China question: How do I initiate litigation for a breach of contract?
December 06, 2011 | BY
clpstaff &clp articles &Two dispute resolution specialists offer their insights on how to handle bringing a Chinese manufacturer to court and how to avoid a similar situation in the future.
I have had a terrible experience dealing with a Chinese manufacturing supplier. Even though we had signed a contract stipulating all the details, the products I ordered were very late and of a substandard quality to the samples I had confirmed. This isn't even my main issue – I only received 70% of the products I had ordered and paid for. The company is refusing to produce the remaining quantity because it claims the materials cost had increased, so my payment only covered 70% of the initial order number. I want to initiate court action against this Chinese company, but have heard that the PRC courts are biased against foreign parties.
How do I bring this unscrupulous supplier to court, receive a fair hearing and avoid a similar situation in the future?
The domestic perspective
First of all, be calm and do not assume that the Chinese courts will be biased against foreigners. According to research by the World Bank, China is ranked as the top 19th country in terms of enforcing contracts (please see http://doingbusiness.org/rankings). You need to pick a good Chinese lawyer to represent you in court. This is easier said than done. Litigation in China, just like in any other country, is not a mechanical process. Rather, its outcome is very much shaped by a lawyer's skills. In choosing lawyers, you should focus on how much courtroom experience he or she has in general and in that particular jurisdiction. A fair hearing is only possible when you have a lawyer who is competent, well-connected and well-established in the legal community so much so that any judge would think twice if he/she ever considers being unfair to his/her client. In China, lower courts pay a great deal of attention to higher courts because being overruled by a higher court will have a direct and almost immediate negative impact on the lower judge's career. If you want to win your case, you and your lawyer need to strategise not only how to win at the trial court level, but also proactively plan your potential appellate battles.
Running into an unscrupulous supplier is rarely just bad luck. More often than not, it reflects that your company does not have in place a system of controlling contractual risks. In doing cross -border business, in particular you need to be carefully screening other parties be they clients or vendors, because the cost of dispute resolution in international settings is very high. China is an extremely competitive society. Just look at any train station - passengers tend to rush instead of walk, even when they hold tickets with guaranteed seats. Why? Because they have been conditioned to step up to compete for resources that have traditionally been scarce. As such, any Chinese business person who sits across the table from you is a battle-hardened person. You must really look beyond the surface in making a decision on whether and how to do business with a Chinese business person. If you only look at prices, delivery time, quality and quantity without understanding the propensities of the other person, you are taking a business risk. A good lawyer in China, like in developed countries such as the US and the UK, should be a good counselor whose experience and wisdom in evaluating people is his or her biggest asset to a business person who deals with China.
Frank Hong
Partner
Long An Law Firm
The international perspective
At the outset, it appears you have a potential claim for breach of contract. Under Chinese law, you may file a lawsuit either at the court located in the Chinese supplier's place of domicile or where the contract is performed. For sales contracts, the place of performance is deemed to be either (i) the place specified in the contract as the place of delivery of goods, or (ii) if the place of delivery is not specified, the place where the goods were actually delivered. To minimise the risk that the court may be influenced to protect the interests of the supplier, you should avoid filing your claims before the court located in the supplier's place of domicile.
Further, given that you are a foreign party, your dispute with the Chinese supplier will be regarded as a “foreign-related” dispute. At first instance, “foreign-related” cases will be heard by the courts at the intermediate level, rather than the basic level courts (which are lower in the judicial hierarchy). Intermediate courts are generally more experienced and sophisticated in handling disputes. In China, litigants have the opportunity to appeal a judgment only once. In other words, the second instance judgment becomes the final judgment. If you disagree with the first instance judgment, you must appeal in time to the next level courts (higher courts). A foreign party without domicile in mainland China has 30 days to file an appeal (whereas a domestic party only has 15 days).
In general, a party alleging breach bears the burden of proving its case. You must therefore provide evidence to show the supplier's breach as well as the actual losses you have sustained. Judges have a strong preference for documentary evidence over witness testimony, so you should be able to present documentary evidence to prove relevant facts. Evidence created abroad should also be properly notarised and consularised.
Note that there is no time limit within which hearing of a “foreign-related” case must be completed. In the interim, you may wish to apply for a court order to preserve any evidence in the hands of your opponent or to preserve any of its property pending final resolution of the suit. This is to minimise any risk that the supplier may seek to destroy evidence or dissipate its assets to avoid enforcement of any final judgment.
To avoid a similar situation happening in the future, we recommend that you:
- Conduct proper due diligence of the parties with whom you wish to conduct business.
-Make payment through a letter of credit rather than direct remittance in advance of the delivery of goods.
-Agree in your future contracts that any disputes be submitted to arbitration instead of court litigation in mainland China. By this agreement, a privately constituted tribunal will make a final and binding decision by way of an arbitral award. In this regard, the parties can choose their own arbitrators and select a neutral venue (which can be outside of mainland China) in which to conduct the arbitration. Foreign arbitral awards are easily enforceable in China under an international treaty to which China is a party, commonly known as the New York Convention. Alternatively, you may agree in your contracts to submit any dispute to the exclusive jurisdiction of the Hong Kong courts. Monetary judgments made by Hong Kong courts are enforceable in mainland China under a mutual enforcement arrangement between Hong Kong and the mainland.
Friven Yeoh
Partner
O'Melveny & Myers
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