Litigation in China: A Long and Rocky Road

(By Dr. Wenbao Qiao) For foreign companies doing business in China, disputes and litigation may sometimes be inevitable. Once a dispute cannot be resolved out of court, there is a long and rocky road to the final success, with several important points to be considered for the planning and handling of litigation in China: 

Documents and Evidence 

The first step of each procedure is to collect and prepare all necessary documents and evidence. According to Chinese law, documents and evidence from another country (such as excerpts from the commercial register or powers of attorney) have to first be notarized in their country of origin and then certified by the Chinese Embassy or Consulate in the respective country. Only notarized and certified documents and evidence will be accepted by Chinese courts. While preparing the documents and evidence, attention should be paid to the timeline required for notarization and certification. There are several important statutory deadlines shown below. Failure to meet these deadlines can lead to the loss of a case. Notarization and certification in Germany usually takes two to three weeks, which in turn may play a critical role for the scheduling of time in preparation for trial.

One practical suggestion for the preparation of power of attorney is to issue it as the so-called “special power of attorney.” Such special powers include, for instance, the changing and withdrawing of any claims. Moreover, they entitle a party to make a settlement, put forward a counter-claim, and make an appeal. The title “Special power of attorney” should thus comprehensively describe the lawyer’s authorization in detail. However, where possible, the power of attorney ought not refer to one specific court. This avoids the need to re-issue the power of attorney if the dispute comes to appeal or to a new court due to jurisdictional problems. Furthermore, it is also advisable to make a notarized copy of the original excerpts from the commercial register and powers of attorney in China as a back-up, because some courts in China may also require separate power of attorney for the execution of a judgment.

Variation in Quality – Expert Reports 

A very common dispute point frequently encountered by foreign companies in China is the variation in the quality of goods, especially in cases resulting from international sales contracts. In disputes regarding quality of goods, it is common to obtain a neutral expert report. During a court proceeding, the parties to the dispute may jointly elect a neutral expert. If they fail to reach an agreement, the Court will appoint an expert for them. Foreign companies often decide to have an expert study carried out by an expert in their home country prior to court proceedings. However, it is uncertain whether such an expert report, even after notarization and certification, will be recognized by Chinese courts. In our practice, we have encountered a multitude of different attitudes of Chinese courts in regard to this evidentiary issue: in one case in Ningbo, the judge did not accept the expert report that we provided, and said that he did not know whether the expert had the qualifications necessary to meet the requirements under Chinese laws. In another case in Yangzhou, all three reports were accepted by the court as effective evidence and the issue of the qualification of the German experts was not mentioned at all.

Interim Injunction 

Another critical question for successful litigation is how one ensures the enforcement of law following the trial. An important legal instrument for this purpose is an interim injunction, which includes, for example, the freezing of bank accounts or attachment of assets. Usually, an interim injunction can be ordered by the court upon the application of a party (or ex officio, which in practice rarely happens due to potential liability on the part of the court) before or during the legal proceeding. The general precondition for an interim injunction is that, without such a measure, the enforcement of a future judgment may result in the judgment being impossible or considerably difficult to obtain. In cases in which the primary aim is the claiming of damages, we strongly recommend making an application for an interim injunction before filing the suit. When applying for an injunction, the applicant has to provide a deposit to the court, which serves as collateral for any potential damages caused by the interim injunction. Such securities may be provided, for instance, in the form of cash deposits, mortgages or letter of guarantee. The actual amount of a cash deposit differs from court to court. As a point of reference, courts in Shanghai usually require a cash deposit of 20-30% of the whole amount in dispute. A third-party guarantee letter is a viable option, especially in cases with a high dispute value, which may negatively affect the cash flow of the plaintiff. There are court-approved security firms which can provide the required guarantee letter to the court. Security firms in Shanghai usually charge 0.5%-2% of the amount guaranteed, depending on the value of the claim. However, some courts, like in the Cixi City, near Ningbo, require a combined guarantee of a cash deposit and a third-party guarantee letter from a court-approved local security company.

Legal Costs 

One of the first questions that arise when deciding whether or not to take legal action is the cost of the whole procedure. In China, legal costs mainly consist of court costs and a lawyer’s fee. In terms of the court costs, there are clear rules. An online calculator (easily found via Google or your preferred search engine) can provide a good overview of expected court costs. Lawyer’s fees may vary from place to place and from case to case, however. Although the Ministry of Justice has issued a so-called “Lawyer’s Fee-Method” in 2006, its provisions remain fairly vague. More detailed rules can be found in several local regulations. For commercial disputes in China, a performance-based lawyer’s fee is not only permitted by law in most cases, but also quite common. The percentage of a performance-based lawyer’s fee is highly dependent upon the total value in dispute. In the latest dispute between Apple and Proview Technology (Shenzhen) Co., Ltd. concerning the trademark “iPad,” the lawyer’s fee for the law firm representing Proview was also performance-based (as has been reported, 4% of the amount in the final verdict of the settlement agreement). In the case of a performance-based fee, payment in installments is the method often used, depending upon the outcome of each separate phase of the court proceedings. Given that many judges in China would prefer to end cases by settlement rather than through trial, it is advisable to conclude a clear agreement with your lawyer regarding what the expected attorney’s fees will be in this event. In China, unlike in Germany or Austria, every party has to cover his or her own attorney’s fees in addition to other legal fees (such as notarization costs). In principle, the prevailing party is not entitled to reimbursement for the above costs. Two major exceptions to this are proceedings regarding intellectual property rights and unfair competition. In these cases, a full refund can be claimed if the costs are reasonable and proportionate. The attorney of a plaintiff with headquarters abroad usually settles Chinese court payments in cash or via wire transfer from the law firm’s account. To ensure that the lawyer or the law firm is entitled to request the court to reimburse court costs afterwards; such authorization has to be clearly defined in the special power of attorney.

Important Deadlines and Duration of Judicial Procedure

For civil legal proceedings with a foreign element, the following important deadlines shall be noted:

Deadline for providing evidence In general min. 30 days
  • from delivery of the notice concerning the initiation of the proceedings
  • is usually indicated in the court’s notice
  • extendable upon request
Deadline for a counter-claim Within the deadline for providing evidence  
Deadline to reply 30 days
  • calculated from receipt of the notice of application or notice of appeal.
  • extendable upon request
Deadline to submit appeal 30 days
  • from delivery of the  judgment or court order

In daily practice, another frequently raised question is: how long will the entire legal proceeding take, from start to finish? Unfortunately, there is no clear time limit for civil proceedings involving connections with foreign elements or those abroad. 

Looking to the Future 

In the past decade, the qualification of judges in China has improved significantly. The elder generation of judges, often without a background in legal education, is vanishing from Chinese courtrooms. Foreign companies’ concerns regarding the qualification of Chinese judges has thus lost much of its ground. However, although the situation has improved considerably, many procedural problems are still not handled uniformly. The Chinese Supreme People’s Court is in the process of standardizing proceedings wherever possible. Nevertheless, complicated situations often result in the same procedural questions being handled in different ways from court to court, and it is likely this will not improve significantly in the near future.

Note: This article was published in the first issue of the “German Chamer Ticker” (February-March), the business journal of the German Chamber of Commerce in China. 

Quoted from the DeBund Newsletter June, 2013

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