Litigation in China

Welcome to another issue of the?China Tech Law Newsletter.?We’ve been talking a lot about what kind of license and what kind of corporate structure a technology business might need to operate here in China.?We have also talked a bit about licensing agreements and other contracts.?The elephant that is often in the room on any discussion of doing a tech or any kind of business in China is enforceability?of contracts.?So let’s get into that here at a broader level.?

For sure, it takes effort to enforce contracts in general in China.?You can say the same thing about a lot of other high growth economies as well. But without a doubt, the decision to initiate a lawsuit (or arbitration case) as a foreign party is made only when other options are not on the table.

For cross-border trade, licensing, or investment contracts between a Chinese and foreign counter-party, the key is to have the contract properly drafted with enforcement scenarios top of mind?WHEN DRAFTING THE CONTRACT, not later on. Clients often come in saying they have an ironclad, simple case.?It's our job then to start managing expectations...?

Right off the bat, when we explain the enforceability (or lack thereof) of the dispute resolution clause and/or the process and cost of submitting foreign-sourced evidence in China, suddenly smaller claims?may not be worth the effort. That’s true anywhere, but especially for a cross-border dispute with a Chinese company.?The threat of bringing a legal action can often feel like a game of chicken or perhaps poker to see if a party goes all in on filing a lawsuit.? But leading up to that point, even if you ultimately will not bring a suit, the arguments you have in your favor with citation to the contract and the law will always?help you in potential settlement discussions.?

Now, let’s go back to the beginning of signing the contract and how you got to that point of go/no-go on filing a case.?If you have an agreement in place but you do not have any specific language in the contract where a dispute between the parties must take place, then by default you would sue the other party where there is as a nexus to the contract. For example,?a US company?suing in a US court. You could also try to sue them in mainland China or sometimes, say if you are dealing with a Hong Kong trading company sourcing from mainland China, in Hong Kong.

For any sophisticated transaction, however, a?proper dispute resolution clause will be included and?instead say (1) how the dispute must be resolved - by litigation, by arbitration, etc., (2) and where the proceedings must take place. This will generally be the sole method to enforce the contract.?

Important side note especially for tech contracts - under Chinese law you can always bring an injunction in court in China for a breach of confidentiality or to stop an ongoing IP infringement.?Even if the dispute resolution clause talks only of arbitration to resolve disputes.

If you bring the case in a US court, you may find it easier to get a judgment either on the merits or by default, especially if the Chinese party doesn't?show up to?dispute your claim. But then you have to actually enforce that judgment,?and enforcing that judgment means you have to find assets to attach to that judgment.??More on that in Part 2 of this post in 2 weeks.

There are (in theory) options where if that company has any assets, even money sitting in a bank account outside of China, you could go after those assets. One of the key obstacles for US to China claims in particular is that there is no treaty recognizing enforcement of foreign court judgments. You might have a judgment in the US for a lawsuit, but there is no obligation for courts in China to respect that judgment and usually they will not.

Arbitration is different. China is a party to the New York Convention on the Recognition and Enforcement of Arbitration Awards. And so if you do have an arbitration award anywhere (even in the U.S.), Chinese courts are obligated to enforce that arbitration award in China. Getting it done is still a logistical challenge though.

You can potentially,?as a third option,?have your US judgement enforced in a third country if that country has a treaty with the U.S. and the other party has significant assets there.

A better strategy of course is to properly draft a dispute resolution clause in the original contract that will be easier to enforce in practice, rather than instinctively?falling back to your home country. In fact, because of the difficulty of enforcing judgments and even arbitration awards in China, more and more foreign companies are agreeing to dispute resolution clauses with dispute resolution required in China.

If the company is located in a major city like Beijing, Shanghai, Shenzhen, or Guangzhou, you could consider opting for Chinese courts. If your Chinese counterpart is in a smaller city, consider arbitration in one of those major cities above instead. An arbitration panel from a place like the China International Economic and Trade Arbitration Commission (CIETAC)?is going to be pretty impartial.

If you don't have a company presence here, you will need to appoint someone through a power of attorney to bring an action?in court?on your behalf in the local Chinese court. This will save you the trip from coming over here to China (difficult?if not impossible?these days anyway).

If we are dealing for example with a case of faulty products, as we saw in some of the height of PPE manufacturing, you would need the evidence of a faulty product to be clearly tested, testing unsealed product and then have those results show that what you purchased does not conform to what the specifications are in the contract.??Similar logic would apply for technology and other products.

Of course many of these specifications (especially talking about the early days of PPE buying) are not clearly set out in the contract in the first place. Assuming you get past that hurdle, your next step is then to have that testing or what other evidence you have put into Chinese and notarized by a Chinese Embassy or consulate in the U.S., so that then it can be used in a court of law here in China. So these processes take time - the costs add up to do each of these steps and still you are left in a situation where you are on unfavorable turf in a court here in China.

You can definitely help your cause by having dispute resolution with enforcement in China, and governed by Chinese law. Have the contract in Chinese in addition to English to reduce any sympathy from the court for the Chinese party not understanding what it was agreeing to. Have a clear descriptions of the goods, the payment method, and basic representations and warranties as to the quality of the product stated clearly with remedies for breach stated unambiguously as well.

Okay, I'm going to wrap up Part 1 of a two-part post here.?For Part 2 in two weeks we’ll get into one of the most important issues in resolving contract disputes - whether you can claim lost profits and other consequential damages, as well as some experience from a friend of mine in the US helping Chinese companies defend themselves in the US.?

Stay tuned, and remember if you haven’t already subscribed to this China Tech Law Newsletter, please do.?Also don’t be a stranger, and if you want to reach out to connect with me here on Linkedin please do.?Linkedin makes me switch my profile default to “Followers” instead of “Connections” in order to publish a newsletter like this on Creator Mode.?If you want to connect just look at “More” options.