Dispute Resolution for Small Claims in China: Why Choosing Chinese Courts Matters

Welcome to another edition of my China Tech Law Newsletter! In international business, the complexities of dispute resolution are often overlooked. This is particularly true for small claim amounts, such as those under $200,000, involving a foreign company and a Chinese company. One of the key factors to consider in these cases is the choice of dispute resolution forum. For many, the Chinese courts offer the most practical and effective solution. Here’s why.

1. Chinese Courts and Foreign Judgments: The Enforcement Challenge

One of the most compelling reasons to choose Chinese courts for dispute resolution is the enforcement of judgments. Chinese courts often do not recognize or enforce foreign judgments. This stance means that even if a foreign company wins a case in its own country against a Chinese company, enforcing that decision in China can be highly problematic and often impossible.

To ensure a smooth and enforceable resolution, it is usually more effective to initiate the dispute within the Chinese legal system. By doing so, you can avoid the pitfalls associated with the non-enforcement of foreign judgments, ensuring that you can actually benefit from the court's decision.

2. Critical Importance When Chinese Companies Lack Foreign Assets

The issue of enforcement becomes even more pronounced when dealing with Chinese companies that have no major assets outside of China. In such cases, even if a foreign company wins a judgment in its home country, collecting on that judgment can be almost impossible if the Chinese company does not have assets in a jurisdiction that would enforce the judgment.

When a Chinese company’s assets are solely within China, foreign companies need a judgment from a Chinese court to reach those assets. By choosing Chinese courts for dispute resolution, foreign companies place themselves in a position where the judgment is directly enforceable. This is crucial for ensuring that the dispute resolution process leads to actual, tangible outcomes, rather than just a paper victory.

3. Streamlining the Process: The Importance of Evidence in Chinese

Another practical consideration in choosing Chinese courts for dispute resolution is the handling of evidence. Chinese courts generally require that all evidence be submitted in Chinese. If the evidence is in another language, it must be translated, notarized, and often consularized by a Chinese embassy. These requirements can add significant time, cost, and complexity to the dispute resolution process.

As much as possible, it is advisable instead to prepare (forseeable) relevant evidence in Chinese from the outset. By having evidence readily available in Chinese, foreign companies can expedite the legal process, reduce costs, and avoid the bureaucratic complexities associated with translation and notarization. This approach not only speeds up the resolution process but also minimizes the risk of errors or misinterpretations that could arise during translation.

4. Cost-Effectiveness in Small Claims

For claims under $200,000, the cost of dispute resolution can be a prohibitive factor in bringing a claim (even when you know you are in the right!). Opting for Chinese courts can often be more cost-effective for several reasons. First, litigation costs in Chinese courts are generally lower than in many foreign jurisdictions. Second, by avoiding the need for translation and embassy notarization of evidence, companies can save on additional legal expenses. Lastly, resolving disputes within China eliminates the need for engaging in complex and costly enforcement proceedings in the future.

5. Impartiality

Chinese courts are familiar with local business practices, regulations, and legal norms, and actually can be quite impartial to foreign companies in major cities. Long gone are the days when there was any local bias to local companies and courts could be easily influenced.? In fact, many courts are incentivized with internal KPIs to handle foreign cases in a completely objective manner.?

6. Practical Considerations for Foreign Companies

For foreign companies engaging in business with Chinese counterparts, selecting Chinese courts for dispute resolution aligns with practical realities. You can also show a willingness to engage with Chinese legal frameworks, helping build goodwill and trust in business relationships. More directly, it reduces the risk of facing unenforceable judgments and the associated financial and reputational costs.

Conclusion

When it comes to small claim amounts, such as those under $200,000, involving foreign and Chinese companies, the practical choice is often to have dispute resolution handled by Chinese courts. The challenges of enforcing foreign judgments in China, the benefits of having evidence in Chinese, cost considerations, and the expertise of local courts make this approach simply more practical. This strategy is especially critical when the Chinese company has no significant assets outside of China, as a judgment from a Chinese court is essential to access those assets. By preparing in advance and choosing the right forum for dispute resolution, foreign companies can protect their interests and ensure that legal outcomes are enforceable and effective.