Drop the stick and back slowly away from the horse carcass.
Drop the stick and back slowly away from the horse carcass/Know when to walk away.

What with China’s economy slowing, our China lawyers are getting a fairly steady stream of emails and phone calls from companies (mostly America) whose Chinese manufacturers have shut down and/or disappeared. The below is email correspondence I recently had with one of these companies, changed to camouflage anything that might enable anyone to identify this company. I chose this American company simply because its sitaution nicely highlights what so may companies that engage in China OEM manufacturing have been going through the last few months. I start with this company’s initial email to me:

Hi Dan,

I’m running into an issue with one of my factories getting ready to close their doors and they have about $210K of our deposits. The factory is broke but they have a lot of assets in the factory.

Is this something that you can help with? Is there something that we can do?

After I determined that the potential client did not have a written contract with its China manufacturer nor did it have anything in writing that would have allowed us to trace its payments to ownership of any specific product made by the Chinese manufacturer:

To put it bluntly, your chances of ever seeing your money again are not terribly good, especially if they do shut down and the creditors come calling. Those creditors will say that, yes, maybe the factory owes you $210,000, but you have no claim to anything specifically owned by the factory (including the products it has sitting there that we would argue were made just for you). Wit this being the case, these other creditors probably will take priority over you or you will be thrown in with them. Many of these other creditors probably have contracts with the Chinese manufacturer making clear that money paid to the factory belongs to them unless and until the factory provides them with the product for which they have paid. Others probably have security interests in factory property.

Your only shot is to move as quickly as possible to try to get what you can though various tactics (letter writing, suing, etc.) before this company actually shuts down completely and starts the creditor feeding frenzy, but even there, your lack of a written contract will make things tough.

We’d be happy to try to help you but I have to tell you that your chances of success are probably less than 50% and so you have to ask whether your paying our hourly attorneys’ fees would be just throwing good money after bad. I do suggest though that you check in with your insurance broker/agent to see whether you might have any coverage for this sort of thing.

I am going to be traveling over the next few days with marginal internet so please text me if you want to get started on this. Like I said, it is urgent and the last thing I want is for any slowdowns to come on our end.

Just as is usually the case in these sort of situations (where we tell them that their chances are not good), the American company chose not to pursue things further in China, but instead to just walk away.

What are you seeing out there?

 

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.