When to use criminal law for commercial disputes

Legal relationships in commercial disputes are as diverse as they are complex. Sometimes they concern purely civil and commercial disputes; sometimes they involve criminal offences. More often there is an intersection of both.

In the world of commerce, the main methods of dispute resolution are negotiation, mediation, arbitration and litigation. Among them, negotiation and mediation exert the lowest costs but are less effective and “less mandatory” that the other two. In commercial disputes, litigation chiefly takes the form of civil and commercial lawsuits, while criminal intervention is often a sign of immense danger and harm.

Is it necessary, then, to resort to criminal law to resolve commercial disputes? And is it feasible?

Debate of necessity

The key question here is whether the resolution of commercial disputes conforms to the functions of criminal proceedings.

China’s Criminal Procedure Law begins by stating the aim of the law is to punish criminals, protect citizens’ personal and property rights, safeguard national and public security, and maintain the order of socialist society.

Under this law, crimes arising from commercial disputes mainly include undermining the order of socialist market economy, encroaching on property and disrupting the order of social administration. In other words, if crimes occur in business transactions and meet the standard for filing a criminal case for prosecution, they fall within the crackdown and regulation scope of the national public power.

Public security organs have set up specialised teams for economic crime detection, to guarantee professional investigation and judgement.

Possible consequences

When suspected of a criminal offence, the most direct consequence would be to lose one’s personal freedom. Common criminal enforcement measures include criminal detention and arrest, which require detainment in a detention house. If convicted, there will follow eventual sentencing and various penalties that may include public surveillance, criminal detention, fixed-term imprisonment, life imprisonment and the death penalty.

There is also the freezing, auction and eventual confiscation of assets to safeguard the interests of the victim. If a guilty verdict is pronounced, it would then be easier to directly compensate the victim for financial loss.

Indirect consequences for being involved in criminal offences include personal and corporate reputation damage, disruption of business operation or development, and even implication of family members.

Potential advantages

Compared with jurisdictional practice in commercial disputes, criminal cases often have the victim’s domicile as the default jurisdiction. This may be more conducive to dispute resolution.

In terms of evidence collection, where there is difficulty in obtaining evidence, parties may call on the assistance of public security authorities. Evidence thus secured can subsequently be used to assert civil demands.

Criminal cases are subject to stricter fact-finding standards and stronger enforcement, with a “penetrative” mindset applied to the examination of case facts, and the identification and enforcement of clues to property. As a result, it is unfeasible for perpetrators to evade their liabilities through verbal excuses or changes of property ownership.

Criminal cases may be handled more efficiently. Currently, general civil and commercial litigation suffers from a mammoth overall caseload and long investigation cycles, whereas simple criminal cases can be wrapped up relatively quickly. In addition, criminal cases clearly have a stronger deterrent effect, conducive to drawing attention to, and satisfying, victims’ related claims.

Feasibility analysis

Within the legal community, we often hear stories of how lawyers quickly and successfully report cases, and how they procure the public security organs to formally file and establish these cases, stressing the difficulty of these tasks.

Conversely, there are also complaints about how public security organs unlawfully intervene in economic disputes, as if it were suddenly easy to establish a case and involve public power in economic affairs. This is mainly attributable to difficulties in identifying the boundary between criminal and civil matters. Also, the occasional abuse of public power certainly does not help with the situation.

In view of these issues, the CPC Central Committee and the State Council have repeatedly emphasised a need to optimise business environment, strengthen the protection of law, and strictly prohibit criminal law interference in economic disputes. Therefore, before reporting a criminal case, it is necessary to assess the nature of the case, whether it meets the standards for launching criminal cases and requirements on jurisdiction, and whether there is any prima facie evidence or clues.

Most importantly, the parties need to be clear about their objective. Is it to resolve a commercial dispute and obtain commercial benefits? Is it to secure evidence? Is it to deprive the other party of personal freedom out of grudges? Or is it a committed pursuit of legal justice?

More often than not, clients expect criminal charges to facilitate the other party’s offer of settlement or other forms of compromise, such as compensation or restitution, or to gain an advantage or progress in business rivalry or negotiation. In these cases, the criminal charge serves not as the end of the solution, but as a means to it.

Therefore, parties should first affirm purpose. Then, on the basis of compliance with the law, they should seek the best course of action.

If the nature of the dispute is purely economic, it would be ill advised to forcibly pursue criminal liability of the other party. After all, there is little comfort for anyone if the punishments disproportionately exceed the crime.

To send the other party to prison, as they experience major financial crisis, is to deprive them of any chance of a comeback. Leniency, on the other hand, an extension of a lifeline, may be mutually beneficial in the end.

Wang Jun is a director at Starrise Law Firm. She can be contacted at +86 136 0109 6729 or by e-mail at wangjun@xinglailaw.com.