Why Foreign Plaintiffs Should Sue First in China: Strategies to Win in the Second-Largest Economy

On 1 January 2024, the amended Civil Procedure Law of China became effective (the “CPL 2024”). Its Chapter 4 (Special Provisions on Foreign-Related Civil Procedures) sets out specific rules for cross-border litigation, among which international parallel litigation may have a significant impact on the winning strategy for foreign firms doing business with the second-largest economy of the world, China.

Article 280 of the CPL 2024 (Parallel Litigation) provides that: “[w]here the parties are involved in the same dispute, one party institutes an action in a foreign court, while the other party institutes an action in a [Chinese] court, or one party institutes an action in both a foreign court and a [Chinese] court, the [Chinese] court which has jurisdiction may accept the action…”

When a foreign party is in a dispute with its Chinese business counterparty, it is natural that the foreign party would consider filing an action in its home jurisdiction rather than suing in China. However, given the impact of the parallel litigation mechanism, a foreign party now faces a choice: in which forum it should sue first, in a Chinese court or in a foreign court?

The viewpoint of this article is that it would be better for a foreign party to consider suing first in China, prior to its Chinese opponent doing so if (i) the Chinese party has impoundable assets in China, or (ii) the enforcement of a judgment, either Chinese or foreign, needs to be sought eventually in China. This article explains why and how.

As a plaintiff in a Chinese lawsuit, a foreign party is entitled to seek an injunction order (including asset preservation, evidence preservation and behaviour restrictions). It is worth noting that Chinese courts do not grant injunction orders assisting an ongoing foreign litigation or foreign-seated arbitrations (except for certain qualified arbitration with judicial seats in Hong Kong). This means that if a foreign party only sues the opponent Chinese party in its home foreign jurisdiction, it will not have a chance to preserve the Chinese party/defendant’s assets in China. The purpose of preserving assets is mainly two-fold: (i) creating certain pressure for settlement; and (ii) freezing enforceable assets to avoid an empty winning judgment.

If a foreign party receives an effective judgment from a Chinese court, that judgment can directly be enforced by Chinese courts against the Chinese party/defendant’s assets in China. Comparatively, if a foreign party wins a judgment from a foreign court, before it could be enforced in China, the judgment itself needs to be recognised by a Chinese court. Furthermore, if the Chinese party/defendant has assets overseas, the judgment of a Chinese court may also be submitted for recognition and enforcement in foreign courts.

As discussed above, if a foreign party needs Chinese courts to enforce the Chinese party’s assets in China, they must either obtain (i) a favourable judgment against the Chinese party in a Chinese court, or (ii) a favourable judgment against the Chinese party in a foreign court and have it recognised by the Chinese court.

If a foreign party chooses to sue in a foreign court, a prior lawsuit in China would obstruct the foreign party’s attempt to enforce the foreign judgment in China and seize assets from the losing Chinese party. For that purpose, a Chinese party may have enough incentive to race to the Chinese courthouse and file a “prior case”. As bilateral treaties between China and certain countries (eg, for Brazil, Kuwait, Bulgaria, Greece, the UAE, Macau, and Italy) provide, a Chinese party, with a prior Chinese lawsuit as plaintiff, may ask the Chinese court for a refusal of recognition of the foreign party’s foreign judgment. For countries without such bilateral treaties with China, according to CPL 2024 Article 300.1(4), where a Chinese court has issued an effective judgment prior to a foreign judgment, it will still reject recognition of the foreign party’s foreign judgment on the same matter/dispute.

Therefore, if a foreign party wishes to enforce assets held by a Chinese party in China, they should sue directly in Chinese courts instead of foreign ones. This would give two results in favour of the foreign party: (i) a Chinese judgment that can be directly enforced (without recognition); and (ii) avoid being obstructed on procedures.

Furthermore, if a foreign party decides to sue in China, they should do so as soon as practical so as to avoid any tactical disruption caused by the Chinese party filing a parallel lawsuit abroad prior to the Chinese court’s acceptance, which may give the Chinese party a ground to seek the Chinese court to suspend/stay the Chinese lawsuit initiated by the foreign party/plaintiff in China (Article 281.1 of the CPL2024).

One flexibility which is arguably available to a foreign party is, if it wins this race, it would not be prohibited from filing another lawsuit in its home jurisdiction, if its home jurisdiction allows international parallel litigation.

Parties are allowed to choose the foreign law as applicable or governing laws for foreign-related civil and commercial matters in China. This means that even in Chinese legal proceedings, the Chinese court will apply the foreign law chosen by the parties. Foreign law is typically provided by the parties, who may engage an expert to provide expert opinion to identify certain foreign law issues.

The Chinese courts’ jurisdiction is not the topic of this article. From a strategic perspective, to avoid disruption from the Chinese party through parallel litigation, while preserving flexibility for the foreign party, a workable solution would be straightforward: using an asymmetric dispute resolution clause in a transaction agreement would serve the purpose.

Asymmetric election of court as forum has been confirmed by China’s Supreme Court in the “Minutes of the National Symposium on the Foreign-related Commercial and Maritime Trial Work of Courts” (Article 2), where a foreign party can have the right to elect to sue in either the court of its home foreign jurisdiction or a competent Chinese court, while the Chinese party can only sue in the court of the foreign party’s home jurisdiction (except for such agreements for employment or consumer matters).

This article examines the scenario arising from contractual and commercial disputes or the subject matters Chinese courts reserve for their exclusive jurisdiction. The situation may vary if the disputes arise from torts, or arbitration has been agreed as the dispute resolution method. Pros and cons between arbitration and litigation have been widely discussed already and it is not the topic of this article.

The Diplomat reported in an article that the bias against foreign firms is not true (“[t]oday, win rates average [for foreign firms] around 80 percent and injunction rates average around 98 percent. With these numbers, it is no wonder that China is increasingly being selected as the forum of choice for non-Chinese companies to litigate IP disputes.”). With the new CPL 2024 and its impact (the ‘race to the courthouse’), foreign firms may add “suing first in China” as an option in their litigation strategy.