Litigation is not the way to go in China - Legal

Business Asia, July, 2003 by Bill O'Shea, Therese Brabet

Australian enterprises which have disputes with their local business partners in China should resort to litigation only when all else has failed. Despite China's continuing reforms to its legal system and its keen interest in attracting foreign investment, litigation in the People's Republic remains fraught with difficulties. These difficulties stem from:

* a judiciary which often lacks sufficient competence and training, is plagued by allegations of corruption and leans towards protecting local interests, both political and economic;

* the continued importance of guanxi (connections with officialdom); and

* the fact that the Chinese Communist Party controls and commands influence within each court.

This is despite the fact that just over 18 months ago, China promulgated the Code of Judicial Ethics for Judges of the People's Republic of China. The Code requires a judge to act independently and without prejudice and prohibits a judge from meeting one party without the other party being present and from accepting any entertainment, money, gifts or other benefits from a party or its lawyers. Many foreigners would wonder (and indeed be concerned) as to why such a code was necessary at all.

Compounding this problem is that many of the older judges in China do not hold law degrees and many have little or no legal training. Although these shortcomings are being addressed quite vigorously, there is a considerable distance to go before China's courts are brought into line with international standards of expertise and transparency.

Know the system

If an Australian business is to get the most out of any court action it initiates in China it must know how the system operates or get help from someone who does. It must also learn to work within that system. The court hierarchy in China is similar to that in the West and is divided into four levels; Supreme People's Court (national), High People's Court (provincial), Intermediate People's Court (municipal) and Basic People's Court (county/district).

Any case involving a foreign party, foreign subject matter leg property situated outside the PRC) or a foreign legal relationship--and is based on a minimum claim of RMB one million ($176 million)--must be heard in an Intermediate People's Court or higher. As foreign investment enterprises (FIEs) are regarded as Chinese legal persons, a dispute between an FIE and a domestic Chinese company or another FIE on a domestic issue is not regarded as containing a foreign element.

Mediation

Mediation is a recommended preliminary step in all types of dispute resolution in China, and is often undertaken as part of the litigation process. Before a trial commences, the judge may suggest mediation to the parties but cannot force them to attend mediation. Where the parties do attend mediation and reach agreement about resolving their dispute, the court will issue a mediation ruling which is final and binding on both parties.

China's courts operate on an "inquisitorial" system similar to that in continental Europe. This means that the judge or judges play a far more active role in questioning the parties than do their counterparts in common law countries such as Australia, the US and UK.

It is well known that to litigate successfully in China, foreign parties, or their lawyers, must maintain close contact with court officials and local government. In many cases, if the likely outcome of a trial is not looking good, an approach to the provincial governor, city mayor, party secretary or even the presiding judge may prove effective. Direct contact with judges and other authorities is not considered corruption in China, but rather part of the accepted process.

Although Australian lawyers can advise Australian and other foreign businesses regarding disputes, they are not given lawyer status when they represent their clients in court. Hence, the role of the Australian lawyer is to advise the client, prepare the case and then leave it to a local lawyer to run the appearances in court.

Complexity

Unlike arbitral awards which are final, court rulings are subject to appeal, unless the ruling is made by an appellate court. Hence, as in Australia, the litigation may continue for years.

The difficulty of having court orders enforced is something which troubles many Chinese and foreign litigants in China. As indicated earlier, enforcement is often difficult, especially where the defendant is a State-owned enterprise, because the courts tend to protect local concerns. Australian businesses should also be aware that China's credit-checking and asset-tracking systems are deficient.

* Bill O'Shea, a partner in national law firm Hunt & Hunt's China practice, has advised Australian clients doing business in China for over 15 years. He was Victorian President of the Australia-China Business Council for more than 10 years. His e-mail address is: bill_oshea@hunthunt.com.au. Therese Brabet is a solicitor working in the China Group in Hunt & Hunt's Melbourne office.