Legal Enforcement and Dispute Resolution with Chinese Suppliers

Why disputes with Chinese suppliers are handled differently

Every business professional trading with China must realize a fundamental fact. The legal system of the People's Republic of China (PRC) operates on different principles than the European continental system, which determines the entire course of any potential dispute.

There is no bilateral treaty between the Czech Republic and the PRC guaranteeing the mutual recognition and enforcement of court decisions in commercial matters. This means that if a Chinese supplier causes you harm and you decide to file a lawsuit in the Czech Republic, you may win and obtain a judgment, but its enforcement in China will be practically impossible. Chinese courts are not obliged to recognize a Czech judgment and, in practice, do so only in exceptional cases.

Many companies only realize this fact when a problem arises. They enter into contracts in English, often subject to Czech law, and rely on domestic justice. Our Prague-based attorneys handle these situations regularly and see how businesses unnecessarily spend resources on proceedings that do not lead to actual recovery of assets.

The second problem lies in the nature of the Chinese judiciary. Although the situation in major cities (such as Beijing or Shanghai) is improving, local courts may still be subject to protectionism in favor of domestic firms. Proceedings before a Chinese court are conducted exclusively in Chinese, and a foreign attorney is not permitted to actively represent you there. The length of proceedings, including appeals and enforcement, can stretch over several years.

The third critical factor is time and control. Once a Chinese supplier receives a deposit or your know-how (design, specifications), you are in a disadvantageous position. Without high-quality contractual security and on-site inspections in China, you may only learn of a problem once the goods are in Europe or when your product is being sold by a competitor.

Choosing between Czech courts and international arbitration

At the moment a dispute arises, or rather when drafting the contract, you face a choice of forum for dispute resolution. This choice determines the enforceability of your claims.

Consider a model situation where a Chinese supplier delivers defective goods worth USD 100,000 and refuses a claim. If you file a lawsuit in the Czech Republic, you will obtain a final judgment after a year or two, but the supplier likely has no assets in the EU. You must then attempt to have the decision recognized in China, where you will encounter the lack of an international treaty, and the court will likely reject your petition.

If you choose a court in China, you must hire a Chinese lawyer and have all evidence officially translated. The process is costly and administratively demanding. Risks include the length of proceedings and potential bias in smaller provincial courts.

If you have agreed on an arbitration clause in the contract, the dispute is decided by an independent arbitral tribunal (e.g., CIETAC in China or HKIAC in Hong Kong). The proceedings are faster, can be conducted in English, and the arbitrators are specialists. International arbitration is the most effective solution for ensuring legal enforceability in trade with China due to the New York Convention.

Contractual requirements for Chinese suppliers

Relying on an order via email (the "Proforma Invoice" style) is a gamble. A contract with a Chinese partner requires specific formal elements.

Signing a contract only in English is risky. If a dispute occurs in China, the court will work with a Chinese translation, which may shift the meaning of your agreements. The ideal setup is a bilingual contract where it is explicitly stated which version takes precedence in case of conflict.

It is even safer to have a high-quality Chinese version prepared as the governing text. This eliminates room for the supplier to make excuses regarding poor translation. Our Czech legal team recommends choosing Chinese law and resolving disputes through arbitration (e.g., CIETAC, HKIAC, SHIAC).

Chinese law does not work with the principle of compensation for "indirect damages" as automatically as we are used to in Europe. Therefore, it is necessary to anchor specific contractual penalties in the contract for breaches of quality, deadlines, or confidentiality. The amount must be reasonable so that a court or arbitrator does not reduce it, but high enough to act as a means of pressure.

If you share designs or technical data, an NNN agreement (Non-Disclosure, Non-Use, Non-Circumvention) is essential. This must be a separate document or a clearly defined part of the main contract, again ideally governed by Chinese law and secured by a contractual penalty.

Overview of Risks and Solutions

Quality Control of Goods

Legal protection is essential, but physical inspection is irreplaceable. Our Prague-based attorneys always advise clients not to pay the final balance until the goods have passed inspection.

Include the right to Pre-shipment Inspection in the contract. If goods arrive in the Czech Republic defective, the cost of returning them to China is often higher than the value of the goods themselves. Furthermore, once the goods leave China, you lose your main leverage over the supplier—the final payment.

Working with inspection agencies ensures a certified report, which serves as key evidence for any potential dispute. Using a Letter of Credit (L/C), where payment is conditional upon the presentation of a positive inspection report, is one of the safest payment methods.

International Arbitration Process

If the worst happens, arbitration is your best path to financial compensation. The proceedings begin by filing a claim and paying the fee, followed by the appointment of arbitrators who are experts in international trade. The award is final and enforceable.

Arbitration costs include institutional fees and legal representation. For international disputes, costs range in the tens of thousands of euros; therefore, this procedure is particularly suitable for higher-value disputes. For smaller disputes, simplified online arbitration proceedings are available.

Advantages of Arbitration in Hong Kong (HKIAC)

A significant advantage of choosing the HKIAC (Hong Kong International Arbitration Centre) is the unique agreement between Hong Kong and mainland China regarding interim measures.

In standard arbitration, you cannot easily freeze a debtor's assets in China before a final decision is issued. However, if you conduct arbitration at the HKIAC, you can request a Chinese court for an interim measure to secure assets or evidence on the mainland while the proceedings are still ongoing.

Current Trends in Trading with China

• De-risking and diversification: Many companies are moving part of their production to Vietnam or India. The legal principles of protection are similar in these countries but require adaptation to local law.
• GPSR Regulation (EU) 2023/988: The new EU General Product Safety Regulation places stricter requirements on importers. Without a high-quality contract, you bear all risks and penalties.
• Foreign State Immunity Law: In 2024, China adopted a law limiting the immunity of foreign states. In commercial disputes with State-Owned Enterprises (SOE), litigation is possible, but jurisdiction specifics must be carefully considered.

Conclusion

Trading with China offers great opportunities but does not forgive mistakes in preparation. The difference between a successful deal and a fatal loss often lies in the quality of the contract and the choice of dispute resolution. Relying on Czech courts for disputes involving Chinese entities is an ineffective solution.

ARROWS law firm has extensive experience with Chinese law and international trade. We maintain a network of cooperating attorneys in China and Hong Kong and can effectively set up your business relationships to be legally enforceable. We are insured up to CZK 400,000,000 and ready to protect your investments. Contact us at consultation@arws.cz.

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