In light of changes in the market conditions and legal framework in China, the insurance industry has an opportunity to engage with confidence and improve its prospects of pursuing successful recoveries from Chinese Suppliers.

Market Conditions

From melamine in baby milk to exploding mobile phone batteries, we have all heard of the high profile recalls of Chinese goods, largely driven by cost-cutting in production and quality control.

China has, however, recently implemented regulatory reforms in an attempt to clean up its image, tightening safety standards and compliance and upholding patent infringement complaints to weed out substandard copycat products. The toxic baby milk scandal in 2008 resulted in two executions, 19 jail sentences, and £100m fines, as well as reform of Chinese tort law. Steps have also been taken to improve enforcement measures against both companies and individual officers.

All this is happening to facilitate China’s geopolitical and economic ambitions and to make it a more attractive place for business. In April, China held a 2nd global summit on its Belt & Road Initiative a massive overseas investment project, launched in 2013, to create new trade corridors linking China to Asia, Africa and Europe.

China is ploughing USD 64bn of loan investment into building ports, roads, railways and even thermal power plants in over 60 countries along the Belt & Road, to improve physical connectivity with potential trade partners

At the same time, it is signing trade, finance and transportation agreements with partner countries to develop a network of law and regulation that will form the framework for resolving disputes between parties involved in this global project.

Arbitration clauses in contracts are already recognised by the Chinese courts and arbitration has historically been perceived as the only viable dispute resolution mechanism in China.

However, that is now changing. In June 2018 China established two new international commercial courts, one in Shenzhen in South China, the other in Xi’An in West China, to resolve BRI disputes. This year, China and Singapore jointly set up an international mediator panel and were among the 46 countries which signed the Singapore Convention on Mediation (the UK and EU are yet to sign).

Legal Landscape

With all these developments, will it become any easier to pursue recovery in the English or Chinese courts against a Chinese supplier of defective goods?

Viable Target?

A local Chinese law firm or investigator can conduct searches into a Chinese supplier’s assets, capital, shareholders, property and bank account numbers. It is also worth investigating whether the supplier has assets or a branch office or agent outside China, as this provides alternative enforcement options.

English Proceedings

A Chinese court will recognise a provision in a contract between an insured and its Chinese supplier which provides for the exclusive jurisdiction of the English courts and will assist with service of English court proceedings on a Chinese entity and collection of evidence for English proceedings from citizens residing in China.

However, where judgement is obtained through the English courts against the Chinese supplier, the Chinese court will not automatically recognise or enforce it. There is no bilateral treaty between the UK and China providing for mutual enforcement of each other’s judgements.

China signed the Hague Choice of Court Convention in 2017 (relating to recognition and enforcement of other countries’ judgements) but it will not be in force until ratified by the Chinese Parliament. In fact, the UK has suspended its own accession to the Treaty until after it has exited the EU.

There is however a new draft treaty in town – the Hague Convention on the Recognition and Enforcement of Foreign Judgments. It is intended to create a single global framework for recognition and enforcement of civil and commercial judgements across borders.

So far, only Uruguay has signed up, but recently China approved the text. If the new Convention is widely taken up, it could greatly improve the cross-border recognition and enforcement of judgements.

In the meantime, enforcement of an English judgement in China relies on the principle of reciprocity, whereby the applicant has to persuade the Chinese court to enforce an English judgement on the basis of the earlier enforcement by the English courts of a Chinese judgement.

Chinese Proceedings

To avoid such enforcement difficulties, an alternative is to commence proceedings in the Chinese courts. The limitation period for bringing a compensation claim in the Chinese courts has recently increased to three years (two years for product liability).

Where an insurer wishes to exercise its subrogation rights, the limitation period is generally three years from the date of payment of the indemnity by the insurer.

Local court bias is still an issue but the Chinese courts are keen to demonstrate that foreign parties receive fair treatment. Proceedings are conducted in Chinese and documentary evidence must also be translated into Chinese and formally notarised, which can increase costs.

There is no formal disclosure process but each party has to present (for cross-examination) evidence in support of its allegations.

On costs, one significant difference is that there is in general no ‘loser pays’ rule. Instead, each party bears its own legal fees. Many Chinese firms require payment of a fixed fee on account at the outset of the matter. Court fees are normally paid by the losing party.

Finally, there is no concept of legal privilege under Chinese law. Statements made in a genuine attempt to settle during a mediation procedure administered by the court cannot be used as evidence of admissions, however western parties are often reluctant for the court to be privy to negotiations.

Know your Supply Chain

Chinese entities will inevitably feature ever more heavily in global supply chains. Ultimately, UK distributors (who, post Brexit, will carry additional responsibilities as UK importers) need to have visibility and control over their global supply chain to prevent unsafe products from entering the UK market.

However, where a loss is caused by a defective Chinese product or component, insurers should no longer dismiss as futile the possibility of making a recovery.