Local Protectionism a Sword Rather than a Shield

Foreign investors are all too familiar with local protectionism in China. In particular, they are well aware that it is often difficult to enforce court judgments and arbitral awards because local governments and courts protect local parties. In such cases, local protectionism serves as a shield to protect the local company.

Yet local protectionism may also serve as a sword.  The biggest obstacle to enforcement is the insolvency of the party against which enforcement is sought. Naturally, companies that win a large judgment will be frustrated if they are not able to enforce the judgment because the losing party is insolvent or because it is protected by the local government or courts. In some cases, the winning company will need the money from the judgment to survive or to take advantage of fleeting market opportunities. In such cases, winning companies will frequently beseech their local government and courts to assist in compulsory enforcement. Under tremendous pressure to aid their own local companies, local governments will pressure local courts to take enforcement measures, including seizure of the assets of third parties usually located outside the region, in flagrant violation of PRC laws and regulations and the rights of such parties.

Two Illustrative Cases