Pursuing claims in China

Outstanding fees, commissions and other charges are not at all uncommon in most businesses, but in shipping there can be significant problems in pursuing such claims when they are against companies from all over the globe. For parties with claims against China-based companies, this article is intended to give a brief overview of what steps can be taken against a stubborn debtor, whether proceedings in China offer useful benefits to the claimant, and how recovery can be made as straightforward as possible.

The first choice is whether to seek settlement or to pursue legal remedies. The approach to be taken to settlement of a debt at a reduced rate will depend partly on the commercial relationship with the debtor and partly on the costs and prospects of recovery through legal proceedings. We shall therefore look at the question of legal proceedings and costs first. A major priority is to identify the correct jurisdiction in which the claim should be brought. There may, of course, be express provision in the contract between the parties as to where disputes should be resolved. If so, this gives a clear starting point as to where proceedings could be commenced. However, where there is an express agreement as to the choice of a jurisdiction other than China, this does not necessarily prevent a claim being brought against the debtor resident in that country, which may be desirable for reasons that will be given later.

Where there is no express provision in the contract, or for those considering what to include in their contract, the choice will be seen as being between the claimant's home jurisdiction and China. There are two considerations here. The most obvious is to find a jurisdiction that is favourable to the claim. There is little use in bringing the claim in a jurisdiction that, for any reason, does not allow the claim or would exclude any relevant evidence. However, where the claim is basically undisputed and the problem is really that the debtor is simply ignoring the requests for payment, the question of enforcability becomes more important.

Considering for a moment an English claimant. English court proceedings, whilst being more familiar to the claimant than Chinese proceedings, offer no easy route for enforcing in China any judgment obtained. This can be contrasted with the position for UK arbitration awards which can be enforced in China under the New York Convention. Enforcement of arbitration awards in this way is generally quite straightforward in courts in the major areas of China, although it can be more difficult in areas less familiar with international matters.

Where possible, therefore, there should be a preference for foreign arbitration rather than court proceedings from the point of view of ease of enforcement. The New York Convention has also been ratified by many other countries, including the USA, Australia, France and Germany, and therefore allows for the easy enforcement of arbitration awards from these countries. Foreign court proceedings can also suffer significant delays in relation to service of documents - we recently had one case where service of a writ from England on a company in Shanghai took in excess of six months.

Many claimants may feel that proceedings in China are unlikely to be effective or that they will be biased in favour of the Chinese party. This is not an entirely fair perception of the court system in China. In respect of maritime claims, most coastal areas of China have specialist maritime courts under whose jurisdiction the claim would fall. Since being established these courts have rapidly become familiar with international disputes. Bringing proceedings in China certainly has advantages so far as the enforcement of any judgement or award is concerned. As regards any jurisdiction clause that makes the dispute subject to another legal system and would normally prevent the claimant from bringing his claim in China, most Chinese defendants would be happier to be sued in their home jurisdiction. It will be much less expensive for them than would foreign court proceedings where they would have to instruct local lawyers to represent them. They are therefore likely to agree to a change of jurisdiction or otherwise not contest the service of Chinese proceedings in favour of somewhere else.

If the parties agree to proceedings in China, this opens up additional possibilities for seeking pre-judgement security. Chinese courts can allow the arrest or seizure of assets in China in relation to a claim that is to be brought outside China, although where the defendant is Chinese the court may decline the application. This can be avoided if the claim itself will be heard in a Chinese court. Where security is sought the plaintiff has to provide counter-security, sometimes in an amount equal to that claimed. Although this may restrict the usefulness of the procedure, if the problem is an unwilling debtor then the attachment of assets can sometimes be sufficient to produce the required results.

The enforcement of a judgement or award made in China is fairly straightforward. Provided the plaintiff can identify assets of the defendant, the court will allow these to be attached. Since a judgement has already been obtained no counter-security need be provided.

Chinese proceedings do, however, present certain complications and disadvantages. In court only Chinese lawyers can appear or represent the client, and proceedings can appear to be slow if the facts of the case are complicated since the court will hold several hearings before any decision is made. Further, the claimant's costs are generally not recoverable in the event that the court finds in his favour.

We would maintain that in certain situations Chinese proceedings may offer more benefit to the foreign claimant than might be expected. Certainly, if the claim is essentially undisputed, then it may be that the threat of, or actual commencement of, court proceedings, will bring about settlement discussions. We have had success in several cases where a serious threat of commencing proceedings in China has been sufficient to initiate and bring to a conclusion favourable settlement discussions. If a settlement agreement can be concluded this will put the claimant in a strong position even if payment is not made in accordance with that agreement, since the claimant can sue on the agreement itself rather than having to argue on the basis of the underlying contract.

This article was contributed by Adrian Clarke and John Lin of the Shanghai Representative office of Sinclair Roche and Temperley

Editors Comment: ITIC has, on a number of occasions, successfully arrested ships in China in order to obtain security on behalf of ship agent Members. However, difficulties can sometimes be encountered and if the ship is trading to other countries it may be more helpful to arrest in another jurisdiction.