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Litigating in China

by Dan Harris in 'China Law Blog'

The China Daily recently did an article, entitled, “Business lawsuits in sharp increase,” on how lawsuits involving foreign companies are up ten percent in the last year. The article ascribes this increase in litigation to more foreign companies coming into China and to the economic downturn. Both of those things may be true but I also think that the increase is due in part to companies getting more comfortable with the fact that it is possible to come out ahead on Chinese litigation.

I am tired of hearing people (including lawyers) tell me that there is no point to litigating in China because it will be so expensive and “they have no laws there anyway.” Wrong. And Wrong. Litigating in China is typically costs less than litigating in the United States and China does have laws. Mind you though, the laws and the judicial decision-making will be different.

Let me explain.

On the most basic level, the decision to litigate in China is really no different than the decision to litigate anywhere else. Is it worth spending approximately X dollars to pursue a lawsuit in which you have a Y percent chance to win and likely collect Z dollars? The answer will depend on the X, Y and Z variables and it is those that I am going to analyze in this post.

The X Variable. Litigation Costs.

Litigating in China is quite different from litigating in the United States. Under China’s civil law system, a plaintiff generally must have the evidence it needs to prevail before it files suit. This is the case because it is rare to be able to get evidence from the defendant through American-style discovery. This means that you will not have to pay the massive costs of American-style discovery and this also means that your case likely will go to trial much faster than if it were in the United States.

One thing I have found though is that once you sue a Chinese defendant, the chances of them settling are quite low. I have heard many explanations for this but I will save those for another day. Suffice it to say though that you should not sue a Chinese company in China unless you are prepared to take your case all the way through trial.

Chinese courts typically require that documents generated outside China be notarized and then authenticated/appostilled by the Chinese embassy or consulate. Securing an appostille on documents is not terribly difficult for those who have done it before, but it can slow things down a bit and also can raise costs if there are a lot of documents requiring this.

Foreign lawyers and foreign law firms cannot litigate in Chinese courts. There are plenty of excellent Chinese litigators but if you are going to require your lawyer be both excellent and fluent in English, you almost certainly will need to pay considerably more.

One of the biggest unexpected costs of litigating in China is the court fees, which you should figure will run you at least 2.5% of the amount of your claim. American litigants tend not to be aware of fees like this and this causes them to get into trouble. I once helped represent an Americna defendant in a Korean case (Korea too requires the plaintiff to pay a portion of its claim as a litigation fee) where the American plaintiff (in an American lawyer kind of move) asked for something like $30 million dollars even though its chances of getting anything more than $2 to $3 million were pretty much zero. I cannot remember any fee numbers but what I do remember is that the $30 million sought by the plaintiff required it pay a large amount in fees and that led to the plaintiff’s American law firm firing the Korean law firm for not having explained how all of this works.

If you are the plaintiff in a China case, you may also want to spend money to try to freeze (or preserve) the defendant’s assets to prevent the defendant from dissipating them to prevent you from collecting on any judgment you might get. Securing a preservation order typically requires a large deposit, generally based on the amount you are seeking to freeze. It is sometimes possible to use a bonding company for the deposit.

Very generally speaking, the prevailing party in China gets much of its costs back but none of its attorneys’ fees.

The Y Variable. Chance of Winning.

It is very difficult to speak generally about the chances of prevailing in a Chinese lawsuit so I will keep this section mercifully brief by commenting on three things that I have noted about Chinese courts.

One, they tend to base their decisions less on the law and more on the equity than do US courts. This is not necessarily good or bad, but it is something you should fully understand before bringing a lawsuit in China. If you are suing a Chinese company that said it would pay you a million dollars and then it did not, you will probably win. If you are suing a Chinese company that said it would do A but then was unable to do A because the price of doing so tripled and if it had done A it would have meant having to terminate 100 employees to cut costs, your chances of prevailing just went down.

Two, politics and corruption are typically going to be less of a factor than you think, particularly in places like Beijing and Shanghai. Your $1 million contract dispute is just not going to draw any political attention unless there is something very unusual about your case.

Three, your case is going to depend on the documents way more than on testimony.

The Z Variable. Amount You Are Likely to Collect.

Again, it is difficult to generalize here, but there is one thing that bears mentioning. Chinese courts are far less comfortable issuing large verdicts than American courts and this is particularly true when it comes to lost profits.

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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