Litigation In China For Foreign Investors

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                                           Litigation In China For Foreign Investors
                                                               By Fred Jones

    The People’s Courts

Chinese courts rely on a legal system more akin to continental Europe than the common law system of
the UK, Canada, or the United States, yet there are distinctively Chinese characteristics. Get a good
local lawyer before litigation in China - only Chinese nationals working for mainland Chinese law firms
may appear in court.

Local Bias – Although there are a number of examples of foreign investors prevailing in Chinese courts
against state-owned enterprises and other well-connected local parties, results vary drastically with
location (big cities being considered among the safest bets for foreigners), and it is often difficult for the
foreign party to enforce favorable judgments.

Jurisdiction and Forum Shopping- Lower courts in China operate on a regional basis, and the Supreme
People’s Court is the court of last resort. Jurisdiction rules must be complied with - a corporate
defendant must usually be sued in the jurisdiction where its headquarters are located.


Some of the key features of the People’s Courts include:

lGreat emphasis on formal documentation over witness testimony

lA lot of attention to the production of powers of attrney, authenticated original documents,
notarizations, and seals

lRelatively low-cost, high speed procedures, at least compared with the glacial speed of litigation in the
United States

lStrict limits on ability to compel the production of evidence (discovery procedures), probably the
greatest disadvantage of litigating in China

lLenient treatment of perjury

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lLack of emphasis on precedent – judicial precedent is not binding in China, although higher courts do
issue detailed legal interpretations to guide lower courts

lLower damage awards - damages awards are low by US standards, and it is more difficult to prove the
amount of loss than in Western countries

lDifficulty in enforcing injunctions, seizure of assets, and specific performance - large bonds are often
required before a temporary restraining order will be issued.

Administrative action (bypassing the couret system) is often available in cases or intellectual property
infringement or counterfeiting.

Appeals – Dissatisfied claimants ar usually entitled to one appeal, whci is usually granted and
executed speedily. However, some judgments are effectively unappealable.


Domestic judgments can be difficult to enforce. Local authorities may fail to assist the enforcement a
judgment that is seen as damaging to local economic interests. Furthermore, the People’s Courts have
a reputation of being vulnerable to the “Enron Effect” – they seldom bother to trace and seize assets
deliberately hidden by defndants through the use of complicated corporate structures.

Foreign judgments are enforceable in theory but difficult to execute. Enforcement is generally based on
the principle of reciprocity, meaning that China will only enforce judgments originating from jurisdictions
that enforce Chinese judgments. However, since China is signatory to a number of relevant bilateral
enforcement treaties, the principle of reciprocity is subordinated to treaty requirements. Of course the
best way to enforce a foreign judgment is to locate overseas assets of the defendant in a jurisdiction
willing to recognize the judgment and seize assets.

Judgments from Taiwan, Hong Kong and Macau - Judgments from Taiwan have long been
enforceable on the mainland, and judgments from Macau have been enforceable since April 2006, in
both cases subject to certain conditions. Nevertheless, expect difficulties in actual practice.
Surprisingly, judgments from Hong Kong are currently unenforceable in the mainland except in cases
where the judgment was rendered pursuant to an exclusive jurisdiction clause in a contract, and even
this provision is subject to exceptions.

International tribunals

Other alternatives for foreign investors include adjudication by the World Trade Organization (WTO) or
the International Centre for Settlement of Investment Disputes (ICSID). Both of these tribunals have
serious drawbacks, however – the WTO because foreign investors cannot sue directly (the plaintiff
must be a state), and ICSID because jurisdiction is based on consent and unless you are Dutch,
German or Finnish, your country has not entered into a bilateral investment treaty with China that
would authorize ICSID jurisdiction (although this situation may be about to change).

David Carnes is licensed to practice law in California. He speaks and reads Mandarin Chinese and has
several years experience working with Chinese law firms and Sino-American joint ventures. His
website, China Legal Bulletin, is at

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                                         What Are American Depositary Receipts?
                                                            By Andrew Leone

 The investment known as ADR stands for American Depositary Receipts, which is a tool used to make
it easier for investors to invest in foreign markets. Instead of having to find a broker with capabilities in
the foreign markets where the securities trade, an investor can just receive ADR’s from a depositary
bank that collects the foreign company’s shares.

These ADR’s can be then represent shares in that foreign market. There are many advantages to
using ADR’s that we have talked about in class such as the liquidity of these assets. Since the whole
process of investing in foreign markets has become easier, the market has become far more liquid.
The annual dollar volume of ADR’s has increased from $75 billion dollars in 1990 to $550 billion in
2002. Instead of having to different brokers and red tape to sell foreign investment we can simply trade

As technology advances it has become easier to invest in foreign companies and we can see this
through the use of depositary receipts. Not only are depositary receipts issued in America but they are
also issued in other countries as well such as Euro DR’s, Singapore DR’s and China DR’s. In the Wall
Street Journal on 2/24/06 there is an article, “Bank of Communications Seeks Listing” where we can
see that Hong Kong-listed Bank of Communications Co. has gained approval to offer shares on
China’s stock exchange and are willing to offer China depositary receipts (CDR’s). By issuing CDR’s,
the bank is better able to sell shares to foreign investors.

For more information on American Depositary Receipts, try checking out some of the Wall Street
Journal articles in their online database. Just go to their webpage at It is a
great resource. I would also try checking out some of the other articles you may find in a google

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