|
Out of court
Traditionally, amicable and out of
court-settlements of disputes have a much higher significance in China than in the
Western business world.
Most business contracts in China include a clause stipulating that negotiation should be employed before other dispute settlement mechanisms are pursued.
Next to negotiation, mediation plays also an important role when settling disputes with Chinese companies.
Even when already in litigation before a Chinese court, judges often try to encourage the parties to pursue further negotiation
or mediation at first.
One main reason why to look first for an out of court-solution are the weaknesses and shortcomings
of the Chinese court system (see below).
Additionally, Chinese business people often want to avoid the ignominy
of unpaid debts or of a public dispute due to the so-called “loss of face”, making them willing to settle the issue by negotiation.
Chinese credit management companies rarely take local debts to
court but rely on persistence.
Interestingly, the age profile of debt placement for Chinese
companies is very different to the US or European profile where debts will
usually be placed at 60 or 90 days past due date, whereas in China the period is at least one year overdue before placement, but in many instances is two years.
In any case, it is recommended to carefully develop a dispute resolution strategy in advance, considering all possibilities, including negotiation, mediation, arbitration and litigation, and the accompanying time and expenses that it may take to resolve the problem.
Negotiations
When a Chinese debtor defaults, it is better first to seek legal
advice before taking any steps. It may be advisable trying to negotiate an
amicable solution (e.g. paying by instalment) as a first step.
A popular device is clearing debts through further trade whereby
the debtor pays cash for further goods plus an agreed cash margin, say 25%,
which is allocated against the existing debt.
This has the dual benefit of reducing the debt whilst ensuring
no risk for the new supplies.
Creditors have to be aware that even if an amicable solution has
been agreed on, a Chinese debtor may still be inclined to take further delaying
actions.
In such a case it might be useful to apply certain pressure
tactics. One such measure would be a “soft arm twisting” by still offering a
compromising scheme to the debtor, while hinting that a non-performance would
lead to a blacklisting at certain trade associations.
This might mean a public loss of face by the debtor, endangering
his business relationships in general. In any case, a time limit should be
specified when going down this route.
Legal proceedings
The Chinese judicial system is still not up to international
standards. In general, court procedures are slow and bureaucratic.
Many judges and court officials are poorly trained, often being
susceptible to corruption and local protectionism.
Partisan actions taken by courts leading to a delay of the
proceedings are common.
Additionally, communist party and government officials sometimes
even interfere in court decisions. It is not unusual that a judge will not wish
to offend a player in the local economy or a businessman with “special
connections” to the local authorities.
This is most notably the case in the rather rural areas, while
in the larger cities and commercial centres like Beijing, Shanghai or Shenzhen
courts are usually more professional and impartial in their
judgments.
Therefore, creditors may in principle first seek an out of
court-settlement. In any case, a creditor should not threaten litigation if he
has any doubt if he will carry it through. It is not a threat in the way it is
in Europe or the US.
Courts in Charge
The Chinese court system is organised along four instances.
Court competence is not defined according to the amount in
dispute, but due the complexity of a case. In charge for international trade
disputes are the courts of second instance (Intermediate People’s Court) and of
third instance (Higher People’s Court).
Enforcement judgments
Enforcement of titles or payment summons are often delayed or
even denied in China.
As said above, courts might be biased due to local protectionism
or influence of party officials.
Delaying tactics are often employed by the court, citing special
formalities to abide by and sometimes demanding for additional examinations of
the case before giving a judgment – even when the evidence is clear.
Another stumbling block is the fact that Chinese small and
medium sized enterprises might easily disappear as their owners withdraw their
assets and liquidate their business with impunity, only to establish a new
company shortly afterwards.
Statute of limitations
In China, the statute of limitations is four years for a foreign
creditor.
Arbitration
Compared to ordinary court proceedings, arbitration might offer
some advantages, e.g. faster procedures, closed hearings and the finality of the
rulings.
When agreeing on an arbitration clause, the underlying contract
or separate agreement must expressively provide that disputes will be resolved
through arbitration.
It should also clearly define the arbitration institute that
will administer the case and the official language to be used.
If they agree on arbitration, most Chinese companies will insist
on local arbitration through the China International Economic and Trade
Association (CIETAC).
While having improved in recent years regarding efficiency and
impartiality, it is still recommended to resist local arbitration.
When agreeing on CIETAC-led arbitration the applicable law will
inevitably be Chinese law. It is also worth noting that CIETAC rules do not
prevent arbitrators discussing a case with unauthorised external parties.
China has ratified the United Nations Convention on the
Recognition and Enforcement of Foreign Arbitral Awards.
Therefore, the parties are free to agree on international
arbitration courts outside China, as foreign arbitration awards are recognised
and can be enforced.
Wherever possible, arbitration in a neutral third country such
as Hong Kong or Singapore subject to international rules, such as provided by
the International Chamber of Commerce, is strongly recommended. But enforcement
of arbitral awards might still be a problem in China, as securing payment is
beyond the powers of the arbitration court.
Therefore, the winning party sometimes has to apply to an
ordinary court
to have the arbitration award recognised and enforced. If
arbitration is agreed outside China, bear in mind that the period for enforcing
any award in China is short at six months from the date of the award.
Weighing up the costs, time and frustration of either
arbitration or legal proceedings when recovering debt, it may be far better to
follow the commercial negotiated route and, in a worst case-scenario, try to
sell the debt to a third party who is specialised in debt purchase for a
sizeable discount.
Legal fees
Lawyer fees are not fixed by statute in China. The different
chambers individually charge distinct “legal service fees”.
Court fees are calculated by reference to the amount in dispute.
In general, the losing party has to reimburse all legal costs of the winning
party.
Remember also the hidden costs of taking legal action such as
translation cost.
Current legislation
China has never had a proper bankruptcy law applicable to all
types of enterprises, only a mix of rules and laws.
The particular legislation to apply to mainly depends on whether
the debtor is a state-owned enterprise (SOE) or a private enterprise.
In general, the current rules and regulations are incomplete,
lack efficiency and are subject to gross inequities.
Creditors’ rights and creditor protection are very limited;
opportunities for creditors to actively participate and influence a bankruptcy
procedure are low.
Judicial independence is rather questionable in case a SOE goes
bust and the government has to play conflicting roles.
New bankruptcy law drafted
After a 10 years period of drafting,
recently the decree on a new bankruptcy law has been submitted to the National
People’s Congress for final review and enactment.
The decree is seen as another key move bringing China’s legal system
in line with international standards. The so-called “Enterprise Bankruptcy and Reorganisation Law” would apply to all kinds of companies, regardless if SOEs or any other form.
In its current draft, the power of courts, judges and the creditor rights would considerably be strengthened. The new Law would also introduce defined corporate restructuring schemes.
The approval of the new law was already scheduled for 2005. The current delay may be explained by the reluctance of the authorities to address the social consequences of bankruptcy (especially regarding the already troubled SOEs) when applying the new rules.
Collection of receivables in China
Safeguarding your credit sales in China
Protecting your credit sales in other countries
Reproduced by kind permission of Atradius
Atradius copyright. The statements and recommendations made herein are for
informational purposes only and should not be utilised as a substitute for
professional advice in specific situations. Therefore we ask for your
comprehension that we can't take over any liability for this report. If legal
advice or other expert assistance is required the services of a professional
should be sought.
|
