Litigation In China: Ten Things You Must Know

Wednesday, October 1, 2008 - 00:00

In 2007, China's GDP grew at the rapid rate of 11.9 percent; the forecast for 2008 is a solid 9.8 percent.1 Along with this fast-paced economic growth comes a continued increase in the volume of business opportunities and of lawsuits. China already is an active and expanding litigation jurisdiction, including one of the most active patent litigation dockets in the world.2 China is focused on reforming its legal system to keep up with this increasing caseload, but its litigation system remains imperfect. This article explains some of the most important things to know about litigating in China.

Procedural Considerations

China has four levels of courts: (1) basic courts in each county, (2) intermediate courts in each prefecture, (3) higher courts in each province, and (4) the national Supreme People's Court. Most civil matters with international components may be brought directly to an intermediate court, and if certain jurisdictional thresholds are met can even be brought directly to a provincial higher court.

Judges in the intermediate and higher courts, especially in first-tier cities and provinces, tend to have more experience in international litigation and may be further removed from the protectionist influence of local governments. Some judges, especially at lower levels and in less developed regions, lack the education needed to grasp the more nuanced issues in complex international litigation. The major intermediate courts have specialized divisions and sometimes special panels for foreign-related cases.

Only Chinese nationals working for Chinese law firms may appear in court. Thus, it is essential to find an advocate who can communicate effectively in both Chinese and the language of the foreign party. In many cases, international law firms operating in China play an important role in coordinating and overseeing such litigation on behalf of their foreign clients.

Unlike the U.S. adversarial system, the Chinese legal system and courts were greatly influenced by the German civil code. Courts in China play a more inquisitorial role in litigation, and often will attempt to steer parties toward an amicable resolution.

Jurisdictional Considerations

Territorial jurisdiction determines venue, personal jurisdiction and jurisdiction over property, and typically is determined by factors including domicile, place of business, place of alleged injury or conduct, location of property and consent of the parties. A plaintiff must have certain contacts with a local forum in order to bring a case in its courts.

Once sued in a Chinese court, the failure to object to jurisdiction - which usually must occur within 30 days for foreign companies and 15 for local subsidiaries - will constitute consent to its jurisdiction.

Chinese courts generally apply a two-year statute of limitations running from when the plaintiff knew, or should have known, that his rights were infringed.

Unpredictability In The Civil Law Legal System

The Chinese legal system is largely based in the civil law tradition. Unlike the U.S. common law system, in Chinese courts judicial decisions are not legally binding on other courts. This lack of precedential authority leads to uncertainty and unpredictability. The Supreme People's Court periodically issues judicial interpretations regarding the application of certain laws that are treated as formally binding and are relied upon in court judgments.

Chinese legal reformers have noted the problem of unpredictability and pushed to publish more judicial decisions to assist judges facing difficult issues of law. This practice is becoming more widespread with increased access to the internet.

The possibility of government interference in legal affairs also adds to the apparent unpredicability. Unlike the U.S. system of governance, where the various branches of the government are separate, Chinese courts are not entirely independent.

Potential For Local Protectionism And Influence

As is common in civil law countries, Chinese judges decide all matters of fact and law. The judges are appointed by their local congress and paid by their local government council. They do not have life tenure, and their employment can be revoked by the congress at any time. Thus, there is a concern that judges may follow advice given to them by local government leaders, rather than exercising their own independent legal analysis. On the other hand, the courts often have incentives and pressure to be especially careful when handling high-profile foreign-related cases.

Local interests may play an important role in disputes, sometimes making it difficult to win or enforce judgments against local parties, especially large state-owned enterprises.

China has relatively low education requirements for judges. Many older judges lack formal legal training and may have difficulty handling complex matters, although standards have been rising dramatically in recent years. In 2002, for example, the government implemented new education requirements for judges, requiring a university degree, creating a more rigorous judicial examination and requiring training for senior judges.

For this reason, it may be wise for U.S. companies to avoid some lower courts in China, especially in more distant cities where there are fewer opportunities for judges to obtain legal education or sophisticated experience. When faced with less sophisticated judges, parties must tailor their presentation accordingly.

Discovery And Evidence

Discovery generally is not available in Chinese courts, although courts have the power to order the preservation of evidence. Thus, parties must generally find and submit their own evidence to meet their burdens of proof.

The timeline for evidence submission is highly abbreviated. After any jurisdictional objection is resolved, parties must prepare and exchange evidence and attend an evidentiary hearing, usually between 30 and 60 days after service of the complaint. Typically, no new evidence will be allowed after that stage, although parties sometimes receive extensions. This timing leaves a very small window to gather evidence and places a premium on early preparation as plaintiff and fast action to collect evidence as defendant. Witness testimony is not common in Chinese courts. Most cases depend upon original written evidence (and in some cases court-appointed independent experts). Notarization and legalization requirements are stictly enforced, making the time window even shorter if evidence must be brought from outside China.

Damages

Damages are very low in China compared to the U.S., although they have been increasing. The cost of litigation also usually is lower since litigation in China is a relatively fast process with few documents and no discovery. However, costs can be front-loaded given the evidence timeline mentioned above.

Enforcing Domestic Judgments

Enforcing domestic judgments in China can be difficult at times. Local law enforcement agencies may exhibit bias against foreign parties and strictly follow procedural formalities, making it difficult to enforce injunctions, seize assets or obtain specific performance. Once a judgment is issued, the losing party will often move assets out of the region, beyond the reach of local law enforcement agencies. Combined with the country's lack of credit-checking and asset-tracking systems, these problems make reaching a party's assets challenging. However, plaintiffs can request the trial court to order property preservation measures with provision of appropriate security.

While this issue is difficult to overcome, parties can try to bring suit in a higher court, where judgment will have broader reach and local bias may be less pronounced. The Chinese government also stresses the importance of mediation, including as a means to obtain relief without fighting to enforce judgments.

Enforcing Foreign Judgments

To enforce a foreign judgment, a judgment creditor must bring a petition for recognition and enforcement. This will be reviewed by the intermediate people's court in light of any relevant international treaties, Chinese law and the principle of reciprocity. Successful enforcement of foreign judgments is rare in practice absent an applicable bilateral treaty. There is no such treaty between the U.S. and China, and U.S. judgments generally cannot be enforced in China.

Conflicts Of Law

There is no unified conflicts of law legislation in China, but the Supreme People's Court has recently issued interpretations to help clarify when lower courts should apply foreign law and how the courts are to determine the meaning of foreign law. The test set forth by the SPC most closely resembles the American "closest relationship" test. Once a court determines which law applies, the court has several means to determine the substantive law. It is important to note, however, that if a Chinese court cannot interpret applicable foreign law, then it will turn to Chinese law.

Arbitration As An Alternative to Litigation

To be valid under Chinese law, an arbitration agreement must be in writing and include an express and a clear intention to submit the dispute to arbitration, the scope of the matters to be submitted, and a specific arbitration commission. It is important to specify the language, governing law, and location of the seat of arbitration in the written agreement. The leading Chinese arbitration commission with the most experience arbitrating international cases is CIETAC.

Ad hoc arbitration is not permissible under Chinese law. If such arbitration is to take place in China, then the arbitration clause will be deemed void. It is unclear whether an award from an ad hoc arbitration tribunal outside of China will be enforced by Chinese courts.

In China, unlike in many other jurisdictions where the existence of a valid arbitration clause is decided by the arbitral panel, the validity of an arbitration clause can be referred to a court. This permits more court interference in arbitration proceedings and may cause delays in arbitration proceedings. As in litigation, mediation often is encouraged in arbitration, and discovery generally is not available.

Applications for enforcement of foreign arbitral awards must be filed within six months from the date the award was issued if both parties are legal entities or organizations, and within one year if either party is an individual. China is party to the New York Convention on enforcement of international arbitration agreements and awards, so Chinese courts generally cannot refuse to enforce foreign arbitral awards. (They have more leeway to review and decline to enforce domestic arbitral awards.) Nevertheless, some inherent bias against foreign awards may apply, and enforcement may be difficult as a practical matter. Thus, parties doing business with Chinese entities may desire a guaranty or other form of security that can be enforced against a non-Chinese party in a non-Chinese jurisdiction. 1 World Bank Quarterly Update, June 2008, The World Bank Office, Beijing.

2 Current Challenges and Future Prospects in Engaging China on Intellectual Property Rights Protection. Mark A. Cohen, Senior IPR Attache, US Embassy Beijing. November 27, 2007.

Steven C. Bennett is a Partner in the New York City offices of Jones Day, practicing in the field of commercial and international litigation. The author wishes to thank his colleagues in Beijing and Shanghai for their comments on drafts of this article. The views expressed, however, are solely those of the author, and should not be attributed to the author's firm or its clients.

Please email the author at sbennett@jonesday.com with questions about this article.