This is the first in what will be a long series on what it takes to litigate or arbitrate successfully against Chinese companies. Disputes between foreign and Chinese companies are on the rise both because both sides on China-foreign transactions are becoming less tolerant of infractions and because China’s economy is on the decline. There is an old saying about how lawyers do well when an economy is either rising or falling, just not when it is stagnating. Put simply, litigation occurs when a company has decided that the highest and best use of a particular chunk of its time and money is to sue someone. When profits are difficult to find outside litigating, litigating becomes more likely. Companies in financial pain tend to lash out by suing or by threatening to sue and we are seeing a wealth of that these days from Chinese companies.
Many years ago, I wrote an article for the Wall Street Journal, Chinese Companies Court Disaster, on how Chinese companies are generally ill prepared for the U.S. legal system. Though this is true of most foreign companies that come to the United States or do business with U.S. companies, the huge differences between our two systems, and even the way Americans feel about China, have made things even tougher for Chinese companies in U.S. Courts. The same holds equally true for Chinese companies in Canadian and Australian and most European countries’ courts as well. Anecdotal evidence among the China lawyers and the litigators at my firm and from others suggests lawsuits against Chinese companies are rapidly increasing yet Chinese companies do not seem any better equipped to handle these lawsuits than when I wrote the Wall Street Journal article more than five years ago. To put it bluntly, Chinese companies making big mistakes whenever they litigate or arbitrate outside China, either as plaintiffs or defendants:
But Chinese companies are needlessly putting themselves at an even deeper disadvantage by making basic mistakes. The first is a failure to do the planning necessary to avoid lawsuits in the first place. In the U.S., companies generally view lawyers as counselors whose job includes helping their clients prevent legal problems, while also making sure the company is best positioned if a lawsuit does pop up (for instance, by helping to draft precisely worded contracts). In China, executives tend to view lawyers as technicians whose job is simply to navigate the court system when a lawsuit arises, rather than as strategic legal planners. This has been a factor in the growing area of U.S. intellectual property litigation against Chinese companies, where often a competent American lawyer would have warned the Chinese manufacturer early on of potential IP problems with a product had the company sought counsel.
This series is going to focus on how foreign companies doing business in China or even with China can best avoid disputes with their Chinese counter-parties and, equally importantly, it is going to focus on how to handle a dispute with a Chinese company should one arise. Please stay tuned.