Archives: litigation

I was just interviewed by a magazine reporter who wanted to know what important business laws impacting foreigners had changed in China in 2012 and what we can expect for 2013.  I started out by telling him that if he was counting on big changes, he had no story.  I then went on to explain that the legal changes occurring in China for foreign businesses doing business in China have been incremental for years and I did not see that changing.  In fact, the level of enforcement of existing laws is probably been and will continue to be more important for doing business in China in 2013 than the laws themselves.

And it is for that reason that I subtitled this post “boooorrring.”  It is boring because what I am going to say is just a re-hash of what I have been saying for years.  Sorry.

With few exceptions, the business law trends I see for China in 2013 are pretty much the same as what we have been seeing for years.  The Chinese government’s primary goal is to stay in power (I think this is true of virtually all governments) and that goal usually drives the enactment and enforcement of its laws. The big, overarching trend I see for China in 2013 is its continuing to more strictly enforce its laws, particularly those that apply to business, and even more so those that apply to foreigners.

I see the following four key things happening on China’s business law front in 2013:

1. China will step up even further its crackdown on foreigners in China violating its visa/immigration laws. If you lack an employee visa, you are  at risk. Yes, this is more likely to impact you if you are from Africa or the Middle East, but we are definitely hearing of increased problems for Americans and Europeans too.

2. China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. China has especially stepped up its enforcement against American and European companies that operate in China but have an entity in Hong Kong without one in the PRC.  We have seen such an increase in this over the last six months that we are wondering if maybe the PRC is using a Hong Kong list.  Providing jobs to Chinese citizens does not let you off the hook on this one. Trust me on that.

3. China will increase its tax collection efforts. This has been going on for years now and if you are doing business in China already I am guessing that your response to this is “yeah, so.” In particular, China has stepped up its transfer pricing efforts and so if your China operations are not making a healthy profit, be prepared for the government to impute healthy profits to it. If you do not already have a good China accountant, get one.  Now.

4. Litigation is increasing.  The idea that Chinese companies and employees do not sue was never true and it is becoming even less true by the year. Chinese companies are getting quite aggressive in threatening to sue their foreign counterparts both in China and even in the United States.  If you fire or lay off your Chinese employee without first getting a signed settlement from them that actually works, your chances of being sued are great.  My law firm settles these cases all the time before litigation and after and let me tell you that “before” is a lot cheaper.

Happy New Year everyone.

Yawn.

What do you think?

By: Steve Dickinson

The PRC State Council Information Office just published  a White Paper on Judicial Reform in China. The purpose of the White Paper is to provide a snapshot view of the progress of legal reform in China over the past ten years. Readers who are interested in the current state of the Chinese legal system and the projection of future trends should take a look. Even for those who do not fully agree with the assessment will benefit by seeing what the top level of the Chinese government believes is important about China’s legal system and its future development.

Four issues raised in the White Paper are of particular interest to foreign investors in China:

1.  The number of lawyers and lawsuits is rapidly increasing. This is contrary to what many foreign investors believe and the implications of this must be understood. The White Paper provides the following basic statistics:

  • There are currently 18,200 law firms in China, up 31.6% from 2000
  • There are 210,000 lawyers registered in China.
  • In 2011, Chinese lawyers acted as counselors for 392,000 clients, up 24.6% from 2008.
  • Chinese lawyers handled 2.315 million litigation cases in 2011, up 17.7% from 2008.

The White Paper does not mention that the number of judges in China has remained static at about 200,000 over this same period.  This has meant an increasing workload for the judges and has negatively affected the quality of decisions. Nonetheless, Chinese people are still making active use of the court system to resolve disputes.

Most foreign business people are unaware of the large amount of litigation that occurs in China and tend to believe that they will never be sued. They therefore do not prepare for lawsuits and, when sued, they do not take the matter seriously and often do not respond promptly and effectively. This is a mistake. As the numbers above show, there are a lot of lawyers in China and they make their money suing people. When a dispute arises, the likelihood of being sued in China is actually quite high. Far higher for example than in Japan or in Korea.

2. China has made major progress in the administration of civil justice.

The improvements fall into four areas:

1) The functions of case filing, trial and execution have been clearly separated. The major change here is in the substantial improvements in executing on judgments. Though this may sound like a purely technical issue, it actually has important practical consequences for foreign companies doing business. Criticisms of the Chinese legal system often center on the difficulty in enforcing judgments. As a result of recent reforms, most Chinese courts have a created a department that focuses exclusively on enforcement. This has resulted in substantial improvement in the enforcement of monetary awards in most major jurisdictions. In addition, pre-judgment attachment of assets has become much more effective, adding a major tool for enforcing monetary awards. For foreign investors, this change cuts both ways. It has made litigation against Chinese companies more attractive since the Chinese company now has a real fear that any judgment will be enforced against it by seizure and sale of assets. On the other hand, it means that where the foreign party is a defendant, there is now a substantial risk that an adverse decision will have a strong negative impact. We are already seeing the impact of this in the willingness of Chinese companies to settle our clients claims against them.

2) The application of the law has been clarified through legal guidance. China is a civil law system, meaning that decided cases are not binding. This lack of case law precedent is often cited as a weakness of the Chinese system, since the laws are written in a sketchy and often vague manner. The Chinese themselves have recognized that weakness and have filled the gap in two ways. First, the Supreme People’s Court regularly issues binding guidelines on the interpretation of important statutes. Second, the SPC and local high courts regularly publish authoritative cases with extensive commentary. These measures have been well received by Chinese lawyers and judges and have substantially improved clarity in the interpretation of Chinese laws. This too has led to Chinese companies focusing on settling claims so as to avoid being sued and losing.

3) Standardization in awards.

The Supreme Court has worked to achieve greater certainty and predictability in damage awards in civil cases. This removes much uncertainty in the litigation process and it also decreases opportunities for local judges to engage in bribery or other unacceptable practices.

4). Case management has been improved.

China’s major courts have installed modern case management systems. Many courts now use an on-line management system that allow parties to independently monitor the progress of a case. In many jurisdictions, streamlined case systems have been adopted that allow for quickly resolving simple matters and small claim matters. The result of all this is that Chinese lawsuits proceed to trial much faster than is common elsewhere in the world. This speed can take foreign parties very much by surprise. A Chinese lawsuit can be filed and tried in the time it takes merely to provide an answer in North American and European courts. From my experience, Chinese courts are not concerned about the thorough preparation of a case. They are more concerned that a case be heard quickly. The Chinese court motto seems to be “Justice delayed is justice denied.” Foreign investors need to take this into account. When service of a lawsuit is received, the defendant must respond immediately. There is no room for delay.

In part two, we will discuss the impact of China’s legal reforms on criminal cases.

 

Spoke the other day with a company that was contemplating suing a Chinese factory regarding bad product. This company bought about $300,000 in product that it simply cannot use. When it told its Chinese supplier of this and then held back its final ~$100,000 payment, the Chinese company said it planned to sue.

This company was referred to us by another company going through the exact same thing.  Our phones are ringing off the hooks with these cases and they are not good.

Let me explain.

Chinese factories, particularly in certain industries like clothing, shoes, gifts/tchotchke, are hurting in China right now. For those of you who always angrily write me whenever I even hint at a downturn in China, I suggest you instead read this New York Times article, entitled, “In China, Sobering Signs of Slower Growth.” What this means is that many of these factories are cutting corners.  Much of the bad product in these cases is not due to bad production, but rather to bad components. The factory that makes the sweaters is using lesser wool to save costs and that doesn’t work. The factory that makes the shoes is using a lower grade leather and that doesn’t work. The factory that makes the plastic toy is using a lower grade plastic. And on and on and all of this without giving any advance notice to the American buyer. Make no mistake, for the first time in a long time, quality fade seems to be on the rise in certain sectors in China.

But it gets worse.

In the old days when a Chinese factory provided bad product, they would usually eventually admit it, and blame it on either a subcontractor or a supplier.  Now they deny it and threaten retribution if they are not paid whatever is still “owed” by their American buyer.  I wrote about this way back in February, 2006, in a post, entitled, China OEM The Smart Way:

Good Chinese suppliers are usually very busy and they often subcontract out to lower quality suppliers. We have handled many cases for foreign companies that received bad product from their previously reliable suppliers and in well over half of these cases, the product quality problems stemmed from the supplier having subcontracted out the manufacturing.  The supplier usually freely admits to having subcontracted the work and sometimes even boasts that the problems otherwise would never have occurred.  The supplier admits legal responsibility for the quality control problem, but then almost always proposes remedying it by giving a small discount on future orders until the damages from the bad product have been covered. The foreign company is usually in no mood to continue doing business with the offending supplier and wants only a monetary remedy.  However, because the profit margins at most Chinese manufacturers are so low, they often simply cannot pay all of the damages caused by the bad product and a standstill results that can only be resolved through litigation.

Those were the good old days.

Today, the tactic is to threaten to prevent the American company from “ever doing business in China again” or, more specifically, to seize the American company’s product at the border.  We take these threats very seriously and they have altered our approach to these sorts of cases.

In the past, if an American company was seeking $200,000 in damages from a Chinese company for bad product, we would most of the time seek to dissuade them from even bothering to pursue litigation. Our thinking was that unless they had a kick-ass written (preferably in Chinese) OEM Supplier Agreement that made crystal clear the quality expectations and the penalties for not meeting those expectations, suing in China would just not be worth the time, money and hassle.  And suing in the United States typically made even less sense.  For an explanation as to why this is usually the case, check out “Why Suing Chinese Companies in the United States is Usually a Waste of Time” and “Suing Chinese Companies in US Courts.

But the strategy changes if the Chinese company threatens to close you down. We have dealt with cases where US companies were unable to buy from any Chinese supplier without paying 100% upfront because their alleged failure to pay had caused China’s export insurance agency to refuse to insure payments from the US company. We have also dealt with way more than our share of cases where someone or something from our client was held hostage in China to secure payment. For more on the hostage issue, check out “China Hostage Situation. Now IS A Good Time To Pay Your Debts” and “China Business. China Jails. China Hostages.

If a US company is facing the situation above, our advise is that they sue the Chinese company somewhere, usually in the United States. Being able to show the Chinese insurance company, the Chinese police, or the Chinese border patrol agents, that you have sued can be invaluable. Your complaint against the Chinese company shows that the situation is not as simple as the Chinese company is making it out to be. Your complaint shows that the Chinese company is not necessarily owed anything at all and that you are not clearly someone who does not pay your debts.

Of course, if your company has no intention of continuing to do business with China and your personnel will not be going there again, then the best strategy probably would be to just walk away, just as in the old days.

The China Daily recently did an article, entitled, “Business lawsuits in sharp increase,” on how lawsuits involving foreign companies are up ten percent in the last year.  The article ascribes this increase in litigation to more foreign companies coming into China and to the economic downturn. Both of those things may be true but I also think that the increase is due in part to companies getting more comfortable with the fact that it is possible to come out ahead on Chinese litigation.

I am tired of hearing people (including lawyers) tell me that there is no point to litigating in China because it will be so expensive and “they have no laws there anyway.” Wrong.  And Wrong. Litigating in China is typically costs less than litigating in the United States and China does have laws. Mind you though, the laws and the judicial decision-making will be different.

Let me explain.

On the most basic level, the decision to litigate in China is really no different than the decision to litigate anywhere else. Is it worth spending approximately X dollars to pursue a lawsuit in which you have a Y percent chance to win and likely collect Z dollars? The answer will depend on the X, Y and Z variables and it is those that I am going to analyze in this post.

The X Variable. Litigation Costs.

Litigating in China is quite different from litigating in the United States. Under China’s civil law system, a plaintiff generally must have the evidence it needs to prevail before it files suit.  This is the case because it is rare to be able to get evidence from the defendant through American-style discovery.  This means that you will not have to pay the massive costs of American-style discovery and this also means that your case likely will go to trial much faster than if it were in the United States.

One thing I have found though is that once you sue a Chinese defendant, the chances of them settling are quite low. I have heard many explanations for this but I will save those for another day. Suffice it to say though that you should not sue a Chinese company in China unless you are prepared to take your case all the way through trial.

Chinese courts typically require that documents generated outside China be notarized and then authenticated/appostilled by the Chinese embassy or consulate. Securing an appostille on documents is not terribly difficult for those who have done it before, but it can slow things down a bit and also can raise costs if there are a lot of documents requiring this.

Foreign lawyers and foreign law firms cannot litigate in Chinese courts. There are plenty of excellent Chinese litigators but if you are going to require your lawyer be both excellent and fluent in English, you almost certainly will need to pay considerably more.

One of the biggest unexpected costs of litigating in China is the court fees, which you should figure will run you at least 2.5% of the amount of your claim.  American litigants tend not to be aware of fees like this and this causes them to get into trouble.  I once helped represent an Americna defendant in a Korean case (Korea too requires the plaintiff to pay a portion of its claim as a litigation fee) where the American plaintiff (in an American lawyer kind of move) asked for something like $30 million dollars even though its chances of getting anything more than $2 to $3 million were pretty much zero.  I cannot remember any fee numbers but what I do remember is that the $30 million sought by the plaintiff required it pay a large amount in fees and that led to the plaintiff’s American law firm firing the Korean law firm for not having explained how all of this works.

If you are the plaintiff in a China case, you may also want to spend money to try to freeze (or preserve) the defendant’s assets to prevent the defendant from dissipating them to prevent you from collecting on any judgment you might get. Securing a preservation order typically requires a large deposit, generally based on the amount you are seeking to freeze. It is sometimes possible to use a bonding company for the deposit.

Very generally speaking, the prevailing party in China gets much of its costs back but none of its attorneys’ fees.

The Y Variable.  Chance of Winning.

It is very difficult to speak generally about the chances of prevailing in a Chinese lawsuit so I will keep this section mercifully brief by commenting on three things that I have noted about Chinese courts.

One, they tend to base their decisions less on the law and more on the equity than do US courts.  This is not necessarily good or bad, but it is something you should fully understand before bringing a lawsuit in China. If you are suing a Chinese company that said it would pay you a million dollars and then it did not, you will probably win. If you are suing a Chinese company that said it would do A but then was unable to do A because the price of doing so tripled and if it had done A it would have meant having to terminate 100 employees to cut costs, your chances of prevailing just went down.

Two, politics and corruption are typically going to be less of a factor than you think, particularly in places like Beijing and Shanghai. Your $1 million contract dispute is just not going to draw any political attention unless there is something very unusual about your case.

Three, your case is going to depend on the documents way more than on testimony.

The Z Variable. Amount You Are Likely to Collect.

Again, it is difficult to generalize here, but there is one thing that bears mentioning. Chinese courts are far less comfortable issuing large verdicts than American courts and this is particularly true when it comes to lost profits.

For more on suing Chinese companies, check out the following:

Because I receive countless emails every day and because so many of them involve the same questions, I have developed various templates to respond. 

Here’s the template I use when a US company writes me with a China product quality problem and the contract they have provided me is not good at all. Much of the time the US has no contract at all, but usually when they do have one, it is usualy so bad as to work against them. Here’s my “stock” answer in that situation.

This is our template response when the contract calls for arbitration in a US city but is pretty much silent on everything else (a far too common scenario when non-lawyers draft a contract).

It’s a tough case and your contract does not help matters at all.

What you probably will need to do is begin arbitration in [US City] and serve [the Chinese company] via the Hague Convention. This will require translating the complaint into Chinese and serving it through the Chinese court system, which takes months. We write our arbitration contracts to say that service can be done by email/fax/personal delivery so as to avoid this sort of situation. 

Your contract is silent regarding the arbitration panel to be used and the choice of law.  I hate to tell you this, but we had a case with a similar arbitration provision and it cost our client $50,000 to get the case into arbitration in the first place because the other side used the vagueness of the provision to stall.  And that was just the arbitration panel alone.  It could cost $10,000 easy to figure out what law should apply here and in the end, I am very worried it will be Chinese law.  I’m worried about that because under Chinese law, terms like “highest quality” and “best workmanship” can be very different from the US.  Very different.

In the end, the arbitrator will probably use US standards (without saying so explicitly) but you’ve opened yourself up for a whole lot of argument in the meantime.  If your complaints are based on the Chinese company’s failure to build your product according to ____ standard or to meet _________ certification, your case becomes a bit simpler because there is at least something clear cut against we can measure the product you received.  You may need an expert to testify regarding the quality problems and that is more cost.

So now that I’ve told you the many issues that you may need to confront just to get the case into arbitration and then to win in arbitration, I’m going to tell you that even if you win in arbitration, you are only about 60% of the way there. Because after you win in the US, you will need to take your US arbitration award over to China and then convert it into a Chinese court judgment and that is going to take a while and will likely involve its own set of fights. Once you have a Chinese court judgment, trying to collect on it will be the next difficult and expensive task.

Here is how I suggest you proceed:

1.  If you are ever going to buy product from China again, you should hire us or some other law firm experienced in writing Chinese OEM Agreements. We typically write the official contract in Chinese (with a Chinese court dispute clause) and the translation in English.  A good contract scares Chinese companies and your threat of a lawsuit thus has a lot more force. Most importantly, a good contract is much more likely to make it worth your Chinese manufacturer’s while to do things right from the get go.

2.  I am very skeptical that it will be worth your while to pursue arbitration in the United States, but that seems to be the only litigation/arbitration route you have.

3.  One other option you have is to have us write a demand letter to [Chinese company] in Chinese to stating that if it does not resolve and pay for the product quality issues, we will pursue arbitration in [US City] pursuant to the contract and then take that arbitration award to China and turn it into a court judgment.  We would act like all of that will be easy. We have a decent (but not great) success rate with these letters in that we do sometimes get real money back for our clients by writing them, even when the litigation/arbitration option is gloomy.

If you have any questions, please feel free to write or call.

What do you think? Part II of this will be the letter we write when the contract calls for litigation in a US city (which is even worse than arbitration, BTW).

My firm recently wrapped up a fascinating matter (it is nearly always bad news when your lawyer describes your matter as “fascinating”). Even though the matter is nearly over, I am going to gloss over certain facts and make up other ones so as not to leave any possible identifiers. The thrust is entirely true and the result is as well, and my reason for writing it also remains intact.

Here goes.

Young Chinese Child falls from a window in a room in which an American employee of our client is one of the few adults. Child is very badly hurt. Very badly. It now appears his injuries will probably not be permanent, but he also may be in recovery for a year. His medical expenses by US standards were fairly low, but they are astronomical by Chinese standards, particularly for this less than large city. A day later, the parents of the child come with a lawyer to tell this employee that they want six figures (in US dollars, not RMB) from him and from his employer for the injuries that have befallen their child. They also go to the police and make the same request of this employee and his American employer.

The parents make clear to the employee that many in the town are behind them and that things will get much worse if payment is not received. The employer calls us and we immediately spring into action. We determine that the police do not seem to be buying into the parents’ story of guilt and they have not told this employee or any other employee of our client that they must remain in town or in China as either witnesses or suspects. We learn that our client is not terribly happy with its joint venture partner in this town and that it has no problem with taking its employees out of there and sending them home to sit this whole thing out. Though they feel terrible about the injured kid, they do not consider themselves responsible. Our research of the facts and the law and our meetings with a cadre of Chinese lawyers we trust all indicate our client is not liable. However, as everyone who has ever been involved in litigation anywhere in the world knows, not being liable and not being subject to expensive and time consuming litigation are two entirely different things.

We determine the best course of action is to get the employees out of this town as quickly as possible and on their way back to the United States. We figure that getting them out will change the leverage game entirely, and it does. The employees leave and the settlement claim by the parents immediately plunges. Now we can talk with all parties (the child, the joint venture partner who actually owns and maintains the building from which the child fell) from afar, pretty much stripped of any imminent threats. We agree to pay the parents something towards the medical bills and we (fairly publicly) ask that instead of the Chinese joint venture partner paying our client what it owes, that it instead pay all of that to the family of the injured child. Agreements are signed on all of this and we move on.

And yes, before anyone accuses me of this, I will come right out and admit it. The point of this article is that it pays to bring your China lawyers in early on a problem, rather than late. Early is better for the attorneys too, but only because many times when it is too late there is nothing the attorney can do (or charge for) beyond saying, “sorry.”

A loyal reader e-mailed me a link the other day to an article on Chinese dispute resolution, written by Graeme Johnston, Litong Chen, Chris Parker, and Steve Kou, from London based mega-firm, Herbert Smith LLP. The article is actually a chapter to a book, entitled, Getting the Deal Through.

Click here for the China litigation paper.

Along with providing me the link, the reader asked me the following two questions:

1) Is it accurate?
2) Why do you suppose it took four people to write this five page article?

My answer to the first question is that it is not only highly accurate, but also a very clear, very concise explanation on the basics of China litigation and dispute resolution. It is excellent.

Oh, and I ain’t gonna touch the second question.

China Law Blog’s own, Steve Dickinson, was recently a guest on “The China Business Show: Secrets of Doing Business in China.” [link no longer exists]

The show and the website are part of Entrepreneur Magazine [the show no longer exists]:

Entrepreneur Magazine’s The China Business Show is an internet radio show that covers all aspects of doing business in China with a focus on sharing valuable insider perspectives, secrets and tips from experts in their field who remain ahead of the curve in China business circles.

Christine Lu hosts the show and, if her interview of Steve is any indication, she does a fine job. The website describes Ms. Lu as follows:

Christine Lu began her own learning curve in doing business in China 11 years ago as a very driven Boston University undergrad student who flew herself out to Shanghai determined to land the best summer internship in Shanghai she could talk her way into. She convinced The American Chamber of Commerce in Shanghai that they needed the services of an unpaid Chinese-American intern and the rest is history.

Offering a strong blend of creativity and cross cultural insight since 1996, Christine’s entrepreneurial career in China has included designing 2 lines of women’s ready to wear clothing, co-founding a dot-com startup, training for 6 months at HSN (Home Shopping Network) International’s headquarters in the U.S., developing a catalog and internet business to compliment a TV shopping company’s multi-channel retail concept and through it all, remaining an active member in networking circles within The American Chamber of Commerce in Shanghai.

Following a successful 5 years leading to her promotion as Marketing Director for TVSN (TV Shopping Network) in China, Christine returned to the US in 2004 and is currently based in San Diego where she lives with her husband and son. In addition to her role as Executive Producer and Host of Entrepreneur Radio’s The China Business Show, Christine remains true to her entrepreneurial retail spirit as the co-owner of an online kitchenware boutique that maintains an excellent Gold Powerseller status on eBay and is a featured merchant in Amazon.com’s Seller Central Network.

Her interview with Steve is entitled, “Insights on Current Legal Trends in China: China’s Current Legal System and Its Impact on Foreign Companies” [link no longer exists] and the following are my quick notes of the core of Ms. Lu’s interview with Steve, which went for less than five minutes.

Ms. Lu: As a China lawyer, would you please tell us whether the law matters in China or is everything controlled by personal connections?

Steve: Starting in 2000 and accelerating in 2004, the law in China became much more important. Those who are not used to this and choose to operate under the old system by just ignoring the written law are getting into a lot of trouble. You no longer can just rely on what local Chinese officials tell you.

Ms. Lu: What are the major trends in the law of interest to foreign investors and for those doing business in China?

Steve: One, China has decided that by 2010, every part of modern business life will be controlled by a very clear written law. China has recently enacted a new tax law, a new property law and [just today] a new bankruptcy law.  The old days of things being run by “anybody’s best guess is diminishing.”  The second thing is that Chinese businesses have become very aggressive in defending their business interests by pursuing litigation.  This usually comes as a big surprise to foreign companies.

Ms. Lu: Can foreign investors obtain fair treatment in China’s courts?

Steve: In the major areas of foreign investment like Beijing Shanghai, Guangzhou, and the Coastal regions, yes.  In those areas, the courts have bent over backwards to give foreign companies fair treatment.  Foreign companies find that if they take the initiative and file lawsuits they can prevail.  This is not true in the other parts of China and this is something to consider in determining where to locate.

Ms. Lu: What advice do you have for entrepreneurs looking to do business in China?

Steve: China’s System is complicated and so you must prepare in advance. If you do this, China can be a very good place to operate as a foreign business. If you do not do this and you start off on the wrong foot, it can be very difficult to recover.

What do you think?

Those of you in China or thinking of going there, I have two words for you:  lawyer up.

These are the words every lawyer loves to hear (come on, admit it), particularly when spoken by a very knowledgeable non-lawyer.  And when that non-lawyer is Shanghai management consultant extraordinaire, Andrew Hupert … well, let’s just say it has not taken us long to heartily pound on the drums.

In a just released post, entitled, “Unions and Lawsuits and Bears. China HR policy shifts,” [link no longer exists] Hupert talks about the broad significance of Wal-Mart’s recent unionization.  Weaving in Dell’s recent China problems and lawsuits (for more on Dell’s China problems, go here, here [link no longer exists] , and here), Hupert concludes by suggesting foreign companies in China invest in a China lawyer.

Gosh, it sure is hard to disagree with that.

Hupert, like so many of us analyzing the recent unionization of Wal-Mart (go here, here, here, and here for more on this) sees it as a broad shift in China policy:

You should view the Wal-mart unionization story as a sign of a broad shift in Chinese HR policy and regulation, rather than as a specific or isolated case of government meddling.

Hupert sees this broad shift as further fueling China’s nascent “sue the foreigner” trend:

Prepare for a wave of ‘rich foreigner companies are cheating me‘ lawsuits, not unlike the one Dell is having. In Dell’s case, the company really screwed up and violated the law. But even though Dell made a settlement ‘ the lawsuits and the bad publicity keep coming. Community justice has always been the style here, and technologies like web logs, camera phones and e-mail just make it more interactive and satisfying.

Hupert rightly points out how literal the law can be in China (and in most emerging market countries) and he emphasizes the need to specifically contract to prevent problems:

You need to make sure that next time, the guy doing the suing isn’t your ex-sales manager who you just fired for selling your client list to a competitor.

‘Did you ever specifically tell him NOT to sell your client list?’ No? Then you may have. Did you ever specifically tell him NOT to sell your client list?’ No?  Then you may have a problem on you hands. And then the blogs and the newspaper photographs. The lawsuit may be of no merit, but it serves everyone’s purposes ‘ everyone’s but YOURS.

Fortunately, Hupert does not leave us without a road map for seeking to prevent endless litigation (is there any other kind of litigation?):

If you are already in China and have been hiring for more than 6 months invest in a lawyer or HR specialist and make sure you know the laws and are in compliance. Spend extra attention on any case or issue that involved someone telling you, ‘oh, but no one really expects you to comply with that regulation”  (See Special Chinese Methods). You may want to have a specialist do this, as HR laws and regs in China can be complex ‘ and involve many levels and branches of government.

If you are NOT already in China or are considering a big increase in your China exposure, re-examine your HR and Financial plans. Make sure you are building in adequate protection and compliance. (I.e.: Is your HR Manager also your 25 yr old personal assistant?) Get your local lawyer and accountant involved in the conversation.

This is definitely the time to get your HR house in order. It is only a matter of time before we start seeing Dangerously Disgruntled Employees. In America, you worry about them showing up with a shotgun [or a lawsuit]. In China, you worry about the web log [and the lawsuit].

We previously posted on how foreign companies need to be ahead of the legal curve in terms of following Chinese law.  In another post, we wrote how foreign companies doing business in China are prime candidates for lawsuits in China because they will be held to a higher standard than Chinese companies:

The same holds true with respect to various business standards in China.  Western firms would be wise to adhere to the stricter United States or European standards whenever feasible.  The Chinese law and courts will likely eventually be getting every bit as strict as the United States, Canada, and Europe, and the standards China applies to foreign companies will always be at the high end in any event.

Or, as Hupert puts it, do you really want to listen to those who are telling you “no one really expects you to comply with that regulation?”

What do you think?

The Wall Street Journal just did an interesting story on growing private entrepreneurship in China, entitled, “China’s Entrepreneurs Offer a New Path: Best Hope for Country’s Economy May Lie With Private Enterprise, But Inexperience Could Hurt Effort.” The article focuses on Broad Ltd., a Changsha(Hunan province) company that manufactures giant cooling systems that do not rely on electricity.  The company sells its coolers worldwide.  Changsha is perhaps best known as Mao ZeDong‘s hometown.

Zhang Yue founded Broad in 1988 and he has done so well with it that he owns a helicopter and a jet plane.  The WSJ describes Mr. Zhang as “the new face of China:”

Mr. Zhang is the new face of China, where private enterprise was only officially recognized a few years ago. Today, China’s entrepreneurs offer a third path between the ailing state enterprises that account for a mere 30% of China’s output and the foreign enterprises that account for over half of the country’s exports and are increasingly making inroads in the domestic market as well.

If China is to flourish, its best hope lies not in state-owned enterprises, which still rely on government support and subsidized credit, but with a group of entrepreneurs such as Mr. Zhang. This group, which barely existed a decade ago, has had great successes, but they often lack the discipline and experience to build lasting business empires.

The article goes on to distinguish Mr. Zhang from most Chinese entrepreneurs because his company produces a product, rather than brokers product sales or develops real property:

Unlike Mr. Zhang, 70% of the richest private entrepreneurs in China are property developers, says Morgan Stanley’s Mr. [Andy] Xie. Most of those who aren’t developers are essentially traders, buying and selling goods and companies. By contrast, Mr. Zhang makes things for which there is demonstrable demand. At the same time, he is an indirect beneficiary of the real-estate boom, because many of his customers are developers.

Most interestingly, Broad’s cooling systems cost more than those from Korea and Japan and Broad does not seek to compete on price:

Moreover, while most manufacturing in China is all about economies of scale that result in the lowest price, Mr. Zhang says he doesn’t compete by undercutting competitors. He says his products are more expensive than those of competitors in Japan and Korea. The equipment used is world class and imported to his Broad factory from all over the world. Mr. Zhang is also unusual in that he is focused on the long term. By contrast, “most entrepreneurs see investment as detracting from profits,” says X.D. Yang, co-head of buyout firm Carlyle Group’s investments in Asia. “They only draw up one-year budgets. They don’t build their companies to last for years and years.”

With energy conservation one of China’s top priorities, the orders for Broad’s “environmentally correct cooling systems” are rolling in.

Mr. Zhang also handles his finances very differently from the typical Chinese entrepreneur:

In a world where capital has never been priced realistically, and, until recently, loans were considered government disbursements rather than debt that had to be repaid, Mr. Zhang is careful about how he seeks financing. “He is the only one I have ever met in China who has not asked me to get him money through Goldman,” Mr. [Fred] Hu adds.

Mr. Zhang pays his taxes and refuses to pay bribes, even though that refusal has cost his company certain contracts.  The article is not clear whether the contracts Broad missed out on by refusing to pay bribes were domestic or foreign.

I found the statistic that China’s state owned entities (SOE) contribute only 30% to China’s GDP interesting.  It is always unclear what is meant by a state owned enterprise in China, but the generally accepted definition does not include city owned companies. I recently read an article noting how much more efficient China’s private sector is than its state sector and how the private sector is growing at a much faster pace because of this.  I am often asked why China is not moving faster in privatizing its large state owned enterprises. My stock answer is that it does not need to do so, as so many of its state owned enterprises are eminently capable of self-destructing.  Unless Beijing interferes with private enterprise to slow it down, I see the role and influence of state owned enterprises continuing to shrink under its own weight.

My own law firm’s experience bears out what the Wall Street Journal says regarding the general unwillingness of most Chinese companies to think long term.  Certainly, we have found this to be true with respect to legal services.  All of the Chinese lawyers with whom I have discussed this topic agree that, with very few exceptions, Chinese companies will avoid using lawyers until a crisis necessitates it.  This contrasts with the prevalent western view that using lawyers is like changing the oil in your car; one pays for both to avoid the far worse alternative — having to buy a new engine or facing litigation.  As Chinese entrepreneurs gain business experience, and as their confidence in the staying power of Chinese capitalism increases, I believe their thinking will become more long term as well.

For more on the rise of capitalism/entrepreneurship in China, check out  “China Rising” at Samizdata Blog, which sees Chinese capitalism growing by small steps and “Top Predators,” at Blood & Treasure Blog, which summarizes Chinese government policy toward entrepreneurs as “not encouraging, not openly promoting, and not being quick to ban.