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China Lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

I had no idea what question to use for today but the following email (modified slightly to delete anything that might enable tracking) from this morning solved that problem for me:

I am _________ from _______, consulting company located in Spain. First of all, thank you for the informative blog posts. They have been very helpful.

My client company is a high-tech manufacturer (digital __________) and tries to expand the market to China.

Is it possible for you to recommend me some China distributors who supply to Department Stores and Home Convenient Stores?

Best Regards.

My response to these emails is usually somewhat along the following lines:

I’m sorry but because we represent a number of similar companies who have paid us tens of thousands of dollars over the years I just can’t. I do not think it would be fair for me to take what we have learned from getting paid to represent these companies and then turn around and give that information for free to one of their competitors. I hope and trust you will understand.

There you have it. Your thoughts?

China ScamWe long ago instituted the rule that if we got three blog comments and/or emails on a subject in a week, we would write about it. We have received three emails and one comment from people about to get scammed by a classic (but obviously resurgent) China scam. The below blog comment came in today:

So pleased to have found this blog. I have been contacted recently by this company from Kunming asking that I fly to Kunming to sign the Official contract. They were proposing that we organise a 20 day tour of France for 89 retired military veterans. We had provisionally booked the hotels and reserved the coaches so had spent quite a lot of man hours on the project.

After sending me the official contract they then asked me to pay my own expenses to China in order to meet them to sign the official contract in person before they would release 30% deposit into our bank account.

This does not normally happen in our Industry so a Chinese colleague phoned the companies that were on the contract and nobody from either the Kunming Tourist Board or the Government Department for retired veterans new who the man was that had signed the contract.

So that’s when I did a bit more research and found this Blog. Halleluya, great to get closure.

BEWARE OF “CON-MING”

This scam has been around forever and yet Western companies are still falling for it. It though seems to be rapidly accelerating of late, which is absolutely par for the course whenever China’s economy starts slowly, which it has been of late.

The scam consists of the Chinese company (actually, in every instance when our firm has done any investigation at all we immediately learned that there is actually no real company there) luring in the Western company with promises of big money for services (or sometimes products) to be supplied by the Western company. There is just one small hitch: the Western company must go to China (near as I can remember, it’s always some third or fourth tier city in China, never Beijing or Shanghai or Shenzhen, or even Tianjin or Qingdao) to sign the contract.

Why must the Western company go to China to sign a contract when China deals constantly get done without an in-person signing ceremony? The following are the reasons typically provided:

  1. Chinese custom. It would be rude if you don’t come. Note that of the thousands of contracts in which my firm’s China lawyers have been involved, less than ten percent have involved an in-person signing.
  2. We need to do this in front of Chinese government officials, for one reason or another. Note that I can recall only two instances where our contracts were signed in front of government officials and those didn’t need to be. They just were because the transactions were so large and so vital to the local economy and doing so was a way of improving government relations going forward.
  3. The contracts need to be notarized by a Chinese notary and for that they need to be signed in front of a Chinese notary. Complete lie.

Why does the Chinese company want the Western company to go to China? How does the Chinese company possible benefit from this? Based on the Western companies that report back to us after they have been scammed, the following are the most common:

  1. Western company personnel will be put up in a local hotel for 4-5 days and the bill will be maybe ten times what it should have been. The hotel and the scammers then split the take. This is not to mention the multiple celebratory banquets that also are grossly over-billed.
  2. The fake notary charges a percentage of the deal, typically USD$8,000 to $15,000. The Western company believes it must pay this for the deal to go through.
  3. The Western company is subtly told that for the deal to go through, government officials must be paid and it is legal for a foreign company to pay them. Complete lie. If these were really government officials and you do really pay them, you are risking jail time in both China and most likely in your home country as well.
  4. Some third party is necessary for the deal for some reason and the Western company must pay that third party. Really?

For more on this particular scam, check out the following:

How do you prevent this scam from happening to you? Easy. You conduct basic due diligence on the Chinese company before you get on the airplane. Long before. The first thing you do is determine whether your China counter-party even exists as a registered China company or not. And when you discover that it doesn’t, you end all communications.

You have been warned. Again.

China Manufacturing ContractsThis is the third in my series on China manufacturing contracts. Part one was on the three main types of China manufacturing arrangements we are seeing these days: Original Equipment Manufacturing (OEM), Contract Manufacturing (CM) and Original Development Manufacturing (ODM). Part two focused on ODM contracts, which ten years ago were relatively uncommon (back then many of our clients were making clothing or toys or very basic electronics), but now make up well over fifty percent of the manufacturing contracts seen by our China lawyers — largely complicated hardware, internet of things (IoT) devices, and industrial equipment.

This post focuses on the intellectual property (IP) issues surrounding who owns what in a ODM arrangement and on the need for that ownership to be clear before any relationship between the foreign (usually American, European, or Australian) buyer and the Chinese factory company begins. I concluded

The technical question of percentage ownership is critically important for our clients because it determines the answer to a second, oftentimes even more important question: if you as the foreign buyer decide to or need to move your product production to a different factory, can you do it? Yes or no? If you own 100% of the IP, you can move. And if you have a contract that makes this clear and penalizes your existing factory for not allowing you to do so smoothly, you almost certainly will be able to do so without incident. However, if your China factory owns some or all of the IP, then you will not be able to switch your production to a new factory without some sort of license or permission from the factory. This is an issue that you need to resolve at the outset and you should not assume that you already know what the factory will say. Often, the response of the China factory is quite surprising to the foreign buyer.

In our recent experience, the most common position taken by Chinese factories is as follows:

  1. The foreign customer owns the exterior design (design patent) for the product. The customer owns its trademarks and logos.
  1. The Chinese factory owns the core intellectual property for the product.
  1. The Chinese factory agrees to manufacture the product for the customer on an exclusive basis. However, the manufacturer is free to continue to make use of its core intellectual property, including any “new work” developed as part of the product design process, in manufacturing for itself and in manufacturing products for other customers. This includes the Chinese factory manufacturing products that will directly compete with the foreign buyer’s product. The only limitation on the Chinese factory is that it cannot employ its IP to manufacture a product that uses the exterior design, trademark or logo of the foreign customer.
  1. The foreign customer cannot take the product and have it made by any other factory. That is, the customer is stuck with the Chinese factory, no matter what happens.

Assume the factory takes the “you cannot go anywhere else” approach. Then you will have to consider critical issues that will arise at the production stage. Specifically, you will need to consider what will happen in the following common situations:

  1. The Chinese factory raises its price to an unacceptable level.
  1. The Chinese factory cannot meet your quantity or time of delivery requirements.
  1. The quality of the product is not acceptable. There are consistently too many defects.
  1. The Chinese factory just decides to stop manufacturing for you. This can be because it simply decides to quit, or this can be because it decides to manufacture a similar product for themselves or for a larger company that can generate larger and more consistent orders.

All the above happens all the time when working with Chinese factories in China in the OEM and CM settings. In those settings, the remedy is to move to a different factory. The alternative to move is the primary threat that keeps the Chinese factory under control. Now consider the situation where you cannot move your production to a different Chinese factory. This obviously puts you in a very difficult situation. You are at the mercy of the factory. This is a situation you must avoid. For more on why it is so important to avoid this sort of situation, check out, China and The Internet of Things and How to Destroy Your Own Company, where we talk about companies that have come to our law firm too late.

The standard international standard for dealing with these intellectual property manufacturing issues is as follows:

  1. The factory is required to make the product for you for so long as you are interested in the product. If the factory determines on its own to quit making the product for you, then the factory must provide you with a royalty free license to the technology solely for the purpose of your being able to manufacture the product in a different factory. If the factory wants to avoid this result, its solution is simple: it must continue to manufacture the product for the foreign buyer.
  1. The factory is locked into a specific price for a specific period. Assuming that the production arrangement will be long term, it is probable there will be valid reasons for raising or lowering the price. For example, exchange rate fluctuation can be a good reason to go in either direction with the price. To provide for reasonable price changes, your contract should provide for a mechanism for annual price adjustments. This mechanism can range from a simple index to the CPI to a complex formula that takes into account multiple factors.
  1. There are two primary mechanisms for dealing with the quantity/time issue. The first is to develop a production schedule that binds both parties. The second is to provide for the situation when the factory is unable to meet the foreign buyer’s requirements by contractually requiring the factory to license production at an alternative location, but only in the amounts required to meet the excess requirements.
  1. Your manufacturing contract should provide for the situation where the factory consistently violates quality standards by giving you — the foreign buyer — the right to terminate the manufacturing contract for breach. The foreign buyer may have other reasons to terminate the contract for breach by the factory. Your contract should state that if it is terminated because of a breach by the factory, the factory automatically licenses you to manufacture your product in a different factory. Some Chinese factories will claim this rule allows for breach in bad faith simply for the purpose of moving to a new factory. If this is a genuine concern, the agreement should provide for a method of arbitration focused solely on this issue.

Though the above provisions are both fair and standard in the international business of custom design and manufacturing, we find that many Chinese manufacturers either refuse to discuss these matters or refuse to accept a reasonable solution. The Chinese factory knows that its customer will be stuck and stuck is exactly where it wants its foreign buyer to be. Being stuck with a factory what behaves unreasonably is a very unpleasant experience. You should consider carefully whether you want to proceed in that kind of situation.

You do not want to be ambushed by these critical issues after you have spent considerable time and money in developing a product with a factory that will then hold you hostage at the production stage. See China and The Internet of Things and How to Destroy Your Own Company for a taste of what this can look like.

You need to get clear on these design and manufacturing and pricing and production and intellectual property issues from the start; that means you need an ODM agreement that sets forth how they will be resolved.

China lawyers
Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Today’s question comes from a reader who sent me a link to a Wall Street Journal article, entitled,
China’s Tech Rules Make It Hard for U.S. Firms to Take Control along with the following core question/comment:

You are always talking on your blog about how foreign companies are better going it alone in China and not entering into joint ventures and not entering into VIE contract arrangements. Do you think HP, Microsoft, Qualcomm and Cisco don’t know any better?

I think HP, Microsoft, Qualcomm and Cisco know exactly what they are doing and we have never said that foreign companies should never enter joint ventures with Chinese companies. My sense/guess is that HP, Microsoft, Qualcomm and Cisco have conducted thorough cost-benefit reviews of these deals and determined the rewards outweigh the risks. Our position on joint ventures are something to be wary of and to be avoided if possible. But we fully realize that there are times where the best way (and even sometimes the only way) forward in China is via a joint venture or some other sort of tied-in relationship with a Chinese entity.

Negotiating with Chinese companies
Negotiating with a Chinese company? Think Game of Thrones.

If you have been reading the business news on China, two things ought to have jumped out at you. One, Chinese companies are looking to buy technology innovation. And, two, Chinese companies have a very annoying habit of backing out of their deals. For a news piece on the former, I give you this May 31 Wall Street Journal article: China’s Xiaomi to Buy 1,500 Patents From Microsoft, subtitled, “deal reflects smartphone maker’s efforts to acquire the intellectual property it needs to broaden its reach.” For the later, I give you this June 1 Wall Street Journal article: China’s Latest Export: Broken Deals.

For the last year or so, our China lawyers have been seeing the same thing. On both counts.

Let’s talk about innovation first. Can China innovate? That question has been asked countless times in the last ten or so years and this blog and our China attorneys have asked that question many times as well. Some of us have even been on seminar panels discussing that issue. But I have stopped asking that question ever since a friend of mine pointed out to me that it is no longer the salient innovation question to be asking about China. I his view (and mine now), the better question is a slightly broader one. The better question is whether China can secure innovation either by generating its own or by buying it. Truth be told, many in China, including at the highest levels of the government, have given up on China becoming a top-tier innovator and have therefore turned their attention to China becoming a top tier innovation acquirer. Add in the fears of a declining Yuan and you have all you need for a golden age (or period anyway) of China innovation acquisitions. And that is exactly what is happening and exactly what our China team has been seeing. Chinese companies are looking to acquire innovation/technology/IP any way they can, including by licensing, by purchasing (either the technology itself or the entire company) or by joint ventures.

Now let’s talk about why so many of these technology deals do not come to fruition and that naturally will lead us to why negotiating these deals is so incredibly difficult and why we subtitled this post “Buckle Up For Some Seriously Tough Negotiating.” The Chinese government is telling Chinese companies to acquire technologies and Chinese companies badly want to acquire technologies, but this does not mean they are not having a really really difficult time securing those technologies the way a company from, let’s say Spain or Germany, might go about acquiring such technologies.

Here is how our firm did a technology licensing deal for a Spanish company recently. This Spanish company wanted to buy a U.S. company with a cutting edge technology. The Spanish company spoke with the U.S. company and they negotiated a purchase price and generally discussed other key terms.  The Spanish company then did its due diligence on the U.S. company and that due diligence uncovered a few warts and raised a few issues. So the Spanish and the American company sat down again and negotiated on some of the new issues and renegotiated on some of the old issues, and within a week or so the deal was again ready to move forward. The whole process from start to finish took 3-4 months.

Here is what typically happens when we represent an American company seeking to do a technology deal with a Chinese company:

  1. The American company and the Chinese company reach what sounds like a perfectly reasonable deal.
  2. We draft up the perfectly reasonable deal and the Chinese company then completely changes it.
  3. Our American company tells the Chinese company that it cannot do the new deal the Chinese company has just proposed.
  4. The Chinese company comes up with some really bizarre explanation for why the new deal it is proposing is absolutely essential and explains why the deal our client thought it had can never work.
  5. We then spend weeks explaining why the old deal is just fine, while the Chinese company alternately acts like it will do the old deal with just a few small changes or hints very strongly to our client that it should take the new deal or the Chinese company will just walk away.

I could go on and on, but you get the point. The point is that Chinese companies like to draw in American and European companies with what looks like a really good deal and then go back on that deal. Chinese companies negotiate like this because they realize that once an American company commits to a deal, it wants to close the deal. Once five people in an American company have told their fellow employees that “we have a deal with XYZ Chinese company,” those five employees do not want to have to keep negotiating that deal for another 5-6 months or just walk away from it. Chinese companies know all this and they seek to wear down the other side, plain and simple.

Chinese companies will change the deal not just monetarily, but in even bigger ways as well. Have a deal where you don’t turn over anything about your technology unless and until you get a large upfront payment? Prepare for an explanation from the Chinese company weeks into the deal why that is no longer possible. Have a deal where the Chinese company is supposed to get your three year old technology? Prepare for an explanation months into the deal as to why you now need to replace that with your newest technology, and all at the same price. Again, I could go on and on.

So how should an American or a European company handle this sort of negotiating. By remaining firm and resolute. Not kidding. In subsequent posts, we will go into greater depth on how to negotiate with Chinese companies. So stay tuned….

 

 

Forming a China WFOEForming a China WFOE can range from routine to complicated. As lawyers, we seldom take on the routine WFOE formation, preferring instead to refer those out to high quality entity formation companies that are able to handle those at a lower rate. We probably refer out about half of the companies that come to one of our China lawyers to form a WFOE.

But others are so complicated and involve so many new or unusual issues that we do them ourselves to better serve the client.

I thought of this today after getting cc’ed on a couple of emails involving WFOE formations we have been working on for (in both cases) European clients. The below is an amalgamation of various emails showing how difficult even one small point can be when it comes to forming a complicated WFOE. This amalgamated email reflects one of our lawyers working to secure more financial information so as to improve the likelihood of our clients’ proposed WFOE passing muster with the Chinese governmental authorities and eventually getting approved. All identifiers have been changed or deleted:

The financials included in this spreadsheet do not address the key questions that need to be answered as part of the WFOE formation process. The main problems are: (1) the spreadsheet treats Company A and the as-yet-unformed WFOE as a single entity (and does not explain how the WFOE will be funded and operated), and (2) the spreadsheet suggests that the WFOE will be largely funded WFOE via debt financing, which is not allowed.

1. What is the cash and equipment capital budget for the WFOE for the first two years? Please clearly distinguish between contributed cash, contributed equipment, shareholder loans and loans from banks/financial institutions. Please also clearly distinguish between the U.S. LLC and the WFOE.

This spreadsheet conflates Company A (the “investor”) and the WFOE. To be clear: for this stage, we are not concerned with how the investor is funded. We are only concerned with how the WFOE will be funded. This spreadsheet must be revised so that it only contains numbers relevant to the WFOE.

Two key numbers are relevant to funding the WFOE: (1) registered capital and (2) total investment. Registered capital is the most important number. The proper amount of registered capital depends on your projected financials, but also on your projected business scope and the location of your WFOE. The latter two are important because that’s what the officials in ______ will largely consider when deciding whether to approve your WFOE. Accordingly, we will need to work closely with______ to determine the proper amount of registered capital. But _____ will not be able to give you an informed answer until they understand exactly what it is your WFOE proposes to do, and until they have reviewed your financials. A general rule of thumb, however, is that your amount of registered capital must be at least the amount of expenses for the WFOE’s first year of operation. In other words, the Chinese authorities want to make sure that you are at least depositing enough money in the WFOE’s bank account to pay the bills for the first year.

This spreadsheet proposes to fund the WFOE in large part by loans. This will not be acceptable. As discussed previously, ALL of the registered capital must be contributed as either cash or contributed equipment. We will need to check with the local authorities to determine how much of the registered capital can be contributed equipment.

The total investment amount is the amount of registered capital + some amount of (optional) loans to the WFOE. Generally speaking, those loans must be from the investor and we will need to confirm with local authorities regarding the rules in ______. The maximum amount of those loans will be some proportion of the amount of registered capital. Setting a total investment amount that is higher than the amount of registered capital allows some flexibility in financing your WFOE’s operations via loans. Otherwise, every time you send money to the WFOE it will be treated as income and taxed accordingly.

In preparing this capitalization plan, please consider the following:

2. What is the source of that capital? Please consider in particular:
a. How many machines will be acquired by the WFOE and at what invoice price?
b. How will the acquisition of the machines by the WFOE be financed? There are two alternatives:
i. The shareholder LLC acquires the machines in the U.S. and then contributes the machines to the WFOE as part of its capital contribution, or
ii. The shareholder LLC contributes cash to the WFOE and the WFOE purchases the machines directly from _______.

The spreadsheet you gave us does not answer these questions. Only question 2a is addressed in part. To be clear, the issue is: what is the source of the WFOE’s registered capital?

c. What other equipment will be acquired by the WFOE? How will that acquisition be financed?
The spreadsheet does include details on equipment that will be acquired, but does not explain how the acquisition will be financed.

d. The WFOE will have substantial start up costs: build out, supplies, rent, salary. Have these costs been clearly determined? How will these costs be financed?
The spreadsheet does have details on these costs, but does not explain how they will be financed.

3. You should note that the capital budget of the WFOE must come from either a) a cash payment from the shareholder or b) contributions of new equipment from the shareholder. It is possible for a small amount of the contribution from the shareholder to be treated as a loan. There are a number of restrictions a) the loan must be documented, b) the terms must be “arms length”, c) loan treatment applies only to cash from the shareholder, not to contribution of equipment and d) the amount of loan vs. capital is severely restricted, with the ratio for a project of this size usually limited to a maximum of 15% debt.
See comments under question 1.

As you can see, the use of loans for a WFOE project is quite complex. The rules on this vary from district to district and there have been recent changes to the regulations that have been interpreted differently from district to district.

4. To be clear, you will be required to state 1) total investment and 2) registered capital. In most cases, registered capital must be at least 85% of the total investment. The remainder can be a shareholder loan, subject to the restrictions of 3. above.

5. In reviewing the financials you provided, there is reference to substantial debt payments. Please provide a clear explanation, taking into account the restrictions on use of debt noted at 3. above.

For more on what it takes to register a WFOE in China, check out Forming a China WFOE: Ten Things To Consider and Forming a China WFOE: The Method and the Madness and if you are particularly ambitious, How to Form a China WFOE in China, Part 13 (and the 12 parts that preceded it).

China trademarksJack Weinberg, a student activist at UC Berkeley during the 60s, is famous for coining the phrase “Don’t trust anyone over 30.” He’d be singing a different tune today if his work involved protecting his client’s trademarks in China.

Recently, a Chinese trademark lawyer and I were bemoaning the nonsense coming out of the China Trademark Office (CTMO) over the past several months. Delays because the computer system is down. Delays because the CTMO ran out of the right kind of paper. Delays because the CTMO hired hundreds of inexperienced employees. Rejections that don’t make any sense.

It’s funny (ironic, not ha ha) how China’s newish Trademark Law, which came into effect on May 1, 2014, included a number of “hard” deadlines for trademark-related work. For example, the CTMO is now required to examine all trademark applications within 9 months, and decide all non-use cancellations within 9 months. Has this happened? Of course not. If anything, the delays are worse than before, and the statutory deadlines seem to be encouraging trademark examiners to make a decision – any decision – just to avoid being late.

Lately, the decisions don’t seem to be so much random as maniacally conservative. Examiners seem so afraid of approving a trademark incorrectly that they are erring on the side of rejecting applications, even if for the most specious grounds. The CTMO is rumored to have moved all of its experienced trademark examiners to handle appeals, leaving only recent hires to handle the trademark applications. Rather than risk making the wrong “yes” decision, these examiners are far too often just saying “no.”

It’s hard to say whether this is poor management by the CTMO (my guess) or a devious form of rent-seeking. Either way, anyone seeking a China trademark is now far more likely than ever before to have to pay for an appeal to “win” their trademark. Fortunately, the examiners handling the appeals are veterans and legitimate trademarks are typically going through at this stage. But with delays becoming routine and appeals becoming all too common, the expected time to receive a trademark registration has become significantly longer. If you’ve got a trademark that you want to protect in China, get your application in now, before it gets even worse.

China Lawyers

Saw the following comment today and thought it would make sense to respond via this blog post, rather than directly:

I never seem to have any luck getting a response on Facebook so I’ll repeat a query here: is it legal to pay the standard 13th month bonus without specifying it in the labour contract? My understanding was that the annual bonus is discretionary, unless you make it otherwise.

We have written 3,865 posts and almost all of them get some comments. Some get a lot of comments. Some get more than 200 comments. Many of those comments are questions. We review the comments to determine whether they are spam or not and if they are not we post them — with a few very rare other exceptions. See China Law Blog Commenting Policies.

Our China lawyers simply do not have the time to read and respond to all of the comments. Sorry.

We are always going to be reluctant to respond to comments that seek from us what is essentially a legal opinion, like the one above. In large part because there is seldom an easy answer for legal questions. Why do you think lawyers charge by the hour?

First off, what is meant by “without specifying it in the labour contract”? Specifying that the 13th payment is discretionary? Specifying that any 13th payment is discretionary? Or not saying anything at all about a 13th payment. These three things can be very different.

If the contract mentions a 13th payment but says it is discretionary but the employer has made the 13th payment for the last 20 years and has on many occasions told its employees that they can expect it every year, how discretionary is it? Has it now de facto become mandatory? Can you see why this situation might be different from a situation where the contract makes very clear that the employer may from time to time make a 13th payment but that doing so expressly does not waive its right not to make a 13th payment and that employer only makes a 13th payment every few years? Can you see why both of these might be different from a situation where the contract is completely silent about a 13th payment but the employer has made one every year for twenty years or has made one only every few years? The comment itself implicitly seems to recognize this, by stating the belief that the 13th month is discretionary, unless the employer makes it otherwise. Our job as attorneys is to determine whether the employer has “made it otherwise.”

Many times our clients tell us their contracts say one thing when they actually say the opposite. Many times our clients are working with an English language contract that says one thing when the official Chinese language version says another. Many times our clients think they have an enforceable contract when under Chinese law they really don’t. See How to Draft a Contract for China. Many times our clients think they don’t have an enforceable contract under Chinese law when they really do. See China LOI and MOU: Don’t Let Them Happen to You. Does this commenter have enforceable written labour contracts with his employees or not? Are those contracts in just English or just Chinese? If they are in both languages, are they clear about the official language or are they explicitly dual-language contracts? All of this could influence both what this commenter wrote to us and, more importantly, the legal reality.

And then there is the fact that so much of China’s employment laws are local. See China Employment Law: Local and Not So Simple. Maybe Shanghai treats this situation (and again, we do not even know what the situation really is) completely differently than Qingdao. Even if we did know where this person is located, we could not answer unless we had that very week answered the very same question with the very same relevant facts in the very same city, unless we were to spend hours reading the local rules for this person’s particular city and then spend more time trying to reach the appropriate government official and then speaking with that official to confirm our legal research.

I wrote this post in less than 20 minutes. If I had spent more time on it and if I had circulated it to some of the other China attorneys in my office (especially if I had sent it to Grace Yang, our lead China employment lawyer), I am certain we together easily could have written at least another ten paragraphs as to why we cannot give any real answer to the above comment without knowing more and without doing our research.

Last week, Grace wrote a post (DIY China Employment Law. Really?) on the problems she sees with foreign companies trying to handle their China employment law matters without a lawyer. Our giving knee-jerk answers to China legal questions would be the China lawyers equivalent.

So for future questions regarding your specific legal issues, please consider the below to be our answer:

We do not know enough to be able to answer your question. For us to be able to answer your question we would need to know a lot more facts and then we would need to conduct legal research into the written laws for wherever it is that you are located and then we would probably want to discuss your situation and our legal findings with the relevant government officials as well. Until we do these things, we simply cannot give you an answer that would be helpful to you.

Sorry.

 

China lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Probably the most common question we get is some variant of the following:

I ordered ____ number of widgets from _____ company in China and I paid them _____ dollars. They never sent me anything [or they sent me a fake or they sent me bad quality] and now they are not answering my emails? Can you help?

Pretty much 100 times out of 100, our answer (sometimes after we have gathered up more information) is something like the following:

I’m sorry, but we  are not interested in taking on your case on a contingency fee basis and I cannot in good conscience ask you to pay us to handle it.

Our lack of interest in your case stems from the following:

1. Your contract [this probably wrongly assumes that the English language PO sent to us qualifies as a contract under Chinese law] is in English. Many courts in China will not hear a case with an English language contract. This is even more likely to be the case in a place like _____. For more on the importance of your contract being in Chinese, check out China OEM Agreements. Why Ours Are in Chinese.

2. You never paid the Chinese company to whom you issued the PO and from whom you received the bad product. You instead paid some other company based in Hong Kong. This is a classic China ploy. If you sue the Chinese company it will say that you never paid them because you didn’t. Not sure if it will win on this, but it is yet another hoop you will have to jump through.

3. Your PO says that you will inspect the product before it ships. The Chinese manufacturer will contend that you either did inspect and were fine with the shipment or that you chose not to inspect and thereby relinquished your right to complain about product quality. Either way, it should make for a pretty good defense. If you are not going to inspect product before it gets sent to you, you should not have this sort of provision.

4. You say that the product you received is of bad quality but your PO nowhere mentions the quality you would be requiring. When it comes to China, if you want your product to be of a particular quality, you need to set out in great detail every single specification that will get it to that quality. China has incredibly low quality levels that are just fine for Chinese commerce and for Chinese courts. From what you have provided me, there is nothing to indicate that your Chinese manufacturer failed to give you exactly what you ordered. You say that what you received is of bad quality and I am sure that is true, but that is under US standards. Under Chinese standards you asked for 5,000 widgets and that is exactly what you got and that is probably all that is going to matter to a Chinese court. For more on why this matters and for how you should handle this the next time you have product manufactured in China, check out How To Get Good Product From China.

You might want to try to interest a Chinese lawyer in pursuing your case in China. Suing the Chinese company in the United States will probably be a waste of your time and money unless this Chinese manufacturer has assets in the United States, and very few do. I very briefly researched the Chinese company to whom you issued the purchase order and it is not even a manufacturer; it appears to be a broker of some sort and Chinese brokers usually do not have much in the way of assets in China, much less in the United States. China courts do not enforce U.S. judgments so even if you win over here, it will be of no value in collecting money from your Chinese manufacturer in China.

If you are going to continue buying product from China, you should have a contract that will work. I suggest that you read the links within this email [now this post] to help prevent this same sort of thing from happening to you again. Again, I am sorry that we cannot be of more help on this.

Maybe 10 out of 100 times, we get a response asking us whether they should pursue their case via the U.S. Embassy or the U.S. Consulate or through their own embassy or consulate (for some reason we seem to get a disproportionate number of these from Australians) may be. To which we always respond as follows:

You can try to pursue this with your embassy or consulate but they generally do not seem interested in these sorts of commercial law matters and we have never heard of a single person getting their money back using this route. This is not to say it isn’t possible, but we are not aware of it ever working. If you do go this route and it does work, please let us know.

So now a question for you, our loyal readers. Have you ever heard of anyone getting their money back on a China product purchase by going through their embassy or consulate?

China IP seminarOn April 27, I and my friend Randall Lewis, Vice President and International Counsel for ConAgra Foods, will be sharing a virtual podium for a free webinar. This webinar is being put on by LexisNexis and in it we will together be discussing the following:

  • How to choose a good Chinese partner
  • How to identify the IP assets you need to protect
  • How to structure your deal to protect your IP
  • How to conducting China due diligence
  • How to drafting China contracts to protect your IP
  • How to choose how your dispute resolution forum

LexisNexis describes it as follows:

Too many American companies go into China or start doing business with Chinese companies, without really knowing the varied risks China poses to their valuable intellectual property and trade secrets,” said Dan Harris, author of the China Law Blog. “These risks should be of utmost concern to anyone whose interests intersect with China. We will show you how to prepare your deals, avoid costly thefts and litigation and defend your IP.

Join Dan Harris of Harris Moure and Randall Lewis, Vice President, International Counsel at ConAgra Foods, as they share strategies and real-life tales that will help government agencies craft regulations and oversight provisions and in-house and outside counsel protect IP and deal with the litigation that results when things go south.

It  will begin at 2 p.m. Eastern time and go for about 90 minutes. Go here for more information and go here to register. Not only will this webinar be free, but it also qualifies for 1.5 CLE credits!