China product defect lawyersAs most of you already know, getting defective products from China manufacturers is almost always a possibility. In many cases, foreign buyers frustrated by bad product simply refuse to pay their Chinese factory. Often the unpaid amount is substantial. The foreign buyer then moves on to a new factory. This new factory is often located in the same general region as the former factory. The Chinese factory virtually never files a lawsuit in this situation. So the foreign buyer then starts believing it is off the hook. But in China, matters like this are almost never that simple.

Most factories in China work with a network of subcontractors. So an unpaid invoice to a single factory usually will impact a large number of smaller businesses. Sometimes even an entire village will be impacted by one failure to pay. When the nonpayment is in a significant amount, the failure to pay can mean the salaries of many (sometimes most) of the local residents do not get paid. This leads to social unrest, which is a major concern of the local authorities, who then seek to work with the factory to try to secure payment. The legal issues (like the defective product) are not of concern. The factory and the local authorities will simply seek funds required to calm down the local unrest. These matters are not usually viewed as a business dispute and the court system is seldom used to try to resolve it. The factory never tells anyone the reason for non-payment was defective product; it instead almost always blames nonpayment on an unjustified default by the foreign buyer.

So long as the foreign buyer remains outside of China, there is little the factory and the local authorities can or will do. However, if the foreign buyer or an employee of a foreign buyer travels in China, the risk of some form of non-court or openly illegal action being taken against the foreign buyer is high. For this reason, we advise our clients to take great care when traveling in China if there is any dispute about their having failed to make a payment of a substantial claim to a Chinese factory. This is particularly important when the factory is a major employer in a specific district. The risk level rises exponentially if the foreign buyer travels in any area close to the district where the factory is located.

So what can happen?

a. Hostage taking. The Chinese side will arrange a meeting to take place at the factory or in a hotel that cooperates with the factory. The factory staff will obtain the passport of the foreign buyer. After the passport is obtained (stolen or taken by force), the factory holds the buyer captive either in a factory dormitory or in the cooperating hotel. The Chinese call this a “soft kidnapping” because no physical threats are made. The factory simply states: we won’t let you leave until after you pay the bill. If the police are contacted, the police will usually say: “It’s none of our business. You should pay the bill.” If the local authorities are contacted, they will usually say “It’s none of our business. You should pay the bill.” Resolving the matter without making payment is nearly impossible.

b. Exit ban. Because of the potential for social unrest, the Chinese authorities usually will work to assist the Chinese factory in getting paid. One way they do this is through an exit ban. The foreign buyer is permitted to enter China, but when the buyer seeks to exit China, permission will be refused. The foreign buyer is told: “You will not be permitted to leave until after you have resolved your payment dispute with the factory.” Exit bans are only approved at the national level and a factory that makes a false claim will be penalized. This is why hostage taking is more common.

So what is to be done?

The easy way to resolve the matter is to pay the entire claim in full. In the alternative, the foreign buyer can avoid being taken hostage or an exit ban by staying out of China. Often neither of these solutions is practical.

So what happens most often is that a partial payment is made pursuant to a settlement of claims agreement. For a settlement to work well, the basic rules are as follows:

  1. The agreement must be in Chinese and enforceable in China. Chinese authorities typically ignore English language agreements enforceable outside of China.
  2. It is normal to include in such an agreement standard settlement language: the creditor takes payment in full settlement of all claims; the creditor agrees not to file a legal action anywhere in the world; the creditor agrees to maintain confidentiality; the creditor agrees not to contact any PRC government authority.

If you have a settlement agreement that meets these above rules the local police and the exit authorities will normally take the side of the foreign buyer and you should be safe from being held hostage or blocked from leaving China. If the payment settlement agreement does not comply with the above rules, it is a waste of time and paper and money.

In general, in the case where there is payment in full or the case of a partial payment under an enforceable written settlement agreement, the risks I write about above will be resolved. I have never experienced an instance where a Chinese entity took anyone hostage or pressed for an exit ban after getting paid and signing an enforceable written settlement agreement. For this reason, even though our China lawyers we have drafted dozens of these settlement agreements, none of us have any experience in having to provide one of these settlement agreements to PRC authorities to try to convince them to free a hostage or lift an exit ban after a formal settlement has been reached.

But on the flip side we also have a lot of experience with companies that have either made a partial payment to their Chinese factory without getting a written settlement agreement or getting a written settlement agreement that does not comply with the two rules set forth above. Our experience in these situations has been uniformly bad and in most instances our clients have had to pay the full amount allegedly owed (and fast) to resolve their crisis situation.

Even in those cases where the reason for non-payment is because of product defects, no authority in the PRC will accept a simple claim from the buyer on this issue. The only way to be sure the PRC authorities will take any notice of the defect claim is by the buyer filing a lawsuit in its home country or (even better) in China making a claim for the defect. Anything short of that will simply be ignored. You can show the Chinese authorities a pile of emails 10 centimeters thick and they will be ignored. You can show them an inspection report and that will be ignored. The only thing they will get their attention is a formal lawsuit with service pursuant to the Hague Convention brought by you against your China supplier. We have done many kidnapping negotiations where our buyer-clients believed they could make the claim that nothing was owed due to defect. This claim never works. The police just laugh and walk away. The local government officials just hang up the phone. On the other hand, presenting evidence of formal legal proceedings where service was properly provided has always worked.

As they say on the cop shows, “Let’s be careful out there.”

For more on dealing with defective products from China check out the following:

China LawyersI often internally cringe when listening to someone back from their first two week trip to China. Those people virtually always come back raving about the place and talking as though it is flawless. Some amazing combination of Paris and Fiji or something.  That’s fine, but what too few seem to realize — and which I am going to have to write about somewhat elliptically for this to stay up on the net — is that at its heart, China can be a risky country. I am not telling anyone to be afraid or not to go there, but I am saying that it ain’t Kansas.

Directly and indirectly from people who call the China lawyers at my firm and from friends who live in China and from what I read, I am sensing there has been an increase in foreigners getting into legal trouble in China. Criminal trouble. Yes, in nearly all of these cases these foreigners did something stupid . . . but still.

Let’s ignore fault and blame for now and get straight to practicalities. Do not contest your cab fare and then get into a an argument with your taxi driver in China. Because if you end up coming to blows, there is a decent chance you will end up in jail and there is even some chance you will end up in jail merely for not paying. I do not know what the odds are in either situation but I do know that it happens more than most people realize.

The same is true of bar fights. In many countries the police will take both inebriated fighters to jail and release them a day or two later. But in China it is not unheard of for the foreigner to face years of prison time.

What should you do to prevent these sorts of problems? One, let it go. You’ve been scammed out of ten dollars? Put that in perspective and move on. You’ve been dissed by some loser at a bar? Walk away. Disarm that person with humor. Be the rabbit. Two, if you are arrested and given an offer that will involve you quickly getting freedom, consider taking it, because it probably will be the last offer you get. And whatever you do, don’t believe it will all just eventually pass over, because if anything it will get worse. Your Embassy or Consulate will usually do whatever they can to help you, but that oftentimes consists of little more than alerting your relatives and giving you a candy bar or two. It’s not that they don’t want to help or are unwilling to help, it’s just that legally there is very little they can do to help.

Whenever we write posts like this we get comments and/or emails accusing us of deliberately scaring off people so as to pad our own pockets. Wrong. Our pockets get padded the more people go to China, not the less. No, we write posts like this because we do not want to see foreigners (mostly young foreigners) get into trouble in China. So don’t. Please.

There are all sorts of other ways foreigners can and do find themselves behind bars for doing things they never realized could lead to criminal prosecution, and the below posts detail some of them:

Your thoughts?

UPDATE: On a somewhat related topic, Foreign Policy Magazine just came out with a hard hitting article on hostage taking to ensure debt repayment, entitled, Hostage Taking Is China’s Small-Claims Court: Everyone in China — including the police — treats kidnapping as just the price of doing business. Wow.

China debt hostage

It has been nearly three years since we did a post on foreigners being held hostage in China. Since our China lawyers still regularly get contacted regarding China hostage situations, that has undoubtedly been too long. To make matters worse, we have recently started hearing of a new and horrific twist. But before I go into that, I will set the typical seen by harkening back to a 2009 post, entitled, China Hostage Situation. Now IS A Good Time To Pay Your Debts.

That post dealt with an email I had received from a trusted reader setting forth the following scenario:

Consumer product company had a rep office – staffed with people with US passports. Company had financial problems and needed to file for bankruptcy. The company sent one of their executives to China to advise their suppliers that they were declaring bankruptcy and would be unable at this point to pay their outstanding balances.

As you can imagine, the Chinese suppliers did not take this well, and they stormed the rep office and are now holding the US citizens hostage – literally. Its been days now -and neither the police nor the embassy will help to extract the people.
The whole thing was obviously not handled properly from the start – but this has turned ugly pretty quickly. Each factory is mainland owned.

I’ll let you know how this turns out – I’m not involved – just hearing most of this second-hand.

I hope to write a happy ending to this story when/if it resolves itself in a safe way that protects both the US people as well as the suppliers – but I am not so sure it will be.

Have you encountered similar experiences?

I responded to that email by saying that my firm has been involved in similar situations countless times and that had we been retained on this one, “our advice would have been so different that I would like to think things would have never reached this point. We would have told this company to get ALL of its personnel out of the country before letting suppliers know (from far far away) about the bankruptcy filing and the upcoming slow payments. That is actually always our first advice (both orally and in writing) whenever a foreign company contacts us for help with their China debt issues.

I then went on and discussed a somewhat similar situation my firm had handled and how I had written on that in a post, entitled, China, We Have A Problem. A Mostly True Story. The key takeaway from that post was the need to get everyone out of town. The situation in that post was as follows:

Young Chinese Child falls from a window in a room in which an American employee of our client is one of the few adults. Child is very badly hurt. Very badly. It now appears the child’s injuries will probably not be permanent, but he also may be in recovery for a year. His medical expenses by US standards were fairly low, but they are astronomical by Chinese standards, particularly for this less than large city. A day later, the parents of the child come with a lawyer to tell this employee that they want six figures (in US dollars, not RMB) from him and from his employer for the injuries that have befallen their child. They also go to the police and make the same request of this employee and his American employer.

The parents make clear to the employee that many in the town are behind them and that things will get much worse if payment is not received. The employer calls us and we immediately spring into action. We determine that the police do not seem to be buying into the parents’ story of guilt, yet they have not told this employee and our client’s other employees that they must remain in town as either witnesses or suspects. We learn that our client is not terribly happy with its joint venture partner in this town and that it has no problem taking its employees out of there and sending them home to sit this whole thing out. Though they feel terrible about the injuries that have befallen the kid, they do not consider themselves responsible. Our research of the facts and the law all indicate our client is not liable. However, as everyone who has ever been involved in litigation anywhere in the world knows, not being liable and not being subject to an expensive and time consuming lawsuit are two entirely different and only tangentially related things.

We determine the best course of action is to get the employees out of this town as quickly as possible and on their way back to the United States. We figure that getting them out will change the leverage game entirely. The employees leave and the settlement amount demanded by the parents immediately plunges. Now we can talk with the child’s parents and  the joint venture partner (who actually owns and maintains the building from which the child fell) from afar, pretty much stripped of any imminent threats. Our client agrees to pay the parents something towards the medical bills and we (fairly publicly) ask that instead of the Chinese joint venture partner paying what it owes to our client, that it instead pay all of that to the family of the injured child. Written agreements in Chinese are signed on all of this and we move on.

If you are a foreign company without a China presence and you owe money to a Chinese company, you do not need to worry about a hostage situation (so long as you never send anyone from your company to China), but you do probably need to worry about Sinosure, and for how to deal with that you should read China Sinosure: What You NEED to Know.

Chinese Law Prof blog did an excellent post on this same topic, entitled, Debt Hostages. That post is on how the police often look the other way (or even assist) with these kidnappings:

When is kidnapping not kidnapping? Apparently when it’s for the purpose of getting a legitimate debt paid. This, at least, seems to be the social understanding of kidnapping in China, and there’s even legal support for it (the law calls it unlawful detention in that case). The latest case is reported in the Dongguan Times: a couple can’t pay the hospital bill for the wife’s delivery of a baby, so the hospital is holding the baby hostage until the parents pay up. They’ve had the baby for over 100 days so far. One amazing thing about it is that this is apparently a government-run hospital, and the hostage-takers have even held a press conference to justify their actions (apparently they felt the father had not been “sincere” in his efforts to pay). The other amazing thing about it (to me) is that this is seen as relatively acceptable. The newspaper report uses quotation marks around the word “hostage,” as if the baby somehow is not really a hostage. And the most a local lawyer can bring himself to call this is “inappropriate.”

The post goes on to note how taking debt hostages just isn’t that big a deal in China and the police even sometimes assist:

I’ve been seeing reports of creditors taking debt hostages for years, and they are always similar in key points: the creditor keeps a human being in forcible detention and demands payment of a debt as a condition for release. What’s more, the hostage-taking and the identity of the kidnapper are not secret; that would defeat the whole purpose. And finally, the police do nothing. They think of it as a civil dispute having nothing to do with them. For example, back in 1992 I read of a case where a jilted suitor took a woman’s baby as hostage for the return of over 1,000 yuan in gifts. The police didn’t immediately arrest this known kidnapper; instead, the go-between, the village committee, and “judicial departments” tried for five months to persuade him to return the child. Only then did they finally give up and arrest him.

Actually, I was wrong to say the police do nothing – sometimes they actively assist in taking debt hostages. In a book entitled One Hundred Strategies for Using Law to Clear Up Debts (运用法律手段清债百策), the writer mentions as an aside that a plaintiff trying to collect a debt asked the police and the procuracy to assist. They helpfully detained three people from the defendant organization for up to eight months, but were unsuccessful in collecting.

So what is the new twist? We are increasingly hearing of situations where someone calls up the partner (with that term so broadly defined as to include a life partner and a business partner and really anyone else who might be relevant) of the hostage and says that if that person pays x dollars (usually ⅓ to ½ of what is actually owed), the hostage will be released. The partner then pays the money and the company owed the debt then claims it never received a yuan of it. Lacking any proof that any money was paid on the debt and without anything in writing actually from the company, the hostage and its partner(s) are right back where they started from in terms of getting the hostage released, but now they are out a good chunk of money.

So what are the takeaways from all of this?

  1. If you are in a debt dispute with a Chinese company and you have people in China, you should try to get them all out of China as quickly as possible.
  2. If you are in a debt dispute with someone in China you should not go to China to try to resolve it.
  3. If you must go to China or if your employee(s) must remain in China, think about using a bodyguard or two and think very carefully about where you or your employee(s) stay and go. Most importantly, be careful with whom you meet.
  4. Consider preemptively suing the alleged creditor somewhere (preferably in US Federal Court) so that you can very plausibly claim to the Chinese police and other authorities that you –or your employee(s) — have been seized and held hostage not because of a debt owed, but out of retaliation for your having sued. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.
  5. Take these situations very seriously and get experienced assistance immediately.
  6. Do not pay money to anyone without a good mechanism in place (and in writing) to ensure that your payment will resolve the debt and immediately lead to a release of the hostage. We typically structure these resolutions where full payment of any settlement amount does not occur until all hostages have been released and are out of China.

What are you seeing out there?

A long time ago, I arrested a Russian ship vessel in Japan’s Hokkaido province on behalf of an American client-creditor.  My client wanted to get that ship to the United States, believing that once there, it could repair and update it and use it.  The arrest was a blast in that we (me, the Japanese Coast Guard and our Tokyo attorney) got to the ship literally as the gangplank was being lifted.

But once we had the ship, we needed to figure out a way to get it to the United States and, more importantly, that meant we needed to secure some sort of short-term visa for its mostly foreign crew.  And of course every day of delay was costing my client a lot of money.  I made the decision to try to short circuit things by going to the US Embassy in Tokyo.  Security was really tight there and a Japanese guard told me that I could not get in without an appointment.  I somehow convinced him that I had a right as an American citizen to visit my embassy at any time (is this correct?) and he made a few phone calls and let me in.

Once inside, a lower level functionary told me to set up an appointment for around two weeks out.  I very politely kept insisting to her that two weeks would be too long and as I was doing so, I started noticing that an important looking person who had been walking by was now listening to our conversation.  Interested, he came over to us and asked me what was going on.  I explained the situation and within about 15 minutes I had about 60 visas for the crew and had left.

The above is one of at least a half dozen stories I could tell of times when a US Embassy or Consulate has gone out of its way to assist either me/my family or one of my clients in a time of need.  I have nothing but the utmost respect, generally, for how the US State Department treats its citizens and aids its citizens overseas.

But there is only so much they can do….

And one of the things they typically cannot do is aid someone involved in a civil dispute overseas.  I would guess that around 100 times over the years I have had someone tell me of some sort of China business dispute (oftentimes involving fraud) and of how they plan to alert the US Embassy regarding it.  I am always hesitant to tell them flat out that the US Embassy doesn’t have the time or the manpower or even the authority to get involved in every little commercial dispute so I usually say something like the following:  “It is my understanding that the US Embassies and Consulates generally do not get involved in civil disputes, but if there is something different about yours that will cause them to take it on, more power to you.”  I used to follow up with these people, but after about ten times where nothing happened, I stopped.

I mention all of this now because of a comment left on our blog the other day by Micah Sitig. The comment was a scan of the latest version of the “Shanghai Consulate News for Americans,” a monthly newsletter sent by the US Consulate in Shanghai to mostly American expats in Shanghai.  The reason Micah left this as a comment was because the lead story was our post from about a month ago, entitled, China Hostage Situations. More Common Than Most Think, But Not Really A Big Issue.  But the reason I am discussing this in this post is the following lead in to my post:

The Consulate is unable to intervene in civil cases and has little influence with the Public Security Bureau.  If you are involved in a civil or business dispute we recommend you contact an attorney immediately.

Good advice, and the advice I am going to use the next time someone tells me they are going to get the consulate or embassy involved.

I would also add that even in criminal cases, the role of the embassy/consulate is usually limited to making sure that the detainee gets access to counsel and decent food while in prison. I think that most companies that have been doing business in China for some time know all of this, but it seems that many new to international business do not

What do you think?

A few weeks ago, a China risk consultancy contacted us regarding their own China legal matter.  During our conversation, the caller went off and said that he really liked our posts on how to avoid getting kidnapped in China.  He then told me that so far this year, not a single week had passed without his company having been called in to deal with a “hostage or hostage-like situation.”  He told me that such incidents are way up this year from 2012 and that 2012 had double the incidents of 2011.  He said that nobody seems to believe how prevelant this incidents are but that we should keep writing about them because they are “happening like crazy and with China’s economy continuing to soften, they will only increase.”

I forget about that phone call until today, when I received my second “hostage” call in two days.  Both are very similar to each other and both are very similar to those we have handled in the past.  I am going to merge the facts surrounding these two recent ones and throw in a bit of the previous ones so that nobody can be recognized.  Those two and pretty much all of them go as follows:

  1. US company gets into some sort of dispute with Chinese company involving money the Chinese company claims it is owed by the US company.  Usually this “debt” has arisen after the Chinese company has provided the US company with terrible quality product and for which the US company refuses to pay.
  2. The Chinese company makes all sorts of threats against the American company, typically including the threat that the Chinese company will make is so that the American company will no longer be able to do business in China ever again.
  3. The American company becomes convinced that the Chinese company is acting unreasonably (because it is) and that if it can simply meet with the Chinese company, reasonableness will prevail and a compromise can be reached.  This is somewhat encouraged by the Chinese company, who goes along with the plan of at least having a meeting.
  4. The American company agrees to go to the Chinese company’s hometown for a meeting.
  5. One person from the American company goes to the Chinese company’s hometown for a meeting, at which point the Chinese company (usually with local police right there) makes clear that it is not willing to compromise in any way and angerly demands that the American company pay the Chinese company every single dollar the Chinese company claims to be owed (and sometimes even more than that). The representative for the American company refuses, at which time the “quasi-kidnapping” begins.
  6. The Chinese company/local police will then seize the American’s passport, tell the American that they have already sued their American company for the alleged debt and alerted the border police not to allow them to leave China.
  7. The “partner” of the person being held hostage in China then calls us to assist, always letting us know that they wished they had read our blog posts on this subject before their partner had left for China.

So I am writing about this yet again in an effort to reach as many as possible before they go over to China.  What should you do if you have a problem with your China counterparty?  What should you not do?  How can you avoid being held hostage in China?

In How Not To Get Kidnapped In China, we set out the following three rules to follow if you or your company are alleged to owe money to a Chinese company:

  1. If you are in a debt dispute with a Chinese company, think about not going to China at all.
  2. If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.
  3. Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

We really should have added a fourth rule, which rule we discussed in “Shanghai Thugs Forcibly Remove Shanghai Residents. Why This Matters For YOUR Business”:

Though China is relatively safe, one should absolutely not write off the possibility of violence in one’s business dealings in China. My law firm has been called in at least a half dozen times where violence was either threatened or occurred. We tell our clients that if they owe money to a Chinese company or are involved in any sort of dispute with anyone in China (partner, employee, etc.), they should avoid meeting to discuss the dispute/problem anywhere other than in a neutral, very public place in the day time. A high end hotel lobby in Shanghai or Beijing is a good choice. Singapore or Tokyo or Seoul are an even better choice.

In other words, if you really think it necessary for you to go to China to try to resolve your company’s debt issues, at least seek to have the meeting in a hotel lobby in Beijing or in Shanghai, rather than in Xiamen in the conference room of the company to whom the debt is allegedly owed.

In “Bo Xilai’s Lessons For Your China Business,” we wrote of how arguing that the hostage does not personally owe the debt is usually not the fastest/best way to resolve these sorts of situations:

I say this because we have been involved in at least two cases where this was the case. U.S. company owes money to Chinese company. U.S. company ceases to do business and so its key figures assume the issue is resolved in that the company has no assets to pay any debt.  They then get on a plane to a foreign country (one was a China case, the other was a Russia case) and they both get seized and “held hostage” until we negotiate out their release. They wanted us to argue that they personally did not owe the debt; their companies did. Our response was to tell them “that would be an excellent argument if we had the luxury of filing court briefs and waiting months for a judge’s decision, but our goal here is to get you released as quickly as possible.”

We deal with this issue in its nascent stages all the time when we work with our clients to shut down their Chinese entities (which for some reason has been happening like crazy of late). We always instruct our clients never to reveal that they will be shutting down their China operations while anyone from the home office is in China. We also tell them that if they or their company ever wish to return to China, they should pay off all their debts and usually the best way to do that is to announce from outside of China the plan to gradually shut down the China office and then, using that as leverage, negotiate down all of the debts. We always stress that once a reduced debt is agreed upon, there should be a written agreement on that and there should be proof of payment on that agreement as well.

All of this is necessary if you want to formally close your China entity, which is, in turn, necessary, if you want to be able to return.

For more on hostage situations in China, check out the following:

I cannot emphasize enough how serious this is and how little the US Embassy and Consulates can do to help Americans being held.  China law actually allows for keeping people in China for the debts of their companies.  And trust me when I tell you that accomodation quality can vary.

What are you seeing out there?

A few weeks ago, a reader e-mailed me with an article regarding the jailing in Shanghai of California businessman Brian Horowitz over a debt he (his company?) allegedly owed a Chinese company. I have been assiduously following the case in the press for many reasons. First, cases like this could prove very important to my firm’s clients. Second, I am convinced my law firm has handled as many (or more) of these cases (around the world) as any other firm. Third, the “facts” in this case, at least as conveyed by the media, have remained very sketchy and I am not fully prepared to believe them.

Let me explain.

According to yesterday’s Los Angeles Times article on the case, the story goes as follows:

An Orange County businessman who was prohibited from leaving China for nearly two weeks because of a contract dispute with a Chinese supplier has negotiated a settlement and returned to the United States.

Brian Horowitz, 46, of Mission Viejo, said Chinese government officials refused to let him leave the country until he paid the Chinese firm $250,000 to resolve a civil lawsuit the company had filed against him. He said he arrived home Jan. 18 after his wife wired the funds to China.

Horowitz said he was stopped at Shanghai Pudong International Airport on Jan. 6 and told that he couldn’t board an American Airlines flight to the United States until the case was resolved. Chinese law permits its immigration officials to deny exit to foreigners with pending lawsuits.

The supplier, Fuzhou Trading Co., was seeking payment for a shipment of blenders that Horowitz’s company, On the Edge Marketing Inc., sold briefly in the U.S., Horowitz said. The Chinese firm’s owner demanded $250,000 to settle the contract dispute before he would direct the judge to let him leave, Horowitz said.

The dispute involved Horowitz’s 2007 purchase of 3,000 gasoline-powered blenders, which were marketed to tailgaters and others who wanted to blend icy drinks without a power source. Horowitz said the blenders did not meet U.S. air quality standards, as the contract required. As a result, the California Air Resources Board fined Horowitz’s company $240,000 in 2009 and ordered him to pull the blenders from stores.

Horowitz said the Chinese company agreed to write off Horowitz’s balance of more than $300,000 because of the fine and recall. But the company alleged in a lawsuit filed in China that Horowitz had failed to make good on his debt. Officials with Fuzhou Trading could not be reached for comment.

Horowitz said he did not learn of the lawsuit until he was stopped at the airport. But experts in Chinese law said it would be highly unusual for the country to enforce a lawsuit without proof that it had been served on all parties.

Horowitz’s take on the case is as follows:

“I’m very relieved to be home,” Horowitz said. “I’m hoping my ordeal helps other businessmen who do business in China to be educated about how to protect yourself.”

Okay, but how? And what really happened here?

We have written on this topic countless times. In “China Hostage Situation. Now IS A Good Time To Pay Your Debts,” we wrote of a U.S. company that had sent one of its executives to China to announce that it would be closing down its China entity, declaring bankruptcy, and not paying its debts. The company’s Chinese suppliers then held this executive hostage.

I wrote of how I could have seen this coming a mile away and of measures to take to avoid this sort of thing:

But if we had been retained, our advice would have been so different that I would like to think things would have never reached this point. We would have told this company to get ALL of its personnel out of the country before letting suppliers know (from far far away) that you had just filed for bankruptcy and that payment would be slow, at best.

We did have a client quite recently in a similar situation, which we wrote about in our post, “China, We Have A Problem. A Mostly True Story.” The key takeaway from that post is that the very first thing we emphasized was the need to get everyone out of town.

Many years ago, I had a similar situation where our client was alleged to owe money to a Vietnamese company. The Vietnamese company had shipped product to our client which we contended was defective and for which my client refused to pay. My client absolutely had to go to Vietnam to meet with other clients and he and I were both very concerned about what might happen to him there. My advice was that he not go, but he insisted that he had too. That being the case, we decided the best approach would be for my client to sue the Vietnamese company in a US court, alleging the Vietnamese company owed my client money for defective product. Our thinking was this might help insulate the client from problems in Vietnam. If the Vietnamese company tried to have my client imprisoned for his company’s alleged debt, we would at least be able to point out that there was an ongoing dispute between the two companies and that the Vietnamese company was seeking to act against my client in Vietnam not to collect on an unpaid debt, but in retaliation for my client having sued. My client went to Vietnam without incident and a few months later we were able to settle all claims. We heard through the grapevine that the Vietnamese company had actually been intimidated into inaction by our lawsuit.

Not so long ago, I wrote a post, entitled, “How Not To Get Kidnapped In China.” In that post, I talked of a recent “hostage” case we had resolved through negotiations:

Ten years ago, it was not at all uncommon for Chinese authorities to seize passports of foreigners involved in civil disputes there, but when Beijing made clear it did not approve of such actions, those incidents pretty much ceased. Kidnappings are, in some ways, more difficult to stop in that the act is sometimes less clear cut. Not that long ago, we had a client who was taken to a decent hotel, put in a room, and told that he would not be able to leave unless and until his company paid a contested (by us anyway) $60,000 debt. Negotiations reduced the debt, our client paid it, and left the country, never to return.

I then set out the lessons to be learned:

1. If you are in a debt dispute with a Chinese company, think about not going to China at all.

2. If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.

3. Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

So where did Horowitz appear to have gone so wrong? First, he says that he reached an agreement with the Chinese company: “Horowitz said the Chinese company agreed to write off Horowitz’s balance of more than $300,000 because of the fine and recall.”  If Horowitz did reach such an agreement, he should have memorialized it in writing, preferably in Chinese, and he should have had a copy of that agreement readily accessible each time he got on a plane to China. Oral (and to a large extent, e-mail) agreements in China are not worth the paper they are not printed on.

Second, I too really do not understand how it is that Horowitz (or his company) could have been sued in China, could have had a judgment entered, and never received any notice of the lawsuit? I am NOT saying this is what happened to Mr. Horowitz, because I do not know what happened to Mr. Horowitz, but I have to wonder if maybe the lawsuit and the judgment were against one of his companies with which he no longer had any concerns and it just never occurred to him that the company debt might be taken so “personally.”

I say this because we have been involved in at least two cases where this was the case. U.S. company owes money to Chinese company. U.S. company ceases to do business and so its key figures assume the issue is resolved in that the company has no assets to pay any debt.  They then get on a plane to a foreign country (one was a China case, the other was a Russia case) and they both get seized and “held hostage” until we negotiate out their release. They wanted us to argue that they personally did not owe the debt; their companies did. Our response was to tell them “that would be an excellent argument if we had the luxury of filing court briefs and waiting months for a judge’s decision, but our goal here is to get you released as quickly as possible.”

We deal with this issue in its nascent stages all the time when we work with our clients to shut down their Chinese entities (which for some reason has been happening like crazy of late). We always instruct our clients never to reveal that they will be shutting down their China operations while anyone from the home office is in China. We also tell them that if they or their company ever wish to return to China, they should pay off all their debts and usually the best way to do that is to announce from outside of China the plan to gradually shut down the China office and then, using that as leverage, negotiate down all of the debts. We always stress that once a reduced debt is agreed upon, there should be a written agreement on that and there should be proof of payment on that agreement as well.

All of this is necessary if you want to formally close your China entity, which is, in turn, necessary, if you want to be able to return.

What are you seeing out there?

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About a year ago, I did a post, entitled, “China Hostage Situation. Now IS A Good Time To Pay Your Debts.” It is time I revisit it.

That post dealt with an email I had received from a trusted reader setting forth the following scenario:

Consumer product company had a rep office – staffed with people with US passports. Company had financial problems and needed to file for bankruptcy. The company sent one of their executives to China to advise their suppliers that they were declaring bankruptcy and would be unable at this point to pay their outstanding balances.

As you can imagine, the Chinese suppliers did not take this well, and they stormed the rep office and are now holding the US citizens hostage – literally. Its been days now -and neither the police nor the embassy will help to extract the people.
The whole thing was obviously not handled properly from the start – but this has turned ugly pretty quickly. Each factory is mainland owned.

I’ll let you know how this turns out – I’m not involved – just hearing most of this second-hand.

I hope to write a happy ending to this story when/if it resolves itself in a safe way that protects both the US people as well as the suppliers – but I am not so sure it will be.

Have you encountered similar experiences?

I responded by saying that my firm has been involved in similar situations countless times (at least a half dozen around the world) and that had we been retained on this one, “our advice would have been so different that I would like to think things would have never reached this point. We would have told this company to get ALL of its personnel out of the country before letting suppliers know (from far far away) that you had just filed for bankruptcy and that payment would be slow, at best.”

I then went on and discussed a somewhat similar situation my firm had handled and how I had written on that in a post, entitled, “China, We Have A Problem. A Mostly True Story. The key takeaway from that post was the need to get everyone out of town. The situation in that post was as follows:

Young Chinese Child falls from a window in a room in which an American employee of our client is one of the few adults. Child is very badly hurt. Very badly. It now appears his injuries will probably not be permanent, but he also may be in recovery for a year. His medical expenses by US standards were fairly low, but they are astronomical by Chinese standards, particularly for this less than large city. A day later, the parents of the child come with a lawyer to tell this employee that they want six figures (in US dollars, not RMB) from him and from his employer for the injuries that have befallen their child. They also go to the police and make the same request of this employee and his American employer.

The parents make clear to the employee that many in the town are behind them and that things will get much worse if payment is not received. The employer calls us and we immediately spring into action. We determine that the police do not seem to be buying into the parents story of guilt and they have not told this employee or any other employee of our client that they must remain in town or in China as either witnesses or suspects. We learn that our client is not terribly happy with its joint venture partner in this town and that it has no problem with taking its employees out of there and sending them home to sit this whole thing out. Though they feel terrible about the injuries that have befallen the kid, they do not consider themselves responsible. Our research of the facts and the law and our meetings with a cadre of Chinese lawyers we trust all indicate our client is not liable. However, as everyone who has ever been involved in litigation anywhere in the world knows, not being liable and not being subject to an expensive and time consuming lawsuit are two entirely different and only tangentially connected things.

We determine the best course of action is to get the employees out of this town as quickly as possible and on their way back to the United States. We figure that getting them out will change the leverage game entirely, and it does. The employees leave and the settlement claim by the parents immediately plunges. Now we can talk with all parties (the child, the joint venture partner who actually owns and maintains the building from which the child fell) from afar, pretty much stripped of any imminent threats. We agree to pay the parents something towards the medical bills and we (fairly publicly) ask that instead of the Chinese joint venture partner paying our client what it owes, that it instead pay all of that to the family of the injured child. Agreements are signed on all of this and we move on.

And yes, before anyone accuses me of this, I will come right out and admit it. The point of this article is that it pays to bring your lawyers in early in a problem, rather than late. Early is better for the attorneys too, but only because many times when it is too late there is nothing the attorney can do (or charge for) beyond saying, “sorry.”

Many years ago, I had a situation where our client was alleged to owe money to a Vietnamese company. The Vietnamese company had shipped product to our client which we contended was defective and for which my client refused to pay. The company CEO absolutely had to go to Vietnam to meet with other clients and he and I were both very concerned about what might happen to him there. My advice was that he not go, but he insisted that he had to do so. That being the case, we decided the best approach would be for my client to sue the Vietnamese company in US federal court, alleging the Vietnamese company owed my client money for defective product. Our thinking was this might help insulate the client from problems in Vietnam. If the Vietnamese company tried to have my client imprisoned for my client’s alleged debt, we would at least be able to point out that there was an ongoing dispute between the two companies and that the Vietnamese company was really seeking to act against my client in Vietnam not to collect on an unpaid debt, but in retaliation for my client having sued. My client went to Vietnam without incident and a few months later we were able to settle all claims. We later heard through the grapevine that the Vietnamese company had actually been intimidated into inaction by our lawsuit.

I have written in the past, in a post entitled, “Owe Money To A Chinese Company? No Need To Pay, on how foreign companies need not worry much about Chinese companies pursuing them overseas for unpaid debt. The gist of the post was that if you need to prioritize who to pay, you should put your Chinese creditors last. Even so, I stressed that this equation applies only if you do not have a “real presence” in China:

This is not to say, however, that foreign companies that do not pay may not face repercussions other than a law suit. For example, if you are a foreign company with a real presence in China, not paying a Chinese company might end up causing you real problems in China and you must consider this before choosing not to pay. Just by way of example, we represent a large Chinese manufacturer in an industry where there are only around five companies capable of manufacturing this particular product. Our Chinese client is owed millions by a US company and that US company figured it would not need to pay. What this US company did not figure was that our client would alert the other manufacturers of the non-payment and now none of those manufacturers will make product for this US company either. Once the US company started running out of product, it started paying our client again. On the other hand, if you have but a small presence in China and you can switch your manufacturing over to some other country….

I am bringing all of this up now after having read an excellent Chinese Law Prof post, entitled, “Debt Hostages.” That post is on how kidnappings in an effort to collect on a debt are illegal in China per the written law, but the police often look the other way:

When is kidnapping not kidnapping? Apparently when it’s for the purpose of getting a legitimate debt paid. This, at least, seems to be the social understanding of kidnapping in China, and there’s even legal support for it (the law calls it unlawful detention in that case). The latest case is reported in the Dongguan Times: a couple can’t pay the hospital bill for the wife’s delivery of a baby, so the hospital is holding the baby hostage until the parents pay up. They’ve had the baby for over 100 days so far. One amazing thing about it is that this is apparently a government-run hospital, and the hostage-takers have even held a press conference to justify their actions (apparently they felt the father had not been “sincere” in his efforts to pay). The other amazing thing about it (to me) is that this is seen as relatively acceptable. The newspaper report uses quotation marks around the word “hostage,” as if the baby somehow is not really a hostage. And the most a local lawyer can bring himself to call this is “inappropriate.”

The post goes on to note how taking debt hostages just isn’t that big a deal in China and the police even sometimes assist:

I’ve been seeing reports of creditors taking debt hostages for years, and they are always similar in key points: the creditor keeps a human being in forcible detention and demands payment of a debt as a condition for release. What’s more, the hostage-taking and the identity of the kidnapper are not secret; that would defeat the whole purpose. And finally, the police do nothing. They think of it as a civil dispute having nothing to do with them. For example, back in 1992 I read of a case where a jilted suitor took a woman’s baby as hostage for the return of over 1,000 yuan in gifts. The police didn’t immediately arrest this known kidnapper; instead, the go-between, the village committee, and “judicial departments” tried for five months to persuade him to return the child. Only then did they finally give up and arrest him.

Actually, I was wrong to say the police do nothing – sometimes they actively assist in taking debt hostages. In a book entitled One Hundred Strategies for Using Law to Clear Up Debts (运用法律手段清债百策), the writer mentions as an aside that a plaintiff trying to collect a debt asked the police and the procuracy to assist. They helpfully detained three people from the defendant organization for up to eight months, but were unsuccessful in collecting.

Not that long ago, we had a client who was taken to a decent hotel, put in a room, and told that he would not be able to leave unless and until his company paid a contested (by us anyway) $60,000 debt. Negotiations reduced the debt, our client paid it, and left the country, never to return.

So what are the lessons from all this

  • If you are in a debt dispute with a Chinese company, think about not going to China at all.
  • If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.
  • Consider preemptively suing the alleged creditor somewhere (preferably in US Federal Court) so that you can very plausibly claim that you have been seized and held hostage not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

Be careful out there…..

I am a fanatical about abiding by the laws in whatever country I am in, not because I necessarily like the laws, but because I do not want to go to jail. I do not know whether we Americans are more arrogant about our own country’s reach than those from other countries (though I suspect that we are), but there do seem to be far too many Americans who mistakenly believe some or all (or at least some variation) of the following:
1. If it’s legal in the United States, it’s legal everywhere;
2. If the United States goes easy on it (marijuana possession, for instance), every other country also goes easy on it, or at least will go easy on it when it is an American involved;
3. If it is legal in the United States and illegal somewhere else, well then surely that somewhere else is acting silly and will come to its senses when a good American lawyer explains to them how things should be;
4. And, if worse comes to worse, and an American commits a crime overseas, the US government will fly them home to mommy and daddy.
None of the above are usually true, though in some cases if you are accused or convicted of a crime overseas, you might be able to get your local newspaper to write an absurd editorial or, if you are extremely wealthy, you might be able to get Senator Patty Murray to write a letter to President Obama asking him to “raise the issue” of your detention. In other words, if you are charged with a crime overseas, you are pretty much on your own….even if you are an American. [FULL DISCLOSURE: My law firm is involved in two law suits against Global Fishing, the owner of which on whose behalf Senator Murray felt “called upon” to intervene, including this one for $5.8 million, plus interest.]
That was in stark evidence today as a Haitian judge ruled that ten Americans who went to Haiti and allegedly scooped up a bunch of Haitian children and drove with them to the Dominican Republic border. The media are saying that many of the kids were not orphans and that the ten Americans had no legal basis for taking the kids or for trying to cross the border with them.
For more on the criminal side of living and doing business in China, check out the following:
— “Avoiding Chinese Jails. I’m Talkin’ To You.” (this post contains a whole host of great tips for making sure you stay on the right side of the law in China)
— “Amazing Lawyers and The Criminal Side of China Business
— “Criminal Law and Business in China — A Strong Caution
— “Foreign Partners In China Crime Do The Time
— “Bad China Products. Hey It’s A Criminal Thing
–“Bad China Products. Hey, It’s A Criminal Thing, Part II

The other day, in a post entitled, “China Hostage Situation. Now IS A Good Time To Pay Your Debts,” I wrote about some U.S. executives who were being held hostage in China over nonpayment of a business debt. Their US based company had gone bankrupt and when they went over to China to explain all this to their Chinese suppliers, they were taken hostage. I have since learned that they were eventually released, though I do not know whether a payment precipitated that release or not.

Forbes Magazine just came out with an article, entitled, “How To Avoid Getting Kidnapped In China,” the thesis of which is that if you are going to do business with another company in China, you should find an “uncle” first who will be able to mediate any disputes that might arise between the two of you:

Before entering a partnership with a Chinese company, you should find an “uncle”–a person both parties trust who will be able to mediate differences. This assures each side that issues will be resolved fairly. I have seen too many American businessmen drag out an inch-thick contract with some clause that they think lets them out of a deal. To their Chinese counterparts, it is clear the Americans are cheating. Use relationships rather than legalese whenever possible to solve problems.

The article  even posits that this US company whose executives were held hostage could have avoided their fate had they had such an uncle: “The case written up by China Law Blog should have been handled that way. Had the foreign company turned to an uncle to smooth relations before declaring it would not pay, the dispute would never have gotten to hostage-taking.”

Well maybe. But I still think the safer tact would have been to get all of your people out of China and then negotiate a payment plan from afar.

The article then talks about the need to “build guanxi:”

Many Americans have heard of guanxi, but it’s often translated wrongly to mean relationships with powerful people. Guanxi means something very different from the American concept of connections. It means being in a social circle where you can let your guard down a little, because there is deep trust, perhaps from generations of coexistence, living in the same neighborhoods or even with interwoven family relations. In the case I was involved in, the CEO didn’t want to hurt his relationship with the uncle, and once he knew I, too, was in the uncle’s circle, he wanted to create a friendship with me.

Many consultants like to tout that they have good guanxi and can arrange meetings with powerful officials to grease the wheels of commerce. They may be able to get the meetings, but those powerful people don’t usually really trust them–especially if the consultants are former officials of foreign governments, as they often are. Building long-term trust is very difficult, especially for those who once sat across negotiating tables representing other countries. Acceptance into a guanxi circle can take years.

Long-term perspective is very important in China. A defaulting borrower should avoid saying he won’t pay and instead pay a little right away and explain that he is hurting but will make good in the future. You cannot rely on bankruptcy to absolve debts.

Bottom Line: We definitely agree on the need to build long term relationships in China and having an “uncle” is certainly not a bad idea. The real key is to build up your relationships before you need them. And if you owe money to someone in China, the wise thing to do is to not go to China until your debt issue is resolved.

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