China Law Blog

Phone calls from potential clients always start out fun and this economic downturn has brought in a whole slew of new clients and potential clients needing legal help in dealing with the economic downturn.

This post is on three potential clients whose situations were so bad that I had to suggest they not hire us at all. None of them liked what I had to tell them, but two of them actually hired us anyway. One to try to deal with the matter on which they initially called, one to deal with another matter and to prevent a recurrence of the situation that precipitated the call.

All three calls started out pretty much the same with the nearly obligatory, "I got your name from so and so. He tells me you are the perfect person to solve my problem." I then respond by extolling the virtues and smarts of "so and so" and then modestly agree that I am pretty experienced with these sorts of matters. All three phone calls quickly declined from there.

The decline began when the companies started telling me the facts. Two of the companies had purchased product from their long time Chinese suppliers and had received -- for the first time -- totally substandard product. They both felt this Chinese company had shortchanged them this time around because it was becoming economically desperate. Neither company had a written contract with their Chinese supplier; they had both used purchase orders. They both wanted my firm to sue on a contingency fee basis and I immediately refused. We do not consider such cases unless there is a contract clearly setting forth the product specifications and the defect in the product stems from failing to meet a clearly enumerated contractual specification. "You are welcome to pay us by the hour," I said, "but instead of spending money on that, I suggest you retain us to write your future contracts in Chinese. That would be money well spent." Neither initially took too kindly to my suggestion; one responded in such a way as to give rise to the title of this post.

The third incident was with a company that had supplied materials to a number of vessels. This company had failed to confirm that the vessels to which it was supplying the product was actually owed by the company buying the product and we discovered it was not. Very roughly, this meant we could not arrest the vessels and the only way our client could recover on its debt would be to sue the purchasing party directly in an Asian country not exactly known for its rule of law.

I told the client it needed to change its procedures before supplying ships in the future. I was going to tell it to always require the vessel owner to also sign on to its contract and to require the purchaser to provide a certificate of vessel ownership so there would be no doubt the vessel owner is putting its own ship at risk. However, before I could say this, the person at the company with whom I was dealing, somewhat angrily told me he knew exactly what he was doing and he had never had this problem before. He made quite clear that he did not think he needed any legal advice regarding his future business. In other words, I was to work magic on his problem now and not worry about him making the exact same mistake again.

In all of three of the above cases, these companies had apparently been engaging in risky behavior for many years, without having suffered any real consequences. It seems the old stockbrokers adage that "genius is a rising market" also holds true for China business.

We lawyers are trained to think about and prepare for the worst case scenario. The economic downturn is causing worst case scenarios to happen constantly and those scenarios are exposing those who apparently believed such scenarios could never occur. In other words, we lawyers are being proven to have been right all along. I told you so.

Would love to hear from readers who are paying the price for having failed to properly document their China deals and from those readers who are faring relatively well for having done so. If there are any of you out there who are benefiting from not having documented your deal or paying the price of having good documentation, I would love to hear from you too.

PS I have been doing my utmost not to flack too much for "best blog" votes, but I certainly would appreciate your clicking here and voting China Law Blog.

UPDATE: To clarify, having a contract does not guarantee one will not have problems. Nor does it guarantee that it will make sense to sue if something goes wrong. Nor even does it guarantee one will prevail if one sues. But, in our experience, having a contract greatly increases the likelihood the Chinese company will choose to mess with someone other than you, greatly increases the likelihood that it will make sense to sue, and, most importantly, greatly increases the likelihood that you will prevail if you do sue. It is the likelihood of losing at trial that causes companies to want to settle and Chinese companies are little different on this score than companies elsewhere around the world.