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Selling Your Product Into China. What You Need To Know.

By Dan Harris on Posted in China Business, Legal News

ABC News is pushing (I received two different emails from ABC on it) a Diane Sawyer/ABC News clip entitled, “‘Made in America’ Products Selling in China.” Though it is the proverbial 3.28 minute puff piece, it is right on the big picture. There are huge opportunities to sell American product and American products are viewed very highly in China.

It starts out noting how “the Chinese spent $104 billion in U.S. exports in the last year — up 542 percent from 10 years ago.”  For more on how China has been greatly increasing its purchases of American goods, check out Selling Into China: The New Wave.  The clip then highlights a number of large and small U.S. businesses that are either trying to sell into China or have succeeded in doing so. Everyone is happy, everyone is at least a little bit jingoistic, and everything looks as easy as simply putting your product on the net and waiting for the hordes of Chinese consumers to come to you. Of course, real life (as opposed to the media’s portrayal of it) is quite different.

The clip completely fails even to touch upon the following extreme basics:

  • Logistics
  • Customs/Duties/Regulations
  • Organizational structures
  • Intellectual property
  • Getting paid

So we will.

Logistics.  We are lawyers, not logistics people, but we know enough to know that if you are going to sell product into China, you need to figure out the best way to get it there and the cost of doing so and whether the costs are prohibitive or not.

Customs/Duties/Regulations. Just yesterday, I received an email from someone asking me why it was having to pay 18% at China customs for its food product, while one of its competitors was paying 7%.  The e-mailer wrote the letter as though we would have an answer right off the top of our heads, but our response was essentially that we had no clue.  We then talked of how it may be because of a difference in processing of the product, it may because of a difference in sizing of the product, it may be because of a difference in from where the product originates or was processed, or it may even be because one of the numbers was wrong.  We would need to know a whole lot more even to guess.  A few weeks earlier, someone had called me because China customs had just refused entry of their product into China because it did not meet China’s safety standards. The caller kept saying how it had “never even occurred” to him that China might have tougher safety standards than the United States.  Well, it should have. The U.S. Government has a very helpful website dealing with China customs.  Check it out before you ship.

Organizational Structures.  How exactly are you going to sell your product into China?  Are you going to do it exclusively from the United States? If so, you will not be able to take RMB unless you use some sort of intermediary.  Are you going to use a distributor in China to get your product sold? If so, will this be an exclusive or non-exclusive arrangement? Who will pay for marketing?  Who will repair the product when something goes wrong? How will you make sure that the distributor does not do something to tarnish your reputation? Or will you set up an entity in China (a Wholly Foreign Owned Entity (WFOE), a Joint Venture (JV) or a Representative Office) to handle your China sales?  Do you have even a basic understanding of how China retail works?

Intellectual Property.  If you want to prevent others from using your brand name or your logo in China, you absolutely must register those as a trademark in China and you should do so before you sell any product there.  For more on registering trademarks in China, check out WHEN To Register Your China Trademark. You face similar issues regarding copyrights and patents as well.

Getting Paid. Presumably, you are seeking to do business with China so as to increase your profits. Unfortunately, selling product internationally has a much higher risk of non-payment than does selling product domestically. We discussed this in The Basics Of Getting Paid When Selling To China:

If you are going to sell product into China (or anywhere else internationally), you should consider employing the following to increase your chances of not getting stiffed:

  1. Secure all of the payment in advance. Sophisticated buyers typically will not accept this unless you put up a performance bond or open a standby letter of credit so that it can get its advance payment back. Note, however, that it can sometimes be difficult for Chinese companies to obtain government approval to make full payment in advance.
  2. Conduct due diligence on your buyer.
  3. Secure some of the payment in advance. This obviously will not guarantee you full payment, but it is better to lose some as opposed to all from a sale.
  4. Secure a Documentary Letter of Credit. With this, you will be paid when there is documentary evidence you have shipped the product according to the terms and conditions of the letter of credit. Smart buyers typically require an inspection certificate to ensure the product complies with the specifications in the contract or the purchase order. This sort of letter of credit mitigates your risk because your buyer’s bank has irrevocably guaranteed to pay upon presentation of the required documents.

We generally recommend our clients secure this letter of credit from a major (not a tiny) Chinese bank, such as Bank of China, China Construction Bank, Industrial and Commercial Bank of China, China Development Bank, and Bank of Communications, or a  branch of a known American, Asian or European bank. WARNING:  We have seen more than our share of fake letters of credit.

To encourage exporting, many countries, including the United States, make it fairly easy and cheap to purchase insurance to cover an improper non payment on the letter of credit.

There are all sorts of variations on the above, but these are the basics.

So yes, Ms. Sawyer, selling into China is rife with great opportunities and we would be the last people to say “don’t do it.” But it is not nearly as simple as you portrayed it, at least if you don’t want to lose your shirt.

What do you think?

 

Aussiewood Film Finance And China Co-Productions. Ever The Twain Shall Meet?

By Dan Harris on Posted in China Film Industry

By:  Mathew Alderson

During the Beijing International Film Festival last month, several Hollywood executives and film producers expressed interest in the Australian producer offset and asked me whether their films might qualify for it. Though these sorts of inquiries tend to arise in connection with official Chinese co-productions, they also come up in connection with Hollywood projects with no immediate China connection.

In this post I will look at the Australian producer offset generally. There are significant exceptions to the rules in the case of an official Chinese co-production so I will look at the producer offset from the standpoint of an official Chinese co-production in a subsequent post.

Under the Australian producer offset, 40% of the production costs of certain feature films can be recovered by the producer, in cash, from the Australian Taxation Office. The producer offset is claimed in the production company’s annual tax return filed in Australia for the year in which the film was completed.

There are two major criteria for the producer offset: the film must have “significant Australian content” and the production costs must be a “qualifying Australian production expenditure” (QAPE). As we are about to see, it is possible for a film with substantial Hollywood involvement to satisfy the producer offset criteria, but there are a lot of moving parts.

Significant Australian Content

To qualify, the film must have “significant Australian content.”  This usually requires substantial Australian involvement in development and a substantial Australian creative contribution during production.

Screen Australia decides whether a film has significant Australian content by applying a points test. Screen Australia considers “significant” to mean “important,”  “notable,” or “of consequence.” Factors to be taken into account include:

  • the subject matter of the film
  • where the film is made
  • the nationalities and places of residence of the people involved in production
  • the details of the production expenditure.

No single factor is determinative.

Residency of cast and crew is considered using Australian tax law principles.  A person generally qualifies as an Australian resident if they have been in Australia continuously or intermittently for more than one half of the tax year. In considering nationalities and places of residence, particular attention is paid to the producer, writer, director, key cast and department heads.

Screen Australia may also consider factors like the following:

  • the extent to which the film originated in Australia
  • the extent of Australian creative control
  • the extent of Australian copyright ownership
  • the “length of association with Australia,” which is the extent to which an Australian producer, writer or director has been involved.

Qualifying Australian Production Expenditure

QAPE is also required to qualify for the producer offset. QAPE is expenditure on goods or services provided in Australia, expenditure for the use of land located in Australia, or expenditure on goods located in Australia at the time they are used. QAPE does not generally include development costs, distribution and promotion costs, or residuals and advances, but it can include the costs of an Australian lawyer on the film.

The QAPE must meet a certain monetary threshold, which is currently AUD 500,000 (about USD$500,000). In other words, you must spend at least this much on QAPE.  QAPE can usually only be claimed for filming expenses not incurred in Australia when the subject matter of the film reasonably requires the film to be shot outside of Australia.

Who Can Apply for the Australian Producer Offset?

Only a company can apply for the producer offset and that company must have “carried out or made the arrangements necessary” for the production of the film. In other words, it must be the production company.

International co-productions or joint ventures can qualify even if they are not official co-productions and even if they do not have significant Australian content. A recent example is Happy Feet Two, a Warner Brothers, Village Roadshow, Kennedy Miller Mitchell production filmed in Australia.

The company must be an Australian resident or a foreign resident with a permanent establishment in Australia and an Australian Business Number or “ABN.”  A permanent establishment is basically just a place, such as an office, through which business is conducted. Note that Australian companies are quick and easy to set up and they require only one Australian-resident director. A Special Purpose Vehicle or “SPV” — such as a company set up by the producers for producing the film — can qualify as the company that incurs QAPE.

Though the producer offset is often regarded simply as a means for funding one particular film, some producers see it as having potential to attract investment in the production company and its slate of projects. Mario Andreacchio, who produced and directed The Dragon Pearl, the first official Sino-Australian co-production, has substantial experience working with the producer offset. For Andreacchio, the important issue is what to do with the offset. According to Andreacchio, “sure, you can cash-flow it and put it in as part of the production company’s equity investment or you can even use it for publicity and advertising or sales costs, but the thing is that you are not necessarily investing in one film – you are investing in the production company and, potentially, all of its projects.” Andreacchio, who is now working on a slate of Sino-foreign co-productions, says that this latter point is often missed by producers and investors alike. “The producer offset does not necessarily need to be only used as  an alternative stream of financing for individual projects; it can also be used as a way to build up a production company. When you start working with a slate of projects, the offset opens up more opportunities for your investors because they can get a spread over a number of your projects.”

In my next post, I will discuss how to get the Australian producer offset in the context of a China co-production.

News Corp Buys Into Bona Film Group And Gets What? The Disclosure Statement Might Tell Us.

By Dan Harris on Posted in China Film Industry

Just back from Los Angeles, where I met with countless people in the movie industry and discussed with nearly all of them how Chinese entertainment companies are and will be buying into Western entertainment companies, and vice-versa. In just the past week, we are hearing of Wanda (China) looking to buy into AMC Entertainment (U.S.) and News Corporation (Rupert Murdoch’s company) having just announced that it will be buying approximately 20% of Bona Film Group, a China-based movie distributor and producer.

And that is where things get complicated.

As soon as I heard about the Bona film deal, my legal cap went on and I wondered it would be accomplishing that when, technically, foreign companies generally are not allowed to own a piece of a Chinese company, which would be even more true (if it needed to be) of a company in a sensitive industry like the China film business.  So I did a quick Google search that immediately confirmed my suspicions. Bona Film Group is not technically a Chinese company; it is a Cayman Islands holding company that lists on NASDAQ.  Variable Interest Entity (VIE), I immediately thought.

So I did some more research and discovered that China Hearsay has already done a fine post on all of this, entitled, “News Corp Purchases Stake in Bona Film Group: Just What Are They Buying Into?” In its post, China Hearsay sets out exactly how this deal can be realized and the risks/uncertainties in a deal like this, involving as it does VIEs.  China Hearsay does a great job analyzing the relevant portions of Bona Film Group’s disclosures regarding VIEs and concludes that Bona did a better job than most in terms of explaining the risks.  I agree and so I recommend this China Hearsay post to those who want to know (or should want to know) the risks of investing in companies that operate through VIEs.

Bottom Line:  We foresee many more such entertainment deals in the next year involving VIEs, so get used to it.

China Luxury Spending Seminar. New York City On May 16, 2012.

By Dan Harris on Posted in China Business

Just got back from Los Angeles, where I met with long-time China hands, Sage Brennan and Renee Hartmann.  Since returning to the United States, Sage and Renee have formed China Luxury Advisors, a consultancy focused on helping luxury goods companies market to Chinese consumers both within and outside China.

These days its difficult to find any consumer brand that is not at least considering the potential to sell to Chinese consumers — whether by entering the China market or by targeting the hordes of wealthy Chinese shopping and traveling overseas. In the luxury industry, interest is even stronger. One need only walk down 5th Avenue or Rodeo Drive (or Beverly Drive, for that matter, which is where I met Sage and Renee for coffee) to notice huge numbers of Chinese shoppers and Mandarin speaking sales associates in the boutiques to greet them.  Since Sage and Renee tell me that more than 50% of Chinese luxury purchases are being made abroad, these shops are getting it right.

But simply opening your door to Chinese customers is not enough to build success. Luxury brands need to first understand the underlying motivations behind Chinese consumer preferences and decisions before they can hope to monetize this lucrative customer group.  If you are looking to learn more about the Chinese consumer, have I got the event for you.  This Wednesday, May 16th, in New York, Jing Daily, China Luxury Advisors and China Luxury Network are putting on an event “to provide luxury brands with greater context and understanding” of the Chinese consumer.

The event will include:

An overview of the Global Chinese consumer opportunity, by my friend, Michael Zakkour, of Technomic AsiaInsights into the Chinese luxury consumer, by Professor Pierre Xiao Lu from Fudan University and author of ”Elite China, Chinese Luxury Consumers” and “Luxury in China, Market Opportunities and Potentials”

  • Insights into the overseas Chinese student community with a Chinese student panel moderated by Sage Brennan
  • Trends in the real estate market, by Sotheby’s International Realty brokers
  • An overview of the current demand for fine art, by Michael Plummer of Artvest
  • Experiences with “the China opportunity,” with Royal Asscher diamonds
  • Tales from wine trips and experiences with Simon Cousins of Illuminant
  • Real life experiences with Chinese affluent travelers, by Christine Lu, CEO of Affinity China
  • Chinese overseas spending, by Renee Hartman

I know about half the people who will be speaking and all of them are incredibly knowledgeable about marketing to China’s consumers.  I am therefore confident in recommending this to anyone with an interest in learning more about China’s consumers. And thanks to Sage and Renee, China Law Blog readers get 30% off the ticket price if they use the code Chinalaw to register at: http://chinalux.eventbrite.com.

Enjoy.

How To Save Face In China. The Book.

By Dan Harris on Posted in Recommended Reading

Unless you have a perfect mastery of Chinese language, symbolism, and social nuances (and who even has that of their own country, anyway?), consider picking up a copy of Anne-Laure Monfret’s Saving Face in China, a practical book aimed at aiding you in making a decent impression on your Chinese business contacts.

Monfret is a French management and HR specialist who spent eight years in China. Her book addresses the trickiest areas of Chinese culture through thoughtful explanations and first-hand stories.  As she illustrates, it takes a whole lot more than common courtesy to navigate Chinese business meals, deals, and conflicts, all of which are fraught with complex hierarchies and expectations.  Alternating between big-picture concepts (e.g., western versus Chinese notions of “efficiency”) and concrete do’s and don’ts (do give a nice bottle of cognac as a gift, but never, ever give a clock), the book is a crash course in avoiding major social gaffes.

Monfret concedes (and I tend to agree) that you are not going to torpedo a big business deal by, say, declining a second helping of chicken feet because most Chinese give westerners sufficient cultural wiggle room.  That being said, your causing a loss of “face” can hurt you and your business venture.

Most English speakers have a general grasp of what it means to “lose face” and westerners certainly value their egos and reputations.   But for the Chinese, Monfret emphasizes that causing someone to lose face is easier and more serious than most westerners realize.  Perhaps most concerning is how difficult it is to restore face once the damage is done—if you want any shot at making amends, you had better use the right variant of the Chinese word for “sorry” and follow the other tips Monfret sets forth in her section on apologies. There is no doubt that knowing China’s cultural customs can aid you in doing business in China and Saving Face in China makes for a quick and enjoyable way to get there.

Saving Face acknowledges the oddness of Chinese social customs without belittling Chinese culture, focusing instead on the historical and psychological context of these traditions.  Embracing both the absurdity and the dead-seriousness of the Chinese concept of “face,” Monfret presents a great deal of information in a straightforward, guidebook-like style that’s perfectly suited for a casual in-flight read. My only beef with the book was that it read as though it had not been reviwed by a native-speaking English editor.  As a French major who lived two years in France (during 4th grade and my junior year in college), I mention this as partial revenge.

Doing Business In China. AmCham Survey Says It’s Not Such A Bad Thing.

By Dan Harris on Posted in China Business

Finally getting around to reading AmCham’s 2012 China Business Climate Survey Report and the news/numbers are actually pretty good.  The numbers are not as good as last year’s, but considering the overall global economic situation, they are still quite good.  Some highlights:

  • 92% of respondents forecast that their China 2012 revenues will either stay the same or surpass their 2011 revenues.  76% forecast they will increase.
  • 39% report that their operating margins in China exceed their worldwide margins and an additional 29% report that they are “comparable.”
  • 66% report that their primary goals and strategies for China are to “produce goods or services in China for the China market.”  This number is up 8% from 2010.
  • 63% of those respondents who brought an IP infringement action in a Chinese court were “satisfied” or “very satisfied” with “the level of cooperation from the Chinese courts.” This number strikes me as shockingly high and I am guessing it is higher than would be the case if the same question were asked of American companies regarding American courts.

On the downside, the American company respondents remain very concerned about IP protection in China, rising costs (particularly the government requiring employers to pay social insurance taxes on foreign employees in China) and a licensing regime that discriminates against foreign companies doing business in China.

In conclusion, the picture for American companies doing business in China is pretty good and not all that different from last year.

Is that what you have been seeing/experiencing?

The FCPA And China. Two BIG Myths.

By Dan Harris on Posted in Legal News

In just the last few weeks I have become aware of two potentially harmful myths regarding the United States’ Foreign Corrupt Practices Act (FCPA).  The first myth relates to who makes the payments and it was set out my someone who I greatly respect for his deep knowledge and experience with China business:

Dan, when I was in Beijing last week, a Chinese employee of a US company suggested to me that there are easy ways around the FCPA, including hiring a third party to do the “dirty work” that US companies aren’t allowed to do. I was shocked to hear that such a massive loophole may have been left in US law. As far as you know, is this really possible? Have you ever heard of such a maneuver being used in practice? If so, is anyone in DC even aware of the gaping hole left in this law? (Feel free to quote my question anonymously if this topic is worthy of a blog post!).  I think the implications of this are pretty serious. Chinese, in general, tend to view the law as an obstacle to be surmounted. I’m not sure most US companies really understand the cultural differences, and are, therefore, running a bigger risk than they realize. A Chinese employee will look you in the eye, tell you what you want to hear, then go off and do whatever will result in his/her getting promoted.

The FCPA most emphatically does not allow US companies to go around it simply by retaining a third party to do “the dirty deed.”  I turn to the FCPA Professor for the answer:

Q. Can a third-party subject a company to anti-bribery violations?

A. Yes.

A significant percentage of anti-bribery violations against business organizations are based on the conduct of agents, representatives, distributors, or even joint venture partners (collectively third-parties).  Utilizing third-parties in foreign markets is very common as third parties best know the local business landscape and how to get things done.  However, knowing the local business landscape and how to get things done can also mean making improper payments on a company’s behalf in violation of the anti-bribery provisions.

The anti-bribery provisions prohibit not only direct payments to a “foreign official” to “obtain or retain business,” but also payments to “any person” (such as a third-party) “while knowing that all or a portion of such money or thing of value” will be provided to a “foreign official.”

The anti-bribery provisions state that “a person’s state of mind is ‘knowing’ with respect to conduct, a circumstance, or a result if (i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or (ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.”

The anti-bribery provisions further state as follows.  “When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.”

As evident from these provisions, whether one can be subject to FCPA liability for the actions of a third-party based on “knowledge” of the third-party’s conduct is a highly fact-dependent analysis.

Because of the FCPA’s “third-party payment provisions,” it is important for those subject to the anti-bribery provisions that utilize third-parties to conduct pre-engagement due diligence and to adopt policies and procedures regarding the engagement and post-engagement obligations of the third-party.

The second myth, and one I heard from two really good lawyers, is that the FCPA does not apply to government officials who work in the “private sector,” perhaps for a State Owned Entity (SOE). The FCPA requires that the payments be to a foreign official and this myth has apparently arisen based on the belief that someone working for a company cannot be working is not, at least at that point, working in their official capacity.  This too is wrong, or at least certainly could be, as per Mike Koehler’s FCPA Professor Blog:

Q. What does “foreign official” mean?

A. The FCPA defines “foreign official,” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.”

The FCPA does not define “department,” “agency,” or “instrumentality.”

The term “foreign official” includes traditional foreign government leaders as well as employees of various foreign government “departments” and “agencies” such as tax officials, customs officials, and others tasked with issuing foreign government licenses, permits, certifications, etc.

The enforcement agencies maintain that state-owned or state-controlled enterprises (so-called SOEs) in foreign countries can be an “instrumentality” of a foreign government such that all SOE employees are “foreign officials” under the FCPA.  The enforcement agencies have taken this position in certain actions even if the foreign government is a minority investor in the enterprise, and the enterprise has publicly traded stock; does business outside of its own borders; employs non-nationals; and has other attributes of a commercial business.  Approximately 50% of recent FCPA enforcement actions are based, in whole or in part, on this enforcement theory.

Recently, in the first challenges to this enforcement theory, certain district court judges have concluded that the question of whether SOEs qualify as “instrumentalities” of a foreign government under the FCPA is a question of fact that is dependent on a number of factors.  (See here for the opinion).  These factors may include the following: the foreign state’s characterization of the entity and its employees; the foreign state’s degree of control over the entity; the purpose of the entity’s activities; the entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions; the circumstances surrounding the entity’s creation; and the foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).

At present, there is no precedential case law on the meaning of “foreign official.”  See here for an extensive overview of the FCPA’s legislative history as to the “foreign official” element.

If you are an American company doing business in China, you owe it to yourself to become at least somewhat knowledgeable about the FCPA.

Any more out there?

How To Get A US Visa For Someone From China

By Dan Harris on Posted in China Business
 
One of our clients recently asked for our help “making sure” it could get a U.S. visa for one of its China-based Chinese managers. The client wanted this manager to come to the United States for two months of training. Our client had heard from a friend in a similar situation that it was “getting near impossible” to get a visa for people from China “unless you do absolutely everything right.”  We have heard that the US Immigration Service pretty much assumes that the papers for everyone from China are fraudulent, and then puts the burden on them to prove otherwise.  To put it another way, it is tough — but not impossible — for Chinese nationals to get into the United States.

So how do you increase the chances?

Back in 2006, The Going Global Blog did a post on getting a U.S. visa for business purposes, entitled, “What Do You Have to Do to Get a Visa Around Here?“  Near as we can tell not much has changed since then.  The post contains tips for securing a United States temporary business visa, and it is based on a meeting the Going Global blogger had with a US Department of Commerce representative.

According to the Department of Commerce person, U.S. consulates “receive so many forged letters” supporting invitations to visit the U.S. for business purposes, “they simply disregard most of them.” The representative suggested circumventing this by having someone in a local U.S. government office concerned with immigration issues (Perhaps the Department of Commerce, the Department of State, or a United States Export Assistance Center) forward a scanned copy of your invitation letter to the Consulate by U.S. government e-mail. Receiving your letter this way will increase the likelihood of the Consulate giving your invitation a thorough look. The Commerce person also talked of how anyone seeking a United States temporary visa must bring as much documentary evidence as possible to the Consulate to show they have strong ties to their home country and every intention to return to it. Documents showing home ownership, a spouse and children, large sums in a bank account in the home country, domestic business interests, and a history of leaving the country and returning.

All of these tips make sense, but I would add one more. If you are doing business with China and will frequently need to obtain visas for people from China, you should right now make it a point to get to know someone at the US Embassy in China or at one of the U.S. Consulates  in China — preferably the one in the region from which the bulk of your visitors will be coming. Tell that person at the Embassy/Consulate about your business and explain to him or her why you will likely eventually need Chinese citizens to come visit you. Ask that person if you can run all such letters through him or her.

Once you build up a record of credibility through honesty and a track record of the people you invite to the United States returning to their home country, it will become easier for you to get visas for people you need to see in the United States.

What have you experienced?

Litigation And Arbitration In China. No Surrender. Ever.

By Dan Harris on Posted in Legal News

My firm has been gearing up for a couple of CIETAC commercial arbitrations against Chinese companies and one thing we can state with near certainty is that neither will settle. The reason for this is Chinese companies virtually never settle their in-country litigation matters. In the United States, something on the order of 97% of all cases in the United States settle or are otherwise resolved before trial.  I actually think the settlement numbers are even higher on business litigation matters, but I am not aware of any study on this.  Nearly every litigation matter settles in the United States because the costs are so huge for litigating a case through trial and both parties usually have a pretty good idea of how the court or arbitral body is going to rule.

Neither of these things hold true in China where so many of its laws are too new to have clear Supreme Court decisions on them.  Without clear and established law, nobody knows how a court will rule.  Parties in the United States can settle cases because they essentially agree on the likely outcome.   There is always a 10% chance of an aberrant verdict either way, but within the 80% of expected rulings, the numbers are usually close enough so that both sides can reach agreement at some number near the top of the bell curve.  But since China cases have no bell curve and no 80%, settlement is as much of a gamble as trial.  Since going to trial often costs only marginally more than not going to trial, there is little incentive to do anything but see the case through.

Adding to this is that many cases in China do not require an outside lawyer (this is also true of CIETAC arbitration) so Chinese companies often fight their lawsuits without having to pay for any lawyer at all.  Chinese courts rarely award the winning party its attorneys fees and they are also slow to award much in interest, further reducing the risk of going to trial and further reducing the incentive to settle.

On top of all this, even when one company prevails in a China lawsuit, collecting from a Chinese defendant company is typically anything but easy.

We hear that around 90% of the business cases filed in China actually go to trial. So if you are going to sue in China, you must be prepared to participate in the litigation for the long haul.

All of this only increases the need to have a well-written (preferably in Chinese) clear-cut contract with clearly set out liquidated damages provisions for breaches.  Such a contract will not only decrease your chances of ever needing to litigate, the certainty it will bring will make settlement of any dispute far more likely.  A contract that is so clearly written that both sides will have an easy time predicting how the court will rule increases the chances of settlement.  A contract provision that requires the losing party pay the winning party’s attorneys’ fees also helps, but such a provision may not always make sense.

China litigation. Have fun with that.

For more on litigating against Chinese companies, check out the following:

Your Chinese Lawyer’s Duty Of Loyalty. What Me Worry?

By Dan Harris on Posted in Legal News

Interesting article in the most recent issue of James Zimmerman’s monthly newsletter.  Zimmerman authored the truly first-rate (and comprehensive) China Law Deskbook.  If you are going to buy one English language book to assist you in figuring out the broad panoply of China’s laws, the China Law Deskbook is that book. Zimmerman’s newsletter article is on “The Issuance of the Notice of the Decision on the Establishment of the System of Lawyers Oath” which was very recently promulgated by China’s Ministry of Justice.  In layman’s terms, this notice sets out the oath required of all China licensed lawyers:

I swear to faithfully fulfill the sacred mission of legal workers in socialism with Chinese characteristics. I swear my loyalty to the Motherland, to the people, to uphold the leadership of the Communist Party of China and the socialist system, and to protect the dignity of the Constitution and the laws. I swear to practice law for the people, keep industrious, professional honest and corruption free, safeguard the lawful rights and interests of clients, maintain the right implementation of the law, uphold social fairness and justice, diligently strive for the cause of socialism with Chinese characteristics.

Zimmerman rightly notes that this oath is mandatory for Chinese lawyers working for Chinese law firms. and that a lawyer who refuses this oath will be denied his or her license to practice law.  Your Chinese licensed lawyer has taken this oath.

Zimmerman goes on to point out that this oath makes clear that Chinese licensed lawyers are not fully independent and “their expressed loyalty – and notwithstanding their personal views – is first and foremost to the State.”  He then discusses how this oath is “interference at best” and makes a Chinese lawyer’s “ethical standards” vastly different than that of American lawyers.  Your Chinese Lawyer. Trust Yet Verify?