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3.4. Litigation

Litigation is, perhaps, the last resort to the dispute settlement. Many foreign companies and their lawyers don’t feel comfortable to have a lawsuit is a Chinese people’s court. One major reason is that they are reluctant to do the litigation in a legal system with which they do not feel familiar. Another reason is that Chinese courts are deemed to have the reputation of lack of judicial independence. Whatever reasons there may be, the reality however is that in many cases foreign parties may have to end up with the litigation in a Chinese court. Although in contract cases, the parties are allow to choose forum, the choice, as noted, is subject to two restrictions: connection between the forum and the contract or dispute, and non-violation of the exclusive jurisdiction of Chinese courts.

Therefore, when drafting an international contract that involves a Chinese party, the foreign lawyer(s) may have think more about the options to deal with possible disputes. In addition to a carefully worded or phrased dispute settlement clause in the contract, a careful consideration on the possible outcome as well as the ultimate goal to achieve would need to be taken in order to reach a acceptable compromise. In certain situations, to have an arbitration or litigation in China does not necessarily mean a bad choice to the extent that the foreign party’s interest would be effectively and adequately protected. An old Chinese saying may help explain the point here: if you don’t go into the tiger’s lair, how can you catch the cubs?

4. Statute of Limitations

The Contract Law contains a special statue of limitation. But this special statute of limitation only applies to two kinds of contracts: the contracts for international sale of goods and contracts for import and export of technology. Under Article 129 of the Contract Law, the time limit is 4 years for an action before the people’s court or arbitration before the arbitration body concerning the disputes over contracts for international sale of goods or contracts for technology import and export. The 4-year statute of limitation is calculated from the date on which the party knows or ought to know that its rights are infringed. This provision is purposed to match the 4-year requirement of the United Nations Convention on the Limitation Period in the International Sale of Goods.76

76The Limitation Convention entered into force on August 1, 1988. The Convention determines “when claims of a buyer and a seller against each other arising from a contract of international sale of goods or relating to its breach, termination or invalidity can no longer be exercised by reason of the expiration of a period of time” (art. 1). Under the Convention, the “limitation period” is four years (art. 8).

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In China, there are three different statute of limitations under the 1986 Civil Code, namely the general limitation, special limitation and ultimate limitation. The general limitation is the two-year statute of limitation and applies to all civil matters except otherwise provided by law. The special limitation is the statutory time limit that falls within the category of “otherwise provided by law”. In addition to the contracts for international sale of goods and transfer of technology to which the 4-year time limit is applied, there are several civil actions that have only one-year time limit. The one-year statute of limitation under the Civil Code applies to: (a) claims for compensation for bodily injuries, (b) sales of substandard goods without proper notice to that effect,

(c) delays in paying rent or refusal to pay rent, or (c) losses or damages to the property left in the care of another person.77

The Contract Law, however, modifies the one-year statute of limitation as applied to the sales of substandard goods. According to Article 158 of the Contract Law, with regard to sales of goods, (a) if there is no agreement between the parties in the contract on the inspection period, the buyer shall make a notice to the seller within a reasonable period of time after it finds or ought to find that the quantity or quality of the goods do not conform with the terms of the contract; if the buyer fails to make the notice as such within the reasonable time period or within two years from the date of the receipt of the goods, it shall be assumed that the quantity or quality of the object has conformed with the terms of the contract; (b) if there is a quality guaranty period, such guaranty period shall be applied in lieu of the two-year limit;

(c) if the seller knows or ought to know the goods to be supplied do not conform with the terms of the contract, the buyer is not subject to the time limit of the notice.78

The ultimate limitation refers to the maximum time period for making a civil claim, and the time period as prescribed in the 1986 Civil Code has a 20-year limit from the date of infringement of the right.79 The 20-year statute of limitation applies to all civil claims regardless of whether the aggrieved party knows or ought to know the damages or infringement. However, under special circumstances, the people’s court may at its discretion extend the period of the statute of limitation. According to the Supreme People’s Court, the “special circumstances” would cover the cases in which the claimant could

77See the Civil Code, art. 136.

78See the Contract Law, art. 158.

79See Civil Code, art. 137.

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not exercise his right during the statute of limitation because of the “objective reasons”.80

But, the statute of limitation may be suspended or tolled, excluding the extended period under the “special circumstances”. If during the last six moths of the time limitation, the claimant is unable to exercise the right to make the claim due to force majeure or other obstacles, the statute of limitation for this particular claim shall be suspended, but will resume on the day when the circumstances for the suspension are removed.81 The “other obstacles” are interpreted by the Supreme People’s Court to include the situation where claimant is lack of the capacity for civil conduct or has limited civil capacity (a) without agent ad litem, or (b) with an agent ad litem who is dead or, no longer has the power of attorney, or has lost capacity himself for civil conduct.82

The statute of limitation will be tolled if any of the following three situations takes place: (a) the claimant (creditor) brings a lawsuit, (b) the claimant makes a claim to the debtor, or (c) the debtor agrees to fulfill the obligation. At the time of toll, the statute of limitation starts all over again.83 With regard to making a claim, it does not have to be made to debtor himself, a claim made by the claimant to the guarantor, the agent, or administrator/receiver of the property of the debtor will satisfy the requirements for the toll.84 In addition, the statute of limitation will also be tolled when the claimant makes a petition to the local people’s mediation committee or relevant authority for the protection of his civil rights.85

There seems to have been a problem in determining the matter of “ought to know” because it would require more analysis on a case-by-case basis. In regard to the contracts, the Supreme People’s Court has developed from the practice a guideline that is aimed at helping deal with the “ought to know” issue. According to the Supreme People’s Court, “ought to know” may be determined differently under the following circumstances: (a) if the contract claim is attached with condition or time limit, the limitation runs from the time that condition is met or the time limit is up; (b) if the contract has a time for performance, the limitation begins to count from the expiration of the time; (c) if there is no performance time period, the limitation runs from the time the

80See Supreme People’s Court, the 1988 Opinions on Several Matters Concerning Application and Implementation of the General Principles of Civil Law of China (Provisional), art. 169 (hereinafter referred to as Opinions).

81See Civil Code, Art. 139.

82See Supreme People’s Court, Opinions, supra note 80, art. 172.

83See Civil Code, Art. 140.

84See Supreme People’s Court, Opinions, supra note 80, art. 173.

85See id., art. 174.

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claimant may make a claim; (d) if there is a claim for restitution after the contract is void or rescinded, its limitation is calculated from the time of the voidance or rescission of the contract; (e) if the object of the contract is “not- to-act” (means a passive obligation), the limitation is counted from the time the obligation of not-to-act is violated; or (f) if there is a claim for continuing performance, damages or liquidated damages due to a breach of contract, the limitation runs from the time of the breach.86

86 See Li Guoguang, supra note 8 at pp. 596–598.