Disputes involving products made in China have recently gained much attention in the global media. In U.S. courts, many U.S. companies that outsource production to China or purchase Chinese goods for resale in the United States have been held liable for damages caused by defective Chinese products.
Being the recipient of a favourable judgment in a U.S. court is not always sufficient for a plaintiff to successfully collect damages against Chinese manufacturers in a product liability suit. At present, there is no treaty between the United States and China in relation to the mutual recognition and enforcement of court judgments.
Therefore, a plaintiff may not be able to collect any compensation against a Chinese manufacturer when the manufacturer is unwilling to honour the U.S. court judgment and has no attachable assets in the United States that could be liquidated to satisfy the judgment.
The alternative for an importer (not an end user) is to seek damages against the Chinese manufacturer in a product liability suit in Chinese courts. It is advisable to choose arbitration to avoid the Chinese court system, but if the Chinese manufacturer is unwilling to agree to arbitration, there are ways to navigate the system.
Major Features of the Chinese Legal System
The Chinese legal system has three major differences to the U.S. legal system:
- It is a civil law system. The Chinese legal system is based on civil law, which is mainly based on codification and starts its analysis from abstract rules, rather than relying on precedents. As such, the logic implied in the Chinese legal system is deductive, not inductive, which to some extent is the basis of the U.S. legal system.
- There are no juries. Typically, a Chinese court is constituted by only three judges, although one of the judges usually has the title “the Jury of People”. The judges play a much more active role during the trial than their peers in U.S. courts. These three judges can literally decide everything in a case.
- There is very limited discovery. The U.S. discovery procedure is one of, if not the, most time-consuming procedures in the U.S. legal system. In contrast, under the Chinese legal system, parties exchange evidence only once or twice during the whole trial. Only on very rare occasions does exchange take place more than three times. Only in very limited situations can a party apply to a court for an order that requests that the other party disclose the evidence its opponent needs.
How to Sue Manufacturers in China
End Users Versus Chinese Manufacturers
It is not advisable for U.S. end users to file a lawsuit in relation to defective Chinese products, simply because it’s not worth doing so.
Chinese law does not allow for punitive damages. The only clause that could be considered punitive is Article 49 of the Law of the People’s Republic of China on Protection of Consumer Rights and Interests. This clause states that a business operator engaged in fraudulent activities in supplying items shall, in response to a consumer’s demand, increase the compensation for loss to twice the cost that the consumer paid for the item. In addition, there is no provision for class actions in China. Each end user must file a separate case against the same manufacturer.
The most efficient redress for the U.S. end user is to sue the importer and the seller of the Chinese goods in the U.S. courts. The defendant could then decide whether to seek compensation from the Chinese manufacturers.
Importers Versus Chinese Manufacturers
Compared to end users, U.S. importers may have more incentive to file a lawsuit against a Chinese manufacturer. However, before embarking on the suit, importers should take the following steps:
- Conduct an investigation into the legal and financial status of the potential defendants: the exporter and the manufacturer.
- Use this information to determine whether it’s worthwhile to sue.
- Consult a reputable Chinese law firm on whether there is a case, and ask them to explain the pros and cons.
If after following these steps an importer decides to sue, it can file a lawsuit against the defendant(s) for breach of contract, assuming that the contract contained a quality and inspection clause. It is also assumed that the importer included a watertight dispute resolution clause in the contract, preferably one that doesn’t ask for redress through the U.S. courts. As explained, a U.S. court judgement doesn’t guarantee that an importer will be able to collect damages.
It is not recommended that the plaintiff files a tortious action, as it would be difficult to obtain the full amount that the importers paid to U.S. end users. The amount end users received from the importer will have been calculated on the basis of U.S. standards and laws, and it is highly unlikely that these will be supported by a Chinese court according to Chinese laws.
In addition, any evidence collected outside the territory of the People’s Republic of China must go through a notarisation and authentication process in the place where it was created. Moreover, all the evidence and any documents must be translated into Chinese.
Compared to the entitlement of end users, the compensation for losses that an importer can get is relatively large. Under Chinese Contract Law, where a party fails to perform its obligations under the contract, or its performance fails to conform to the agreement and causes losses to the other party, the amount of compensation for losses is equal to the losses caused by the breach of contract. These include the interest receivable after the performance of the contract, but this is applicable only if the total amount doesn’t exceed the probable losses caused by the breach of contract foreseen (or which ought to have been foreseen) when the party in breach agreed to the contract.
The best offence is a watertight defence. Contracts and agreements should only be drawn up with the assistance of local knowledge and a thorough understanding of the Chinese legal system. To ensure full protection, importers should consult corporate and disputes lawyers before reaching any agreement. Navigating the Chinese court system is only possible with a highly experienced local guide.