Bloomberg Law Reports - Suing Chinese Companies: The New Wave
Article by Dan Harris and Rebecca Carlson, Harris Moure PLLC
The rapid increase in business transactions between Chinese and American companies has been matched by a concomitant rise in legal disputes. Attorneys who have dealt with such litigation recognize a pervasive impediment to successful resolution: the daunting task of collecting on any judgments achieved. Chinese courts do not enforce U.S. judgments and they have only recently acquired the power to fully enforce their own domestic awards.
It is typically most effective, therefore, to sue a Chinese company in the United States, provided that the Chinese company has assets in the United States or in a country that recognizes U.S judgments. If the Chinese company has no such assets, suing in China may be the only choice.
This article will clarify the challenges of litigating against Chinese companies and will offer guidance in overcoming these challenges both in the United States and in China.
Jurisdiction is a fundamental issue in international legal disputes. Suing a Chinese company in the United States requires the typical contact inquiry involved in suing any foreign company. See Asahi Metal Industry Co. v. Superior Court of California, Solano Cty., 480 U.S. 102,(1987), Glencore Grain Rotterdam B.V. v. Sinvnath Rai Harnarain Co., 284 F.3d 1114 (9th Cir. 2002). An American company usually faces no jurisdictional bar to suing a Chinese company in Mainland China.1 However, it is important to research where the company is based: Hong Kong, Mainland China and Taiwan are different jurisdictions entirely.
Suing in the United States
If a U.S. court has jurisdiction over a Chinese company, litigating and winning against that company in a U.S. court is, with a few exceptions, comparable to suing any other company. The most notable differences typically arise in service of process, discovery, litigation strategy, and, if necessary to execute the judgment in China, enforcement.
Service of Process
China is party to the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters.2 Therefore, service on a Chinese company must fully comply with this Convention.
Service under the Hague Convention on Service is effected through the designated Chinese Central Authority in Beijing, which is the Bureau of International Judicial Assistance, Ministry of Justice of the People's Republic of China. The U.S. company must submit the following to the Ministry of Justice: (1) a completed United States Marshall Form USM‐ 94;3 (2) the original English version of the documents to be served (the summons must have the issuing court's seal); (3) the Chinese translation of all documents to be served;4 and (4) a photocopy of each of these documents. Note that because the USM‐94 will not be served, translation is not necessary. In addition to the documents, a payment of approximately US$100 by an international payment order must be sent with the service request, payable to the Supreme People's Court of the People's Republic of China.
The Ministry of Justice will then send the service documents to the appropriate local court, and that court will finally effect service. In the authors' experience, Chinese courts are often fairly slow to send out service. If the Chinese company being sued is a powerful local entity, the service may be even slower. However, repeatedly calling and emailing both the court itself and the Ministry of Justice can often expedite service. Service normally takes around one to three months.
Service on a Chinese company by mail is not effective and U.S. courts have held that China's formal objection to service by mail under Article 10(a) of the Convention is valid. See DeJames v. Magnificence Carriers, Inc.,654 F.2d 280 (3d Cir. 1981), cert. den., 454 U.S. 1085; Dr. Ing H.C. F. Porsche A.G.v. Superior Court, 123 Cal. App. 3d 755 (1981).
Once a U.S. company succeeds in serving a Chinese company in a U.S. lawsuit, discovery can begin. Because the Chinese company is now party to a U.S. lawsuit, it is technically bound by normal discovery rules. However, discovery in China can be difficult. Apart from the restrictions placed on discovery by the Chinese government, Chinese companies are not accustomed to U.S.‐style discovery, and they often consider compliance to be optional.
China prohibits even voluntary depositions from being taken on its soil. In its declaration on accession to the Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters,5 China stated it did not consider itself bound by Articles 16‐22 of the Convention, portions of which would grant consular officers the right to oversee depositions. In 1989, China permitted a limited deposition in the matter before the U.S. District Court for the Northern District of California. U.S. v. Leung Tak Lun, et al., 944 F.2d 642 (9th Cir. 1991). However, China advised the United States that the particular grant of authority for that deposition should not be regarded as a precedent. Indeed, there is no subsequent record of China permitting a deposition. At worst, conducting a deposition in China may lead to arrest, detention, or expulsion.6
Instead, the best way to depose a China‐based witness is for the witness to come to the United States. However, if the witness is unable or unwilling to do so, there are several additional options available. One common method is to fly the potential deponent to Hong Kong or to another neighboring country and conduct the deposition there, either in person or telephonically from the United States.7 Another possibility is to conduct a telephonic deposition of the witness in China. But because even a telephonic deposition technically occurs entirely within China,8 it almost certainly runs afoul of China's prohibition.
Under the Hague Convention on Evidence, China has agreed to allow some limited discovery of documents. Articles 1 and 2 of that Convention provide for document discovery by means of a Letter of Request issued by the court where the action is pending and transmitted to the "Central Authority" of the jurisdiction where the discovery is located. The Central Authority is then responsible for transmitting the request to the appropriate judicial body for a response. However, Article 23 permits a signatory country to "declare that it will not execute Letters of Request issued for the purpose of obtaining pre‐trial discovery of documents as known in Common Law countries."9 China has executed such a declaration and, therefore, document discovery for trial purposes is permissible. The "fishing expedition" discovery for which the United States has become known, however, is not.
Yet even for the document discovery authorized in China, it is unlikely that the Chinese Central Authority will instruct a Chinese court to compel production. The U.S. State Department made the following accurate summary of how China tends to respond to U.S. court document discovery requests:
While it is possible to request compulsion of evidence in China pursuant to a letter rogatory or letter of request (Hague Evidence Convention), such requests have not been particularly successful in the past. Requests may take more than a year to execute. It is not unusual for no reply to be received or after considerable time has elapsed, for Chinese authorities to request clarification from the American court with no indication that the request will eventually be executed.10
U.S. companies hold many advantages over Chinese companies in U.S. litigation. In today's political climate, American jurors generally view Chinese companies unfavorably. Moreover, Chinese companies' tendency to skirt American discovery rules, if brought to the court's attention, have the potential to cost the Chinese company valuable credibility.11 Finally, Chinese companies tend to underestimate the importance of U.S. trial court decisions in fact‐finding, often holding back until appeal:
Appeals in China are usually de novo, meaning that if a trial‐court judge disagrees with your version of the facts, you can make another attempt to tell your side of the story at the appellate level. But in the U.S., appeals courts take as a given the trial court's findings of fact and will hear only disputes about the trial judge's interpretation of legal questions. This means that in America you rarely get more than one chance to put forth your version of the facts, so you had better do it right the first time. In China the fight often begins only once a case hits the appeals court.12
Enforcing U.S. Judgments In China
U.S. judgments have virtually no value in China. Neither a treaty nor a reciprocal arrangement exists between China and the United States regarding the recognition or enforcement of judgments in civil matters. Chinese courts simply disregard U.S. judgments.
If the Chinese company has assets in the United States, or in another country that generally enforces U.S. judgments (such as the United Kingdom, Canada or South Korea), suing in a U.S. court is typically the best way to proceed. Otherwise, the judgment of a U.S. court is of little to no use.
Arbitration in the United States
China is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards,13 so its courts typically do enforce foreign arbitral awards from recognized arbitral bodies.
Suing in China
If suing a Chinese company in the United States does not make sense, pursuing litigation in China may. Though China's court system is very different from that to which American lawyers areaccustomed, it is more navigable than many American lawyers believe it to be. Foreign companies can and do regularly win cases against Chinese companies in Chinese courts. Before suing in a Chinese court, though, it is important to understand some basics about its court system.
First, though Chinese courts will enforce the law prescribed in a contract, their analysis will have Chinese characteristics. Chinese judges place more emphasis on the overall context and "fairness" of the case and much less upon legal technicalities than their American counterparts. For example, if a company executes a contractual obligation poorly because of an incompetent or uncaring employee, a U.S. court would almost certainly hold the company liable for all damages arising from the breach. A Chinese court, on the other hand, might limit damages, because a Chinese judge might consider it unfair to penalize a company for the incompetence of one employee.
Second, Chinese courts prohibit nearly all discovery. Companies suing in China without a strong case at the outset seldom prevail.
Third, Chinese courts base their rulings almost exclusively on documentary evidence as opposed to testimony.14
Fourth, settlement is very rare in Chinese business litigation matters. The cost of litigating is low, and once a complaint has been filed, Chinese culture is such that the company will lose face if it settles. In this regard, it is preferable to lose the case and to blame it on the judge than to settle and be viewed as having been at fault.
Fifth, Chinese courts rarely award high damages. Chinese companies generally operate at very low margins and Chinese courts are loath to avoid harming a functioning business or causing layoffs. In particular, Chinese judges are hesitant to award damages for lost profits or for pain and suffering. The damages available in U.S. courts are simply not awarded by Chinese courts.
Sixth, collectability on judgments in China is improving, but it is still not to the level of the United States.15 Chinese courts often lack the authority over and fail to receive the assistance from other law enforcement agencies necessary to force collection on their judgments. In addition, many Chinese companies find it more cost effective to simply avoid the judgment by shutting down and re‐opening under a new name.
Though suing Chinese companies in U.S. courts can be advantageous, it is not always possible and it does not always make sense. When suing in a U.S. court either cannot be done or does not make sense, it does make sense to weigh the option of suing in China. Suing and collecting from a Chinese company is typically not going to be easy as suing and collecting from a domestic company, but the chances of success against a Chinese company in both the United States and in China will usually warrant pursuing litigation in one country or the other.
Dan Harris is a founding member of Harris & Moure, a boutique international law firm with attorneys in Seattle, Washington, and in Qingdao, China. Dan is also an editor of the China Law Blog (www. chinalawblog.com). Email: firstname.lastname@example.org. Rebecca Carlson is an associate at Harris & Moure. Email: email@example.com. Dan and Rebecca focus on international litigation and arbitration.
1 Chinese courts have jurisdiction over international cases involving a foreign plaintiff against a Chinese company. Civil Procedure Law of the People's Republic of China, Articles 3 and 237.
2 See: http://www.hcch.net/upload/conventions/txt14en.pdf.
3 This form is available online at http://www.usmarshals.gov/forms/usm94.pdf.
4 Although China did not make a specific reservation regarding translations when it acceded to the Hague Convention on service, China's Central Authority has advised the U.S. Embassy in Beijing that documents to be served in China must be translated into Mandarin Chinese. Since it is China's Central Authority that effects service of process, the best approach is to comply with its requirements.
5 See: http://www.hcch.net/upload/conventions/txt20en.pdf
6 "China Judicial Assistance" by the U.S. Department of State. See: http://travel.state.gov/law/judicial/judicial_694.html.
7 Telephonic depositions require court approval
from the U.S. court under Federal Rule of Civil Procedure 30(b)(4).
9 See: n. 5, supra.
10 See: n. 6, supra.
11 For further discussion, see: Dan Harris, Chinese Companies Court Disaster, Wall Street Journal, August 18, 2010, available at: http://online.wsj.com/article/SB1000142405274870455410457543652398301107....
13 See: http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvent....
14 See: Margaret Y.K. Woo and Yaxin Wang, Civil Justice in China: An Empirical Study of Courts in Three Provinces, available at: http://www.law.wisc.edu/gls/documents/woo_and_wang.pdf.
15 See: Randall Peerenboom, Between Global Norms and Domestic Realities: Judicial Reforms in China, May, 08 2009, available at: http://ssrn.com/abstract=1401232.