China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

In 2006, however, the Nanjing Intermediate People's Court heard the patent infringement case of Yuan Lizhong v. Yangzhou City Tongfa Air-Raise Actuator Factory & Yangzhong City Tongfa Industry Co. Ltd. This case was the first counter-suit for damages action brought as a reaction to malicious litigation. In March, 2009, the Supreme People's Court promulgated the Opinions of the Supreme People's Court on Several Issues Regarding the Implementation of the National Intellectual Property Rights Strategy ( Fafa [2009] No. 16) ("Opinion") which provides that: "The courts shall accept where appropriate and adjudicate cases that seek declaratory judgments of non-infringement and litigations that seek counter-suit for damages in claim of malicious litigations.”

The Opinion provides practical guidance to the people's courts in counter-suit for damages actions if in the face of malicious litigation.

Definition of Malicious Litigation and How to Determine "Malice"
When a party initiates litigation in the PRC, it must adhere to the "Honest and Credit" principle. Otherwise, the party will be considered to be abusing its right to litigate under the Chinese law. Based on this principle and general understandings described in academic research papers, we believe the definition for malicious litigation refers to "a groundless civil action filed without a violation of substantive rights or without factual basis and other justifiable reasons to pursue litigation and which will result in damages to the interests of the alleged parties". Among the elements referred to above, the key element is to determine if the party that initiated the groundless civil litigation is acting with "malice" towards the other party.

Counter-Suit for Damages Actions
Although the Opinion issued by the Supreme People's Court allows counter-suits for damages, it did not specify details on the application of such a practice. Since the counter-suit for a damages action is a type of litigation where a plaintiff prays for compensation for damages suffered from a malicious litigation, the proceeding at its core is a civil suit regarding infringement of rights and with the corresponding remedy for compensation.

Legal Trends for Counter-Suit for Damages Actions
Though there are not yet explicit provisions regarding malicious litigation in Chinese law, a basic legal mechanism for preventing malicious litigation is now being formed, particularly in the field of intellectual property. It is foreseeable that the people's courts will set stricter criteria for accepting such cases and impose tighter controls over granting interim injunctive measures.

Evasion or Negative Response
Regardless of the size of the dispute or the size of the Chinese company involved, some take an evasive attitude when confronted by overseas disputes, either failing to respond at all or hiring cheap and inexperienced foreign lawyers. This can put the Chinese parties at a severe disadvantage and it was a common situation at the beginning of the reform of investment laws in China. Now it occurs less frequently.

Instructing a foreign law firm to form the legal team
Currently, when dealing with complicated international disputes, many Chinese companies instruct large international firms as their key legal advisors. These firms in turn hire well-known local lawyers in third countries as and when needed. The advantage of doing things this way is that the legal team has enough experience and, when fully prepared, may have the power to persuade foreign courts and arbitrators, increasing the success rate of the Chinese companies involved.
However, this strategy leads to two common problems. First, fees are relatively high. Lawyers in foreign law firms generally charge high rates. Second, communication can be an issue. While there are no obstacles to communication between foreign firms and the corresponding foreign courts and arbitrators, communication between foreign firms and their Chinese clients may not be so effective. Different legal cultures and dispute resolution practices sometimes make it difficult for Chinese clients and foreign lawyers to fully understand one another.

Normally litigation lawyers at foreign firms do not understand Chinese and are often not very well acquainted with the commercial practices of Chinese companies. Chinese lawyers hired by international firms do not face language obstacles, but they may lack experience in complex international arbitration procedure. Because of this, Chinese clients often encounter difficulties establishing truly effective communication with their foreign counsel.

Hiring a Chinese law firm with experience in international litigation and arbitration to create an international legal team
This is a new combination whereby a Chinese company involved in an international litigation or arbitration proceeding hires, a Chinese law firm with experience in international litigation and arbitration to be responsible for building a global legal team. The advantages of this new strategy are the efficient use of fees and the increased efficiency of lawyer/client communications. As Chinese lawyers with international experience can read Chinese and directly draft in English, this saves on document translation costs. In addition, as Chinese lawyers understand the thoughts and concerns of Chinese clients, they can more effectively communicate with their Chinese clients. Moreover, key Chinese litigation lawyers with international experience are based in China rather than abroad. This makes meetings and day-to day communication with Chinese clients easier.
When facing commercial disputes abroad, particularly in the areas of foreign investment or production, hiring an internationally experienced firm of Chinese lawyers to lead foreign counsel and build an effective global team can be an excellent choice for Chinese clients.
 

Certainly, when clients choose a team led by Chinese lawyers, the lawyer’s understanding of English is not enough. The Chinese lawyer should:
 

• Have a depth of experience in foreign litigation and arbitration
• Understand the workings of international firms
• Understand the needs and concerns of Chinese clients
• Have a sizable team of its own in order to cope with a large number of tasks in a short period of time and in a variety of urgent situations

For an example of King & Wood’s experience leading a global team in complex multijurisdictional litigation, follow this link.

如何解决海外投资引起的跨国商业纠纷

近年来，中国企业的海外投资业务快速增长，尤以能源矿产、银行业、IT业和制造业等行业表现突出。2009年8月18日，中国石油化工集团公司宣布以约合72.4亿美元的价格成功收购总部位于瑞士的Addax石油公司，这是迄今为止我国公司进行海外资产收购最大的一笔成功交易。在此前的几年，中石油也进行了几次大的海外并购交易。例如，中国石油于2009年5月收购新加坡石油公司约45.51％的股份，交易对价约合10.2亿美元。另外，中国五矿集团公司、中国有色集团、宝钢集团、中国工商银行等企业也在对外投资方面大有作为。

随着中国企业对外投资的不断增长，商业争议时有发生。根据我们的经验，中国企业在应对海外争议案件方面大致存在以下几种模式：

一、逃避或消极应对

无论大小案件，也无论中国公司的规模大小，有些中国公司在应对海外商业争议案件时会采取逃避态度，不出庭或者找经验不足但收费低的外国律师去应对。这种做法通常都使得作为案件当事人的中国公司处于极为不利的境地。这种情况在对外开放的早期比较常见，近年来已经不常出现。

二、聘用境外事务所，由该外国所组建律师团

目前有不少的中国企业在应对复杂的海外争议案件时，倾向于聘用国际大型律师事务所作为其首席律师，再由该事务所视案件需要选聘其他国家的律师，组建律师团。这种模式的好处在于，这样的律师团通常具备足够的经验，而且如果准备充分，有能力去说服外国的法官或外国仲裁员，加大了中国公司在海外争议案件中胜诉的机会。

但实践证明，这种模式常存在两个方面的问题：第一是费用高昂。境外国际性律所事务所的律师费普遍比较高；第二是沟通问题，即尽管境外律师组成的律师团与境外的法院或境外仲裁机构的沟通没有障碍，他们与中国客户之间的沟通却往往不尽如人意。由于法律文化和争议解决途径方面的差异，中国客户与其聘请的境外律师有时候难以进行有效的沟通。

通常，境外律师事务所的有诉讼经验的律师不懂中文，对中国公司的商业做法也了解不多，而受聘于国际所的中国律师在语言上虽无障碍，却又往往欠缺海外诉讼仲裁程序的经验，因此中国客户常常感到与自己聘的境外律师进行有效的沟通比较困难。

三、聘用有国际诉讼仲裁经验的中国律师事务所，由该中国所组建律师团

这是一种新的组合方式，即中国企业在涉及境外的诉讼或仲裁程序时，聘请具有国际诉讼仲裁经验的中国律师事务所，再由该中国所根据案件的需要组建律师团。这一模式的优点是可以节约成本，并提高客户与律师间的沟通效率。因为有国际诉讼仲裁经验的中国律师可以阅读中文文件，并可以直接草拟英文文件，这样就节约了相当的法律文件的翻译成本。另外，中国律师比较了解中国客户的想法和担心，因而可以高效地跟客户进行沟通。并且，中国的有国际经验的诉讼律师就在国内，比远在外国的国际诉讼律师更方便与中国客户沟通。

因此，对中国公司而言，在面对跨境商业争议（尤其是海外投资、生产引起的商业争议）时，聘请有丰富国际诉讼仲裁经验的中国律师，由这样的中国律师负责组建并引领包括境外律师在内的律师团，不失为一种理想的选择。

当然，如中国客户拟遵循本模式，聘请中国律师来组建律师团，则这样的中国律师仅仅懂英文是远远不够的。能够胜任本模式下角色的中国律师必须：

• 拥有丰富国际诉讼仲裁经验；
• 了解境外律师事务所的运作；
• 了解中国客户的需求和担心；
• 有相当规模的团队，能够应对短时间内的大量任务以及各种突发情况。

请点击本链接，以了解金杜在引领国际律师团队解决复杂的跨司法区域争议方面的案例。

However, if the downloading process is not conducted properly, the evidence won’t be recognized as authentic, even if the downloading has been witnessed by a notary public. 

In the NuCom Online (Beijing) Information Technology Co., Ltd. v. ChinaNetwork Communications Corporation Limited, Zigong Branch case, the Supreme People’s Court emphasized, in its (2008) Min Shen Zi No.926 Civil Ruling, the necessity of examining the origin of web-based information , as said origins are fundamental  to deciding whether the notarized evidence can be used as the basis for a court’s judgment. If the notary public cannot gain access to the computer or mobile hard drive before the notarization procedure and if the notarization itself does not  include a record of the state of the computer or mobile hard drive with respect to the integrity of said computer/mobile hard drive prior to the downloading, the Supreme People’s Court deems that the notarization can prove that the act of downloading occurred before a notary public, but it cannot prove that the data at issue was actually downloaded from a specific location on the Internet.

The Supreme People’s Court’s above judgment is based on the nature of  web technology. Electronic data stored in a web sever can also be stored or cached in a local computer. Under certain scenarios, when you use a local computer to visit a target website, the web pages displayed are actually those stored or cached in the local computer, rather than web pages downloaded from a remote website.   Therefore, the actual origin of the evidence cannot be guaranteed merely by having a notary public witnessing the downloading process, as that “downloading” may be simply pulling up the web page from the cache in the local computer.

The Supreme People’s Court’s opinion noted above is not only guidance for the courts when examining  notarized web page evidence, but also an important instruction for those parties seeking to gather evidence in support of judicial proceedings in China. To ensure proper authentication of web-based evidence, parties should conduct notarized web page downloads at the notary public office using the notary public’s computer and, also, request that the notary public record the condition of the computer prior to the notarization process. If the downloading must be done on another computer, the party should initiatively request the notary public to delete all relevant files from the caches of the computer by appropriate procedures before downloading the requested web pages and record all of the detailed steps in the notarization process. 

Given China's resilience to the financial crisis, it seemed a good place to meet redemptions and liquidity needs by selling positions. However, it was much easier to get money into China than to get it out.

Beijing has long been wary of foreign investors, imposing strict controls on FDI and offshore loans. Unable to resist GDP growth, renminbi appreciation and real estate expansion, investors wanted in – keen to avoid regulatory processes and wanting exit strategies. Offshore structuring appeared as a solution, but this was conceived against the bubbling real estate market – where much of the foreign money was headed.

I warned investors that 1 billion square feet of residential and commercial projects were underway in Beijing alone. But local banks and foreign funds provided cash; developers continued to build. The government tried to rein in a runaway market. The lending spigot at local banks ended, interest rates and down payment requirements increased and anti-speculation taxes were imposed. The bubble began to burst, with markets in south China suffering first. Developers, undeterred, bought more land and continued building. Their ambitions finally caught up with them last year.

China's listed real estate developers have seen their share prices fall by 80% from November 2007. Despite government efforts to revive the residential market, buyers are only responding to price cuts. Many of these developers are hemorrhaging cash, turning to non-banks and gray market lenders.

The unlisted firms have caused the most trouble. An IPO promised riches and so these developers expanded aggressively. They needed capital; foreign investors acquiesced. Investments were structured offshore and the money came onshore via preferred equities and convertible bonds issued by offshore companies with real estate holding companies in China.

Many large developers missed IPO deadlines, facing disgruntled investors. Alternative investment managers now face redemptions from investors and busted covenants and debt defaults from Chinese developers.

It seems, from the offer¬ing circulars, that few of the investors or developers knew what they were getting into. The developers gave guarantees, pledged unlisted shares, issued “no-IPO put options”. They agreed to pay punitive escalating internal rates of return, going from 30% to 70%, if the IPO was delayed by 18- 30 months.

The alternative investment managers who relied on “contractual” guarantees to protect their interests overlooked the clause in the circulars which states that offshore creditor rights are not enforceable in Chinese courts. Neither are judgments in foreign courts binding on Chinese corporations or citizens.

Many of the international law firms that developed these structures are now advising clients not to enter Chinese litigation. Yet they recognize that by the time the offshore judicial process concludes, Chinese developers would have transferred assets with any unencumbered value, or allowed onshore creditors to slap asset preservation orders on any remaining assets.
The international law firms are too pessimistic. Foreign investors can use the Chinese legal system to enforce their offshore creditor rights, seize collateral, freeze assets to keep them from disappearing, enforce guarantees and bring Chinese entrepreneurs to negotiate.

Most Chinese real estate developers sleep soundly yet foreigners remain engrossed in inconclusive meetings trying to answer their investors’ questions:
• What is the status of my investment in China and what is the condition of the Chinese partner?
• Is the original investment strategy still viable in the present climate?
• Should I continue to hold, sell or invest additional capital and if so is there a realistic business plan I can evaluate?
• If I continue to hold or invest is there a way to get closer to the company and its assets onshore to remedy some defects inherent in offshore structures?
• How do I limit my liability and is there a plan to get my capital out of China?
• Are my interests and those of the alternative investment manager still aligned?

My advice to foreign investors is: act now. Chinese business partners will inevitably satisfy local creditors first, unhesitatingly encumbering a foreign investor's secured assets. Investors must rectify the defects in their offshore structures so they can use local courts and rely on Chinese litigation to settle with local partners.

The end game is to develop a capital preservation and exit strategy, leading to an informed decision to invest, sell or stay the course.