China lawyersPotential clients often ask our China lawyers, “what’s the worst thing that can happen if I don’t do ________.” My usual response is I don’t know or you get sued or you get arrested or you will never be allowed to leave China.” See Doing Business in China with Deportation or Worse Hanging Over Your Head. Whenever I mention prison or getting stuck in China forever I can “hear” the eyes roll on the other end of the computer or the phone because few take this risk seriously.

Guess what people. Get over your First World rule of law biases and start dealing with the real world, or as a friend of mine who regularly deals with China hostage situations is always saying, “this is China.”

The “this” about China hit me hard today via our China Law Blog Facebook page (go here to check that out where, purely coincidentally, my most recent post is how the portion of my Chinese TV interview from yesterday where I discussed hostages in China was completely deleted). Anyway, here is today’s story and it is filled with absolutely critical lessons for anyone doing business in China AND for anyone doing business with China who has any intention of ever going to China.

So I wake up this morning with a Facebook message from someone in trouble in China asking us to publicize his situation on our blog to help in a fundraising campaign. The fundraising campaign is here and it is titled, Being wrongfully sued and not allowed to leave China and rather than have me tell the story, I will pull it word for word from this campaign (see below) and then “unpack” it. Just as an aside, I visited the Getty museum in Los Angeles about a week ago and our tour guide used that word (unpack) before analyzing each and every painting and sculpture. The first time she used it I loved it but by the tenth or so time I hated it. This being your first time….

In 2013/2014, we started a personal training fitness gym in Shenzhen, China with 3 foreign partners. The initial agreement and plan between the partners was to grow the gym, however 2 years into operation, due to a variety of factors beyond our control, we could no longer afford to operate the business at the standard that we wanted. We had to pay high costs and find a way to close the business while respecting the staff and community.

The attempted transfer and closing process took many months while we interviewed potential investors and people who wanted to take it over. It ultimately came down to a young Chinese man who had spent many months in the gym, wanted to own his own gym and was getting to know the operations and the members. Unfortunately for us, this man’s intentions were not honest, and he manipulated the situation to his favour. Since we are foreigners in China, we were not knowledgable about certain legal processes and trusted him in this transfer. He devised a way to take over the business by paying the business’s then upcoming bills due, and some debts owed – amounting to RMB 217,000 (approx US$ 32,000). He then wrote up a pre-agreed contract stating that the RMB217k was a loan and that the business and equipment would serve as collateral should the loan not be paid back. Since we wanted to simply move on from the business, and were not able to handle the expensive monthly overhead, we agreed to this process, meaning we received nothing in the end for a business we had spent 3 years building, but would be free of the business liability.

This Chinese man is a loan shark, and once we had parted ways with him, believing everything was agreed to and wrapped up, we moved on with our lives.

Fast-forward two years, and unbeknownst to us, this man had filed a lawsuit, claiming that the business owed him the RMB 217k. The case was filed, and was ruled in his favor, since we had no knowledge of the case and thus never showed up to court to contest this man’s false version of events. It wasn’t until John tried to leave the country that we came to find out about its conclusion as he was told that he would not be allowed to leave China. In China the legal system greatly favours Chinese, and the entire case was processed and closed without our knowledge and thus no response from us, and as it stands now we are being ordered to pay a whopping RMB 250k ($40K).

We want to chance to set the record straight and show the court the documentation which shows the agreement we had and how this man has committed fraud. We want to re-open the case, and respond to the verdict that was passed without our knowledge. In order to fight the case we need to hire a lawyer and pay court costs and so are asking our family, friends and any citizens of the world who can support our cause and pursuit for the truth.

Initially we are trying to raise RMB 55K ($8K) to cover the legal and court fees, so we can do everything possible to clear our good name and release the government hold on John’s passport. This will be a long, difficult battle but we will keep you updated every step of the way and maintain full transparency throughout this process.

Thank you so much for taking the time to read this, and for your support, whether financial or just by sending positive energy and thoughts our way.

Now for the legal unpacking (that’s only by second time with that word) and an analysis of what likely went wrong and what probably should be done to try to solve it. The quotes from above are in normal font and our analysis is in italics.

  1. “He then wrote up a pre-agreed contract stating that the RMB217k was a loan and that the business and equipment would serve as collateral should the loan not be paid back. Since we wanted to simply move on from the business, and were not able to handle the expensive monthly overhead, we agreed to this process, meaning we received nothing in the end for a business we had spent 3 years building, but would be free of the business liability.”  Mistakes: Not using a lawyer with this contract. Based on the above, it very much appears that this was a loan contract for RMB217k and this person(s) did not fully realize that. Any competent lawyer could have told them that. I am guessing the contract was in Chinese — why wouldn’t it be as it was a Chinese transaction —  and that may also explain why it was not fully understood. Or maybe it was a situation where eagerness took precedence over common sense. Who knows? Bottom line is that you should never sign a contract without fully understanding it and you should virtually never sign a contract without the assistance of a qualified lawyer.
  2. Fast-forward two years, and unbeknownst to us, this man had filed a lawsuit, claiming that the business owed him the RMB 217k. The case was filed, and was ruled in his favor, since we had no knowledge of the case and thus never showed up to court to contest this man’s false version of events. Mistakes: Maybe none, or maybe this person received notice of the lawsuit but did not realize what it was. I say this because Chinese courts tend to be very good at getting their notices out and they also tend not to rule until it has been confirmed that notice was received.
  3. It wasn’t until John tried to leave the country that we came to find out about its conclusion as he was told that he would not be allowed to leave China. Mistakes: Chinese law allows the government to not allow people to leave who owe money. This is why our China lawyers are constantly telling people not to go to China if they MIGHT owe money and to get the hell out of China as quickly as possible if they are there. See Maybe Owe Money To China? Don’t Go There. 
  4. In China the legal system greatly favours Chinese, and the entire case was processed and closed without our knowledge and thus no response from us, and as it stands now we are being ordered to pay a whopping RMB 250k ($40K). Mistakes: I’m guessing a Chinese defendant would have had the same result as it sounds like a fairly garden variety loan agreement and this amount probably included interest and perhaps attorneys’ fees as well.
  5. We want to chance to set the record straight and show the court the documentation which shows the agreement we had and how this man has committed fraud. We want to re-open the case, and respond to the verdict that was passed without our knowledge. In order to fight the case we need to hire a lawyer and pay court costs and so are asking our family, friends and any citizens of the world who can support our cause and pursuit for the truth. Mistakes: Is it even possible to re-open the case at this point? I do not know but I doubt that it is. I could be wrong about this, but it seems to me that this person is doubling down on his mistakes by again not hiring a lawyer to figure out the best way to get out of this. Let’s just suppose it is not to late to try to “re-open” the case. In most countries of which I am aware, to be able to re-open a case like this you must not only show that you were not given notice of the case you also must show that if the case were to be re-opened that you have at least some chance of overturning the ruling on the merits. If this is a legal and valid and garden variety loan agreement, that chance may very well not be there. If re-opening the case is going to be impossible, no money should be spent on that route. It probably should instead be spent on trying to strike a deal with the lender and in return for whatever payment he accepts, a settlement agreement is signed (this settlement agreement should be in Chinese and pursuant to Chinese law) and then used to get the hold on leaving China lifted. 

But in the end, this person does need money to hire a Chinese lawyer (probably ideally based in whatever city in which the lawsuit was brought) to figure out how to figure out the situation and help this person get out of China.

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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.