Introduction

Contract Law in China has undergone significant changes in recent years, and China's legal system can be complex and challenging for those who are new to it. Enforcing contractual rights is an important area of concern for businesses operating in China, and there are several considerations that businesses should take into account when entering into contracts and seeking to enforce their rights through the courts.

But Why?

Foreign companies that do business in China can face a number of legal challenges, including disputes with Chinese companies. We can have a look at some common reasons why foreign companies may want to sue Chinese companies (together with some examples) :

  1. Breach of Contract : Breach of contract is one of the most common reasons for legal disputes between foreign and Chinese companies. This can include disputes over payment terms, delivery schedules, quality of goods or services, and other issues related to the terms of a contractual agreement. For example, in 2018, South Korean electronics company LG Display sued Chinese rival BOE Technology Group, alleging that BOE breached a contract by stealing LG's OLED technology.

  2. Intellectual Property Infringement : Another common issue that is prevalent for legal disputes between foreign and Chinese companies is intellectual property infringement. This can include cases of patent, trademark, or copyright infringement, as well as trade secret theft. For example, in 2018, South Korean electronics company LG Display sued Chinese rival BOE Technology Group, alleging that BOE breached a contract by stealing LG's OLED technology.

  3. Counterfeiting : Counterfeit goods are also problematic forcing the owners ie. foreign companies to take legal action against Chinese companies involved in the production or distribution of counterfeit goods of its products. Counterfeiting can include not only products, but also packaging, labels, and other components of a product. This can be look at as recently as in 2019, where French luxury goods company Chanel sued a Chinese online retailer for selling counterfeit Chanel products.

  4. Corporate Governance and Compliance : Foreign companies operating in China may also face legal issues related to corporate governance and compliance, including issues related to bribery, corruption, and other illegal practices. In some cases, foreign companies may choose to take legal action against Chinese companies or individuals involved in such practices. For example, in 2016, Chinese authorities arrested several executives of British drugmaker GlaxoSmithKline on charges of bribery and corruption.

Understanding China's Contract Law

Drafting a Strong Contract

Enforcing Your Contractual Rights

Challenges Faced

Language and Cultural Barriers

Lengthy and Complex Court Proceedings

Lack of Transparency and Predictability

Political Considerations

Advantages and Disadvantages

  1. Legal Process Familiarity: Chinese companies are familiar with the legal process in China and understand the rules and regulations governing business practices in the country. This means they may be better equipped to defend themselves against legal claims brought by foreign entities. This can potentially result in a fairer trial for both parties.

  2. Cost-Effective: Legal fees in China may be lower compared to other countries, particularly those in Western Europe and North America. This makes suing a Chinese company in China more cost-effective for businesses.

  3. Enforceability of Rulings: If a plaintiff wins a lawsuit against a Chinese company in China, the ruling may be more easily enforced in China since the court is situated in the same jurisdiction as the defendant company. This can potentially result in a more effective legal remedy.

  1. Lack of Transparency: The Chinese legal system does not have the same transparency as other legal systems, and there is a perceived lack of independence of the Chinese judiciary. This lack of transparency can lead to a lack of impartiality in court proceedings, particularly if the defendant is a local Chinese company. This means that the court may be biased towards local Chinese companies over foreign entities.

  2. Language and Cultural Barrier: Chinese law is complex, and court proceedings in China may be conducted in Chinese only. This can put foreign companies that do not have Chinese-speaking lawyers at a disadvantage, particularly if they need to present their case in a language they are not familiar with. Additionally, there may be cultural barriers that can impact how evidence is presented and perceived in a Chinese court.

  3. Lengthy Process: Suing a Chinese company in China can often be a lengthy process, and the trial and the decision can take several years to be concluded. This means that businesses may have to wait a long time before receiving any legal remedy or resolution of their dispute. This can be frustrating for the plaintiff, especially if they are a foreign entity trying to navigate a foreign legal system.

  4. Limited Legal Tools: The Chinese legal system does not have the same range of legal tools and remedies available as other legal systems. For example, there is no class-action litigation or punitive damages in China. This means that plaintiff businesses may be limited in the types of legal remedies they can pursue.

Conclusion

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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