Litigation and Arbitration

Hong Kong ArbitrationEvery month or so, a lawyer will write me out of the blue with a “quick question” about a draft contract. Without a doubt, the most common “quick question” I (and the other China lawyers at my firm) get is asking me to “confirm” that Hong Kong arbitration would make the most sense for such and such type of contract. I usually respond to this question by explaining that for me to be able to confirm or disagree with their having chosen Hong Kong arbitration I would need to review the entire contract and know a ton more information. About half the time, the lawyer responds by asking like what? I then respond by saying that when the lawyers at my firm are trying to figure out the best venue (location) and method (arbitration versus litigation) to put into an international contract, we typically consider the following:

  1. Who the parties are.
  2. Where the parties are located.
  3. Applicable law.
  4. Contract language.
  5. The goals of the client. Money? IP protection? Something else?
  6. The likelihood that the client would breach the contract as compared to the likelihood the other side would breach the contract.
  7. The sort of disputes likely to arise.
  8. The language(s) spoken by the client and the other side
  9. The client’s wealth as compared to the wealth of the other side.
  10. The need to engage in discovery if there is a dispute.
  11. The need to bring in third parties to any dispute.
  12. The complexity/simplicity of likely disputes
  13. Appeal concerns.
  14. Confidentiality concerns.
  15. Concerns regarding speed of dispute resolution.
  16. Enforcement of judgment/award concerns.

Contracts cannot be reviewed in a vacuum.

Let me explain.

A very long time ago, a large manufacturing company client contacted me to help with an international product recall. This companies product had a faulty and potentially dangerous part that had been provided to it by one of its smaller suppliers. My first thought was that my client should seek reimbursement of the recall costs from this small supplier and its insurance company. Towards that end I asked for a copy of the supply contract as between my client and its supplier.

Unfortunately, the contract protected the small company in every respect. This surprised me because usually big companies impose its terms on their small suppliers. I explained to my contact at the company (an excellent international compliance person, but not a lawyer) why his company had allowed such an unfavorable contract to be used and now it was his turn to be surprised. He told me that his company had believed this was a really well drafted contract and they had recently stared using it with all of their new suppliers. My response was that it was one of the best drafted supply contracts I had ever seen and that was part of its problem; it had been incredibly well drafted but entirely in favor of the small supplier, not in favor of my client who was the recipient of the parts. I then asked who had drafted this contract (I was especially curious because I thought my firm had a lock on this company’s international contracts). His response was that no lawyer had drafted it; a non-lawyer high up in supply chain management had seen this contract when their largest supplier had required they sign it and he just figured it would be a really good contract because it came from XYZ company. My response was, yes, it is a great contract, but a great contract for a parts supplier, NOT for a parts recipient and when XYZ company required you sign this contract it was acting as a supplier. The client ended up paying every dollar of the recall.

What would happen if a lawyer were handed this contract for a one or two hour review from another lawyer without being provided with the context behind this contract? The lawyer would review it and say this is a great contract and I don’t see anything that needs to be changed.

Context can be equally crucial for dispute resolution clauses.

Over the years, our China attorneys have dealt with the following situations, the facts of which have been modified so as to negate any possibility of anyone recognizing the specific matter:

1. Tokyo Jurisdiction. An American company comes to us after learning that its Chinese manufacturer has started manufacturing and selling  the American company’s newest version of its core product. I read a provision in the contract to expressly state that any future iterations of the core product would belong to the Chinese company and I mention this to the potential client. The potential client then tells me that when it complained to its Chinese manufacturer about IP theft, the Chinese manufacturer cited to the same provision and said the product now belonged to them.

To make matters worse, the contract called for all disputes to be resolved in “Tokyo Superior Court.” I asked the potential client how it was decided Tokyo Superior Court would be the venue for any disputes and the potential client explained it as follows:

The Chinese company asked for disputes to be resolved by arbitration in Beijing and my lawyer said that we wouldn’t stand a chance there and so we refused. The Chinese company then proposed Singapore or Hong Kong arbitration and my lawyer countered with Tokyo Superior Court because it was the opposite [both with respect to the type of forum — arbitration versus court — and the location] of what the other side wanted.

Ugh. I then explained how no country other than China will allow for a lawsuit in its courts that has zero to do with its country and because this case would involve a US-based company going up against a China-based company on an issue with zero relevance to Japan, there is no way a Japanese court will allow itself to be a free (or nearly free) public forum for this dispute. I did not even bother to mention that there is no such thing as the Tokyo Superior Court or that even if the US company were to sue in Tokyo and get its case heard in Tokyo (which will never ever happen) and then win in Tokyo, no court in China would ever enforce the judgment because the Tokyo court never had any jurisdiction over the matter. The US company might be able to convince a Chinese court to take the case, but I doubt it, simply because China very much tends to enforce contracts no matter how silly they may be and I most Chinese courts would likely just toss the case for not having been filed in Tokyo as per the contract.

2. Toronto Jurisdiction. This is one of my favorites. I get an angry email from someone that essentially says as follows:

I read your blog regularly and carefully and you were wrong about Canada and that makes me wonder what else you have been wrong about. I read one of your posts where you talked about how you like to propose Canada for disputes because Chinese companies often will agree to that. Well the Chinese company we work with did agree to that but when it came time for us to actually sue them there, all of the Canadian lawyers told us that we couldn’t.

Future communications revealed that this company had — based on my having extolled the virtues of proposing Canada for arbitrations — believed it could list the Toronto courts as the jurisdiction for disputes between its US-based company and its Chinese counterpart. Just as would have been true in the Tokyo instance above, there is no way a Toronto court will hear a dispute between two foreign companies on a matter that has no relevance to Canada. Fortunately, the Canadian lawyers to whom this company went realized this and chose not to waste the US company’s time and money pursuing litigation in Toronto. I had to point out that we constantly emphasize that dispute resolution provisions must be fact and situation specific and that there is a big difference between what can be done in arbitration and what can be done in a foreign country’s courts. I didn’t — but I should have — pointed out the disclaimer here on our website:

The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice…. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.

3. Split Jurisdiction.  We get this one fairly often. The contract provides that the Chinese company must sue the United States company in a U.S. court and the U.S. company must sue the Chinese company in a Chinese court. The thinking behind this is logical but its execution is so flawed that we avoid these provisions like the plague.

These provisions initially seem to make sense because this sort of split jurisdiction appears to favor the U.S. company. If the Chinese company seeks monetary damages from the American company, it must go through the trouble of suing the American company in a U.S. court where the U.S. company will presumably get a fair trial. And on the flip side, the American company can sue the Chinese company in a Chinese court, which is (90 percent of the time, anyway) exactly where the U.S. company should want to be. For why this is the case, check out China Enforces United States Judgment: This Changes Pretty Much Nothing and China Contracts: Make Them Enforceable Or Don’t Bother.

But Chinese courts typically hold that this sort of split jurisdiction clause means there is in fact no jurisdiction in China. So if you really want jurisdiction to be in China, your agreement should be 1) be governed by Chinese law, 2) be written in Chinese and 3) provide for exclusive jurisdiction in China. This is not black letter law. This is just what actually happens on the ground in China’s courts and this is why our firm’s China attorneys provide for all three of these in all contracts where it is critical our client be able to sue in China.

But once again there is no clear answer as to what might be best for any given company’s specific situation. To properly evaluate whether you go with Chinese law in a Chinese Court (which is what we usually end up choosing to do), you need to consider your most important concerns. Is it more important you have an effective remedy against the Chinese company with which you are contracting or is it more important you make it as difficult as possible for the Chinese side to sue you? If your primary goal is to be able to enforce the contract against a Chinese company, you usually will want to provide for exclusive jurisdiction in China with Chinese law applying and the contract being in Chinese. But if your primary goal is to prevent the Chinese side from suing you, you should consider providing for exclusive jurisdiction in the United States. But if you do this, you must realize that because China does not enforce U.S. judgments, you may never be able to enforce it against your Chinese counter-party. It is these preferences that should help you decide the best jurisdiction provision for your contract. In any event, the split jurisdiction approach generally does not work.

4. Geneva Chamber of Commerce Arbitration. A very good client of ours came to one of our international litigators with a contract calling for arbitration before the “Arbitration Institute of the Geneva Chamber of Commerce.” Problem was the Geneva Chamber of Commerce did not have an Arbitration Institute nor did it handle international arbitration. Our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce, which is a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the contract disputes resolved in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. But then when it came time for my client to pursue arbitration we had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, and the opposing side vigorously contested our choice of forum. We actually were able to keep the case there, but only after incurring a large amount in fees fighting to do so.

5. South Carolina Arbitration in Chinese Under British Law. Yes you read it right and if you are not stunned by this, you should read it again. This is my all time favorite. U.S. company comes to us with an arbitration clause mandating arbitration in South Carolina in Chinese under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and and the added costs of researching and arguing British law, the U.S. company — wisely — chose not to pursue the case. When I asked the company how it had chosen this particular dispute resolution provision they explained that they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that can make sense, but such a provision is a disaster if you are the one that ends up needing to sue. Again, context is everything.

Every once in a while when I say that I cannot opine about their having chosen Hong Kong arbitration for their specific contract, the attorney will write me back asking for “my general opinion regarding Hong Kong arbitration”. My response is that there are plenty of excellent arbitrators in Hong Kong but arbitration there is generally very expensive and, most importantly, it is seldom the most effective forum for enforcing a contract with a Chinese party.

Frankly, the biggest issue I have with Hong Kong arbitration is that far too often attorneys choose it not because it is the best forum for their client’s disputes, but simply because they are comfortable with it because it has a common law system very similar to the United States, Great Britain, Canada and Australia and the contracts and the arbitration can easily and logically be in English. Like everything else, whether these reasons make sense will depend on the entire context.

International IP litigatorOur China IP lawyers get a steady stream of emails asking what can be done to stop Chinese companies from selling “knock-offs” of their products. This is really two questions. What can be done to prevent Chinese companies from knocking off your products and what can be done to stop a Chinese company that has already knocked off your product. This post will address both questions.

I.  The Basics For Preventing Counterfeiting. 

Back in the retail stone ages (five or so years ago), when companies would come to my law firm for China trademarks to protect their brand names from Chinese copycats, we would tell them that applying for such a trademark would take about a week, but actually getting the trademark officially registered in China would take more than a year. We would then tell them that until their trademark is registered in China, we would be almost powerless to stop companies in China from using their brand name. Few voiced any concerns with this.

Fast forward a few years and now when one of our China trademark lawyers tells a client that securing a China trademark will take a year, those who sell online (which these days is almost everybody) rightfully get all nervous and want to know what to do in the meantime to protect against copycats. See China and the First to Market Fallacy for how incredibly quickly China companies can and do copy products and get them to market.

Our typical response is to talk about “building IP walls outside China.” If you are selling your product in the United States and in Spain you should focus on protecting those two countries, by among other things, securing trademarks in those two countries as quickly as possible. Though a U.S. or a Spain trademark technically will not give you any trademark protection in China, it can still help in getting offending ads removed from Chinese websites like Alibaba. If “your” product shows up on Alibaba and you have no registered IP, your chances of getting Alibaba or some other Chinese website to take it down are slim. But if you have a registered Chinese trademark that is being infringed by something online your odds of getting that offending ad taken down are good. If you have a Spain trademark and an Alibaba ad clearly targeted at Spanish consumers infringes on your Spain trademark, your odds of getting that ad taken down are not bad, which is a whole lot better odds than if you did not have the Spain trademark at all. The same holds true for the United States.

Of equal importance though is that if you have a Spain trademark on your product you can use that trademark to try to keep the offending product from China from reaching Spain. You can do this by working with Spain’s Customs and Border Protection Bureau, which is authorized to block, detain and seize incoming products that violate Spain and EU intellectual property rights. The United States and virtually all other EU countries have similar procedures. In many countries it makes sense to register your trademark from that country with its Customs office.

Registering your trademarks with China’s Trademark Office is the essential first step for just about any company that is having its product made in China or that faces a counterfeiting threat from China.. See File Your Trademark In China. Now., China: Do Just One Thing. Trademarks, and China’s Changing Trademark Environment. Why You Need To Register Your Trademark Now. Because China is a first-to-file country, until you register a trademark you have no rights in that trademark. But a trademark registration alone will not limit the spread of counterfeit goods. A trademark registration merely gives you the legal capacity to enforce your rights to that mark, and should properly be seen as one of the pieces in an overall strategy.

For any company concerned about counterfeit goods coming from China, the next step should be registering your trademark with Chinese Customs. This is not a legal requirement but a practical one: though China Customs officials have discretion to check every outgoing shipment for trademark infringement against the Trademark Office database, in reality they only check against the Customs database. No separate registration with China Customs means no enforcement by China Customs. See How To Register Your China Trademark With China Customs and China Trademarks: Customs Helps Those Who Help Themselves.

If you register your mark with Customs, they will contact you any time they discover a shipment of possibly infringing goods. At that point you have three working days to request seizure of the goods. Assuming you request seizure (and post a bond), Customs will inspect the goods. If Customs subsequently concludes the goods are infringing, they will invariably either donate the goods to charity (if the infringing mark can be removed) or destroy them entirely. The cost of destruction, and of storing the goods during the inspection process, will be deducted from your bond. Registration with China Customs generally takes three to five months and can only be done after China’s Trademark Office has issued a trademark certificate.

We cannot stress enough the importance of China trademarks and China NNN Agreements for any counterfeit prevention strategy. China patents and China copyrights should be an important part of your counterfeit prevention strategy as well, but in our experience, getting offending goods taken off websites is fastest, easiest and most likely if you have a China trademark. See China and Worldwide: Trademarks Good, Patents Bad. Or as one of our China IP lawyers is always saying: “You can probably survive a Chinese company selling a duplicate of your product and selling it for half of what you charge, but if that duplicate product also can legally use your company and/or brand name on it, you may never recover. A China-centric NNN Agreement works to ensure that your own supplier will not sell your products out its back door. Note that a Western-style NDA Agreement for China will probably decrease your IP protection, not increase it.

II.  The Basics for Stopping China Counterfeiting

I apologize in advance for this portion being U.S. focused. This is somewhat necessary for this portion of this post because so much of it deals with litigation and my law firm has litigators in only the United States and in Spain. And since I am not a licensed Spain lawyer, I will confine my discussion regarding IP litigation against Chinese companies to just the United States. Nonetheless, almost all of what I say below is applicable to varying degrees to most countries outside China, not just the United States.
You just discovered a Chinese company is knocking off your product. What do you do? If you are like most companies, you go to your regular lawyer and ask her what to do and if she is like most U.S. lawyers she probably does not know. So then what? At that point, you or your regular legal counsel should reach out to a lawyer experienced in fighting Chinese counterfeiters and experienced in cross-border litigation. There are a lot of options for going after Chinese counterfeiters and the key is usually choosing the right option or the right combination of options.
The right option is usually going to depend largely on your own individual situation. When one of our international IP litigators gets an email asking us to take on a China counterfeiting matter, we usually fire back with a slew of questions to try to learn more. Below are some of the more common questions we ask.
  • What IP registrations do you have and where?
  • Do you have any trademarks registered in China? Do you have any trademarks registered in any other country? Are these knock off products using your brand name or your company name or your logo? Do you have trademarks on any of these in China? Elsewhere?
  • Please describe your registered trademarks. Is the counterfeiter using any of these?
  • Do you believe you have any common law trademarks anywhere? Is the counterfeiter using any of these?
  • Do you have any copyrights? Are any of these copyrights registered in China? Are any of these copyrights registered anywhere else?
  • Please describe your registered copyrights. Is the counterfeiter using any of these?
  • Do you believe you hold any copyrights that are not registered anywhere? Is the counterfeiter using any of these?
  • Do you have any patents registered in China? Do you have any patents registered in any other country?
  • Please describe your patents. Is the counterfeiter infringing on any of these? If so, how?
  • Have you registered your IP with any customs offices in any country? If yes, please describe.
  • Do you know anything about the Chinese company you believe to be knocking off your products? Please describe any prior dealings you have had with this company. Do you have any contracts with this company?
Answers to the above questions (and many more) help our international IP litigators figure out how best to proceed.
The below are some of the options you might have for pursuing your China-based counterfeiters.
1. Pursuing administrative or litigation relief in China. This might be done administratively, via civil litigation in a Chinese court, or even criminally. If you have a contract with the Chinese company that is counterfeiting your products and that contract calls for arbitration of all disputes, arbitration will be another option for you.
2. Figure out who is importing the counterfeit products. Oftentimes the US importer is closely connected to the company in China that is knocking off your products — like a son or a daughter or a spouse so pressuring or suing the importer often can be effective with the Chinese company as well.
3. Suing Chinese companies in US court usually takes a long time because Hague service of process on Chinese companies is taking a long time, and with the trade war heating up, it’s likely to start taking even longer. It is already at the point where if you do not have a Chinese attorney constantly calling all the right people in China all the time to check on the progress of your Hague service, it probably will never happen. There are though sometimes creative ways to get around Hague Service of Process.
On top of this, getting a Chinese court to enforce a US judgment is going to be difficult, if not impossible and the US-China trade war likely will hurt you on this front as well. See China Enforces United States Judgment: This Changes Pretty Much Nothing. This means your suing for damages in a US court will oftentimes not be the right tactic for you to take against a Chinese counterfeiter. But a Chinese counterfeiter in a US court might allow you to seize funds or other assets belonging to the counterfeiter or get an injunction blocking its sales.
4. Official Chinese company records can be goldmines of information that you may be able to use to impress upon the Chinese company the need for it to stop copying your products. This is especially true if those records help you show US connections
of the company or its owners or officers or directors.
5. Section 337 cases filed with the International Trade Commission in Washington D.C. can be a great way to stop counterfeit products from entering the United States. See Stopping Infringing Products From China: Section 337 Cases. These cases can be pursued without having to serve the Chinese defendant under the Hague Convention service of process rules.
6. Serving takedown notices on the online sites that are selling the counterfeits of your products can oftentimes be fast and easy and effective, mostly depending on the existence and quality of your IP registrations. See e.g.,
How To Remove Counterfeits From Alibaba Register Your China IP.
Bottom Line: It’s never too early to take action to prevent Chinese companies from counterfeiting your products. And if you are hit with a counterfeiter, it is critical that you explore and weigh your options carefully.
For more on counterfeit products from China, check out China Counterfeiting: 8 Common Myths

China company chop

It is always a good idea to have your Chinese counter-party “chop” or “seal” your China contracts with their official China company chop. It has been more than five years since we blogged about what constitutes an official China company chop and it seems like our China lawyers are getting an uptick in requests for us to explain how to discern what is and is not an official China company chop. This post is a response to those emails and a necessary update to our previous posts on China company chops.

Every contract with a Chinese company must be executed by a person at the Chinese company with authority and it must be chopped with the official company chop (sometimes also referred to as a company seal). However, there are many types of company chops. Which one should be used? How do you know if the company chop is real? What does a real China company chop look like? What does Chinese law require of a China company chop? What are some examples of fake company chops?

An official Chinese company chop on a contract says the Chinese company itself has authorized the contract. This means that the company cannot later claim that whomever signed it was not authorized to do so and so the contract should be deemed invalid.

The rules/requirements for Chinese company chops are different in every city, so there is oftentimes no way to know whether a company’s chop is a proper, legally registered and authorized company chop just by looking at it. For this reason, the Chinese courts have decided that they generally do not care and if the document is chopped with something that purports to be the company chop and if the signer of the document is either the legal representative of the Chinese company or a person with apparent authority to act on behalf of the Chinese company based on his or her business card the Chinese courts will usually not invalidate the contract based on a technical argument related to the validity of the company chop or the authority of the signer.

What this means in real life is that if you ever sue a Chinese company for breach of contract and the Chinese company tries to claim that the chop on your contract is not really theirs and its President (per his or her business card) did not have authority to sign on behalf of the company, it will almost certainly lose. Nonetheless, what this also means is that you will have one more litigation hurdle you must jump and on which you could conceivably fall. What if it is a mid-level manager who signs your contract and not the President? Your prevailing on your breach of contract litigation now looks less certain.

Since there are so many kinds of company chops, it is best to insist on the standard round company chop using red ink. Some of these company chops are numbered and some are not. This varies by district and is not an indicator of validity. The newish oval company chops in black and purple are not common and should be avoided for companies that want to take the cautious approach. Unfortunately, some districts have moved to using these oval company chops and so it can be a good idea to determine whether you are in one of these districts. Nonetheless, none of our China attorneys have personally dealt with a Chinese company that did not have access to a standard round company chop with a star in the middle.

The only way you can be virtually certain about the authenticity of a Chinese company chop is to do expensive and time consuming and difficult in-person due diligence. You can visit the head office of your Chinese counter-party and inspect the company chop there and then compare that company chop to the company chop used on previous contracts executed by the company and provided to you during your visit. For this sort of visit to be helpful, you need to be fluent in Chinese and know enough about Chinese law and business to be able to discern whether the older contracts you are being shown are real or not. As you can imagine, this sort of in person due diligence is not ordinarily done, other than on really big money transactions.

Better yet, you send a China attorney to confirm with the government that the company chop that will be used on your contract is actually the company’s real company chop. But this method too is usually reserved for only big money transactions because because getting an attorney to run to the local MOFCOM office is not going to be cheap or easy.

Our firm’s China lawyers are occasionally engaged to do one or even both of the two company chop verifiers described above, but for verifying company chops for more typical China contracts we usually suggest foreign companies do the following:

Ask the Chinese party to provide you with the following four pieces of information:

  1. The signatory’s title, in Chinese and in English
  2. The signatory’s name in Chinese characters.
  3. A scanned copy of the signatory’s business card, in Chinese and English [unless you already have a copy
  4. A copy of the Chinese company’s business license

Armed with this, our China lawyers cannot guarantee anyone that the company chop is indeed authentic, but we can at that point let our clients know whether we are comfortable or not with the chop. By this point we have almost certainly already done basic due diligence on the Chinese company and so we already know it is a legitimate company and so once we get the above information relevant to the company chop, it is the incredibly rare instance when we express discomfort.

The bottom line on China company chops is that so long as the company chop looks authentic and so long as the person signing the contract or document has apparent authority to act on behalf of the Chinese company, that is all that is normally required. Due to the variations from district to district regarding Chinese company chops, on all but really large transactions, it will usually not make economic sense for you to do much more than to get your experienced China lawyer (who must be fluent in Mandarin) the four pieces of information listed above and have them give the company chop a relatively quick perusal.

To a certain extent, China company chops are somewhat overrated. The big issue is whether you are dealing with a person in the Chinese company with authority to bind the company. Are you even dealing with the company and not some rogue employee or third party? Does the company even exist, using the name they have given you? Those are the real issues, and they require real work to resolve. The notion that “the company chop is everything” is no longer a wholly accurate representation of the current state of law in China. Finally, any company chop can be faked. So even if you know what the genuine chop looks like, you do not know whether the one you are looking at IS that chop or is rather a fake.

However, insisting that that any legal document be chopped is still required in China so the basic best practices described above should be used for all your China contracts.

Got it?

 

 

China litigation lawyers attorneys arbitrationAmerican and European companies often reach out to my law firm after having spent 4-6 months trying to reach a settlement with their Chinese counter-party and then given up. These companies tend to be quite frustrated and I find telling them that what has  happened to them is actually quite common and that Chinese companies rarely settle disputed matters early. Reaching settlement with a Chinese company without a live case or arbitration is very difficult.

Chinese companies tend to view litigation differently from Western companies. Western companies generally know litigation to be very expensive, very risky, and very time-consuming and they typically strive to avoid it. Chinese companies tend to be reluctant to engage in serious good faith settlement negotiations for fear the opposing side will view their having done so as a concession that their position is not all that strong.

Often, Western companies will engage in months and months of settlement negotiations with the Chinese side barely budging and/or constantly changing its negotiating position. Eventually the Western company gives up and calls one of our China lawyers for help in deciding whether it should just walk away or pursue litigation.

Faced with these matters, our China attorneys typically do the following:

  1. Review all relevant contracts.
  2. Gather up all relevant facts.
  3. Research the Chinese company.
  4. Conduct any necessary legal research.
  5. Review the settlement negotiations. Carefully.

Items 1-4 above are going to look very familiar to Western lawyers, but item five less so. This is because, settlement negotiations in the Western world usually cannot be used as evidence at trial or arbitration, but this evidentiary exclusion generally does not apply in Chinese courts or before Chinese arbitral bodies. Because of this, Chinese companies will sometimes drag out settlement negotiations in an effort to get YOU to put forth even lower (or even higher) settlement amounts and then use YOUR lowest/highest settlement offer to argue that YOUR case is worth a lot less or a lot more than you are now claiming. They will also use your factual admissions against you.

Western companies tend not to be prepared for this and we constantly see them saying things in writing like “though we admit we could have been clearer in our instructions to you” or “we do not dispute that if we had spotted this sooner our damages would have been less.” Very roughly speaking, Western negotiators often use “win-win” tactics in an effort to meet their opponent half-way. Using this sort of tactic in trying to settle with a Chinese company can be dangerous. In Chinese Business Negotiation – Guarding Your Virtue, China negotiation expert Andrew Hupert extorts companies “to stop bargaining like an American and give away nothing for free”:

Are you a withholding, passive-aggressive manipulator who makes promises he can’t or won’t keep? Well, maybe it is time to start — at least in China. No one buys the cow when they can get the milk for free. In China, technology, IP and business methodology is the milk of profitable transactions. If you’re giving it away too early or too cheaply, then you are the expensive cow no one buys. Sorry.

*    *    *    *

Americans new to Chinese negotiation think they can build up a bank of good will and trust by “front loading” their benefit package. Novices think that doing business in China is about having Chinese partners owe them favors. They are kidding themselves — and forcing conflict. If the Chinese side of the deal feels that it is ahead of the game, their best move is to terminate the partnership and lock in their gains — not wait around for you to collect on what you feel is owed to you.

Hupert is correct. According to Hupert, Americans seek to demonstrate their good will be over-delivering, hoping to build up a goodwill bank that will be reciprocated by the Chinese side. The Chinese side often encourages this by talking up the importance of the relationship or by acting as though it really truly does want to resolve the dispute. I have found that Korean and Japanese companies value “the relationship” considerably more than the typical Chinese companies, but far too many Americans think China and Korea and Japan are pretty much the same on this, but they most certainly are not. Hupert explains China “relationships” in the real world:

Win-Win type negotiators often feel that the best way to approach a negotiation is to demonstrate their good will, trust and value by “over-delivering.” They feel that if they provide the Chinese side with what it wants now (technology, brand, product designs), that the Chinese side will feel obligated to reciprocate later (distribution, execution, quality control). The western side has read up on guanxi and harmony, and believes this is the way to develop loyalty and respect.

Hupert sets out five ways to protect yourself in and from China and the following portions of his advice apply to settlement negotiations as well:

  • Don’t project your desires on your Chinese partners. Find out what they really want. Assume nothing.
  • Know what you want. Withholding is easy. Knowing what you want from your China counter-party is tougher. Good negotiators in China are able to articulate a graduated list of goals and demands. Prepare for a “YES” when you negotiate.
  • Ask for a specific plan for your future together and negotiate the specifics of what the Chinese company is offering.
  • Walk away smiling, if you have to. Some Chinese negotiators are too grabby for your own good. Don’t stick around hoping things will magically get better on their own because they won’t. If a China deal is going to die, than quick and clean is the best way. Don’t hang around to get abused and battered, praying that they’ll eventually see what a great partner you could be. Get the hell out of there now.

Despite the long odds of settling with a Chinese company without first filing for litigation or arbitration, our China dispute resolution lawyers usually (but certainly not always) counsel our clients to at least try, but to be careful when doing so. Among other things, we urge them to do all that they can to protect the confidentiality of their settlement communications and yet still be mindful of every communication they send. Make clear on all your settlement communications that they are “Without Prejudice and for Settlement Purposes Only.” Doing this will make it less likely your communications show up at trial or arbitration, but it will not guarantee it. We also urge them not to move too quickly off their initial positions, unless and until they see real and permanent movement from the other side. We also work with them to help figure out when good faith settlement negotiations have ended and why at that point the risk of continuing to talk usually outweighs the possible benefits of doing so.

What have you seen when trying to settle with a Chinese company before litigating or arbitrating?

For more on negotiating with Chinese companies check out the following:

Sinosure, Leviton Law Firm, Brown & Joseph
Sinosure wants you

Sinosure and its US collection companies and law firms (mostly through Brown & Joseph and the Leviton Law Firm) seem to be stepping up their collection efforts against American companies that allegedly owe money to their Chinese suppliers.

First a bit of background on the Sinosure players that my firm’s international litigators see showing up again and again. I am providing this to give you background on how Sinosure typically handles its U.S. collection claims and on the people with whom you will likely need to deal.

The first to appear on behalf of Sinosure is usually an Illinois based company, Brown & Joseph. Brown & Joseph calls itself “a commercial and credit collection firm” and our clients pursued by Sinosure usually get an email from Brown & Joseph stating something like the following (I changed the company name and the amount to remove any identifiers:

Please allow this correspondence to serve as notice that this firm has been retained by China Export & Credit Insurance Corporation (Sinosure) on behalf of their policy holder Dongguan ________Sewing Machine, Ltd.

All further communications regarding this matter should be directed to my office.

The claimed amount of default is $345,862.23 in which the policy holder has now filed for credit insurance due to nonpayment.

Your immediate cooperation is needed to resolve this issue out of litigation. Pursuant to the attached Trust Deeds all rights have been assigned to Sinosure to collect this on their behalf.

Your failure to cooperate may result in future import and credit implications of goods from the People [sic] Republic of China.

With that being said, please review the attachments and acknowledge the invoices and amount owed of $345,862.23 for verification purposes.

In addition, I will anticipate your payment in full via wire directly to our firms [sic] escrow account. The wiring instructions are listed below. Please email me with the wire confirmation number and upon receipt I will confirm closure of this case.

Domestic Wire Transfer:

Routing Bank: First Bank & Trust, Evanston IL

ABA: 071925538

Account #: 4084168

Beneficiary: Brown and Joseph, LTD

If you are unable to remit payment in full, you will be required to contact me directly before the end of business tomorrow to discuss a reasonable payment plan for our client to review.

I look forward to your immediate response as I only have a limited time to resolve this file in my office prior to litigation.

This letter threatens both litigation against the U.S. company that allegedly owes money to a Chinese company and it also threatens to impact the U.S. company’s “future import and credit implications of goods from the People [sic] Republic of China.” I am not sure whether the threat to future imports and credit from China is deliberately unclear, but what Brown & Joseph seems to be saying here is that if you do not pay, Sinosure will cease providing insurance on your credit purchases from your Chinese suppliers. U.S. companies that buy products from China on credit need to take this threat very seriously.

Don Leviton seems to be the head attorney on Sinosure’s U.S. matters. Mr. Leviton’s Linkedin profile lists him as “counsel” to Brown & Joseph and also as a Principal at Atlas & Leviton. Here is Don Leviton’s profile on Brown & Joseph. Donald Leviton’s Avvo page lists him as a lawyer at the Leviton Law Firm in Hoffman Estates, Illinois. Here is what appears to be the Leviton Law Firm Website, but because it does not list any contact information nor any attorney names, it is possible this is not Donald Leviton’s law firm or that it was and no longer is. The Leviton Law Firm has this to say about commercial collections:

While not always possible, it was our philosophy and goal to negotiate amicable settlements and workouts between our clients and debtors in order that the parties may attempt to continue their business relationships in this very challenging economic environment.

Note how it says “it was” their philosophy. It’s not clear whether putting this in past tense is a typo, bad grammar, or if indeed its philosophy has changed. But I can tell you that from my firm’s dealings with Sinosure (when represented by Don Leviton or Leviton Law Firm or Brown & Joseph), I would use words like “relentless” or “unyielding” or even “tone deaf” to describe the philosophy of those who are tasked to collect a debt on behalf of Sinosure. I mention resolute and unyielding because it is difficult to impossible to get any monetary compromise and “tone deaf” because it is not uncommon for Sinosure to seek from foreign companies more than they appear to actually owe and then still not back down at all on the amount.

Elizabeth Dawson, who appears to be a Senior Account Executive, International Claims and Litigation, for Brown & Joseph seems often to be the first point of contact on a Sinosure collection matter. It is not clear whether Ms. Dawson is an attorney but I could not find an Elizabeth Dawson on Illinois’s roll of attorneys. Our clients pursued by Sinosure have also dealt with Michael Jones from Brown & Joseph, who also may or may not be an attorney. I cannot find information about Michael Jones online and so it is possible Michael Jones no longer works for Brown & Joseph and no longer represents Sinosure.

Brown & Joseph also seems to describe itself as a law firm and boasts of its international debt collection prowess and of its China expertise:

U.S.-Based Collection Law Firm.

Brown & Joseph, Ltd. is the leader in North American debt recovery for Chinese manufacturers who export goods all over the world. After 15 years of international recovery experience successfully handling cases for the groups that oversee credit insurance on exports, Brown & Joseph can offer significant resources that help to locate shipments, resolve disputes and gain immediate settlements, overcome language and cultural barriers, and recover money owed.

Our U.S. based firm has worked with many leading global trade credit insurers to reduce write-offs, protect their interests by legally securing debt in the local domicile, all while keeping your out of pocket costs minimal by working on a contingency basis. If there is no money recovered that is owed to you, there is no fee. Our contingency based fees for our recovery services (no success-no charge) apply the same to accounts whether the debtor company is foreign or domestic.

The #1 International Debt Recovery Agency in China

Over the past 11 years Brown & Joseph has come to be recognized as the #1 most effective collection firm recovering from U.S. businesses that owe international credit grantors….

Between China and the U.S., much like between any two countries, if you are not able to efficiently bridge [sic] gap between language and cultural barriers you will not succeed.  Brown & Joseph has succeeded. We currently have lawyers in both the U.S. and China and unlike most law firms, we perform all of our services on a results oriented contingency basis. We are only paid when we collect.

Am I the only one who finds it ironic that in the very sentence in which Brown & Joseph brags about being a bridge between language and cultural barriers it makes an obvious linguistic error?

What though should you do if Sinosure, Brown & Joseph, the Leviton Law Firm, Don Leviton, Michael Jones, Elizabeth Dawson — or, more likely some combination of these companies and people — are knocking at your door? There are many strategies you can employ but we are reluctant to reveal them online because we do not want to tip off the “enemy” to how we combat them.

I can though tell you that the first thing you should do is to make sure your intellectual property is in order in China, especially your trademarks. If Sinosure/Brown & Joseph/Leviton Law Firm/Donald Leviton/Michael Jones/Elizabeth Dawson are on your tail it is because a Chinese company is contending you owe it money. That Chinese factory is unhappy about not getting paid and one of the things it can (and often does) do to gain leverage against you is to register your brand name as its own trademark in China. If it does this, it will own “your” brand name as a trademark in China and this will allow it to stop your products from being made in China with your name on them and to stop products with your name on them from leaving China. See 8 Reasons to Register your Trademark in China. This sort of trademark usurping became so common in China it is now technically forbidden. Your factory company cannot register or hold your brand name as its own trademark. However, because pretty much every company in China is now aware of this prohibition, they also know exactly how to get around it. If you owe $345,000 to a factory in Dongguan, it will not register your brand name as its own Chinese trademark; instead, the owner of the Dongguan factory will get his cousin in Shenzhen to register your brand name as his company’s trademark, making it difficult to impossible for you to challenge it.

The best tactic is to register your brand names in China as a trademark NOW. See China: Do Just ONE Thing: Register Your Trademarks. And by now, I mean before Brown & Joseph or Leviton Law Firm demanding you pay Sinosure money you allegedly owe. But if you are too late for that and already in trouble with a Chinese company, if you act really quickly you may be able to preserve your name in China, but you need to be really careful. If your company is alleged to owe a factory company in Dongguan $345,000 and you have a trademark (or even a copyright or a patent) in China, those assets are sitting right there in China for seizure by whomever you owe the money. If a Chinese court enters a judgment against your company whatever China IP you have registered in your company’s name will be sitting right there in China available for seizure as payment of the judgment. What can you do to avoid this problem?

We have seen companies set up multiple companies with one of its companies buying products from China and another company owning its China trademarks. This can provide protection before you have a Sinosure debt collection, but if you are in the midst of such a problem the solutions get considerably more complicated.

The best protections against Sinosure are best enacted before you have a Sinosure problem. There are protections and defenses against Sinosure after it seeks to collect from you, but we cannot reveal those here because we do not want Sinosure and its minions to know what those are.

For more on dealing with Sinosure and China manufacturing disputes, check out China Sinosure: What You NEED to Know.

China lawyers
Hague Service of Process in China

Just read an excellent post over at the Letters Blogatory blog. The post is entitled Service of Process and the Unauthorized Practice of Law and it is on how service of process companies so often mess this up to the detriment of their clients. It also asks whether these companies are engaging in the unauthorized practice of law and hints that they are.

The post starts out talking about the lawyer-blogger’s recent experiences with international service of process botched by service of process companies:

I have come across several cases recently where a plaintiff, or more likely the plaintiff’s lawyer, had hired a “vendor” or a contractor to serve process abroad, and where it seemed clear to me that the “vendor” had given the client bad advice or where the vendor had not done a good job effecting the service. For example, I’ve seen vendors submitting requests for service to a foreign central authority and then, after the client asks why service hasn’t been completed, informing the client that service in the country in question might take a year. The client then moved for leave to serve by alternate means, which is perhaps what the client should have done in the first place with its money. Or else I’ve seen a vendor lash out at a foreign central authority’s refusal to execute a request for service rather than try to understand the legal basis for what the foreign central authority is saying.

Ditto for the international lawyers at my firm as we too have recently seen a quasi-onslaught of bad or delayed service of process attempts on Chinese companies. We typically see these sorts of things at about year one of failed service when the client-company  turns to its lawyer and says: “it’s taken more than a year and we are nowhere in effecting service, would you please find someone who can help us on this?”

The post then starts asking questions about whether these service of process vendors may be operating outside the law by practicing law without a license: “To what extent do the things we do in international service of process constitute the practice of law? Or conversely, to what extent are the “vendors” doing things they shouldn’t be doing unless they are lawyers?”

Good theoretical questions, to which I will eventually provide a very practical “answer” below. The post then posists how the serving of process is not the practice of law when it consists of little more than going to someone’s house and handing them court papers. I 100% agree because as the post notes, this does not involve any “real legal judgment.” But as noted in the post, “the decision of what form of service to use, especially in cases of service abroad, is most certainly a decision that requires legal judgment, at least in many cases”:

Suppose you say you want to serve via the foreign central authority. There are some logistical questions about how long the process will take, what fees must be paid, etc. But there are other more significant questions for the lawyer: Will the methods of service the foreign state is likely to employ satisfy due process requirements in the US? Does the case seek the kind of relief, e.g., punitive damages, or is it the kind of dispute, e.g., a tax dispute, that will lead certain foreign states to refuse to execute the request? And if you want to use an alternate method of service permitted by the Convention, similar questions arise.

To we China lawyers, the “money” portion of the post is when it discusses a vendor who spends a long time trying to effect service, only to mention after getting paid and after having submitted the service of process request to China’s central authority how incredibly long service of process is now taking on Chinese companies. See Serving A China Company Under The Hague Service Convention: Have Fun With That where we said service takes one to five months. Those were most certainly the good old days, however, as it is taking a year or more now. There is also the very real issue in any United States case against a Chinese company as to whether the case is even worth pursuing, because so often it is not. See China Enforces United States Judgment: This Changes Pretty Much Nothing

Now for my practical answer on the unauthorized service of law question. The real issue is not so much whether these service of process companies (which are typically great for serving process domestically) are engaged in the unauthorized practice of law or not. To me the issue is whether you as a company want to entrust your multi-million dollar (or even $200,000) case to a non-lawyer to figure out the best way to effect service that complies with the Hague Convention, the requirements of the court in which your lawsuit is pending and the foreign country in which the defendant is going to be served. And if you are a domestic litigation lawyer facing these same issues, do you a year down the road want to explain why you used what is essentially a specialized messenger service to effect complicated international service? I sure wouldn’t.

China arbitration clause
Oh no, yet another bad jurisdiction clause

Our China lawyers see a lot of contracts with China companies written by lawyers outside our law firm and by one of the parties themselves. We mostly see these contracts when someone writes us to see if they have a viable lawsuit against their Chinese counter-party. Unfortunately, it is the rare instance where their contract has set up the foreign company (usually an American or European company) for a good lawsuit. Truth be told, very few law firms know how to write good contracts for China and pretty much no non-lawyers do.

Typically, the most obvious and easily spotted flaw is in the jurisdiction clause and boy have we seen some doozies on that front, especially lately. Over the years, our China attorneys have dealt with the following, the facts of which have been modified so as to negate any possibility of anyone recognizing the specific matter:

1. Tokyo Jurisdiction. A company comes to us after learning its Chinese manufacturer has started producing for itself and selling (very successfully) the company’s newest version of its core product. I read the contract and one provision in particular to expressly state that any future iterations of the core product would belong to the Chinese company and I mentioned this to the potential client. The potential client then told me that when it had complained to its Chinese manufacturer about IP theft, the Chinese manufacturer cited to the same provision and said the product now belonged to them. Ugh.

To make matters worse, the contract called for all disputes to be resolved in “Tokyo Superior Court.” I asked the potential client how the heck it was decided Tokyo Superior Court would be the venue for any disputes and the potential client explained it as follows:

The Chinese company asked for disputes to be resolved by arbitration in Beijing and my lawyer said that we wouldn’t stand a chance there and so we refused. The Chinese company then proposed Singapore or Hong Kong arbitration and my lawyer countered with Tokyo Superior Court because it was the opposite [both with respect to the type of forum — arbitration versus court — and the location] as what the other side wanted.

Ugh. I then explained how no country other than China will allow for a lawsuit in its courts that has zero to do with its country and because this case would involve a US-based company going up against a China-based company on an issue with zero relevance to Japan, there is just no way a Japanese court will allow itself to be a free (or nearly free) public forum for this dispute. I did not even bother to mention that there is no such thing as the Tokyo Superior Court or that even if the US company sued in Tokyo, got its case heard in Tokyo (which will never ever happen) and then won in Tokyo, no court in China would ever enforce the judgment because the Tokyo court had no and should never have asserted jurisdiction. Ugh. The US company might be able to convince a Chinese court to take the case, but I doubt it, simply because China very much tends to enforce contracts no matter how silly they may be and I would guess most Chinese courts would toss the case for not having been filed in Tokyo as per the contract.

2. Toronto Jurisdiction. This is one of my favorites. I get an angry email from someone that essentially said as follows:

I read your blog regularly and carefully and you were wrong about Canada and that makes me wonder what else you have been wrong about. I read one of your posts where you talked about how you like to propose Canada for disputes because Chinese companies often will agree to that. Well the Chinese company we work with did agree to that but when it came time for us to actually sue them there, all of the Canadian lawyers told us that we couldn’t.

Future communications revealed that this company had — based on my having extolled the virtues of proposing Canada for arbitrations — believed it could list the Toronto courts as the jurisdiction for disputes between its US-based company and its Chinese counterpart. Just as would have been true in the Tokyo instance above, there is no way a Toronto court will hear a dispute between two foreign companies on a matter that has no relevance to Canada. Fortunately, the Canadian lawyers to whom this company went realized that and chose not to waste the US company’s time and money pursuing litigation there. I had to point out that we constantly emphasize that dispute resolution provisions must be fact and situation specific and that there is a big difference between what can be done in arbitration and what can be done in a foreign country’s courts. I didn’t — but I should have — point out the disclaimer here on our website:

The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice. By using this blog you understand there is no attorney client relationship between you and our law firm. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.

Ugh.

3. Split Jurisdiction.  We get this one fairly often. The contract provides that the Chinese company must sue the United States company in a U.S. court and the U.S. company must sue the Chinese company in a Chinese court. The thinking behind this is logical but its execution is so flawed that we avoid these provisions like the plague.

These provisions initially seem to make sense because this sort of split jurisdiction appears to greatly favor the U.S. company. If the Chinese company seeks monetary damages from the American company, it must go through the trouble of suing the American company in a U.S. court and, presumably, the U.S. company will get a fair trial there. And on the flip side, the American company can sue the Chinese company in a Chinese court, which is (90 percent of the time, anyway) exactly where the U.S. company should want to be. For why this is the case, check out China Enforces United States Judgment: This Changes Pretty Much Nothing.

But there is a giant flaw to the above analysis. Chinese courts typically hold that this kind of split jurisdiction means there is in fact no jurisdiction in China, so you really want jurisdiction in China, your agreement should  be 1) be governed by Chinese law, 2) be written in Chinese and 3) provide for exclusive jurisdiction in China. This is not black letter law. This is just what actually happens on the ground in China and this is why our firm’s China attorneys provide for all three of these in all contracts where it is critical our client have the right to sue in China.

But once again there is no clear answer as to what might be best for any given company’s specific situation. To properly evaluate whether you go with Chinese law in a Chinese Court (which is what we nearly always end up choosing to do), you need to consider your most important concerns. Is it more important you have an effective remedy against the Chinese company with which you are contracting or is it more important you make it as difficult as possible for the Chinese side to sue you? If your primary goal is to be able to enforce this contract against a Chinese company, you should provide for exclusive jurisdiction in China and Chinese law should apply and the contract should be in Chinese. But if your primary goal is to prevent the Chinese side from suing, you should provide for exclusive jurisdiction in the United States. But if you do this, you must realize that because China does not enforce U.S. judgments, the U.S. agreement will  be useless as a means of enforcement against the Chinese party. It is these preferences that should help decide the best jurisdiction provision for your contract. In any event, the split jurisdiction approach generally does not work.

This is all a very difficult and must be considered carefully. There is no simple answer. A hard choice has to be made. The first thing I look at when someone shows me an agreement is its jurisdiction provision. In most cases, the US lawyer has screwed up and made it impossible for the US company to enforce the contract and that stops things right there. We must avoid that result if the client in fact wants to enforce in China. If, however, this is that rare instance where the client is only concerned about preventing a lawsuit, a US jurisdiction clause with a US choice of law provision would be fine. In that case, a Chinese version is not required, but I still recommend it because at least then the Chinese counter-party will be able to understand it fully and that alone is important for making sure that it and our client are on the same page before they start doing business with each other.

4. Geneva Chamber of Commerce Arbitration. A very good existing client of ours came to us with a contract calling for arbitration before the “Arbitration Institute of the Geneva Chamber of Commerce.” Problem was that the Geneva Chamber of Commerce neither had an Arbitration Institute nor did the Chamber handle international arbitration. In this case, our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce (at least I think that was what it said), which at that time (and today) was a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the disputes handled in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. Back then, the Geneva Chamber of Commerce did no arbitration. Zero. So when it came time for my client to pursue arbitration my firm’s arbitration lawyers had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, figuring we could argue that is what the parties meant and that arbitral body would want to keep the case. The opposing side vigorously contested our choice of forum and only many briefs and many dollars later did we prevail.

5. South Carolina Arbitration in Chinese Under British Law. Yes you read it right and if you are not stunned by this, you should read it again. This is my all time favorite. U.S. company comes to us with an arbitration clause mandating arbitration in South Carolina, in Chinese, under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and the need to use two lawyers (one who is experienced with arbitration and another who is fluent in Chinese) and the added costs of researching and arguing British law, the U.S. company — wisely — chose not to pursue the case. When I asked the company how they came up with such a provision they explained that they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that  can make sense, but such a provision is a disaster if you are the one that ends up needing to sue.

Bottom Line: Jurisdiction clauses in international contracts are complicated and important and there is no one size fits all.

China employee litigation
China litigation: there be wolves out there.

A loyal reader sent me a Bloomberg News article, titled China’s Grocery Trolls Make Giant Piggy Banks of Wal-Mart and Carrefour. The article was how grocery “trolls” purchase food from China’s large grocery store chains, knowing the food does not comply with China’s Food Safety Law. The buyer of the out of compliance food then sues the grocery store chain for ten times the purchase price and, apparently, usually wins:

Xue Yanfeng went shopping in a Carrefour SA supermarket in western China in May 2015 and bought 20 bottles of honey for a total of 892 yuan ($134). He then left the supermarket with his groceries and sued the French company. In court filings, Xue alleged the nutritional labels said each 100-gram serving contained 1,326 kilojoules of energy. But, according to his calculations using nutritional data on the label, each serving contained only 1,102.

Xue, who couldn’t be reached for comment, argued that the error violated China’s Food Safety Law, which guaranteed him compensation of 10 times the purchase price. The Xinjiang court agreed, and a week after his purchases it awarded him a refund of 892 yuan and compensation of 8,920 yuan.

That was one of 40 lawsuits Xue has filed against supermarkets and retailers for violating the Food Safety Law since late 2015, when China introduced a strengthened version to tackle the country’s well-publicized food safety woes. The new version removed a clause in the previous law that said victims must prove personal injury or loss to be eligible for compensation. The change has spawned a cottage industry of professional complainers who’ve developed sophisticated operations to challenge food manufacturers and retailers for compensation.

I immediately thought of California’s Proposition 65, which is constantly snaring unwary businesses for failing to provide adequate notice of the potential harm their products may cause. Ironically, Chinese companies are prime targets under this California law because they so often are unwilling to pay lawyers in drafting the required notices.

I then thought of the similarities between California’s and China’s employment laws, both of which are also classic traps for the unwary. Years ago a very large Chinese company sought help from my one of my firm’s California lawyers in drafting a settlement agreement with a soon-to-be terminated California employee. We quoted a very low fee (these agreements are a piece of cake) but the Chinese company thought it too high so it pushed on by itself. A month later, the Chinese company called us back, this time to retain us for sure. It turned out that the by-now terminated employee knew California law and that his settlement agreement did not comply with one certain provision in that law. So even though our client had paid him $100,000+ as a severance and unpaid commissions, he was now suing them for $50,000+ in unpaid commissions, plus his attorneys’ fees. Our client had zero chance of prevailing in this lawsuit and it settled quite quickly for the full $50,000+ and it also had to pay its attorneys fees, which were at least five times higher than they would have been for us to draft the simple settlement agreement, correctly. NOTE: I have changed the facts of this matter so as to remove any possible identifier.

We see this same sort of thing on the China employee front as well. See China Employee Termination: Avoid These Mistakes and China Employee Terminations: Don’t Get Lazy. Just as in California, there are a boatload of China employees who will agree to a termination or other settlement (either in writing or orally), get paid under the settlement and then walk down the street, retain a lawyer and then sue (with really good cause) for more.

This happens with Sinosure matters also. See How to Survive Your China Manufacturer Dispute. Sinosure Too. A foreign company  allegedly owes money to a Chinese manufacturer and Sinosure (China’s export insurance company) comes calling to collect. The foreign company then contacts its manufacturer to resolve the matter. The Chinese manufacturer and the foreign company orally (or via an ineffective writing) agree to resolve the matter with the foreign company usually paying anywhere between 70 to 90% of what is allegedly owed. Then when Sinosure calls again, the foreign company explains how the matter has been resolved and Sinosure essentially says, like hell it has.

The other day a British company wrote me after having fallen for a fake settlement with its manufacturer for the second time in the last year. When I essentially chewed them out for having messed up once and then instead of seeking legal help the second time, merely “doubling down on their initial mistake,” their response was to say that “obviously foreign companies cannot get a fair shake in China, where it would seem everyone is out to rip you off.” I respond to that comment now (because there was no point then). Not exactly. If you are going to do business in China it is incumbent upon you to know the laws and if you do not know the laws to get help from someone who does.

Yes, doing business in China is difficult and its laws are complicated, but that is true of pretty much every country I know. Be it California or China, it’s on you. People the world over — and that most certainly includes China — are ultra-litigious and that is not going to change soon if ever. Your defense to this is to know the laws and abide by them, to the letter. Saying that the laws are difficult or that there are bad people out there does not cut it and you ought to know that. Oral agreements in China are not worth the paper on which they are not printed and written agreements drafted by anyone not experienced with Chinese language contracts have no greater value.

You have been warned (yet again).

China lawyerWay back in 2008 I wrote a post immediately after one of my firm’s lawyers returned from a federal court hearing where the judge essentially said — near as I could tell without any basis in law — that service of an English language only complaint on our client was valid even though she did not speak a word of English and even though the Hague Convention rules on service of process for that particular country explicitly stated that the complaint needed to be translated into her native language. In that post, which follows, I raged (well for me it was raging) against a US legal system that fails to sufficiently account for foreign law.

This post is on private, not public international law. That means it has little to nothing to do with such hot button issues as the United Nations, the Kyoto Protocol, or the International Criminal Court. This post is on how American courts deal with business cases involving foreign parties and foreign or international law as that law applies to such cases. No more, no less.

Many years ago, I was representing a Canadian-Australian manufacturer in a big case down in Texas along with two truly excellent Dallas litigators. At some point in the case, I had the “brilliant” idea of arguing that US Federal law had preempted Texas state law, mandating dismissal of plaintiff’s claims against my client. We settled the case before the court could hear our preemption argument, but I still remember the half-joking advice I received from Texas local counsel. It was something along the lines of, “forget about federal law, this is Texas; we don’t recognize federal law down here.”

I am beginning to wonder about the willingness of US courts to apply foreign or international law, even in those instances where US law calls for such application.

In a few months, I will be in Las Vegas (I count myself among the people who love Vegas!) speaking on the Hague Convention rules on Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, as they apply to Chinese companies. Based on my firm’s experience with getting US courts to recognize international law, I am sorely tempted to just say something like, “forget about international law. This is the United States. We don’t recognize international law here.” Go ahead, just stick your summons and complaint in a bottle, throw it in the ocean, that ought to be enough for you to get a default judgment anyway. And since China never enforces US judgments anyway, why does it matter?

I am sure my speech will be a bit more nuanced by the time I get there, but you get the point.

For at least the third time (two times is coincidence, three times is a trend), a US court has allowed a case to go forward against a defendant despite the plaintiff having clearly failed to abide by the Hague Convention Rules on international service of process. The most recent instance is in a still pending case so I cannot go into the specifics on that one.

Virtually every time we have sought to get the US courts to enforce the Hague Convention or even, in one instance, when we sought to get a US court to pretty much ignore the Hague Convention, the US court has seemed perfectly willing to rule as though the United States has no obligation to abide by a treaty it signed. I have a strong sense US Courts (both state courts and federal courts) will not enforce the Hague Convention’s technical service requirements (including that the summons and complaint must usually be translated into the language of the country in which it is being served). Oh, and getting a US court to throw out or stay (delay) a case so that an already pending case in another country can be decided first — forget it. My conclusion is that US courts are happy to ignore foreign/international law in favor of handling things under US law, whether US law should apply or not.

Since writing the above, our firm has had a Federal Court ignore Australian law in a case without even deigning to explain why and a state court refuse even to consider delaying the US action based on an already pending case in Spain, and get mad at our lawyers for even making the request!

US court judgments are rarely enforced outside the United States and one of the reasons given for this is the failure of American courts to recognize foreign law. Our foreign clients — international businesspeople from countries like Australia, England, Spain, and Germany that are not generally anti-American — are complaining more and more to our lawyers about US courts “think they can ignore the rest of the world.” Add in a President whose response to countries beyond our borders is a big FU and low-life neo-nazis marching in our streets with torches, and you can understand why so many of my non-American friends have been asking if I am concerned about the United States’ standing in the world and the impact all of this will have on our legal system.

My answer is yes.

Strangely enough, I recently thought through much of the above when analyzing an intellectual property matter on which I worked. The matter was for a European company looking to sue an American company under Chinese law in a United States court. (Please nobody ask me to explain either how the parties got into this situation nor why this contortion was even being considered.) What struck me was how despite all of the things about which I wrote above, my opinion to the European lawyers was that if they were to pursue litigation in a US court they could excpect the court to abide by the law, and since the law was clear (and did not really involve court power as did the cases above), we could expect it to apply Chinese law.

I guess I am standing on history (at least that of the U.S. legal system) for now.

Your thoughts?

Chinese lawyers
Just say no to Hong Kong jurisdiction.

Hong Kong courts are world class and few foreign companies would not rather have their disputes against their Mainland China counter-parties resolved in Hong Kong as opposed to in Yiwu or in Harbin. Hong Kong as the jurisdiction of choice is very alluring. But for all sorts of reasons, it’s a trap.

Let me explain.

Back in 2008 China and Hong Kong entered into a reciprocal enforcement agreement to make judgments from Hong Kong courts enforceable in China, and vice-versa. Foreign lawyers (usually those not experienced with China contracts or China courts) see this and think having their clients disputes resolved in Hong Kong is the way to go. But as is so often true of China, what is on paper does not correspond so well with the real world and most of the time calling for disputes with Mainland Chinese companies to be resolved in Hong Kong is a terrible idea.

Consider a contract between a U.S. technology company and its PRC licensee. [Though our example is of a U.S. company, what we say below holds true for nearly all Western countries/companies as well.] The U.S company seeks to avoid Chinese law by providing for English as the contract language, U.S. law as the applicable law, and enforcement in a U.S. court. The Chinese side refuses and insists on the opposite: Chinese language, Chinese law and enforcement in a Chinese court. As a compromise, the U.S. side proposes the following: English language, Hong Kong law and enforcement in a Hong Kong court. The Chinese side readily agrees and the contract is signed.

Why did the Chinese side agree? It agreed because it knows this “compromise” has created the worst possible situation for the U.S. company. The contract is NOT enforceable against the Chinese company, so the Chinese company is off the hook for any liability. On the other hand, the contract IS enforceable against the U.S. company, giving the Chinese company substantial power in the event of a dispute. The U.S. company has placed itself in the worst possible position. I have Chinese lawyer friends who brag about setting up foreign lawyers with this “trick.”

There is though a chance both parties will be disappointed because there is a risk the Hong Kong court will refuse to hear the case because the matter has no connection to Hong Kong. Remember that Hong Kong is an entirely separate jurisdiction from China. For this reason, a contract between a U.S. company and a Chinese company governing conduct that will occur in the PRC has no connection to Hong Kong. It is therefore entirely possible the Hong Kong court will refuse to further crowd its docket and will simply refuse to hear the case.

But let’s just assume the Hong Kong court hears the case and renders a judgment. What then will happen? If the Chinese company is the plaintiff and if it prevails, its judgment against the U.S. defendant will be easily enforceable in the United States against the assets of the U.S. company. Hong Kong is a common law country with laws and legal procedure based on the laws of England. U.S. courts regularly enforce such common law judgments and the odds are overwhelming they would do so in this situation as well

But If the plaintiff is the U.S. company and it prevails and then seeks to enforce its Hong Kong judgment in the PRC, the situation is quite different. On the surface, it appears enforcement of the judgment should not be an issue under China and Hong Kong’s  reciprocal enforcement agreement of 2008 which on its face makes judgments from Hong Kong courts enforceable in China. However, Chinese courts regularly ignore this statute by not enforcing Hong Kong judgments.

Chinese courts avoid enforcement in two ways. Sometimes they simply refuse to act. They do not openly reject the demand for enforcement. They instead accept the demand and then do absolutely nothing. This is the most common technique.

The other approach is to find technical reasons to reject the demand for enforcement. Usually the Chinese court will reject the Hong Kong judgment based on a claim that award was based on grounds that violate Chinese public policy. Since Chinese civil law and Hong Kong common law come from an entirely different legal background and legal procedure, it is generally easy for a Chinese court to find a public policy issue.

Often, the Chinese party will not appear in the Hong Kong action. In this case, the U.S. side will obtain a default judgment. Like many Asian courts (and European and U.S. ones as well), Chinese courts are reluctant to enforce any form of default judgment. When the default judgment is from a foreign jurisdiction, the likelihood of enforcement is very low. Knowing this, good Chinese lawyers instruct their Chinese clients not to appear when sued in Hong Kong.

As noted above, a contract between a Chinese entity and a U.S. entity has no factual or legal connection with Hong Kong. Chinese law allows the parties to a contract to chose the applicable law, but when the parties choose a law with no connection to the underlying transaction, Chinese courts typically deem this to violate public policy.

Whether the Court issues a written ruling or simply does nothing, the effect is the same: no enforcement of the Hong Kong judgment against the Chinese party defendant.

So what this all means is that by writing a Hong Kong jurisdiction provision into the U.S. company’s contract with its Chinese counter-party, the U.S. company (or its lawyer) has placed itself in the worst of all positions. First, it must convince a skeptical Hong Kong court to hear a case with no connection to Hong Kong. And since Hong Kong has a loser pays system, the U.S. company usually must post a substantial monetary bond to cover the risk that it will not prevail on its claim. Then it must pay the very high attorneys’ fees and court costs demanded by the excellent Hong Kong legal system. Then it must wait as the Hong Kong court takes what can be a substantial period of time to render judgment when the facts and parties are all foreign to Hong Kong. Then, if and when it finally receives its Hong Kong judgment, the U.S. company will likely learn the hard way that its judgment has no value since it is not enforceable in China. Or even worse, the Chinese party prevails on its counterclaim and the Chinese party is free to enforce its judgment against the American company in the United States. And to top it all off, the U.S. company loses its bond, which goes to pay the Chinese company’s legal fees.

Hong Kong as the jurisdiction for disputes with Chinese companies? Great on paper, but really bad in real life.