(By Dr. Wenbao Qiao) For foreign companies doing business in China, dispute 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 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 be first 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 the 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 time schedule of trial preparation.
One practical suggestion for the preparation of power of attorney is to issue it as so called “special power of attorney”. Such special powers include, for instance, changing and withdrawing any claims. Moreover, they entitle to make a settlement, put forward a counter-claim and make an appeal. “Special power of attorney” should thus describe the lawyer’s authorization in detail and comprehensively. However, where possible, the power of attorney should better not refer to one specific court. This avoids the need to re-issue the power of attorney if it comes to appeal or to a new court due to problems of jurisdiction. Furthermore, it is also advisable to make a notarized copy of the original excerpts from the commercial register or powers of attorney in China as reserve, because some courts in China may also require separate power of attorney for the execution of the judgment.
Variation in Quality – Expert Reports
A very common dispute point encountered by foreign companies is the variation in quality, especially in cases resulting from international sales contracts. In disputes regarding quality, it is common to obtain a neutral expert report. During a court proceeding, the parties in dispute may jointly elect the expert. If they fail to reach an agreement, the Court will appoint an expert. Foreign companies often decide to have an expert study carried out by expert in their homeland prior to court proceedings. However, it is uncertain whether such an expert report, even after notarization and certification, will be recognized by the Chinese courts. During our business, we have encountered different attitude of the Chinese courts: 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 qualification 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 qualification issue of the German experts was not mentioned at all.
Interim Injunction
Another critical question for a successful litigation is how to ensure law enforcement following the trial. An important legal instrument for this purpose is the interim injunction, which includes, for example, the freezing of bank accounts or attachment of assets. Usually, 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 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 the future judgment may be impossible or considerably difficult. In cases which have a main aim of claiming damages, we strongly recommend making the application for 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 a guarantee letter. The actual amount of the 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 dispute amount. 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 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 city Cixi near Ningbo, require a combined guarantee of cash deposit and third-party guarantee letter from a court-approved local security company.
Legal Costs
One of the first questions which would arise when deciding whether or not to take legal action is the costs of the whole procedure. In China, the legal costs mainly consist of court costs and lawyer’s fee. In terms of the court costs there are clear rules. An online calculator (easily to be found via Google) can provide a good overview about the expected court costs. The lawyer’s fees may vary from place to place and from case to case. Although the Ministry of Justice 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, performance-based lawyer’s fee is not only permitted by law in most cases, but also quite common. The percentage of the performance-based lawyer’s fee is highly dependent on the total dispute value of each case. 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 is also performance-based (as has been reported, 4% of the amount in the final verdict or the settlement agreement.) In the case of a performance-based fee, installment payments are often used, depending on 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 make clear agreement with your lawyer on attorney’s fees for 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 the reimbursement for the above costs. Two major exceptions to this are proceedings regarding intellectual property rights and unfair competition. In these cases 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 the Judicial Procedure
For civil legal proceeding with a foreign element, the following important deadlines shall be noted:
| Deadline for providing evidence | In general min. 30 days |
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| Deadline for a counter-claim | Within the deadline for providing evidence | |
| Deadline to reply | 30 days |
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| Deadline to submit appeal | 30 days |
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In daily practice, another frequently raised question is: how long will the whole legal proceeding take? Unfortunately, there is no clear time limit for civil proceedings involving connections with abroad.
Looking to the Future
In the past decade, the qualification of the judges in China has been improved significantly. The elder generation of judges without legal education background is vanishing from the Chinese court room. The concern of foreign companies on the qualification of Chinese judges has thus lost its ground. However, although the situation has improved considerably, many procedural problems are not handled uniformly. The Chinese Supreme People’s Court is in the process to standardize proceedings wherever possible. Nevertheless, the complicated situation with different ways of handling the same procedural question from court to court will not improve significantly in the near future.
Note: This article was published in the first issue of the “German Chamber Ticker” (February-March 2013), the business journal of the German Chamber of Commerce in China.
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