China contracts

Phone calls from potential clients nearly always start out fun and this economic downturn has brought my law firm a whole slew of new clients and potential clients needing legal help in dealing with the economic downturn.

This post is on three potential clients whose situations were so bad I had to suggest they not hire us. None of them liked what I told them, but two actually hired us anyway. One to try to deal with the matter on which they initially called, one to deal with another matter and to prevent a recurrence of the situation that precipitated their call.

All three calls started out pretty much the same with the nearly obligatory, “I got your name from so and so. She/he tells me you are the right/perfect/best person to solve my problem.” I respond by modestly agreeing that my law firm’s International lawyers are pretty experienced with these sorts of matters. All three phone calls quickly declined from there.

The declines began when the companies started telling me the facts of their situations. Two of the companies had purchased product from their long-time Chinese suppliers and had received — for the first time — totally substandard product. They both felt their  Chinese product suppliers had shortchanged them this time around because they were becoming economically desperate. See China Manufacturing Risks are Sky-High Right Now. Act Accordingly.

Unfortunately, neither company had a written contract with their Chinese supplier; they had both used purchase orders. They both wanted my firm to sue on a contingency fee basis and I immediately refused. My law firm rarely takes on a bad product lawsuit against a Chinese company on a contingency fee basis unless there is a valid contract that sets forth the product specifications and the defect in the product stems from failing to meet a contractual specification. See How to Prevent China Factory Problems and Trademark Theft That is Happening Like Never Before.

Both companies then asked me about how much we would charge them if we were to take their cases on an hourly basis and my response to both was the same: “You are welcome to pay us by the hour but if I were you, I would not spend my money on that and I would instead suggest you retain us to write you a manufacturing contract that actually works for China. That would be money well spent because it will go a long way to prevent this sort of thing from happening again. ” Neither company took too kindly to my suggestion — at least at first. One responded in such a way as to give rise to the title of this post. I totally get it. You have just lost a lot of money and the lawyer you have been told can help you recover it is telling you he does not like your case and instead wants you to pay money to prevent a recurrence.

The third incident was with a company that had supplied its own product to a number of Chinese ships. This company had failed to confirm that the ships to which it was supplying its product were actually owed by the company buying the product and it took our lawyers very little time to discover that they were not. Very roughly, this lack of a link between the company that actually bought the product and the ships to which the product was delivered meant we could not arrest/seize the ships to secure payment and the only way our client could recover on its debt would be to sue the purchasing party directly in an Asian country not exactly known for its rule of law. And the fact that our client had a lousy contract with that buyer did not exactly help.

I suggested to the company that it needed to change its procedures before supplying ships with its product in the future. I was going to tell this company it should in the future always require potential buyers provide a certificate of vessel ownership and then confirm that ownership with the applicable ship registry so there would be no doubt the vessel owner is putting its own ship at risk when it buys the product. But before I could say this, the person with whom I was speaking somewhat angrily told me he knew exactly what he was doing and he had never had this problem before. He made quite clear he did not think he needed any legal advice regarding his future business. In other words, I was to work magic on his problem now and not worry about him making the exact same mistake again.

In all of three of the above cases, these companies had been engaging in risky behavior for many years, apparently without having suffered any real consequences. It seems the old stockbrokers adage that “genius is a rising market” also holds true for China business. Or as I frustratingly put it to a company a few months back: “Look, my grandmother smoked a pack of cigarettes every day of her life since she was 16 years old and she lived to 92, but that just means she was lucky; that does not mean smoking isn’t harmful or dangerous.”

Having a good contract does not guarantee you will never have problems. Nor does it guarantee it will make sense for you to sue if something goes wrong. It does not even guarantee you will prevail if you do sue. But, in our experience (and that of pretty much everyone experienced in cross-border business), having a contract (1) greatly increases the likelihood your Chinese company will choose not to mess with you, (2) greatly increases the likelihood that it will make sense for you to sue the Chinese company if it does mess with you, and most importantly, (3) greatly increases the likelihood you will prevail if you do sue. It is the likelihood of losing at trial that causes companies to want to settle and Chinese companies are no different on this score than companies elsewhere around the world.

We lawyers are trained to think about and prepare for worst case scenarios. The current economic downturn is causing worst case scenarios to happen constantly and those scenarios are exposing those who apparently believed such scenarios could never occur. In other words, we lawyers are being proven to have been right all along. Or to put it more bluntly: We told you so.

We would love to hear from readers who are paying the price for having failed to properly document their China deals and from those readers who are faring relatively well for having done so. If any of you out there are benefiting from not having documented your deal or paying the price of having good documentation, we would love to hear from you, too.

Have at it, people. . . .

 

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Photo of Dan Harris Dan Harris

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

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

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

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His 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.

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

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. 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 Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses 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.