Tuesday, September 13, 2011

Enforcing Chinese Judgments in the U.S.

September 13, 2011

As the first case in history where a Chinese judgment was successfully recognized and enforced in the U.S., Hubei Gezhouba Sanlian v. Robinson is a milestone. Hubei Gezhouba Sanlian Industrial Co., Ltd. and Hubei Pinghu Cruise Co., Ltd vs. Robinson Helicopter Company, Inc. CV-01798-FMC (2009) (U.S. Court of Appeals, 9th Circuit - Case No. 09-56629.

The case involved a lawsuit over an accident in China involving a helicopter manufactured by Robinson Helicopter Company, Inc. (“Robinson Helicopters”) that resulted in the deaths of three people. A judgment in excess of six million U.S. Dollars was entered against Robinson Helicopters by the Shanghai Supreme Court after a lengthy evidentiary hearing before three judges. Robinson Helicopters did not participate in the hearing notwithstanding being served with notice of the hearing.

The United States District Court overcame the absence of any U.S./Chinese treaty for the enforcement of foreign judgments by relying on the California Uniform Foreign Money Judgment Recognition Act (UFMJRA) to enforce the Chinese judgment.

Based on the doctrine of “stare decisis”, which obligates trial judges and lower appellate courts to follow judicial precedent established by the appellate court judgment, creditors from China can, subject to the facts of the underlying case and the circumstances in which the Chinese judgment was obtained, file a civil action in a District Court in the Ninth Circuit for enforcement of the Chinese judgment.

The major issues considered by the District Court and by the Ninth District Courts of Appeal in granting recognition of the judgment against Robinson Helicopters were the following:

    1. The jurisdiction of the Chinese court. The case was originally filed in the District Court in California. The Defendant filed a motion to stay the proceedings based on their argument that the District Court was not the proper court according to the principle of forum non conveniens and agreed to submit to the jurisdiction of the court in China as a condition of the District Court granting the motion to stay the proceedings. Therefore, when the judgment creditor filed the motion to enforce the Chinese judgment, Robinson Helicopters was estopped from arguing the Chinese Court did not have jurisdiction in the underlying case.

    2. Whether the Defendant was denied” due process” in the judicial proceedings in China. Robinson Helicopters argued it was denied its right to due process in the Chinese judicial proceedings. The District Court concluded Robinson Helicopters had actual notice of the judicial proceedings in China and had both sufficient time and the opportunity to participate in the judicial proceedings. The judgment was entered by a panel of three judges after evidence was presented by the plaintiff during the evidentiary hearing. The District Court found the judicial proceedings in the Chinese court were fundamentally fair, did not offend against basic fairness and complied with the concept of “due process” in foreign judicial proceedings as set out in Society of Lloyd’s v. Ashenden, 233 F.3d 473, 476-77 (7th Cir. 2000); Shell Oil Co. v. Franco, 2004 WL 5615657 (C.D. Cal. 2004) (citing Ashenden).

    3. Whether service of process was proper. The District Court determined service of process was made in compliance with the requirements of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (“Hague Convention”).

    4. Whether it would be equitable to enforce the Chinese judgment. The Defendant argued there are neither bilateral treaties nor multilateral international conventions between the U.S. and China with respect to the mutual recognition and enforcement of judgments issued by each country’s courts in civil and commercial matters. The District Court held lack of reciprocity is not grounds for refusal of recognition under the UFMJRA and it’s successor statute.

It is worth noting this case was very fact-specific. The Defendant by filing the motion to stay the action in California based on form non convens consented to jurisdiction over the case in the court in China and could not challenge the jurisdiction of the court in China in subsequent enforcement proceedings in the District Court. In addition, the Plaintiff made sure service of process strictly complied with the Hague Convention; the judicial proceedings in the Chinese court were complete, fair and complied with the U.S District Court’s due process requirements for proceedings in foreign countries; and the statute of limitations was property tolled.

Chinese entities doing business with U.S. persons or entities need to carefully draft their contracts to resolve all issues of jurisdiction, applicable laws, conflict of laws, service of process and enforcement of judgments obtained in China in the U.S. to take advantage of this judicial precedent. Chinese judgment creditors with judgments against U.S. persons or entities proposing to enforce the Chinese judgments in the U.S. who have not previously agreed on all these fundamental issues with the U.S. judgment debtor will have a difficult time fitting within the four corners of this judicial precedent. They may be successfully in enforcing a Chinese judgment in the Ninth District if they can establish the Chinses court was the forum convens, the U.S. defendant was properly served with process and had an opportunity to meaningfully participate in the legal proceedings in China, and the Chinese judicial proceedings conformed to the Ninth Circuit’s definition of due process in foreign judicial proceedings.

Tuesday, April 5, 2011

Laying Off Representative Office Employees in China? Do Yourself a Favor and Do it Legally.

April 1, 2011

Fewer and fewer foreign companies in China are seeing the benefits of having a representative office (“Rep Office”) in China even though Rep Offices were considered at one point to be the most effective and least expensive way for foreign companies to establish a presence in the Chinese market. Some of our clients now want to convert their Rep Office to a wholly foreign owned enterprise (WFOE) because of the greater flexibility a WFOE offers; others want to downsize the Rep Office or shut it down.

Before you downsize or shut down your Rep Office it is in your best interests to comply with all applicable national, provincial and municipal Chinese laws, in particular Chinese labor laws when you lay off your Rep office employees.

Your legal obligations to the employees of the Rep Office arising out of, or relating to, the proposed lay off of those employees depends on how the Rep Office recruited its employees. If the Rep Office recruited its employees through a qualified foreign affairs service, then the relationship between the Rep Office and its employees is a labor relationship and the relevant laws and regulations for the protection of Chinese labor apply to any proposed termination of their employment relationship with the Rep Office.

If any of the following circumstances makes it necessary to reduce the workforce at the Rep Office by less than twenty (20) employees but 10 percent (10%) or more of the total number of the Rep Office’s employees, the Rep Office may reduce the workforce for the following reasons:

  • (1) A restructuring pursuant to the Enterprise Bankruptcy Law;
  • (2) Serious difficulties in production and/or business operations;
  • (3) If the enterprise switches production, introduces a major technological innovation or revises its business method, and, after amendment of employment contracts, still needs to reduce its workforce; or
  • (4) Another major change in the objective economic circumstances relied upon at the time of conclusion of the employment contracts, rendering them non-performable.

However, before the Rep Office can lay off employees, it must follow the following procedures:

  • (1) explain the circumstances to its Trade union or to all of its employees thirty (30) days in advance of the proposed lay off date,
  • (2) consider the opinions of the Trade union or the employees,
  • (3) report the workforce reduction plan to the Human Resources and Social Security Bureau in the city in which the Rep Office is located.

The Rep Office may NOT terminate an employment contract if the employee is a pregnant female employee during her pregnancy, confinement or nursing period unless the pregnant employee has seriously violated the Rep Office’s rules and regulations.

An employee must be paid severance pay based on the number of years worked with the Rep Office at the rate of one (1) month’s wage for each full year worked. For the purpose of calculating the severance pay, monthly wage means the employee’s average monthly wage for the twelve (12) months prior to the termination of his or her employment contract. Any period of employment of not less than six (6) months but less than one (1) year shall be counted as one (1) year. The severance pay payable to an employee for any period of less than six (6) months shall be one-half of his or her monthly wages. The Rep Office may terminate an employment contract by giving the employee thirty (30) days’ prior written notice, or one (1) month’s wage in lieu of notice.

If the Rep Office terminates or ends an employment contract in violation of the Laws of the People’s Republic of China on Employment Contacts, the Rep Office shall pay damages to the employee equal to twice the severance pay due the employee calculated as set out above.

If the Rep Office did not pay social insurance premiums or provide a housing fund for the employee as is required by Chinese law, the employee may report either of these omissions to the local government authority which will require the Rep Office to pay social insurance premiums and provide a housing fund and may also impose a fine on the Rep Office.

Notwithstanding the foregoing, if the Rep Office negotiates a compensation agreement with the employee to be laid off, the amount of economic compensation payable by the Rep Office to the employee is not fixed by law.

If the Rep Office did not recruit its employees through a qualified foreign affair service, the relationship between the employees and the Rep Office is in the nature of a civil service relationship, and labor protection laws do not apply and there are no mandatory civil legal obligations on either the Rep Office or the employees.

Therefore, unless otherwise agreed to by the parties, the Rep Office is not required to pay severance compensation to the employee when the Rep Office terminates the employment contract with the employee. In these circumstances there are no legal restrictions on terminating an employment contract with a pregnant employee.

Furthermore, unless otherwise agreed to by the parties, the Rep Office is not required to pay social insurance premiums or provide a housing fund for their employees.

However, if the Rep Office did not recruit the employees through any foreign affair services, then the hiring is deemed to be in violation of administration rules and the government may impose fines on the Rep Office for illegal hiring. There has not been any clear guidance from either statutes or civil cases regarding the amount of the fine to which the Rep Office may be subject. The normal practice in Beijing, however, is somewhere between ten thousand Renminbi (10,000 RMB) to fifty thousand Renminbi (50,000 RMB).

Even though it appears to be cost effective to recruit employees illegally, when it comes to laying off the illegally hired employees of the Rep Office, you never know what fines or other penalties you may ultimately be subject to when you violate Chinese laws.

Friday, February 19, 2010

Li Zhuang’s Sentence: Support for or Death of the Rule of Law in China

By Julia Zhu

China's eventful 2009 ended with another controversial episode: a record-length trial in the widely observed case of Li Zhuang, a prominent criminal defense lawyer from Beijing.

Earlier this month,  Li Zhuang was convicted of falsifying evidence and jeopardizing testimony after his client, Gong,  a suspected gang leader, who was caught in a massive crackdown in Chonqing, said the lawyer told him to lie after he was tortured by police.

Li Zhuang was sentenced to two and a half years in prison by the Chongqing court.

Li’s sentence has triggered a heated debate in China. Support for Li’s conviction came mainly from the general population. The anti-corruption campaign has been very popular among Chongqing residents, who report years of terror living under the control of violent mob factions in collusion with police and local government officials. It is, therefore, not surprising that many residents harbor no sympathy for a lawyer defending an individual who has harmed the public interest and view the lawyer's conviction as a sign of progress within the legal system. The overwhelming majority of internet comments in China expressed anger at Li for "rescuing" a heinous criminal and making big money so doing.  They believed Li acted to impede justice and that he should be punished for it.

On the other hand, many lawyers and legal scholars cite this case as an example of the lack of protection afforded to lawyers in recent years. They strongly questioned the legitimacy of the reported evidence and Article 306 of criminal law, which provided the basis for Li's arrest. Article 306 stipulates that lawyers must not "destroy or forge evidence, help any parties destroy or forge evidence, or coerce or entice witnesses into changing their testimony in defiance of the facts or giving false testimony." This vaguely-worded provision, according to the Global Times, "makes the Chinese mainland defense lawyer into something of an endangered species."

One main issue the court debated was whether Li’s client had, in fact, been tortured.  Judging from various news reports, neither the defense nor prosecution convincingly established their claims. Consequently, whether Li Zhuang had attempted to fabricate evidence of his client's torture remains unclear.

However, Li Zhuang's arrest ,conviction and sentencing raises serious questions about legal procedure and the protection of the fundamental rights of lawyers in China.  Among the more troubling due process aspects of this case are the extremely short period between his arrest and sentencing (arrested 22 days after he was retained by the client, tried 16 days after his arrest, and sentenced 9 days after trial), the lack of corroboration of Gong’s testimony, which Gong claims he made in exchange for a less severe sentence in his own case, and reports that no witnesses actually testified at the trial, with witness testimony obtained by prosecutors merely read aloud into the court record in violation of China's Criminal Procedure Law.

Subject to these serious due process issues, the legal issues were vigorously debated by both the prosecution and defense at trial and the entire trial was open to the public.

The public debate on the rule of law, due process and lawyers' rights, as well as the increasing emphasis on the importance of separating the public's emotional response to an individual case from an analysis of legal procedure, has been especially promising, as it suggests an increasing public interest in defining what a country ruled by law should look like.

Wednesday, January 27, 2010

What to do? What to do? What to do? What to do?
What to do about Overproduction?
by Edythe Huang

Too much of a good thing may not be quite so wonderful.  Since the EU Chamber of Commerce in China released a report in November, economist and financial watchers have been busy throwing in their two cents about "Made in China."  In case you have not been paying attention or did not think that the EU Chamber of Commerce's recommendations to the Chinese government about how China should run its economic affairs were important or were just too busy celebrating the holidays, here's a recap. In late November the EU Chamber of Commerce took it upon itself to highlight the problem overproduction of manufacturing goods was creating both in China and the "rest of the world."  In their report, they made a series of recommendations which included redistributing national income from companies to households, removing subsidies for energy and other outputs, forcing companies to slash capital expenditure, raising interest rates, and reforming the fiscal system to give local governments more power.

                Here are a few of my favorite reactions to the report --

                There's the typical accusation of protectionism:

"The claim is purely to defend their own interests.  These countries welcome Chinese exports when they cannot produce enough goods for their industrial and consumer needs during a good economy, but then these same countries limit Chinese exports amid an economic recession. . .  It's a double standard." -  Zhou Shijian, senior analyst with the Sino-US Relations Research Center of Tsinghua University. (reported by China Daily) 
                There's the typical blow off, this is not a big deal and it is going to go away on its own:
"The problem is just short term. . . It will disappear when the Chinese economy regains momentum." - Li Wei, analyst from Standard Chartered China, stating that overcapacity will be solved when China's domestic demand goes up. (reported by China Daily)
                There's the typical reassurance:
"China's exports in 2010 will grow, and there's no doubt about that," vice-minister of commerce Zhong Shan told a forum at the University of International Business and Economics in Beijing.
                There's the typical overreaction, claiming the problem is even bigger than the public thinks:
Daniel H. Rosen of the Wall Street Journal pointed out that overcapacity is not just a problem in the areas highlighted in the report: iron and steel, cement, electrolytic aluminum, glass, coal chemical, polysilicon and wind power equipment.  The problem is not only that there are too many manufactured goods; there's too much of everything in China, that is, except the important things such as doctors, teachers, and jobs overall. 
                There's the typical focus on ulterior motives (not that this is not notable):
All Roads Lead to China blogger Richard Brubaker noted one reason for the EU Chamber of Commerce's disapproval and note of China's overproduction: "Equally interesting is that while US exports have benefitted from the current situation, the EU has not.  That as the dollar has sunk, the Euro “peg” to the RMB has gone the wrong way for most of the EU making its goods and services more expensive."
                And finally, there's the well thought out acknowledgement of the complexity of the problem:
Michael Pettis, professor of finance at Beijing University, wrote a very good opinion piece in the Financial Times.  In the article, he highlighted the frightening scale of excess capacity occurring in China, and the foreign producers' fears of the impact of China's growing surplus.  He recommended, nay warned, China that if there will be an economic crisis in the trading system if China did not expand its exports in 2010.  On the other hand, he underlines the problem of his own solution, the rest of the world simply cannot absorb the surplus capacity and neither can the ordinary Chinese because ordinary Chinese are not earning enough to absorb the capacity because they are too busy paying for a system that gives the benefits to making products, not consuming them. 
I do not know if Party officials read the Financial Times, but they seemed to be listening to Michael Pettis.  After a month of very little comment on the EU Chamber of Commerce Report, XinHua came out with an exclusive report with Premier Wen Jiabao on the topic.  Surprisingly, or perhaps not, Premier Wen seems to agree with Professor Pettis.  He acknowledged that industrial overcapacity has been a global issue that is caused by both current global trends and long-existing problems with the imbalanced economic structure -  words which seem to come straight from Michel Pettis' article.  

Where does that leave us?  Well, everyone seems to agree that there is a problem.  What that problem is exactly and how to resolve it is a different issue all together.  What is agreed upon?

(1) There exists a complex problem with the fundamental structure of the economy in China that is based upon some "imbalance." 
(2) This problem is an international problem.  

That is all economists, financial analysts, international organizations, bloggers, financial journalists, international diplomats and the Chinese government can agree upon.  After that, it's a free for all.  The Chinese are saying that Western governments, the EU and the US in particular, are enacting protectionist measures during an economic crisis.  Western governments are yelling back that the Chinese governments hands are unclean- they are manipulating currency and creating more than the world can consume, but worst (and my favorite accusation because it always comes out at the end to add an extra punch), the Chinese are not even taking care of their own people who bear the burden of this problem.  

 At least we agree there is a complex problem, well, except for Li Wei.  Now how are we going to fix it? Premier Wen Jiabao has said that the problem is being worked on.  The Chinese government is channeling excess capacity into new fields.  The latest 1.18 trillion RMB stimulus package is being spent on affordable housing projects, construction of infrastructure, and improving people's livelihoods. That sounds nice, especially the part about improving people's livelihoods.  But I fear I'm a bit more cynical than that.  I'm afraid Premier Wen Jiabao proposal is simplistic at best.  I am not criticizing the good intentions of the Chinese government nor am I stating that areas highlighted by Premier Wen are not respectable areas upon which to improve.  I just do not think that the limited strategy described by Premier Wen is enough to satisfy the complexity of the problem.  For example, Premier Wen stated that the Chinese plan to spend stimulus on affordable housing projects.  Sounds great.  However, China is already dealing with an excess of developed real estate.  By building more affordable housing, which is great for common Chinese, the result is more properties left empty and more overcapacity.

I do not have a solution.  I'll leave that to the disagreeing experts.  But one thing is for sure, the devil is in the details and this is a problem where the details are going to make all the difference.   

Tuesday, October 27, 2009

The Magic Tool of Swift and Successful Debt Collection
by Robert J. Allan and Edythe Huang

In our blog on September 25, Don't Chi Ku If You Don't Have To, we discussed the reoccurrence of Chinese sellers unable to collect accounts receivable from American buyers based on excuses of timeliness or non-conforming goods. In our story there is usually an American businessperson or entity taking advantage of the poor Chinese seller because of the seller’s cultural inclinations. The American buyer knows the Chinese seller is unfamiliar with the United States legal system and is culturally resistant to seeking the advice of legal counsel (although this is changing). The American buyer takes advantage of the Chinese seller by accepting goods but never paying on the premise the Chinese seller will not do anything about it.

We have already suggested seeking the advice of legal counsel; but there's more.

What can Counsel for the Chinese seller of goods do about the American buyer’s failure to pay for the goods?

The most powerful tool in our collections arsenal is the Prejudgment Writ of Attachment. In our experience, once a Right to Attach Order has been issued based on a Prejudgment Writ of Attachment, the debtor always wants to settle and is willing, if able, to pay at least a substantial portion of the outstanding debt.

In California, where Allan Law Group, our United States founding member is based, a Prejudgment Writ of Attachment allows commercial creditors with debts owed greater than US$500 to create commercial liens on the debtors' property before a Court issues a judgment. Typically, a Prejudgment Writ of Attachment is proper when the defendant may attempt to hide assets from the Court to prevent a debtor from transferring, encumbering, dissipating, or concealing assets available to satisfy the judgment. In order to obtain a Prejudgment Writ of Attachment, there must be an express or implied contract and a fixed or readily ascertainable amount which the creditor can and must show with "probable validity" the corporate debtor owes the creditor.

Ascertaining with certainty the amount owing is the most important fact and the most time consuming feature of the process. Although the statute seems somewhat vague when referring to a "fixed or readily ascertainable" amount it is not. The Court will only issue a Prejudgment Writ of Attachment if the amount claimed to be owing can be ascertained with certainty. Being off by a “penny” can prevent the Right to Attach Order from being issued. Remember, the Court is placing a lien on another "person's" property based on a claim, not a judgment and will not do so unless it is established to the Court’s satisfaction that a “sum certain” is probably due to the creditor by the debtor.

In order to obtain a Right to Attach Order, the creditor must first file a complaint, which is served by the usual means, on the debtor. Notice of the hearing on the Application for the Pre-judgment Writ of Attachment must be served with supporting declarations and supporting documents. At the hearing on the Application the creditor has the burden of proving the creditor’s right to attach general or specific property, that the creditor will likely prevail in the action with probable validity, and that the attachment is not sought for any other purpose but to secure the claim.

Before the Court orders a Right to Attach, the creditor must file a Bond or Undertaking, typically through an admitted surety insurer. This is done to protect the debtor in case the creditor does not win the suit.

The Court will issue a Right to Attach Order if the creditor has met its burden of proof. Once issued by the clerk of the Court, the order will allow the County Sheriffs or the United States Marshals Service to seize property of the debtor which is located in the jurisdiction of the Court. The property will be held until the trial is completed.

The Problem -- Most businesses cannot wait a year or longer to collect accounts receivable and survive.

The Solution -- Once a Right to Attach is ordered by the Court, the creditor's attorney should expect a call from the debtor's attorney. It is now time to settle.

Thursday, October 1, 2009

Following the Food
by Edythe Huang

It's not that my father does not like to travel, because he does. But he has a great fear of going to places that don't have Chinese food. This fear has kept him from joining many trips abroad- so much so that I take pictures of Chinese restaurants wherever I go to show him that, next time I return to the same destination, he can come too, without the fear of being forced to eat the native food.

During one of my last vacations, I took more pictures of Chinese restaurants than I ever have before… and no, I was not in Asia. There were Chinese restaurants in the countryside of the Czech Republic and Austria, in the city of Ljubliana, Slovenia, in the small countryside towns of Postojnska, Slovenia, and even in northern Croatia. Chinese restaurants were everywhere in the Eastern European countries I visited.

Imagine my (non-existent) surprise when I got back to the office and the article "Chinese Investment in Europe: a Shift to Services" in the Chinese Business Review was waiting for me. According to Vanessa Rossi and Nora Burghart, the newer EU members from Eastern Europe are one of the new targets of Chinese Outbound Direct Investment (ODI). Although the UK and Russia receive most of Chinese ODI directed at Europe, the Eastern European countries of the EU are the latest place where Chinese hope to see a growth in exports.

Eastern Europe is not the only place that is seeing a rise in Chinese ODI. The Chinese Business Review issue dedicated to the topic cites Latin America as the next biggest new hotspot. Yet, Chinese restaurants have been in Latin America for years. Chinatowns in Mexico City, Havana, Buenos Aires, Lima, in San Jose and the Puntarenas area of Costa Rica that have been around for decades, some even over a century.

If you want to stay ahead of the curve and know where China is going next, look to the unlikely economic indicator: the number of Chinese restaurants in the area. In my experience, and without passing any judgment, Chinese business people tend to believe that Chinese food is far superior to any other food in the world. The statement is based on the many hours that I have spent listening to various "Uncles" and "Aunts" talk about how great Chinese food is and how much better it is than anybody else's food (when cheekily asked when was the last time they had non-Chinese food, many have been happy to tell me that they deemed to have Japanese food this past week. When asked the last time they had "Western food," the typical response was a cringe accompanied by some reference to the fact that he or she just can't manage to eat a potato). To many Chinese, the idea of going without Chinese food for even a week is a harrowing prospect. But, if they know they can get Chinese food while on a business trip, no matter how awful it is, they are happier to make the trip.

This information can benefit any wei go zen (non-Chinese), especially business people. If you are working with or entertaining Chinese people, make sure Chinese food, preferably "the good stuff," is available for native contacts or visitors. Don't be afraid to make recommendations of good Chinese restaurants, after all, most conversations in China revolve around what restaurants are the best restaurants in town or for a particular dish. And if you want to know where Chinese business is going to go next, remember, in many cases, Chinese business follows Chinese food.

Chi li ma?

Friday, September 25, 2009

Don't Chi Ku if You Don't Have To

By Edythe Huang and Robert J. Allan

Our clients are giving us déjà vu. It's better than many ailments, but the eerie feeling is just as disconcerting, especially when the root cause is known. As we sit in on client interview after client interview in which they tell us their story, we can't help but let that peculiar sensation wash over us. . . the sensation that we've heard this all before.

Typically, the story goes something like this:

There's a Chinese seller and an American buyer who have cultivated a relationship over a couple of years. According to the contract they have been following for the last year or two, the Chinese seller is to deliver goods in installments over a period of time. The American buyer has always paid on time, and the relationship is a good one.

Suddenly, upon receiving one of the installments, the American buyer calls up the Chinese seller and sternly says, "the goods weren't conforming this time and I'm not paying for them." The Chinese seller is puzzled, but writes it off as a singular incident and sends the buyer the next installment of goods on time.

This time, the American buyer accepts the goods and pays on time. The Chinese seller is reassured and sends off the next installment of goods on time.

The American buyer finds something wrong with this third installment and refuses to pay. Once again, the Chinese seller believes that there must be something wrong with the shipment. After all, he and the American buyer have a long standing relationship. Next time, he tells himself, everything will be fine and he'll get paid. . . just like last time.

He sends a fourth shipment. Again, the American buyer finds something wrong with the shipment and refuses to pay.

If he's smart and on top of things, the Chinese seller realizes that the long term relationship that he spent years cultivating with the American buyer may not be as strong as he thought it was. He calculates that he has sent three installments and is owed a few tens of thousands of dollars, yet knows he is not going to get paid. Many buyers do not realize that they are not going to be paid until a few more installments of goods have gone out and they are out a few hundreds of thousands of dollars.

Panic sets in. What can he do about it? Many decide that all they can do is chi ku, or ”eat the bitter.” The accounts receivable gets moved to a loss, a very painful loss.

But there are a few brave souls who have ventured into the American justice system. Those are the ones who are giving me déjà vu. They are approaching American lawyers to help them collect. And we're able to collect, but it takes the Chinese seller to, first, be able to recognize the problem, and second, get in touch with an attorney who can collect.

If you and your business don’t have to chi ku, then why would you?

Monday, September 14, 2009

Enforcing Chinese Judgments in the United States
By Julia Zhu and Robert Allan

We often receive inquiries from our clients on enforceability of judgments entered by US courts either in Hong Kong or China. Now, here comes the other side of the coin. We were recently asked by a reporter about how many judgments entered by Chinese courts are enforced in the US.

The enforcement of foreign judgments is frequently regulated by bilateral treaty or multilateral international convention between two states. Presently, the United States is not a party to an international agreement for the general recognition of foreign judgments. No treaty obligates foreign courts to recognize judgments of U.S. courts and vice versa.

Actions to enforce a foreign judgment generally are filed in a federal court of the United States because jurisdiction is based on diversity. However, the enforcement of a foreign money judgment in a court of the United States is determined by the laws of each individual state.

If the time to appeal in the court of origin has lapsed, and the judgment has become final, the holder of a foreign judgment, decree or order may file suit before a competent court in the U.S. which will determine whether to give effect to the foreign judgment. The local version of the Uniform Foreign Money Judgments Recognition Act applies in most states, including California.

Foreign country money judgments may be enforceable in California if they meet the requirements of the UFMJRA and the creditor brings an action in California to obtain a domestic judgment. California courts, however, have broad discretion to deny enforcement of foreign country judgments. The UFMJRA applies to any foreign country judgment granting or denying recovery of a sum of money. It does not apply to a judgment for taxes, a fine or other penalty or a judgment for support in family law matters. The UFMJRA does not prevent recognition by “comity” (or nonrecognition) of a judgment that does not come within the terms of UFMJRA.

A foreign country money judgment may be recognized in California only if final, conclusive, and enforceable where rendered even though an appeal is pending or may be taken.

We conducted a research on Westlaw for case law nationwide regarding enforcement of Chinese judgments, 68 cases came up.

A very recent case is worth our attention. On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the UFMJRA.

It is generally believed that United States courts will not enforce Chinese judgments given the lack of a treaty between the two countries on the issue and given that Chinese courts generally do not enforce United States judgments in China, which limits the argument for reciprocity in the United States. Given this decision, California may become a favorable forum for enforcement of Chinese judgments in the United States. One can expect this decision to be of great interest to Chinese plaintiffs with Chinese judgments against American corporate defendants, especially those located in the state of California. Other states that have enacted the UFMJRA, including New York, may also be affected.

Friday, June 26, 2009

by Alexandra Damsker

As we discussed in our last entry, arbitration is gaining steam as a method of dispute resolution in both the PRC and Hong Kong. As a refresher, arbitration is legally binding, and comes in two (or three) basic "flavors" in the PRC. First are local PRC disputes, which go through either the China International Economic and Trade Arbitration Commission and China Maritime Arbitration Commission. Second are international disputes, which generally - but not always - includes US companies (see the final paragraph for this warning). International disputes can be broken down further into disputes regarding "foreign awards" (from a non-Chinese arbitration institute), and those regarding "foreign-related awards" (from a domestic arbitration body involving a foreign party). The distinction between "foreign" and "foreign-related" will be seen in the section regarding enforcement.

In any event, parties with international disputes relating to the PRC generally choose to arbitrate in Hong Kong. Hong Kong has a long and well-established legal history, particularly with international disputes (especially with those involving Western nations) and is easier to predict in many ways than PRC outcomes. Also, unlike the PRC, but similar to the US, Hong Kong is subject to principles of common law. Accordingly, along with Singapore, Hong Kong is the main venue of arbitration in the region. The primary arbitration center is the Hong Kong International Arbitration Center (HKIAC), which increased the number of disputed resolved 35% in 2008 over 2007 (compared to 14%increase in 2007 over 2006). As noted previously, the increase is likely due, in part, to the declining economy, as the decreased cost and increased speed both serve to facilitate the speed and profitability of business.

Hong Kong announced in February of this year that it expected to create a single regime for international and local arbitration, based on the UN Commission on International Trade Law Standards (UNCITRAL), without rewriting them. (Interestingly, if both parties are PRC citizens, the arbitration is considered "international" in Hong Kong, just as the Hong Kong arbitration ruling is considered "international" by the PRC government for the purposes of enforcement, discussed below). The use of UNCITRAL is being interpreted as permitting the use of UNCITRAL interpretation for interpretation of the new Hong Kong ordinance, bringing new clarity to arbitration proceedings (and, presumably, negotiations prior to arbitration), filling gaps in Hong Kongʼs court system. The ordinance will also contain limits on court redress of arbitral awards.

Arbitration procedures are gaining popularity among unlikely followers. For example, arbitration tends to typically be less attractive to financial institutions for both the tendency to "split the baby" and their lack of summary judgment. However, the HKIAC recently announced that it is resolving investor disputes related to sales of US $2.03billion in financial products (mostly mini-bonds) associated with Lehman Brothers (see http://www.asialaw.com/Article/2068790/Search/Results/A-new-solution.html?Keywords=Civil+Justice+Reforms) - yet another signal in arbitrationʼs new popularity.

In addition, on April 30, a key case, A v. R, was resolved in Hong Kongʼs High Court, further enforcing the finality of arbitration decisions and encouraging enforcement of the award payment. In that case, the court concluded that mounting an unfounded challenge to an arbitration award fails to comply with a partyʼs obligation to further the objectives of the Civil Justice Reforms (introduced April 2, 2009), particularly the duty to assist the court in the just and efficient resolution of a dispute. Further, and most importantly - it added indemnity costs, considering heavier than usual costs fair, adding further penalty to those wishing to challenge arbitral awards in Hong Kong.

But how enforceable are the judgments reached in these proceedings? Sonia Chan writes an excellent article for AsiaLaw.com regarding the enforceability of arbitration proceedings, http://www.asialaw.com/Article/2023082/Search/Results/Protectionism-is-stifling-Chinese-arbitral-awards.html?Keywords=Arbitral%2bawards, which is briefly summarized (in conjunction with additional research): Basically, unless your defendant is in Beijing, Shanghai or Guangzhou - it can be tough, but it’s getting somewhat easier.

The tools are all there: The PRCʼs Civil Procedure Law of 2007 lays out the basic principles of recognition and enforcement of foreign arbitral awards, which includes both institutional and ad hoc (proceedings conducted by someone other than an "arbitral institution") arbitration proceedings conducted in Hong Kong, both of which are recognized in the PRC. It also lays out a two year time limit for enforcement (an improvement over the previous law’s one year limit), which helps creditors.

However, arbitral awards cannot be enforced unless they have been recognized by the local PRC courts as being enforceable, and local protectionism has been a problem. Although, in 1995, the PRC Supreme Court declared its solitary supremacy in its right to refuse to recognize both foreign awards (from a non-Chinese arbitration institute) and foreign-related awards (from a domestic arbitration body involving a foreign party), that hasn’t solved the problem. There is no time limit on the Supreme Court’s decision, so getting through the procedural red tape can drag on for years - which can also be due to some local protectionism. Enforcement is further hampered by Chinese interest, local or otherwise, in the defendant - and, as anywhere, whether or not the defendant is even solvent.

Finally, it is important to note that domestic arbitral awards may not be enforceable at all! Unlike foreign and foreign-related arbitral awards, Chinese courts can review the arbitration tribunal’s findings of both fact and law. The mere fact that one party is a wholly foreign-owned entity will not normally render the award foreign or foreign-related. So the winning party in arbitration may be pronounced the loser by the court. Consider this when considering domestic arbitration - you may end up in litigation anyway...

Is arbitration the answer? Perhaps - it depends on where you and your partners are located, the interests the PRC has in your and your partners’ business, and the solvency of your partners’ business should the situation decline. Once again, this cannot be overstated: CONSULT YOUR ATTORNEYS. THIS SHOULD BE CONSIDERED BEFORE A MATERIAL BREACH OCCURS. Once disaster strikes, these questions can certainly be revisited, but you are never stronger in negotiating that when you are still at the contracting stage, particularly as the mood is still congenial and terms are much easier to set. An ounce of prevention is worth ten pounds of cure when it comes to dispute resolution mechanics. At the USA China Law Group sound prevention is sound business - please feel free to contact us.

Wishing you good counsel - and good health!


by Alexandra Damsker

You are coasting along, manufacturing products in China, beginning product development there, as well as opening up your European and Asian markets when - something goes disastrously awry. Despite the best of intentions between you and your Chinese suppliers, a shipment is missed, a major contract term goes unfulfilled, and negotiations are getting you nowhere. “But I have a contract!” you say? As our friends at www.chinalawblog.com have explained so well, Chinese contract law is far from clear(see, for example, http://www.chinalawblog.com/2009/06/china_gets_all_new_on_contract.html, discussing the Explanations of Contract Law released by the PRC Supreme Court, effective May 13, 2009).

What are your options? Well, as in the US, you have the courts, mediation, and arbitration.

The benefit of the court system is that all decisions, including mediation and arbitration,are subject to the ruling of the courts. In that respect, if you start with the courts, youare more likely to get a final ruling. However, as Chinese law is based on Civil Law rather than common law, there is no system of stare decisis (“like cases are determined alike”)-therefore, there is little to no predictability in ruling. Determinations can only besurmised by hints from the Supreme Court, and most would wish just a bit more to on which to base the outcome of their business. Without the principle of predictability to buoy up one sideʼs argument - and thus speed up negotiations and settlement – the odds that a dispute will end up in the fickle and byzantine Chinese court system is discouragingly high.

Mediation is an alternative, and may work better for those who merely need assistance negotiating the relationship or one or two issues. As a less adversarial and often cheaper process, disputes can be resolved quicker and with relationships more likely to remain intact. However, mediations are non-binding, and issues may end up in the courts and/or arbitration in the end - with additional costs, delay, and possible antagonism. If, however, you merely require “lubrication” in your relationship to restart your negotiations, “conciliation centers,” as they are know, are not uncommon, and your legal counsel can refer you to a good source of knowledgeable, independent mediators.

Arbitration, on the other hand, is legally binding, and is gaining prestige and steam in both the PRC and Hong Kong. Local disputes in the PRC usually go through the China International Economic and Trade Arbitration Commission and China Maritime Arbitration Commission. However, most disputes with any international aspect, including those involving US companies, go through Hong Kong which, unlike the PRC, is subject to principles of common law, and, along with Singapore, is the main venue of arbitration in the region. The primary arbitration center is the Hong Kong International Arbitration Center (HKIAC), which announced that it resolved 605 disputes in 2008,compared to 448 in 2007 and 394 in 2006. The increase is no doubt due, in part, to the declining economy, as the decreased cost and increased speed both serve to facilitate the speed and profitability of business. Arbitration is expanding as a method of dispute resolution, and will be discussed further in our next blog entry.

So, what to do? Regardless of which path you choose - make sure you clearly indicate your chosen venue (litigation, mediation, arbitration) and body IN YOUR CONTRACTS. This cannot be overstated - an ounce of forethought will keep you from pounds of medication for your ulcers and heart...and isn’t that what good lawyers are for? Good health comes with good counsel - so keep your counsel informed of events in your company, and let them protect you. The attorneys at the USA China Law Group have years of experience in keeping you protected, so contact us at your earliest opportunity.