Litigation in China for Foreign Investors

The People's Courts

Chinese courts rely on a legal system more akin to continental

Europe than the common law system of the UK, Canada, or the

United States, yet there are distinctively Chinese

characteristics. Get a good local lawyer before litigation in

China - only Chinese nationals working for mainland Chinese law

firms may appear in court.

Local Bias - Although there are a number of examples of foreign

investors prevailing in Chinese courts against state-owned

enterprises and other well-connected local parties, results

vary drastically with location (big cities being considered

among the safest bets for foreigners), and it is often

difficult for the foreign party to enforce favorable judgments.

Jurisdiction and Forum Shopping- Lower courts in China operate

on a regional basis, and the Supreme People's Court is the

court of last resort. Jurisdiction rules must be complied with

- a corporate defendant must usually be sued in the

jurisdiction where its headquarters are located.

Procedure

Some of the key features of the People's Courts include:

lGreat emphasis on formal documentation over witness testimony

lA lot of attention to the production of powers of attrney,

authenticated original documents, notarizations, and seals

lRelatively low-cost, high speed procedures, at least compared

with the glacial speed of litigation in the United States

lStrict limits on ability to compel the production of evidence

(discovery procedures), probably the greatest disadvantage of

litigating in China

lLenient treatment of perjury

lLack of emphasis on precedent - judicial precedent is not

binding in China, although higher courts do issue detailed

legal interpretations to guide lower courts

lLower damage awards - damages awards are low by US standards,

and it is more difficult to prove the amount of loss than in

Western countries

lDifficulty in enforcing injunctions, seizure of assets, and

specific performance - large bonds are often required before a

temporary restraining order will be issued.

Administrative action (bypassing the couret system) is often

available in cases or intellectual property infringement or

counterfeiting.

Appeals - Dissatisfied claimants ar usually entitled to one

appeal, whci is usually granted and executed speedily. However,

some judgments are effectively unappealable.

Enforcement

Domestic judgments can be difficult to enforce. Local

authorities may fail to assist the enforcement a judgment that

is seen as damaging to local economic interests. Furthermore,

the People's Courts have a reputation of being vulnerable to

the "Enron Effect" - they seldom bother to trace and seize

assets deliberately hidden by defndants through the use of

complicated corporate structures.

Foreign judgments are enforceable in theory but difficult to

execute. Enforcement is generally based on the principle of

reciprocity, meaning that China will only enforce judgments

originating from jurisdictions that enforce Chinese judgments.

However, since China is signatory to a number of relevant

bilateral enforcement treaties, the principle of reciprocity is

subordinated to treaty requirements. Of course the best way to

enforce a foreign judgment is to locate overseas assets of the

defendant in a jurisdiction willing to recognize the judgment

and seize assets.

Judgments from Taiwan, Hong Kong and Macau - Judgments from

Taiwan have long been enforceable on the mainland, and

judgments from Macau have been enforceable since April 2006, in

both cases subject to certain conditions. Nevertheless, expect

difficulties in actual practice. Surprisingly, judgments from

Hong Kong are currently unenforceable in the mainland except in

cases where the judgment was rendered pursuant to an exclusive

jurisdiction clause in a contract, and even this provision is

subject to exceptions.

International tribunals

Other alternatives for foreign investors include adjudication

by the World Trade Organization (WTO) or the International

Centre for Settlement of Investment Disputes (ICSID). Both of

these tribunals have serious drawbacks, however - the WTO

because foreign investors cannot sue directly (the plaintiff

must be a state), and ICSID because jurisdiction is based on

consent and unless you are Dutch, German or Finnish, your

country has not entered into a bilateral investment treaty with

China that would authorize ICSID jurisdiction (although this

situation may be about to change).

David Carnes is licensed to practice law in California. He speaks and reads Mandarin Chinese and has several years experience working with Chinese law firms and Sino-American joint ventures. Check out his website, Import From China [http://importfromchina.blogspot.com].

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