Navigating Commercial Litigation for Foreign Companies in China

Commercial litigation for foreign companies in China has evolved significantly in recent years, with important changes to the legal landscape and dispute resolution processes. Here is a detailed overview of the key aspects foreign companies should be aware of when engaging in commercial litigation in China:

Legal Framework and Recent Changes

1. Civil Procedure Law Amendments (2024)

The Civil Procedure Law of China, which governs civil litigation, including commercial disputes, underwent significant amendments effective January 1, 2024. These changes have substantial implications for foreign companies involved in litigation in China:

• Expanded Jurisdiction: Chinese courts now have broader jurisdiction over foreign-related civil and commercial cases. The amended law allows Chinese courts to hear disputes with “appropriate connections” to China, even if they don’t fall under previously specified categories.
• New Categories of Exclusive Jurisdiction: Chinese courts now have exclusive jurisdiction over disputes related to the establishment, dissolution, or liquidation of legal entities in China, and disputes concerning the validity of intellectual property rights granted within China.
• Simplified Service Process: The amendment has simplified the process for serving foreign defendants without a domicile in China, potentially increasing the likelihood of foreign businesses being sued in Chinese courts.
• Recognition of Foreign Judgments: The law now provides more detailed criteria for recognizing and enforcing foreign court decisions in China, including examining the foreign court’s jurisdiction and its connection to the dispute.

Key Considerations for Foreign Companies

2. Choice of Forum

The amendments allow parties to agree in writing to submit disputes to Chinese courts, even without a direct connection to China. Foreign companies should carefully consider jurisdiction clauses in their contracts, potentially opting for foreign court litigation or arbitration to avoid Chinese court jurisdiction where possible.

3. Intellectual Property Disputes

Chinese courts now have greater influence in global IP disputes, particularly those involving standard essential patents. Foreign businesses should be aware that judgments from foreign courts conflicting with China’s exclusive jurisdiction may not be recognized or enforced in China.

4. Asset Investigation and Preservation

Early preparation is crucial. Companies should conduct thorough asset investigations on Chinese counterparties before initiating litigation. Ongoing monitoring of assets throughout the dispute process is important to prevent asset dissipation.

5. Enforcement Challenges

While enforcement remains a challenge in Chinese courts, having a Chinese court judgment provides a clearer mechanism for enforcement compared to foreign judgments. Companies should assess the likelihood of successful enforcement before pursuing litigation.

6. Local Representation

Foreign companies typically need to engage local Chinese lawyers for court proceedings. However, it’s advisable to have an offshore Chinese legal expert to manage strategy and liaise with the court, as this allows for a more confrontational approach if necessary without putting local counsel at risk.

7. Alternative Dispute Resolution

Arbitration remains a popular choice for foreign companies due to easier enforcement of arbitral awards under the New York Convention. The use of alternative dispute resolution, especially arbitration, is growing in China, with institutions like CIETAC handling an increasing number of international cases.

Recent Trends and Developments

8. Improved Fairness

There’s a perception that commercial courts in China have become more reliable and fair towards foreign parties in recent years, especially in cases that don’t involve high-profile disputes with state-owned enterprises.

9. Specialized Courts

China has established International Commercial Courts in Shenzhen and Xi’an to handle foreign-related commercial disputes, indicating a commitment to improving the handling of international cases.

10. Increased Transparency

Efforts have been made to increase transparency, including the launch of bilingual websites for the International Commercial Court.

11. Expert Involvement

China is cultivating foreign-related litigation expertise and hiring international experts to build a more globally competent judicial team.

12. Application of International Treaties

Chinese courts are increasingly applying international treaties and practices in foreign-related civil and commercial cases.

Challenges and Risks

Despite improvements, foreign companies still face significant challenges in Chinese commercial litigation:

• Language and Cultural Barriers: Proceedings are conducted in Chinese, requiring reliable translation services.
• Unfamiliarity with Chinese Legal System: The Chinese legal system differs significantly from Western systems, requiring specialized knowledge.
• Local Protectionism: While diminished, there may still be instances of local protectionism, especially in disputes with politically connected entities.
• Enforcement Issues: Enforcing judgments, especially against Chinese companies with limited assets, can be challenging.
• Reputational Risks: Litigation in China can potentially lead to reputational damage or operational disruptions for foreign companies.

Dispute Resolution Options: Litigation vs. Arbitration

13. International Arbitration

Foreign companies operating in China can include an international arbitration clause in their commercial contracts. This ensures disputes are resolved through arbitration rather than traditional court cases. Both parties can also use arbitration to resolve a dispute at any trade stage, known as a “contract of application.”

14. Recognition and Enforcement of Arbitration Agreements

The “New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards” signed in 1958, is the most comprehensive international agreement regulating the recognition and enforcement of foreign arbitral awards. China signed this convention in 1987, making it the primary legal basis for arbitration parties to enforce foreign arbitration awards in China.

15. Binding Nature of Arbitration in China

Commercial arbitration in China is divided into international and domestic arbitration. Both clauses are final and binding. However, the implementation of international arbitration awards in China can be problematic. The decision of local arbitration bodies like CIETAC is more binding within China, with limited grounds for appeal.

16. Advantages and Disadvantages of Arbitration

Choosing between courts and arbitration depends on various factors, including the nature of the conflict, applicable law, parties’ nationality, and asset location. Arbitration offers benefits like confidentiality, faster resolution, and flexibility but may lack the same enforceability and cost-effectiveness as court litigation.

Get in touch with our Team of Professionals

Navigating commercial litigation in China requires understanding recent legal changes, considering strategic choices like forum selection, and weighing the benefits of arbitration versus court litigation. Engaging local and offshore legal expertise, preparing for enforcement challenges, and staying informed about legal developments can help foreign companies effectively manage disputes in China.

For tailored legal support, visit China Legal Solutions to connect with experienced professionals who can guide you through the complexities of commercial litigation in China.