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China Contracts Because China Law Does Matter

Posted in Legal News

Fascinating and important post over at the Chinese Law Prof blog today, entitled, “When does law matter in China?”  The post and my own experiences lead me to answer by saying “all the time.”  But remember mattering is not the same thing as being determinative.

Professor Clarke starts his blog post by noting how he is “often asked (skeptically)” whether the law matters in China.  He then answers it with the following:

I was struck by this article on the Caixin web site today. Apparently the Ministry of the Environment possesses detailed data on soil pollution in China. Lawyer Dong Zhengwei made a request under the “Regulations on Open Government Information” for that data to be made public. In response, the MOE stated that the information could not be released as it was a state secret.

Surprise, surprise, right? Of course the government does not want to release this information. But think about how this scenario could have played out in an era not so different from today: (1) Lawyer requests information. (2) No response. And this could have happened whether or not there were regulations on open government information.

Instead, the existence of these regulations combined with a shift in what for want of a better term we might call legal culture has meant that the MOE apparently feels the need to respond in some way. It has to come up with a justification for not revealing the data. And that means it has to put itself in the embarrassing position of lamely claiming that this information is a state secret, implying that releasing it would somehow harm national interests.

Let’s make two assumptions: (1) an action based on an explicit rationale is easier to criticize than one for which no rationale is supplied; and (2) government officials and agencies would, all other things being equal, prefer not to put themselves in the position of exposing themselves to criticism. If you buy those two assumptions, then at the margin we should expect to see more information being made available as a result of the regulations.

In other words, this law matters not because there is some institution out there (for example, courts) that can force the government to reveal information, but because the very procedure, even if it results in an effectively unreviewable decision not to disclose, puts some pressure on government to operate differently from the way in which it has operated in the past.

He is absolutely right.  The law had at least some influence here.

The reason I found Professor Clarke’s post so interesting to me is because I had a similar discussion on a much more micro level just an hour or so before I saw his post.  A company called me about the pros and cons of having an NNN Agreement with its potential Chinese manufacturers.  It had previously had a Chinese company sign an NDA (Non Disclosure Agreement) and had just discovered that company was now selling its product online.  My response was something like the following:

An off the shelf U.S. style NDA is virtually never going to work.  First off, they focus on disclosure, when the focus really should be on stopping the Chinese manufacturer from competing with you. Second, they usually call for litigation in the United States, which pretty much every Chinese company knows will have no impact on them because Chinese courts do not enforce U.S. judgments.  We write our agreements very differently.  We write ours so as to convince the Chinese manufacturer that it would be better off not violating our agreement than violating it.  We do this by making sure that our dispute resolution clause has teeth, by making sure that the Chinese manufacturer will be held liable if it manufactures our client’s product, and by making clear what the damages/penalty will be for any violation.

We have done probably 500 of these agreements by now and about 245 times they come back signed without changes.  Another 245 or so times they come back with reasonable changes and then there is a bit more negotiating and then the agreement gets signed.  Maybe ten times or so, the Chinese company refuses to sign and then we tell our clients to find someone else because that company is refusing to sign because they want to be free to compete without a good NNN Agreement making their life difficult.

The potential client then asked if any of our clients had ever sued on such an agreement and I told him that as far as I was aware, none had ever needed to do so, and that showed the strength of the agreement.  I then talked of how the main reason for having such an agreement is to prevent problems, not to be able to win in court if there are problems.  I then made clear that having such an agreement is no guarantee against IP theft, but that if you have a good agreement and you are dealing with a legitimate Chinese company, the odds will be very much in your favor.  And if you do not have such an agreement, I can guarantee that your chances of having problems will go way up.

A legal system need not be perfect to be relevant and important.  The U.S. legal system is neither perfect nor certain, and yet nobody ever questions the value of a contract.  Just for the sake of example/argument, let’s say the U.S. system works 95% of the time in a commercial context and the Chinese system works 60% of the time in that same context.  My contention is that in both countries it still makes sense to have a good contract because having a good contract sufficiently increases your odds.

What do you think?