email from someone that essentially said as follows:

I read your blog regularly and carefully and you were wrong about Canada and that makes me wonder what else you have been wrong about. I read one of your posts where you talked about how you like to propose Canada for disputes because Chinese companies often will agree to that. Well the Chinese company we work with did agree to that but when it came time for us to actually sue them there, all of the Canadian lawyers told us that we couldn’t.

Future communications revealed that this company had — based on my having extolled the virtues of proposing Canada for arbitrations — believed it could list the Toronto courts as the jurisdiction for disputes between its US-based company and its Chinese counterpart. Just as would have been true in the Tokyo instance above, there is no way a Toronto court will hear a dispute between two foreign companies on a matter that has no relevance to Canada. Fortunately, the Canadian lawyers to whom this company went realized that and chose not to waste the US company’s time and money pursuing litigation there. I had to point out that we constantly emphasize that dispute resolution provisions must be fact and situation specific and that there is a big difference between what can be done in arbitration and what can be done in a foreign country’s courts. I didn’t — but I should have — point out the disclaimer here on our website:

The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice. By using this blog you understand there is no attorney client relationship between you and our law firm. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.

Ugh.

3. Split Jurisdiction.  We get this one fairly often. The contract provides that the Chinese company must sue the United States company in a U.S. court and the U.S. company must sue the Chinese company in a Chinese court. The thinking behind this is logical but its execution is so flawed that we avoid these provisions like the plague.

These provisions initially seem to make sense because this sort of split jurisdiction appears to greatly favor the U.S. company. If the Chinese company seeks monetary damages from the American company, it must go through the trouble of suing the American company in a U.S. court and, presumably, the U.S. company will get a fair trial there. And on the flip side, the American company can sue the Chinese company in a Chinese court, which is (90 percent of the time, anyway) exactly where the U.S. company should want to be. For why this is the case, check out China Enforces United States Judgment: This Changes Pretty Much Nothing.

But there is a giant flaw to the above analysis. Chinese courts typically hold that this kind of split jurisdiction means there is in fact no jurisdiction in China, so you really want jurisdiction in China, your agreement should  be 1) be governed by Chinese law, 2) be written in Chinese and 3) provide for exclusive jurisdiction in China. This is not black letter law. This is just what actually happens on the ground in China and this is why our firm’s China attorneys provide for all three of these in all contracts where it is critical our client have the right to sue in China.

But once again there is no clear answer as to what might be best for any given company’s specific situation. To properly evaluate whether you go with Chinese law in a Chinese Court (which is what we nearly always end up choosing to do), you need to consider your most important concerns. Is it more important you have an effective remedy against the Chinese company with which you are contracting or is it more important you make it as difficult as possible for the Chinese side to sue you? If your primary goal is to be able to enforce this contract against a Chinese company, you should provide for exclusive jurisdiction in China and Chinese law should apply and the contract should be in Chinese. But if your primary goal is to prevent the Chinese side from suing, you should provide for exclusive jurisdiction in the United States. But if you do this, you must realize that because China does not enforce U.S. judgments, the U.S. agreement will  be useless as a means of enforcement against the Chinese party. It is these preferences that should help decide the best jurisdiction provision for your contract. In any event, the split jurisdiction approach generally does not work.

This is all a very difficult and must be considered carefully. There is no simple answer. A hard choice has to be made. The first thing I look at when someone shows me an agreement is its jurisdiction provision. In most cases, the US lawyer has screwed up and made it impossible for the US company to enforce the contract and that stops things right there. We must avoid that result if the client in fact wants to enforce in China. If, however, this is that rare instance where the client is only concerned about preventing a lawsuit, a US jurisdiction clause with a US choice of law provision would be fine. In that case, a Chinese version is not required, but I still recommend it because at least then the Chinese counter-party will be able to understand it fully and that alone is important for making sure that it and our client are on the same page before they start doing business with each other.

4. Geneva Chamber of Commerce Arbitration. A very good existing client of ours came to us with a contract calling for arbitration before the “Arbitration Institute of the Geneva Chamber of Commerce.” Problem was that the Geneva Chamber of Commerce neither had an Arbitration Institute nor did the Chamber handle international arbitration. In this case, our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce (at least I think that was what it said), which at that time (and today) was a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the disputes handled in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. Back then, the Geneva Chamber of Commerce did no arbitration. Zero. So when it came time for my client to pursue arbitration my firm’s arbitration lawyers had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, figuring we could argue that is what the parties meant and that arbitral body would want to keep the case. The opposing side vigorously contested our choice of forum and only many briefs and many dollars later did we prevail.

5. South Carolina Arbitration in Chinese Under British Law. Yes you read it right and if you are not stunned by this, you should read it again. This is my all time favorite. U.S. company comes to us with an arbitration clause mandating arbitration in South Carolina, in Chinese, under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and the need to use two lawyers (one who is experienced with arbitration and another who is fluent in Chinese) and the added costs of researching and arguing British law, the U.S. company — wisely — chose not to pursue the case. When I asked the company how they came up with such a provision they explained that they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that  can make sense, but such a provision is a disaster if you are the one that ends up needing to sue.

Bottom Line: Jurisdiction clauses in international contracts are complicated and important and there is no one size fits all.

China employee litigation
China litigation: there be wolves out there.

A loyal reader sent me a Bloomberg News article, titled China’s Grocery Trolls Make Giant Piggy Banks of Wal-Mart and Carrefour. The article was how grocery “trolls” purchase food from China’s large grocery store chains, knowing the food does not comply with China’s Food Safety Law. The buyer of the out of compliance food then sues the grocery store chain for ten times the purchase price and, apparently, usually wins:

Xue Yanfeng went shopping in a Carrefour SA supermarket in western China in May 2015 and bought 20 bottles of honey for a total of 892 yuan ($134). He then left the supermarket with his groceries and sued the French company. In court filings, Xue alleged the nutritional labels said each 100-gram serving contained 1,326 kilojoules of energy. But, according to his calculations using nutritional data on the label, each serving contained only 1,102.

Xue, who couldn’t be reached for comment, argued that the error violated China’s Food Safety Law, which guaranteed him compensation of 10 times the purchase price. The Xinjiang court agreed, and a week after his purchases it awarded him a refund of 892 yuan and compensation of 8,920 yuan.

That was one of 40 lawsuits Xue has filed against supermarkets and retailers for violating the Food Safety Law since late 2015, when China introduced a strengthened version to tackle the country’s well-publicized food safety woes. The new version removed a clause in the previous law that said victims must prove personal injury or loss to be eligible for compensation. The change has spawned a cottage industry of professional complainers who’ve developed sophisticated operations to challenge food manufacturers and retailers for compensation.

I immediately thought of California’s Proposition 65, which is constantly snaring unwary businesses for failing to provide adequate notice of the potential harm their products may cause. Ironically, Chinese companies are prime targets under this California law because they so often are unwilling to pay lawyers in drafting the required notices.

I then thought of the similarities between California’s and China’s employment laws, both of which are also classic traps for the unwary. Years ago a very large Chinese company sought help from my one of my firm’s California lawyers in drafting a settlement agreement with a soon-to-be terminated California employee. We quoted a very low fee (these agreements are a piece of cake) but the Chinese company thought it too high so it pushed on by itself. A month later, the Chinese company called us back, this time to retain us for sure. It turned out that the by-now terminated employee knew California law and that his settlement agreement did not comply with one certain provision in that law. So even though our client had paid him $100,000+ as a severance and unpaid commissions, he was now suing them for $50,000+ in unpaid commissions, plus his attorneys’ fees. Our client had zero chance of prevailing in this lawsuit and it settled quite quickly for the full $50,000+ and it also had to pay its attorneys fees, which were at least five times higher than they would have been for us to draft the simple settlement agreement, correctly. NOTE: I have changed the facts of this matter so as to remove any possible identifier.

We see this same sort of thing on the China employee front as well. See China Employee Termination: Avoid These Mistakes and China Employee Terminations: Don’t Get Lazy. Just as in California, there are a boatload of China employees who will agree to a termination or other settlement (either in writing or orally), get paid under the settlement and then walk down the street, retain a lawyer and then sue (with really good cause) for more.

This happens with Sinosure matters also. See How to Survive Your China Manufacturer Dispute. Sinosure Too. A foreign company  allegedly owes money to a Chinese manufacturer and Sinosure (China’s export insurance company) comes calling to collect. The foreign company then contacts its manufacturer to resolve the matter. The Chinese manufacturer and the foreign company orally (or via an ineffective writing) agree to resolve the matter with the foreign company usually paying anywhere between 70 to 90% of what is allegedly owed. Then when Sinosure calls again, the foreign company explains how the matter has been resolved and Sinosure essentially says, like hell it has.

The other day a British company wrote me after having fallen for a fake settlement with its manufacturer for the second time in the last year. When I essentially chewed them out for having messed up once and then instead of seeking legal help the second time, merely “doubling down on their initial mistake,” their response was to say that “obviously foreign companies cannot get a fair shake in China, where it would seem everyone is out to rip you off.” I respond to that comment now (because there was no point then). Not exactly. If you are going to do business in China it is incumbent upon you to know the laws and if you do not know the laws to get help from someone who does.

Yes, doing business in China is difficult and its laws are complicated, but that is true of pretty much every country I know. Be it California or China, it’s on you. People the world over — and that most certainly includes China — are ultra-litigious and that is not going to change soon if ever. Your defense to this is to know the laws and abide by them, to the letter. Saying that the laws are difficult or that there are bad people out there does not cut it and you ought to know that. Oral agreements in China are not worth the paper on which they are not printed and written agreements drafted by anyone not experienced with Chinese language contracts have no greater value.

You have been warned (yet again).

China lawyerWay back in 2008 I wrote a post immediately after one of my firm’s lawyers returned from a federal court hearing where the judge essentially said — near as I could tell without any basis in law — that service of an English language only complaint on our client was valid even though she did not speak a word of English and even though the Hague Convention rules on service of process for that particular country explicitly stated that the complaint needed to be translated into her native language. In that post, which follows, I raged (well for me it was raging) against a US legal system that fails to sufficiently account for foreign law.

This post is on private, not public international law. That means it has little to nothing to do with such hot button issues as the United Nations, the Kyoto Protocol, or the International Criminal Court. This post is on how American courts deal with business cases involving foreign parties and foreign or international law as that law applies to such cases. No more, no less.

Many years ago, I was representing a Canadian-Australian manufacturer in a big case down in Texas along with two truly excellent Dallas litigators. At some point in the case, I had the “brilliant” idea of arguing that US Federal law had preempted Texas state law, mandating dismissal of plaintiff’s claims against my client. We settled the case before the court could hear our preemption argument, but I still remember the half-joking advice I received from Texas local counsel. It was something along the lines of, “forget about federal law, this is Texas; we don’t recognize federal law down here.”

I am beginning to wonder about the willingness of US courts to apply foreign or international law, even in those instances where US law calls for such application.

In a few months, I will be in Las Vegas (I count myself among the people who love Vegas!) speaking on the Hague Convention rules on Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, as they apply to Chinese companies. Based on my firm’s experience with getting US courts to recognize international law, I am sorely tempted to just say something like, “forget about international law. This is the United States. We don’t recognize international law here.” Go ahead, just stick your summons and complaint in a bottle, throw it in the ocean, that ought to be enough for you to get a default judgment anyway. And since China never enforces US judgments anyway, why does it matter?

I am sure my speech will be a bit more nuanced by the time I get there, but you get the point.

For at least the third time (two times is coincidence, three times is a trend), a US court has allowed a case to go forward against a defendant despite the plaintiff having clearly failed to abide by the Hague Convention Rules on international service of process. The most recent instance is in a still pending case so I cannot go into the specifics on that one.

Virtually every time we have sought to get the US courts to enforce the Hague Convention or even, in one instance, when we sought to get a US court to pretty much ignore the Hague Convention, the US court has seemed perfectly willing to rule as though the United States has no obligation to abide by a treaty it signed. I have a strong sense US Courts (both state courts and federal courts) will not enforce the Hague Convention’s technical service requirements (including that the summons and complaint must usually be translated into the language of the country in which it is being served). Oh, and getting a US court to throw out or stay (delay) a case so that an already pending case in another country can be decided first — forget it. My conclusion is that US courts are happy to ignore foreign/international law in favor of handling things under US law, whether US law should apply or not.

Since writing the above, our firm has had a Federal Court ignore Australian law in a case without even deigning to explain why and a state court refuse even to consider delaying the US action based on an already pending case in Spain, and get mad at our lawyers for even making the request!

US court judgments are rarely enforced outside the United States and one of the reasons given for this is the failure of American courts to recognize foreign law. Our foreign clients — international businesspeople from countries like Australia, England, Spain, and Germany that are not generally anti-American — are complaining more and more to our lawyers about US courts “think they can ignore the rest of the world.” Add in a President whose response to countries beyond our borders is a big FU and low-life neo-nazis marching in our streets with torches, and you can understand why so many of my non-American friends have been asking if I am concerned about the United States’ standing in the world and the impact all of this will have on our legal system.

My answer is yes.

Strangely enough, I recently thought through much of the above when analyzing an intellectual property matter on which I worked. The matter was for a European company looking to sue an American company under Chinese law in a United States court. (Please nobody ask me to explain either how the parties got into this situation nor why this contortion was even being considered.) What struck me was how despite all of the things about which I wrote above, my opinion to the European lawyers was that if they were to pursue litigation in a US court they could excpect the court to abide by the law, and since the law was clear (and did not really involve court power as did the cases above), we could expect it to apply Chinese law.

I guess I am standing on history (at least that of the U.S. legal system) for now.

Your thoughts?

Chinese lawyers
Just say no to Hong Kong jurisdiction.

Hong Kong courts are world class and few foreign companies would not rather have their disputes against their Mainland China counter-parties resolved in Hong Kong as opposed to in Yiwu or in Harbin. Hong Kong as the jurisdiction of choice is very alluring. But for all sorts of reasons, it’s a trap.

Let me explain.

Back in 2008 China and Hong Kong entered into a reciprocal enforcement agreement to make judgments from Hong Kong courts enforceable in China, and vice-versa. Foreign lawyers (usually those not experienced with China contracts or China courts) see this and think having their clients disputes resolved in Hong Kong is the way to go. But as is so often true of China, what is on paper does not correspond so well with the real world and most of the time calling for disputes with Mainland Chinese companies to be resolved in Hong Kong is a terrible idea.

Consider a contract between a U.S. technology company and its PRC licensee. [Though our example is of a U.S. company, what we say below holds true for nearly all Western countries/companies as well.] The U.S company seeks to avoid Chinese law by providing for English as the contract language, U.S. law as the applicable law, and enforcement in a U.S. court. The Chinese side refuses and insists on the opposite: Chinese language, Chinese law and enforcement in a Chinese court. As a compromise, the U.S. side proposes the following: English language, Hong Kong law and enforcement in a Hong Kong court. The Chinese side readily agrees and the contract is signed.

Why did the Chinese side agree? It agreed because it knows this “compromise” has created the worst possible situation for the U.S. company. The contract is NOT enforceable against the Chinese company, so the Chinese company is off the hook for any liability. On the other hand, the contract IS enforceable against the U.S. company, giving the Chinese company substantial power in the event of a dispute. The U.S. company has placed itself in the worst possible position. I have Chinese lawyer friends who brag about setting up foreign lawyers with this “trick.”

There is though a chance both parties will be disappointed because there is a risk the Hong Kong court will refuse to hear the case because the matter has no connection to Hong Kong. Remember that Hong Kong is an entirely separate jurisdiction from China. For this reason, a contract between a U.S. company and a Chinese company governing conduct that will occur in the PRC has no connection to Hong Kong. It is therefore entirely possible the Hong Kong court will refuse to further crowd its docket and will simply refuse to hear the case.

But let’s just assume the Hong Kong court hears the case and renders a judgment. What then will happen? If the Chinese company is the plaintiff and if it prevails, its judgment against the U.S. defendant will be easily enforceable in the United States against the assets of the U.S. company. Hong Kong is a common law country with laws and legal procedure based on the laws of England. U.S. courts regularly enforce such common law judgments and the odds are overwhelming they would do so in this situation as well

But If the plaintiff is the U.S. company and it prevails and then seeks to enforce its Hong Kong judgment in the PRC, the situation is quite different. On the surface, it appears enforcement of the judgment should not be an issue under China and Hong Kong’s  reciprocal enforcement agreement of 2008 which on its face makes judgments from Hong Kong courts enforceable in China. However, Chinese courts regularly ignore this statute by not enforcing Hong Kong judgments.

Chinese courts avoid enforcement in two ways. Sometimes they simply refuse to act. They do not openly reject the demand for enforcement. They instead accept the demand and then do absolutely nothing. This is the most common technique.

The other approach is to find technical reasons to reject the demand for enforcement. Usually the Chinese court will reject the Hong Kong judgment based on a claim that award was based on grounds that violate Chinese public policy. Since Chinese civil law and Hong Kong common law come from an entirely different legal background and legal procedure, it is generally easy for a Chinese court to find a public policy issue.

Often, the Chinese party will not appear in the Hong Kong action. In this case, the U.S. side will obtain a default judgment. Like many Asian courts (and European and U.S. ones as well), Chinese courts are reluctant to enforce any form of default judgment. When the default judgment is from a foreign jurisdiction, the likelihood of enforcement is very low. Knowing this, good Chinese lawyers instruct their Chinese clients not to appear when sued in Hong Kong.

As noted above, a contract between a Chinese entity and a U.S. entity has no factual or legal connection with Hong Kong. Chinese law allows the parties to a contract to chose the applicable law, but when the parties choose a law with no connection to the underlying transaction, Chinese courts typically deem this to violate public policy.

Whether the Court issues a written ruling or simply does nothing, the effect is the same: no enforcement of the Hong Kong judgment against the Chinese party defendant.

So what this all means is that by writing a Hong Kong jurisdiction provision into the U.S. company’s contract with its Chinese counter-party, the U.S. company (or its lawyer) has placed itself in the worst of all positions. First, it must convince a skeptical Hong Kong court to hear a case with no connection to Hong Kong. And since Hong Kong has a loser pays system, the U.S. company usually must post a substantial monetary bond to cover the risk that it will not prevail on its claim. Then it must pay the very high attorneys’ fees and court costs demanded by the excellent Hong Kong legal system. Then it must wait as the Hong Kong court takes what can be a substantial period of time to render judgment when the facts and parties are all foreign to Hong Kong. Then, if and when it finally receives its Hong Kong judgment, the U.S. company will likely learn the hard way that its judgment has no value since it is not enforceable in China. Or even worse, the Chinese party prevails on its counterclaim and the Chinese party is free to enforce its judgment against the American company in the United States. And to top it all off, the U.S. company loses its bond, which goes to pay the Chinese company’s legal fees.

Hong Kong as the jurisdiction for disputes with Chinese companies? Great on paper, but really bad in real life.

China cyber law
Screenshot of Hangzhou Cyber-court Website, showing its Chinese name as Hangzhou Railway Transport Court as of end of June.

China has adopted a plan to establish a cyberspace court in Hangzhou lately. The plan is for this court to accept filings electronically, try cases via livestream and hear only e-commerce and Internet related cases.

Why Hangzhou? As a general rule of Chinese civil procedure law, lawsuits must be brought in the place of the defendant’s domicile. For companies, domicile means their principal place of business or the place where it has its registered address. Hangzhou is home to Alibaba and to many other technology companies, it has been dubbed the “capital of Chinese e-commerce,” and it is the site of the China Cross-Border E-Commerce Comprehensive Test Zone (中国(杭州)跨境电子商务综合试验区). Hangzhou courts have experienced a considerable increase in the number of e-commerce related cases, from 600 cases accepted in 2013 to more than 10,000 in 2016.

Before these most recent plans for a cyber-court in Hangzhou, the Zhejiang High Court launched a pilot program to create Zhejiang E-Commerce Online Court System to better handle Hangzhou’s increasing caseload in Hangzhou. Three Hangzhou trial courts and the Intermediate Court of Hangzhou initially joined this system to try certain e-commerce related cases online. Other than a different space (cyberspace versus an actual courtroom) for the actual litigation/trials, there are no significant differences between the online court and traditional courts. The Zhejiang E-Commerce Court website explicitly states that its litigation processes will strictly follow China civil procedure law.

What Cases Will the Cyber-Court Handle? The Cyber-court will have general jurisdiction over certain Internet and e-commerce related cases in the Hangzhou area. Although the Cyber-court’s website is currently inaccessible, according to the Zhejiang E-Commerce Court website, the following cases (over which the existing trial courts in Hangzhou would normally have original jurisdiction) will be tried by the Cyber-court beginning on August 18, 2017:

  • Disputes regarding online purchases of goods, online service agreements, and small [online?] loan agreements;
  • Disputes regarding “internet copyright” ownership and infringement;
  • Infringement on personal rights (e.g. defamation) using the Internet;
  • Product liability claims for goods purchased online;
  • Domain name disputes;
  • Disputes arising from Internet based administration;
  • Other civil and administrative cases concerning the Internet assigned to the Cyber-court by a higher court.

No matter in which district of Hangzhou a defendant is domiciled, cases that come within the above list should be filed with the Cyber-court instead of with the trial court in the previously relevant district.

How to file a case with the Cyber-court and Attend trials? Please note that because the Cyber-court’s website is currently offline and inaccessible we have had to base the information in this section on what we obtained from the website back when it was live in July and from news reports. The Cyber-court will use an online platform that allows people to file cases and attend trials. To be able to use this platform, users must first verify their identity and then register for an account. There are two options for doing this. One is to physically go to Hangzhou and show your ID to the court clerk, which to a large extent defeats much of the purpose of having the online court system. The other is to have your identity verified through Alipay (Alibaba’s payment service). If you already have an Alipay account and Alipay has verified your identity (because you probably used Taobao before), such a verification will be accepted by the cyber-court’s system.

Once you have a cyber-court account, you can file a complaint, submit evidence, and request service of process through this platform.

You can attend your trial remotely by entering a verification code on a webpage. Transmission of audio or video of any hearings and trials and the evidence presented and other data exchanges will be encrypted using security technologies provided by Alibaba Cloud.

Implications. For people who do not live in Hangzhou area and want to sue someone there based on causes that are within the Cyber-court’s jurisdiction, the new system sure will make that more convenient. It also will likely make rulings on internet and internet related cases more consistent and thereby give more and better guidance to potential and actual litigants

But I also wonder whether all of what has been put under the cyber-court’s jurisdiction makes sense. Take product liability as an example. How is a product liability claim for goods purchased online any different than that for goods purchased physically in a store? In what will the cyber-court be better able to handle such a claim? There may be difference in online and offline purchase agreements for issues such as where the defendant resides, the place of execution or performance of the agreement or jurisdiction. But those are typically answered by existing product liability law, contract law, and civil procedure law and there is no single “Product Liability Law for Cyberspace.” Do we need a separate cyberspace law or is it just the Law of the Horse? Many countries, including China, have separate maritime and IP courts and those have generally worked well. Does it make sense to have a separate court handle internet disputes? I hate to sound trite, but time will tell. Is this a genuine attempt to reform e-commerce and embrace technology? Will this one cyber-court eventually assume nationwide jurisdiction of internet claims (not likely)? Will other regions in China create their own cyber-courts? What have other countries done on this front? Please comment below if you know!

Does it make sense to have the system rely so heavily on one company’s technology (Alibaba’s)? Did it have any real choice? How secure is Alibaba’s technology as to data and privacy protection? What protections are in place to prevent Alibaba from appropriating and using the litigation data?

Finally, as with most new developments involving cyberspace and e-commerce in China much about the cyber-Court remains  unclear and will likely change, and fast. I will be covering the changes so please stay tuned.

notarization, appostille, consularizePretty much every week, our China lawyers get emails or phone calls from someone (probably half the time a fellow lawyer) seeking assistance with making a document legal for some sort of use somewhere in the world. Maybe 40 percent of the time, the request relates to a need to authenticate an official Chinese document or government record so it can be used in a United States court or government filing or U.S. transaction. Maybe another 40 percent of the time, it’s essentially the opposite: the person needs a U.S. document authenticated so it will work for a Chinese court or a Chinese government filing or China transaction.

Much of the time, the party reaching out to us expects a quick answer that will allow them to do what they need to do, at little to no cost or for us to do it for a couple hundred dollars. Pretty much without exception though, we have to burst that bubble by explaining how these things can be quite complicated and time consuming and, hence, expensive. The reason being that what is actually required varies in pretty much every instance, depending on the exact reason the authentication is needed and if they wish us to provide them with legal counsel we will need to do the following:

  1. Research exactly what will be required. This typically involves our reviewing the law and talking with the appropriate government official (especially if it is China).
  2. Oftentimes, we must arrange with a notary in a specific city to notarize a document and many times we also must deal with the appropriate Secretary of State (or comparable) for an apostille or comparable and with the appropriate consulate or embassy or court for the consularization or legalization. Accomplishing these things can be incredibly time consuming as they often involve multiple letters and phone calls, and even occasionally flights when things get delayed.
  3. Translations are also often required.

Just saying….

 

China employment lawyers
Don’t pay twice for your employee’s vacation

Employers in China are constantly getting sued over employee vacation days. The very short version of the general rule is that any employee who works continuously for one year is entitled to statutory annual paid leave (a/k/a paid vacation days). This is not news to China-based foreign employers as their parent companies all have vacation policies. However, what is not so well known is the legal requirement that they make arrangements for the employees to be able to enjoy their statutory vacation days. What this means is that employers in China must stay on top of how their employees take (or not take) their vacation days and, more importantly, they must pay their employees for unused vacation days, unless they can prove the relevant employee has voluntarily given up such vacation days. But the tricky part ain’t over.

Foreign employers in China far too often assume their employees cannot prevail on claims for payment for unused vacation days if they have waited too long. But this is only sort of correct. As with pretty much everything else involving China employment law, how the statute of limitations is calculated varies. Some courts treat compensation for unused vacation days as normal wages and apply the longer statute of limitations and give employees until one year after their employment is terminated to sue for all such compensation. Some courts treat it as a pure penalty payable by the employer and apply the shorter statute of limitations, which may bar a portion of the unused vacation pay the employee is claiming to get. Some courts completely ignore the issue of statute of limitations and this usually means an employer that cannot produce evidence to show its employee actually took the vacation days at issue will need to pay for any “unused” vacation days, no matter how long ago.

Our China employment lawyers advice our clients not to focus on how a particular Chinese court in a specific city will apply the statute of limitations on any given day, especially since courts in different districts in the same city have been known to use different standards. Rather, we tell them to focus on working to prevent the problem. From day one, your HR department should be keeping track of how each of your employees takes his or her vacation days. If there are lingering issues or claims, clean them up right away. Get your employees to execute an agreement (in Chinese!) making clear the employee acknowledges having been paid in full for any unused vacation days.

Though employees in China should plan their own vacation days and do have the freedom to give them up, it is not a good strategy for an employer to leave it to their employees to track and/or accumulate their vacation days without checking. When employees sue for vacation time years after that time was accrued, you want to have good evidence that no payment is owed.

China employment laws and foreign companies. One tough mudder.
China employment laws and foreign companies. One tough mudder.

The China Labor Bulletin just did a post revealing something my law firm’s China lawyers (especially our China employment lawyers) have sensed/felt for quite a while: China employees increasingly know their rights and have no compunction about doing what they can to enforce them:

While latest national LDAC case data compiles data only up to 2015, local government reports reveal more recent statistics, and tell stories of the rising rights awareness of workers.

A whitepaper on labour disputes from Guangzhou noted the increasing diversity of grievances raised by workers in recent years. Unpaid social insurance, for example, account for over 40% of all arbitration cases over the past three years. Women workers are an increasing portion of all cases, and are taking action against unequal treatment, illegal firings or wage cuts during pregnancy or maternity leave, and discriminatory hiring practices.

Though this article does not specifically address employment cases against foreign companies doing business in China, I would venture to bet that employment disputes between Chinese employees (and expat employees as well) and foreign companies have increased at an even faster pace. We see this in the number of emails we get from both employees (expats mostly) seeking to sue and from employers threatened with lawsuits. In virtually every employment dispute we take on as counsel, however, the parties eventually settle, meaning they never become a part of any Chinese government statistic.

I wrote on this last year for Above The Law, in an article entitled, China Employment Disputes: Settle, Settle, Settle: Attorney Dan Harris says there’s only one way to deal with labor disputes in China. That article started out with the following:

Every few weeks, one of our China lawyers gets an email from a foreign company (virtually always a WFOE) that is in a dispute with one or more of its China-based employees. These foreign companies are usually surprised to find themselves in such a dispute because they are of the view that they did nothing wrong. They too often believe that hiring my law firm will consist of us spending an hour or two reviewing the facts and the law and then telling them that they did nothing wrong and then making the case go away.

The only difference today is that we are getting those emails every single week, and usually more than one. But what hasn’t changed is what causes foreign companies to get themselves in this situation, nor what they need to do to get out of them. The two leading causes for the employment disputes we see are a failure to have a well-crafted set of Rules and Regulations combined with maladroitly handled employee terminations. See China Employee Termination: Avoid These Mistakes. We also have seen no slow down in foreign companies getting into big trouble for having “employees” in China without their actually having a China WFOE to serve as the employer. See Doing Business in China with Deportation or Worse Hanging Over Your Head.

Bottom Line: China wants foreign companies doing business in China for financial reasons and those companies that are not fulfilling their China financial duties, be it via taxes or employee payments are at risk.

China litigation
Owed money by a Chinese company? Sometimes you just have to sue.

Nearly every week, an American or a European company (or sometimes an Australian company) will write to one of our China lawyers asking what it can do to get paid on its contract. The amounts typically owed are between $50,000 and $250,000, but sometimes they run deep into the millions.

These companies writing us are not our law firm’s existing clients because we so strongly advocate not doing deals with Chinese companies without getting a substantial payment upfront. See Want to Get Paid by a Chinese Company? Do These Three Things:

Demand a large amount upfront and make clear both orally and in your contract that you will not begin work or ship your product until you receive the full amount of this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that the Chinese side is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency and any time a Chinese entity wants to send US currency to a foreign entity (greater than $50,000 a year), it needs approval from the transmitting Chinese bank. This generally requires the parties to have executed a contract (in Chinese) for goods or services that are acceptable for foreign entities to provide, and that the foreign company has submitted a formal invoice in a form acceptable to the bank — because the bank in turn usually needs to get approval from government authorities. For the specifics on what is required to get paid by a China company, check out Service Companies In China. How To Get Paid.

These companies writing us for help in getting paid are obviously past the point where a well-crafted contract can help them and they want to know exactly what they should do to get paid. One of our China attorneys recently responded as follows to such a company with very large amounts owed to it by two Chinese companies, one a State Owned Entity (SOE) and the other a privately-held Chinese entity (I have modified the email a bit to hide any possible identifiers):

Usually the best way to collect money owed to you by a Chinese company is to file a lawsuit. Otherwise, the Chinese company will probably just ignore you. The problem, of course, is that lawsuits by WFOEs against SOEs are not favored in China. If your claim has any defect, that defect will normally defeat the claim. However, filing a suit can provide you with leverage in any settlement negotiation. Your case against the privately-held company will probably be easier. But for both cases, much will depend on the quality of your contract and until we review those contracts we would only be guessing at your chances.

Sending demand letters to Chinese companies tends to be a waste of time, though they often make sense to confirm the default, if such confirmation is required under the relevant contract. Most Chinese companies ignore demand letters and this is especially true of SOEs. These two companies have been the clear decision not to pay you and unless and until you sue them, they probably will stick by that decision. In fact, sending a demand letter from your lawyer is seen by many Chinese companies as a sign of weakness. They are of the view that if you are really going to sue them, you would do so and not just send out letters. Those who send demand letters are too cheap to hire a lawyer to do anything more.

So that leaves filing a lawsuit against these two Chinese companies. But lawsuits are rarely inexpensive and filing one will permanently affect your relationship with these buyer and it could hurt your standing in the _______ industry in general. Litigation should therefore be initiated only after careful consideration. I cannot assess your chances of prevailing in litigation until after a review your contracts and other documents and get a much better sense of the entire factual situation. But I can tell you that just like in the United States, litigation in China is expensive (though usually considerably less expensive than in the United States, slow (though usually considerably faster than in the United States) and uncertain. So pursuing litigation is not a course to be taken lightly. However, when you are being ignored, it is the only affirmative action you can take.For what it is worth though, the World Bank recently ranked China as the fifth (5th) best country in the world in terms of contract enforcement!

Using an “intermediary” is a standard “old school” Chinese practice. Provided no bribe is given to this intermediary and provided this intermediary acts pursuant to China law, using such an intermediary is not illegal. [This was mentioned because the company owed the money said that someone had told it to collect the debt in this way]. These intermediaries typically charge a percentage of what they collect and you should measure that percentage against the cost of litigation. The problem with using an intermediary though is that you become dependent on the intermediary and your contract with that intermediary may make it difficult or impossible for you to sue your creditor if and when you wish to do so  and you become liable if your intermediary for whatever it does that is irregular or illegal. Most importantly, its chances of success are uncertain and we have seen instances where intermediaries have not only failed to collect, but the things they have said and done have essentially ruined the chances of succeeding in any lawsuit.

Using an intermediary in your case seems particularly problematic for two reasons. How is an “intermediary” going to convince an abusive SOE to pay its bill to you a WFOE? It sounds far fetched to me, but I don’t have all of the facts. Two, you are coming up against a statutes of limitations that may prevent you from ever being able to sue these two companies. The last thing you want to do is miss out on your opportunity to sue because you are bogged down using an intermediary. I do not know enough about your case to tell you how to proceed, but I can tell you that we generally advice against companies using intermediaries to collect on their China debts.

If want me to review the contracts and other documents that would support your claims, I am available to do that.