The China Laws Series . 17 March 2023
Introduction
Contract Law in China has undergone significant changes in recent years, and China's legal system can be complex and challenging for those who are new to it. Enforcing contractual rights is an important area of concern for businesses operating in China, and there are several considerations that businesses should take into account when entering into contracts and seeking to enforce their rights through the courts.
But Why?
Foreign companies that do business in China can face a number of legal challenges, including disputes with Chinese companies. We can have a look at some common reasons why foreign companies may want to sue Chinese companies (together with some examples) :
Breach of Contract : Breach of contract is one of the most common reasons for legal disputes between foreign and Chinese companies. This can include disputes over payment terms, delivery schedules, quality of goods or services, and other issues related to the terms of a contractual agreement. For example, in 2018, South Korean electronics company LG Display sued Chinese rival BOE Technology Group, alleging that BOE breached a contract by stealing LG's OLED technology.
Intellectual Property Infringement : Another common issue that is prevalent for legal disputes between foreign and Chinese companies is intellectual property infringement. This can include cases of patent, trademark, or copyright infringement, as well as trade secret theft. For example, in 2018, South Korean electronics company LG Display sued Chinese rival BOE Technology Group, alleging that BOE breached a contract by stealing LG's OLED technology.
Counterfeiting : Counterfeit goods are also problematic forcing the owners ie. foreign companies to take legal action against Chinese companies involved in the production or distribution of counterfeit goods of its products. Counterfeiting can include not only products, but also packaging, labels, and other components of a product. This can be look at as recently as in 2019, where French luxury goods company Chanel sued a Chinese online retailer for selling counterfeit Chanel products.
Corporate Governance and Compliance : Foreign companies operating in China may also face legal issues related to corporate governance and compliance, including issues related to bribery, corruption, and other illegal practices. In some cases, foreign companies may choose to take legal action against Chinese companies or individuals involved in such practices.For example, in 2016, Chinese authorities arrested several executives of British drugmaker GlaxoSmithKline on charges of bribery and corruption.
Understanding China's Contract Law
China's Contract Law was first enacted in 1999 and was subsequently revised in 2018. The revised law introduced several important changes, including provisions relating to online contracts and e-commerce transactions.
Under China's Contract Law, a contract is a legally binding agreement between two or more parties that defines their respective rights and obligations. In determining the validity of a contract, the court will consider factors such as whether the contract was entered into voluntarily, whether the parties acted in good faith, and whether the terms of the contract are clear and unambiguous.
Drafting a Strong Contract
To ensure that a contract is enforceable in the Chinese courts, it is important to draft a strong contract that is clear, comprehensive and tailored to the specific needs of the parties involved. Key elements of a strong contract include a clear statement of the parties' rights and obligations, a detailed description of the goods or services being provided, and provisions relating to breach and remedies.
It is also important to keep in mind that China's legal system is influenced by Confucian principles, such as the importance of relationships and social harmony. It is therefore advisable to include provisions in the contract that support maintaining good business relationships, such as the use of mediation or arbitration in case of disputes.
Enforcing Your Contractual Rights
If a party breaches a contract, the first step is usually to try to negotiate a settlement. If a settlement cannot be reached, the next step is to initiate legal proceedings.
In China, contracts can be enforced through either the People's Court system or via arbitration. If the contract stipulates that disputes should be resolved by arbitration, then the parties should go through the arbitration process before bringing the matter to court.
When bringing a case to China courts, it is important to have a clear understanding of the legal process and to work with experienced legal counsel. The parties will need to submit evidence to the court, including the relevant contract and any other relevant documents. The court may also request any additional evidence it deems necessary.
Challenges Faced
In all litigious affairs, businesses should take into consideration several risk mitigating steps by being aware that there are several potential challenges and risks that businesses should be aware of when seeking to enforce their contractual rights usually including the following:
Language and Cultural Barriers
One of the most common challenges faced by businesses seeking to enforce their contractual rights in China is the language and cultural barrier. Chinese legal documents are usually written in Chinese, and court proceedings are conducted in Chinese. This can present difficulties for foreign parties who may not be fluent in the language, and who may not be familiar with China's legal culture and traditions.
To address these challenges, it is advisable to work with lawyers and translators who are fluent in both Chinese and the relevant foreign language. This will ensure clear and accurate communication between all parties and help to avoid misunderstandings or errors.
Lengthy and Complex Court Proceedings
Legal proceedings in China can be lengthy and complex, and may involve multiple stages and appeals. This can be frustrating for foreign parties who may be used to a more streamlined and efficient legal system.
To mitigate these risks, it is important to have a clear understanding of the legal process and the specific requirements of the court in which the case is being heard. It is also important to work with experienced legal counsel who can guide the parties through the process and help to navigate any potential obstacles.
Lack of Transparency and Predictability
Another challenge faced by businesses seeking to enforce their contractual rights in China courts is the lack of transparency and predictability in the legal system. Court decisions in China are often made on a case-by-case basis, and there may be a lack of consistency in the application of the law.
To address these challenges, it is important to work with experienced local counsel who are familiar with the specific court in which the case will be heard, as well as the applicable law and recent judicial developments. This will help to ensure that the case is presented in a way that maximizes the chances of success and that any potential risks or challenges are identified and addressed.
Political Considerations
Finally, businesses seeking to enforce their contractual rights in China courts should be aware of the potential political considerations that may come into play. China's legal system is closely linked to the government, and court decisions may be influenced by political factors.
To mitigate these risks, it is important to ensure that the case is presented in a way that focuses on the legal merits and is not overly politicized.
Advantages and Disadvantages
Nonetheless, filing a contentious civil suit in the Chinese courts can still be an arduous process and experience. Here, we will present some of the advantages and disadvantages of taking legal action in China, as well as the enforcement of judgments.
Advantages:
Legal Process Familiarity: Chinese companies are familiar with the legal process in China and understand the rules and regulations governing business practices in the country. This means they may be better equipped to defend themselves against legal claims brought by foreign entities. This can potentially result in a fairer trial for both parties.
Cost-Effective: Legal fees in China may be lower compared to other countries, particularly those in Western Europe and North America. This makes suing a Chinese company in China more cost-effective for businesses.
Enforceability of Rulings: If a plaintiff wins a lawsuit against a Chinese company in China, the ruling may be more easily enforced in China since the court is situated in the same jurisdiction as the defendant company. This can potentially result in a more effective legal remedy.
Disadvantages:
Lack of Transparency: The Chinese legal system does not have the same transparency as other legal systems, and there is a perceived lack of independence of the Chinese judiciary. This lack of transparency can lead to a lack of impartiality in court proceedings, particularly if the defendant is a local Chinese company. This means that the court may be biased towards local Chinese companies over foreign entities.
Language and Cultural Barrier: Chinese law is complex, and court proceedings in China may be conducted in Chinese only. This can put foreign companies that do not have Chinese-speaking lawyers at a disadvantage, particularly if they need to present their case in a language they are not familiar with. Additionally, there may be cultural barriers that can impact how evidence is presented and perceived in a Chinese court.
Lengthy Process: Suing a Chinese company in China can often be a lengthy process, and the trial and the decision can take several years to be concluded. This means that businesses may have to wait a long time before receiving any legal remedy or resolution of their dispute. This can be frustrating for the plaintiff, especially if they are a foreign entity trying to navigate a foreign legal system.
Limited Legal Tools: The Chinese legal system does not have the same range of legal tools and remedies available as other legal systems. For example, there is no class-action litigation or punitive damages in China. This means that plaintiff businesses may be limited in the types of legal remedies they can pursue.
Enforcement of Judgments:
Even if the plaintiff is successful in their lawsuit against a Chinese company in China, there are still challenges to enforcing the judgment. For example, there may be language barriers, difficulties in serving legal documents, and the need to navigate a complex legal system. Additionally, there may be differences in legal frameworks between China and the plaintiff's home country, which can make enforcement of judgments more difficult.
To enforce a foreign judgment in China, the plaintiff must go through a separate enforcement process. This process involves obtaining an enforcement order from a Chinese court, which requires the plaintiff to provide evidence of the foreign judgment, evidence of the foreign court's jurisdiction, and the legal basis for the foreign judgment. Once the enforcement order is obtained, the plaintiff must then initiate a separate enforcement action.
Conclusion
In conclusion, while it may be advantageous in some cases for businesses to sue a Chinese company in China due to the familiarity of the legal process and potential cost savings, there are also significant disadvantages to consider, such as the lack of transparency and cultural and language barriers. Additionally, enforcement of judgments can be challenging due to differences in legal frameworks and the need for a separate enforcement process. As with any legal decision, it is important for businesses to carefully consider the potential risks and benefits before taking legal action.
The China Laws Series in our ongoing weekly series published every Friday to talk about the different laws in the China concerning businesses, foreign investments and the related laws and regulations promulgated to provide a helpful and reliable guide whether you are seeking to be employed in the China or doing business in the PRC. This is not intended to substitute a qualified PRC's lawyer or legal consultant's legal advice. Our legal partners in the PRC are ready on hand to assist you in all of your enquiries and needs. You can email me at brentyap@vikneshyap.com to know more.