What are the reasons for the increase? And is this a good or bad thing?
The China Daily runs the headline “Business lawsuits in sharp increase” and correctly points out that one of the factors for the increased number of cases is that there are more and more foreigners doing business in China. They explain:
… the rise in disputes was partly due to an increasing number of overseas companies entering the mainland.
By the end of November, the mainland had about 453,600 of these companies, up from 426,000 in September 2008, according to figures from the State Administration for Industry and Commerce.
However, another reason for the jump in court cases is related to the background of these new companies coming to China.
Apart from established US companies, we’ve noticed more and more small and medium-sized enterprises, that once ignored the mainland market, are now seeking opportunities on the mainland. Localization is the most difficult aspect for newcomers.
Late entrants are more conservative and unfamiliar with Chinese culture and laws.
Let’s also keep in mind that China’s legal system is relatively new. The article explains:
Legislation concerning overseas-invested enterprises was drafted about two decades ago and may need to be updated. For example, such laws fail to specify the detailed rights and obligations of the mainland and overseas parties.
So we have a combination of a young Chinese legal system and a lot of new-to-China businesses.
What are the other reasons for the increase?
Some reasons not mentioned in the article are as follows.
10 to 15 years ago, foreigners tended to feel they could not get a fair shake in a Chinese court, so they didn’t bother to pursue that option. With China joining the WTO at the turn of the century and the government committed to improving the rule of law to help bring stability to a growing economy, the perception is changing and there is a feeling among foreigners that the playing field is more level these days. As such, it is natural that more and more foreigners would seek relief to their problems in the courts.
In the past, partnering with a Chinese company was much more regulated. It is still very complex, but Chinese and Foreign sides are fairly flexible in negotiating the terms of their partnership, be it a Joint Venture or a simple PO to buy products. The foreign side often uses contract templates from back home which they feel comfortable with. The Chinese side tends to see the contract as more of a memo of understanding rather than strict legal document, and as the China side puts the relationship first, they may sign the agreement without even translating it into Chinese or really understanding it. Unfortunately, this is very dangerous as even if things feel smooth at first, there are most likely icebergs hidden in the water which the foreign partner doesn’t yet see coming. So failure by the two sides to communicate the long term partnership details is a common cause of relationship breakdown and thus the spike in court cases.
About the blogger
Written for CSIC by Sophie Mao (China based lawyer at www.AsiaBridgeLaw.com) with support from Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)