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Q&A: DISPUTE RESOLUTION IN CHINA
WITH dispute resolution in China on the up thanks to developments in international arbitration laws, the ongoing effects of the global economic downturn and fluctuating levels of M&A, this is a key area for Chinese firms and both their international and domestic clients.
Frank S. Hong, Shanghai-based senior partner at LongAn Law Firm specialises in FDI, international business transactions, and international dispute resolution. He has experience advising multinational corporations on in-bound foreign direct investment as well as Chinese companies investing abroad, particularly in the US. LongAn Law Firms senior partner also has considerable experience in international intellectual property issues, cross-border M & A and private placements. Coordinating with counsels in foreign jurisdictions, Hong also manages commercial arbitration and litigation with an international element.
Here he discusses the rising levels of cross border related dispute resolution, the importance of the cultural characteristics inherent in the legal and judicial system in China, and the increasing volume of foreign companies involved in disputes here.
HAVE YOU SEEN AN INCREASE IN CHINA RELATED CROSS BORDER DISPUTE RESOLUTION?
This has definitely been the case. Particularly, I see an increasing number of cases where Chinese companies initiate cross border claims against foreign parties in China or overseas forums.
HOW FAR HAS THIS AREA BEEN AFFECTED BY THE ECONOMIC DOWNTURN?
The global downturn has made a marked difference. Most of the China related cross border disputes we have recently handled can be directly or indirectly attributed to the economic downtown in general and the 2008 financial crisis in particular. There has been one to two year process by which parties exhausted efforts of amicable resolutions and subsequently resorted to formal dispute resolution.
WHAT ADVICE DO YOU GIVE FOREIGN CLIENTS OPERATING IN THE CHINESE JUDICIAL SYSTEM?
It is almost a cliché or even a tautology to say that foreign clients must be aware of the Chinese characteristics of the legal and judicial system in China. But it is worth repeating and emphasizing this point one more time here. The more meaningful question, of course, is what exactly the Chinese characteristics are in this context. Frankly, as practitioners, we struggle to appreciate the so called Chinese characteristics every day. First of all, this very term, Chinese characteristics presupposes an international norm of legal and judicial system that is mostly inspired by western ideas. Is this international norm still a relevant reference point in China? Absolutely it is. But its influence has been declining in the past 10 years or so as the home grown practices begin to take hold. In observing the dispute resolution practice in China, one must be able to see multiple layers of forces at play at any given moment. Reading the law books alone simply wont do the job.
WHAT KIND OF TYPICAL PITFALLS SHOULD FOREIGN PLAYERS BE FAMILIAR WITH?
In strategizing litigation in China, foreign players often fail to anticipate the challenge posed by the Chinese evidential rules. Courts rarely compel witnesses to take stand in trial and people generally avoid offering testimonies in matters that do not affect their personal interests. In commercial disputes, one is likely to be disappointed if he/she expects the presiding judge to connect the dots based on evidences presented by simply exercising common sense or judicial discretion. Admissible evidences tend to be written documents that are directly on point. The judicial thinking in evidential issues tends to be very formalistic. It is truly ironic to see that Chinese judges in the past known for their proactive inquisitional approach are actually very much laid back in handling evidential matters in commercial disputes.
TO WHAT EXTENT ARE THE EXPERIENCES GAINED IN DISPUTE RESOLUTION RELEVANT TO CROSS BORDER M&A PRACTICE? DO YOU SEE AN INCREASING VOLUME OF FOREIGN COMPANIES INVOLVED IN DISPUTES HERE?
China-related cross border patent disputes and major commercial disputes are clearly on the rise. The stakes tend to be very significant. In both situations, Chinese parties are increasingly willing to be the plaintiff. Within the commercial category, I also see an increase in fraud related cases involving very large amount of assets. This is obviously a result of the economic downturn. Major orders or investments that were never delivered often wreak havoc for the Chinese parties and their local communities as typically Chinese parties relied on such grand plans in offering land, credit and other resources to foreign parties. Chinese parties resort to commercial litigation and even criminal proceedings to hold foreign parties accountable.
HOW FAR HAVE YOU SEEN A RISE IN LABOUR RELATED DISPUTES IN CHINA?
Labour disputes have always been the most significant legal risk exposure for the foreign invested companies in China. Over the last ten years, salaries of mid to senior level local managers have risen to a high level. As a result, financial stakes for labour disputes are no longer insignificant. In the greater Shanghai area, some of the earliest foreign invested manufacturing enterprises have been operating for 20-30 years and are now entering their sunset stage. Handling a lay off of workers nearing retirement in the coastal area has proven to be a very challenging matter and requires a sophisticated combination of legal, communication, management and even political skills.
HOW WOULD YOU ADVISE YOUR CLIENTS IN BALANCING SETTLEMENT NEGOTIATION WITH LITIGATION OR THREATENING LITIGATION?
Just like in any culture, balancing settlement negotiation and litigation is easier said than done. In China-related international disputes, a particular challenge comes from communication. Counsel, parties and to a lesser extent judges are in a very dynamic and fluid stream of communication. No one should read any messages at face value. Counsel must advise clients to be very sensitive to the cultural background of parties. Culture, here, means more than just national culture. It goes to what kind of industry, what kind of corporation, the personal background of the representatives of the parties, the educational background, linguistic background, and so on. Balancing negotiation and litigation is not a matter of finding the right ratio which simply does not exist. Rather, it is a dynamic deployment of different communication channels.