I am tired of feeling bad for people/companies who call or email me to say that they just bought this or that from China and they did not receive it or what they received is not even close to what they ordered and paid for.  Happened to me twice yesterday:

  • Restaurant owner in the Midwest bought two kitchen machines from China for about $15,000 for the two of them.  Why?  Because according to him, the same machines cost around $30,000 each in the United States.  The machines he received did not work at all.  Not at all.  Neither of them.  His requests to the seller to fix them or to accept a return were completely ignored and he wanted to know what my law firm could do to help.  I told him pretty much nothing other than to write a letter in Chinese threatening to sue the offending company in China, which letter would almost certainly be ignored.  He asked about suing in China and I told him that to do so, he would need to find a Chinese lawyer to take the case in the somewhat remote city in which the Chinese company is based and then he would need to pay that lawyer, along with the court filing fees, and who is to say that he would win in any event?  And then if he does win, how will he actually collect on the judgment?  He asked whether there is some sort of law in China mandating that companies accept returns.  I told him that I was not aware of such a law, but that even if there were such a law, why should his Chinese manufacturer follow it? We ended the conversation with him saying that it would have been cheaper in the long run for him to have just bought the machines in the United States and with my agreeing with him.
  • Retailer in the Midwest (pure coincidence) bought $23,000 of allegedly ceramic dish-ware, only half of which ever came and all of which was low grade plastic.  Again, I had to tell the caller that it would not make sense to pay my firm anything to assist in what would almost certainly be a fruitless exercise.  This person ended the call by saying she would never buy from China again.  My reaction to that was to remain silent.

If you are going to be doing a one-time China product purchase (really not just from China, but from anywhere) without due diligence and a contract, you should know that what happened to these two companies could very well happen to you and that your recourse will be limited, at best.  And if you are going to be doing a one time product purchase from China of an amount that does not warrant your engaging in at least some due diligence regarding your seller and/or in having an enforceable contract drafted, well then maybe you should reconsider.

Cause if the deal goes bad and you call me, I won’t have much to tell you.

Just saying….

Had lunch the other day with two friends of mine here in Seattle.  One of these guys has been sourcing product from China for about 30 years.  The other has been working with big companies in Asia (mostly China) for about 30 years.  We talked China pretty much the entire lunch.

At one point the sourcing guy asked me what I do for companies that have received bad product from China and are not getting any recourse (or are just being told that they will get a 5% discount on the next order, which is essentially the exact same thing).  I grimaced and explained how only a few hours earlier, I had received an email (from an Eastern European company) asking me essentially that very same question.  Here’s the email, with any possible identifiers having been changed:

Hello,

I’ve been working for a Company “LC” Ltd. and my boss asked me to write a claim against a Chinese company. We have bought ________, last Invoice 08/12/2010. Unfortunately, they didn’t supply us with spare parts (promised) and then disappeared. I have written a claim to China Chamber of Commerce – no answer was received. Your advice? The company name is __________, Email: ________ is not responding. So our losses are approximately more than 20 thousand USD, because 35% have been repaired on a guarantee.  Our company have been successfully in the market of ______ for ______ years and this case is spoiling our good reputation.

Thank You,

I responded as follows:

I am sorry this happened to you, but unfortunately, there is typically not much (if anything) you can do in this sort of situation.  You could try hiring a Chinese law firm in ______ [the town where the company was once located] to see whether the company still exists and to assist you in undertaking a cost-benefit analysis of suing it.

Dan

Man, I hate these situations.  I do not have enough information to just flat out tell the person who emailed that her company has no chance or that it should just give up now. I mean it is possible that the Chinese company is thriving and hiring a Chinese lawyer will immediately get this Eastern European company paid, simply because the Chinese company would rather just pay than fight a lawsuit.  But that is very unlikely.  What is more likely is that the Eastern European company will pay a Chinese law firm to pursue the Chinese company and that it will eventually be determined that the contract between the Eastern European company and the Chinese company is not strong enough on which to sue in this type of case.  Pretty much all of the contracts we have seen involving small companies buying small amounts of product from China are not written to provide the buyer with a good chance of prevailing in such a case.  In fact, most of the time, these small companies do not have any contract at all; they have been buying the product strictly via Purchase Orders.

As for contacting a chamber of commerce or a consulate, I have never heard of either of those things achieving results in this sort of situations.

So what is a company in this situation to do?  Just walk away?  What have you seen out there?  What would you do?  What do you suggest?

Many months ago, a veteran China hand responded to one of our blog posts by writing me with his own story of China problems. I found his story both typical and fascinating and sought his permission to run it.  He gave me permission and then I promptly lost it in the shuffle until now.  Though the writer of this story would probably disagree with me, I see the story as revealing two main takeaways for doing business in China.  First, get everything in writing, in Chinese and in clear and excruciating detail. Two, figure that your relationship between you and your Chinese partner will change and that your great relationship now could be a very sour one later.  Which gets us back to why the first takeaway is so important.

Here’s the story:

I started coming to China from Australia in late 2006 to find a company or companies to process wood flooring products that I had been marketing in Japan for over ten years.  My going to China was driven by rising costs and my firm’s view that the Australian dollar would strengthen as the mining boom accelerated.

I quickly found that it was not a matter of negotiating a deal, putting it in writing and heading off over the horizon to market my competitive advantage.  I was soon pinned down in various factories making sure that my material was not turned into boiler fuel.  Timber is a not a complicated business, but it does require systems and a great degree of care, but here there was a great void in most cases between the tea drinkers in the office and the ordinary workers who were generally farmers with no idea how a factory should work.  Systems, management and QC were no more than marketing slogans (along with win-win).  Even when the Chinese company appeared to be modern and prosperous, a few days on site quickly left one disillusioned — yet another lemon.

After a year or so, and half a dozen or more factories, I decided that, in spite of the obvious challenges, I would be better off doing this on my own in my own factory. No doubt I did everything wrong in terms of how I went about finding information and setting up a WOFE, but with the help of the local government I managed it without major hassles and even after almost five years there have been no significant problems associated with this.  I figured that if I had the support of the local government I would not be kicked out and having learnt a little of how things work I also thought that problems could be ironed out one way or another and would probably cost me no more than had I enlisted expert help.  I can hear Dan grinding his teeth from here, but small-time entrepreneurs have a different view of risk and opportunity.  With more to lose I would certainly have gone about things in a more orthodox way.

My big problem had nothing to do with this. It started the day in December 2008 when I found my bank account frozen.  There was no notification and no immediate explanation from the bank in response to our phone calls.  After a couple of days in limbo we received a letter from the local city court advising that we were being sued for failure to pay a debt.  The lights came on.

I had been doing business with a local company and was on good terms with the owner until a few months earlier.  When I was setting up in mid-2008, I asked his advice on some second hand equipment that I was intending to buy.  He was about to leave for Vietnam and so suggested he look at it when he got back, which was fine with me, but on his return he offered to help me to purchase and install an entire production line because a factory had gone belly up in Shanghai.  This seemed to be a good idea, provided the equipment was what I needed. He claimed to have seen the equipment and said that it was only six months old.  He would talk to the factory and get a price when he was next in Shanghai.  I said that I would not buy anything that I had not seen, but he responded that if I were to turn up with him the price would undoubtedly be higher.  I would not have agreed to this except that he assured me that if I did not want it he would take it himself.  All he needed was a returnable deposit of 30% from me and I would get the choice.  I did not think that he would renege on this as we had been friends for over a year and a half and had conducted regular business, worth about $25,000 per month, and he had always kept his side of the bargain until that point.

We put everything in writing and I was intending to get it drawn up into a formal contract. I did it up as a quasi-legal document based on my limited legal knowledge from a previous life.  I was very clear about the deposit being returnable without conditions.  We both signed this document (which was in Chinese) and I had my translation as well as a detailed appendix of the equipment with a break down showing the value ascribed to each item. (Hold this last thought).

The deal was good and the equipment, if as described, would have served my purposes well, but when it was delivered, there had been a few changes. He explained to me that the Taiwanese sander on the list was not as good as he had thought and so he had substituted a better one.  I was beginning to feel that things were going pear shaped.  If he had seen the equipment, why was it no longer good?  (I learned later that the “bad” sander had been delivered to his factory and he had given me his Chinese one worth about 20% of the price.)

I went to check the machinery the next day, but it was difficult to see in the unlit storage area and it was covered in dust.  Half the equipment was absent and it turned out that there was a second truck that went to another location, which in retrospect was to drop off some bits of equipment that my friend thought were superfluous to my humble requirements.  The next day more equipment was delivered, but a major component, the dust extraction system, was not among them.  I was told it was big and awkward and would be brought over later when we did the installation and set up.

There was a two month delay in installing the equipment because the local authorities in the industrial park had run out of money and could not afford to connect the power.  Hmmn.  In the meantime, while I patiently watched several revised deadlines float by, Lehman Brothers collapsed.  That was of course before my troubles started and, although worrying, did not seem to be a show stopper.  Perhaps it should have been, but it was too late anyway.  I had contracted with the factory and had all this equipment ready to go in.

Finally in October we got power on in the factory and could now install the equipment.  At this point my benefactor explained that the dust extraction system would not be good enough for my factory, which was in an industrial park with relatively high environmental standards.  He deducted a trivial amount from the contract, equivalent to one eighth of the amount noted in the annex.  The explanation for this was that it was a “package price” and the individual prices were just rough numbers.

I was shocked and realized that I had been stitched up.  The equipment, now that it was in the light and cleaned up, was not six months old, but four years old.  I immediately went to see my former friend to get an explanation and to ask him either to reduce the price drastically to reflect what I had received or to take it all away. He was calm in the face of my obvious anger and anxiety. He explained to me that it would all be fine and that everything would work.  It was like a car, the outside might not look so flash, but it would still get me from point A to point B.  I countered that I had paid for a six months old Mercury and had received a four year old Volkswagen Santana and I did not want a Santana.  My customers would not want a Santana either.  They would expect to see good quality equipment with very fine tolerances, not a bunch of old crap.  I said I wanted my money back, to which he responded that I should have done this in July when the equipment arrived.  But there was no such condition. The equipment was to be delivered and installed and I had the option not to accept it.  It was unequivocal.  He then said that he would finish the installation and I could see how it all functioned.  I said that was not going to change anything.

Incidentally, concerning the age of the equipment, the English version of the contract said it was six months old, but the authentic version, the Chinese, said it was used for six months. This should not matter because normally equipment that is six months old is used for six months, but when it is four years old, there is no way to prove that it had only been used for six months.  The clock on one key machine showed that it could indeed have been used for six months if it had been run 24 hours a day for six months with no shutdown.  In reality, the clock showed that it had been operated normally for about three years.  I asked him why he did not tell me it was four years old.   He said it was good enough for my factory and he did not think it was an important fact.

To install the line, I now needed to buy a dust extraction system and so I contracted with a company to provide a new one with a high specification that would do the job whatever equipment I finally ended up with.  The line was duly installed and we did some test runs. There were various problems, but he had people come in and patch these up.  I was not happy, but believed at this stage that the best solution was to negotiate a new price, use what was acceptable and buy replacement machines where necessary.  So we started operating, using equipment that got me from point A to point B, but that was not a long-term answer.  I let him know that I would not pay another cent and that he could come anytime and take the line out. It was a gamble, but I figured he knew he had done the dirty on me and he would just opt for what he could get.

Over the next month or so we had a few meetings but it was a stalemate.  I had the equipment and he had my deposit and it was in my view a reasonable deal, so I had no intention of budging.

In November things got ugly.  He sent me a message through one of his staff asking me when I would pay the balance.  I was astounded that he still expected payment in full, less about RMB10,000 for the dust extraction system that was supposedly valued at 80,000.  He simply pretended that all the other issues were irrelevant and that the contract amount was still owed. Given that I was still doing other business with him, I decided that it would be better to settle provided the amount was not too silly.  I went back and made an offer to him that I thought was far more than fair.  I wanted a three month warranty in return for this additional cash. I was prepared to put this new offer in writing and to pay it at the end of the three month warranty period.

Soon afterwards the proverbial shit really did hit the fan.  The last container that I had purchased from him had just arrived in Japan and I had paid the balance, but now he refused to release the container.  This was a real shock.  Talk about dirty tactics.  The companies involved were unrelated to this dispute and the true victim was my Japanese client, who was an innocent bystander.  I could not draw him into this so I had to get an immediate release.  I sat down with my lawyer and hurriedly finalized the new draft contract.  At this point my good will and desire to resolve this in good faith had completely evaporated.  I explained to my lawyer that I needed an out.  I wanted the contract to say that I would pay in full once the conditions of the contract had been fulfilled, knowing that they could not possibly be fulfilled.

We signed this, I smiled and shook hands politely and he duly released my container.  I knew full well that the shit would really hit the fan now because he would be utterly incensed when the time came and I refused to pay.  But to involve my Japanese client in this dispute would have been a cardinal sin.  He accounted for about one-third of my business at that point and if he were to discover the mess I was in it would have been a disaster.  If he had walked, we may as well have shut up shop.  He never did find out and we survived to fight another day.

Roll forward now to December and my frozen bank account. He sued us for failure to pay up. We sued him for breach of contract.  The senior judge was an old mate of his, but the guy handling the case was straight.  He made quite an effort. He came out to see the equipment and took pictures of all the manufactures’ plates.  He seemed to be very fair and sympathetic. I had enlisted help from an old colleague who headed an Australian Government agency in China.  His appearance on the scene seemed to up the ante a bit and there was a lot of rushing about between offices and then a delay in the hearing.  A new date was set and we duly appeared, but our adversary did not.  He sent a young lawyer who struggled with the details of the case.  He simply did not know, but that was no matter.  The deal had been done before the hearing.  The judge had a quiet word with my lawyer and advised us to withdraw our suit and to settle out of court.  A very modest amount of RMB40,000 was put forward and I immediately agreed.  This was far less than I had offered in my earlier proposal before the container release problem came up.  The costs in the case would be split, but I would not get a bill.  (That sounded good.)  However, if I insisted on pursuing the case, I would win, but only temporarily.

The judge explained to my Chinese lawyer that his boss was the senior judge who would get to hear any appeal.  He was the guy I got introduced to when my old colleague came up to support me.  He avoided eye contact with me and I knew where he stood. The best thing to do was to pay this small amount and put it down to experience.  I paid immediately and my bank account was soon unfrozen.

It was a salutary experience.  It was also exhausting at a time when I was not in a position to be taking my eye off the main game.  It was also surreal.  I had a morbid fascination with what was happening to me and a sense that I was seeing behind the curtain to the workings of the system, if it is a system.  If there is anything that I take away from the experience it is that playing a straight bat here is not necessarily going to do you any good.  At the same time I still think that one needs to go into things sincerely, but be aware that this attitude is unlikely to be reciprocated.  A lot of small time entrepreneurs here got to where they are by being street smart.

In an apparent paradox, I still believe that my erstwhile friend did not set out to screw me. There were communication issues and I admit that I should have been a lot tougher from the outset, but I think that what happened was what always happens here.  Circumstances change, good intentions are forgotten and greed prevails.  Rationalization ensues. There is no paradox, because here a deal is never a deal. I believe that when he saw the equipment some of it was very good, indeed it was too good and I was getting too good a deal, and he really could use that sander and a few other bits and pieces.  I was rich and I could afford to pay anyway. Swapping them with his was not cheating me because I had not seen it. His equipment would do the job and I would get over it.

So good luck fellow travelers.  I wish you luck!  Keep your wits about you.

Oftentimes, when business negotiations start stalling between my firm’s client (typically an American company) and their Chinese counter-party, our client asks us to step in. They sometimes think the problem is linguistic and they think that one of our Mandarin-speaking attorneys can solve that problem by talking directly with the Chinese company or with the Chinese company’s Chinese attorney. Other times, we are asked to step in to explain to the Chinese lawyer on the other side why his or her client just doesn’t get it.

We typically refuse and explain why doing this does not usually make sense in the context of China business transactions.  I recently explained to a client why this is the case:

Our contacting the Chinese company’s lawyer would be viewed as bad form in China and it also is very unlikely to advance anything in this matter.  Lawyers in China simply do not play the same role in deals as lawyers do in the United States. Chinese lawyers generally do not have very close relationships with their clients, who view them as little more than technicians who write up what they are told.  This being the case, we are concerned that if we contact the Chinese company’s lawyers, the Chinese company (and their lawyers) will view you as not taking the deal as seriously as you should. We are also concerned that they will view our stepping in as a lack of trust by you towards them and maybe even as your questioning their competence. On top of that, Chinese lawyers keep things close to the vest and when we do talk to them they usually say nothing more than that they have to talk to the client.

Deal points are nearly always handled client to client in China, not via the lawyers and this is true of in-house lawyers as well.  Though it is often useful for us to talk to in house/outside counsel when it is a question of how to draft a provision to which the business people have already agreed, it is virtually never useful for us to initiate such contact when there is no agreement, when there is on-going negotiation or when there are open issues or concerns. Those sorts of things need to go through proper channels as determined by the business people. Chinese legal staff usually do not participate in negotiating contracts, which are viewed as a business issue. The best way to handle these things is typically via an email from you the client.  The Chinese tend to prefer writings over oral communications in any event, because their written English tends to be much better than their spoken.

In other words, it usually makes sense in a China context for negotiations to be business to business, not lawyer to lawyer or lawyer to business.

Enhanced by Zemanta

Interesting article in the most recent issue of James Zimmerman’s monthly newsletter.  Zimmerman authored the truly first-rate (and comprehensive) China Law Deskbook. If you are going to buy one English language book to assist you in figuring out the broad panoply of China’s laws, the China Law Deskbook is that book. Zimmerman’s newsletter article is on “The Issuance of the Notice of the Decision on the Establishment of the System of Lawyers Oath” which was very recently promulgated by China’s Ministry of Justice.  In layman’s terms, this notice sets out the oath required of all China licensed lawyers:

I swear to faithfully fulfill the sacred mission of legal workers in socialism with Chinese characteristics. I swear my loyalty to the Motherland, to the people, to uphold the leadership of the Communist Party of China and the socialist system, and to protect the dignity of the Constitution and the laws. I swear to practice law for the people, keep industrious, professional honest and corruption free, safeguard the lawful rights and interests of clients, maintain the right implementation of the law, uphold social fairness and justice, diligently strive for the cause of socialism with Chinese characteristics.

Zimmerman rightly notes that this oath is mandatory for Chinese lawyers working for Chinese law firms. and that a lawyer who refuses this oath will be denied his or her license to practice law.

Your Chinese licensed lawyer has taken this oath.

Zimmerman goes on to point out that this oath makes clear that Chinese licensed lawyers are not fully independent and “their expressed loyalty – and notwithstanding their personal views – is first and foremost to the State.”  He then discusses how this oath is “interference at best” and makes a Chinese lawyer’s “ethical standards” vastly different than that of American lawyers.  Your Chinese Lawyer. Trust Yet Verify?

Got an email recently from someone who had contacted me months ago regarding a potential litigation matter against a Chinese company. The case was not terribly complicated and so I recommended this person secure local Chinese counsel, particularly since he spoke Mandarin.  The new email was an update and the news was not good.

Seems this person is convinced that his local Chinese attorney passed on secrets to the Chinese company he intended to sue. I cannot say whether this is true or not, but I can tell you this is at least the third time I have become aware of something similar and I have never heard a story like this involving an American lawyer.  The other two instances involved American companies that had retained Chinese law firms for their trademark applications, only to have those (two different) law firms take forever to file for their trademarks and then report back that a Chinese competitor company had — in the meantime — beaten the American companies to the trademarks.  Both companies were convinced (as was I) that their law firm had given an advance tip-off to their Chinese competitors and, no doubt, gotten paid nicely for having done so.

My firm has never experienced this problem with a Chinese lawyer, but I have experienced it with a Korean lawyer (it was actually in favor of my client in that instance) and I wrote about it in a post, entitled, “China Lawyer Ethics — Perils And Pitfalls For Foreign Companies:”

Many years ago, I was meeting with the in-house international legal counsel for a very large Korean company, or chaebol. I was there representing the chaebol on one case, but the in-house counsel wanted to use our meeting as an opportunity to “pick my brain” about a fairly small, but somewhat complicated, multi-party case on which he was working. The case involved an alleged breach of contract and a number of American high tech companies. The case was pending in a Korean court and settlement talks had just begun. The in-house lawyer spent maybe ten minutes explaining the facts of the case and the various players to me and once I had reached a point where I felt I understood its overall outline, he handed me a two page letter to review.

The letter was written by an American attorney, on behalf of his American client, to the Korean lawyer representing the American company in Korea. The letter talked about how the American company wanted to settle the case for a million dollars, but they would be willing to take $600,000. The letter then instructed the Korean attorney to start settlement negotiations at $1.4 million.

Seeing as how my client had a copy of this letter, I initially assumed the American company whose settlement strategy was revealed in the letter was on the same side in the Korean case as was my Korean client, and I read the letter accordingly. I then read the letter again and then read it a third time. I was really confused and I had to confess as much to the Korean in-house lawyer. I told him I had thought the American company whose settlement strategies were being discussed was the American company suing the chaebol, but I obviously must have misunderstood the facts. The Korean in-house lawyer (who had an American legal degree) smiled and then explained.

The American company in the letter was on the opposite side of the chaebol and the letter setting forth the innermost workings of its settlement strategy directly involved its efforts to settle with the chaebol. My Korean client had been given this letter by the Korean attorney who was suing the chaebol on behalf of the American company, because this Korean lawyer had attended the same Korean law school as the in-house lawyer and had started law school a year or two later, making the in-house Korean lawyer his “big brother.” The opposing Korean lawyer would golf once or twice a year with the in-house Korean lawyer and had been trying to secure legal work from the chaebol for some time.

I went on to explain how we deal with this lack of a confidentiality guarantee:

I was young at the time and I was naive and I was appalled and I expressed my disbelief. The Korean lawyer laughed and explained to me that this was par for the course in Korea. To this day, I have no idea if this was or is really par for the course in Korea, but I have always acted as though it is, and I have always acted accordingly.

One of the ways I have handled this is by consistently using the same few lawyers in Korea for all of my firm’s clients. My thinking is that our providing so much work to these lawyers does two things. First, it creates a personal relationship between me and them and thus makes it that much more difficult for them to turn around and hurt me by hurting my client. Second, it takes away much of the incentive for the Korean lawyer to hurt my client because the Korean lawyer knows that if he (Korean lawyers are almost invariably men) does so, the regular stream of work my firm provides him will dry up. The way I see it, the foreign client who goes directly to the Korean lawyer in a one-off relationship is at far greater risk of a breached confidence. Despite all this, I am still far more circumspect in dealing with Korean lawyers who I use as local counsel than I would be in dealing with an American lawyer in Topeka.

The other way I handle this is to use American lawyers in Korea, of which I know many. I figure there is almost no way an American lawyer would risk his or her law license by engaging in such tactics.

We have done the same thing in China by choosing to work with only one or two Chinese law firms in each city so as to build up strong relationships and mutual trust.

Bottom Line: We are absolutely NOT saying all Chinese lawyers will violate your confidences because that is far from being true. But we are saying that you shoud not hire anyone as your lawyer in China unless and until you are sure you can trust them, because maybe you cannot.

Many years ago, my youngest daughter, now 11, would email the same-aged daughter of a Chinese lawyer with whom I had worked on a couple of cases and with whom I had become friends. What always amazed me about the correspondence (emails sent to my daughter were translated into English by the Chinese lawyer) between the two girls was how amazingly similar their lives were. Both listed spaghetti as their favorite food, though the Chinese girl was far more impressed by McDonalds than was my daughter. Both loved the social life at school but did not particularly like anything else about it. Both were taking music lessons. Both were doing gymnastics. And both thought Barbie was the coolest thing since….well….since Barbie.

I thought of these emails today after reading the China Herald’s recent post, entitled, “One-child policy supports Barbie ” on how China’s one child policy could be so favorable for Barbie’s China sales. One big difference between the Barbies my daughter had and those of her email pal is that my daughter’s were nearly all handed down from her mother, her sister, and from friends, whereas, the Chinese girl had to go out and buy each of hers.

Because Barbie is so relatively new to China, in terms of demand, hand me downs, and even image, it will probably take a while for it to develop a nationwide cachet among 6-9 year old females, as it has in the United States. (My daughter would probably kill me if I do not note that she ceased playing with Barbies years ago — right about the same time she ceased “playing” with friends and began “hanging out” with them). But this newness also means Barbie might have marketing opportunities in China that it does not have in the US. Mattel is seeking to market Barbie in China not just to young kids, but to twenty-something women as well. The new Barbie Store in Shanghai even serves a Barbietini, and though I confess to not knowing (or caring) what goes into it, I am betting it is pink.

I find it fascinating how Western products can be marketed anew in China. Examples of this abound. My international law firm has a client that makes equipment that in turn makes a very high tech computer product. Bear with me here as I essentially make up the numbers (as I have long forgotten the real ones) to make a point. The client’s machine is outdated and nobody buys it in the United States any more. The cost to our client to make the machine is about $100,000 and the client sells it for $200,000. Its “competitors” make a $1,000,000 machine and that is what Americans buy. In China, however, there are still a whole slew of companies that need this machine but cannot afford the $1,000,000 version. Those Chinese companies are our client’s customers. Our client has virtually no competition at their price level and it almost certainly never will because it would cost another company too much upfront money to warrant making this outdated equipment. Our client has a lock on this ultra-niche market until such time as all Chinese companies can afford the $1,000,000 machine or until used $1,000,000 machines become readily available at a substantially lower price.

For more on old time US products being resurrected in China, check out “China’s Resurrection Of The Tang — Long Shelf Life Is Key.

Just completed my two week China trip and some thoughts remain from that trip that have yet to make it to the blog because they do not warrant their own post.

Here goes:

1. Shanghai cabs suck. There are not nearly enough of them and too many of the cab drivers are so new to town they do not know where anything is. I had one cab driver who did not know where the Bund was. I kid you not. The biggest problem though is that it always took 20-30 minutes to find an empty cab. One of the greatest perks of my staying in the Westin at the Bund Hotel was that there was always a cab right there. Using my billable hourly rate as a measure, the ready availability of cabs there more than paid for my room every single day.

2. Beijing cabs are even worse than Shanghai cabs. Not only do the drivers not know the city, they tend to be incredibly rude. They would assume that because Steve (co-blogger Steve Dickinson) speaks fluent Chinese, he should know the directions to wherever we were going and they would get really angry at him when he did not. Twice we exited a cab when it had become clear the cabbie did not know where to go and was unwilling to call anyone to find out.

3. Beijing is an absolutely great city as long as you don’t breathe. I am certain there are people who turn down jobs there because of the pollution. Whither the Olympics?

4. Make absolutely sure your name is 100% correct on your airline ticket. If it is not, you run a very real risk of not getting on your flight. This has never happened to me, but a client told me of this having happened to them. If your passport says Douglas, your ticket better not say Doug.

5. Shanghai traffic is getting more orderly. There are now “traffic assistants” just about everywhere whose job (near as I can tell) is to scream at people on motorbikes and to make sure pedestrians obey the lights. Sure, the cars still pretty much ignore the signals and all but plow into pedestrians, improvements are happening.

6. Sun With Aqua Restaurant has absolutely world class sushi at less than world class prices, but its service is only so-so. It is quite a bit better (also quite a bit more expensive) than Hatsune, which is widely considered Beijing’s best sushi restaurant.

7. I have come to like Shanghai style food. It lacks the pizazz of Sichuan or even Cantonese, but when done right, it is damn good.

8. The Chinese drink wine very differently than in the West. Before we went to dinner one night with our lawyer friends in Qingdao, we talked about Chinese wines and they asked me if I would like to drink wine at dinner. I immediately said yes, envisioning maybe two or three glasses instead of the infinite drinking of beer which usually happens at such dinners. Boy was I wrong. The wine flowed just like beer and probably half the glasses were chugged. We drank Huandong Chardonney all night and it was not half bad. This was the only brand of wine served in the restaurant and there were promotional posters for it all around.

9. China’s stock market is out of control. Everyone talked about it way too much. People told me they were having trouble keeping employees who were leaving well paying jobs to day trade. People told me they were losing employee productivity because so many of their employees were day trading on the job. I would ask if people in China think the market can only go up and the answer I usually got was that they realize it can go down, but they are convinced it will not go down for many years. Can you say bubble?

10. There must be 20,000 empty condominium units just on the road from Qingdao city center to the airport, and yet the building of condos goes on apace there. I was also told there are huge numbers of ultra high end condos being built on the coastal road from Qingdao to Laoshan mountain. These condos are listed at between $350,000 to $1 million and virtually none of them are selling. Again, more and more are being built. So what is going on here? My guess is that the banks want to lend and people want to borrow and if anyone were to admit that these developments are not selling, there would have to be loan write-offs and nobody wants that. Can you say bubble?

11. A Chinese lawyer told me he now asks all of his Chinese clients who their foreign competitors are and then offers to see if he can put them out of business for operating illegally. This has become so lucrative for him that he does not even charge to determine if they are legal or not. He makes that determination for free and if they are, he charges a large flat fee for putting them under. He proudly gave me the name of a Seattle company I know (but do not represent) which was next on his list. He also said that come 2008, he would be suing foreign companies whose Chinese employees did not have written contracts.

12. Mooncake is China’s fruitcake, except they are now making pretty decent chocolate mooncake and that is probably not possible with fruitcake.

As always, comments are welcome.

New blog out there called The Life of a Lawyer at a Chinese Law Firm: Practicing Law in a Country Where There is no Law [link no longer exists. It is a most unusual blog and certainly worth a look-see.

The writer has wisely chosen to remain anonymous, though it took me one e-mail to get the writer’s name. The writer explains his purpose as follows:

I want to explain who I am and why I am writing this. Some of this info comes from my blog/diary entries that I wrote and kept private for the past 20 months while working at one of China’s largest law firms (five offices, about 300 attorneys, all Chinese except me initially, and later another two foreigners added (see the bottom of the list), in addition to some semi-volunteer summer interns like Travis Hodgkins who spent a couple months at the firm and for some reason and somehow survived on the US$10 per day salary the firm paid them).  [CLB Note: Travis is spending this summer with us in Shanghai where we are paying him considerably more than $10 per day] I’ll mix the notes I have that track my time at the law firm with comments about current legal issues here, so there’s a mix. I kept my blog because some of what I saw was so incredible, and I’d guess others especially US attorneys would agree. I am now doing mergers and acquisitions work, still based in China, at a specialty firm, also in Beijing.

I am writing this for a few reasons, some more admirable than others. The more admirable reasons are that I’ve met foreign law students during the 2+ years I’ve been here who are trying to figure out how a foreign attorney can get a job here, and make decent money, since most of them just get slave wages as interns at Chinese firms and others that hire them to polish English or serve as the model foreigner for clients. In addition, I’ve received calls and emails from people abroad  nearly every day asking the same questions: how do I get a China lawyer job. That’s a good reason to write this. Another good reason is that blogs are becoming popular, and I like to read some of them, especially the China Law blog and Ben’s Blog an American working in China.

A reason I think it is interesting to read about what a US attorney does in China is because the law in China is a charade in many ways. There are laws here, certainly, and regulations, and plenty of them. However, the court system is corrupt and doesn’t work and there really isn’t any way to enforce laws so for all intents and purposes they don’t really exist.

Oookaaay.

So in his first post he who goes by the name Jeff, slams two law firms, maligns the management skills of 1.3 billion people and writes off China’s nascent legal system in its entirety. He also wrongly claims there are no American lawyers blogging from China even though Steve Dickinson, who co-writes this blog, has been living and working in China for years.

Reading the Life of the Lawyer blog is for me somewhat like staring at a car wreck on the side of the road. I do it and I think I somewhat enjoy it, but it makes me feel uncomfortable.

Is this blog intended to contribute to the discourse on law and lawyering in China or is it merely a temporary outlet for anger and revenge?

I would love to hear what others think on this one.

At any given time, my firm’s China lawyers are involved in a number of litigation matters in Chinese courts and a couple of them have recently been coming to the fore. In most of these cases, we are representing American companies owed between $1 and $10 million by Chinese companies who owe this money either because they have not paid or because they provided bad product.

The other day, I received an e-mail from my co-blogger, Steve Dickinson, who oversees the China side of our litigation matters. The e-mail from Steve was actually to an attorney who is regular counsel for the company we are assisting in China. Because Steve’s e-mail was lawyer to lawyer, it went into a bit more detail and had a bit more editorializing on the subject of China litigation. I loved it because it provides an excellent snapshot of the initial stages of litigation in Chinese courts and I very much wanted to put it on the blog.

But before I could do so, I had to strip out anything that might allow one to identify the pending case. I have done that by taking out any mention of parties, lawyers (both the China attorneys and the attorneys stateside) or even the court in this memo. I also changed at least one item in the post as a further diversion. I have, however, retained the heart and soul of the e-mail and none of my deletions/changes have any real impact on its substance.

I am writing to provide you with a general update on the XYZ matter. We are currently waiting for the arrival of your document package. We plan to file the complaint shortly after receipt. Based on our current planning, that will be sometime in the middle or end of next week.

I would like to inform you about the basic procedures that will follow after the complaint is filed. Note in all respects that China is a civil law jurisdiction, so the procedure is much closer to that of continental Europe than to that of a common law jurisdiction such as the United States [or Canada or England].

After we file the complaint, the Court convenes an initial hearing. In China this happens quite quickly. Normally, in the XYZ court, the first hearing is convened within two months after the complaint is filed.

Generally, for complex international disputes, at least three hearings are required to resolve the case. The time for convening the second hearing can be the subject of some dispute. The defendant will be expected to plead difficulty and lack of information and complexity and the rest and will seek delay. In general, the Chinese courts do not like delay, and they tend to view such requests quite strictly. The time for the first hearing can also be delayed if XYZ files a motion challenging jurisdiction or if XYZ requests time to deal with complex evidentiary issues. Again though, these matters are viewed quite strictly in China. Chinese courts, especially the XYZ court, like to move the cases through their dockets extremely quickly.  That is why we have taken time to carefully prepare before filing the complaint. Once the process starts in China there is little time for extra preparation.

As a general rule, no personnel from XYZ will be required to attend the hearing. Further, XYZ likely will not be required to provide any form of statement or affidavit concerning the facts of the case. The Chinese courts like to work from documentary evidence. The evidence we have provided is quite complete and there should be no need for any supplementation in the form of either live testimony or affidavits. As a common law attorney, I find this quite odd, but that is the Chinese system. The courts here view humans as more likely to lie than tell the truth, so they prefer to work with hard evidence whenever possible. This is a major advantage in this case, since the hard evidence is very good for us.  The court will not give them much room to talk out of it, which benefits our position.

I will attend and assist at all of the hearings in XYZ court and will provide detailed reports on the proceedings. The XYZ court is a quite reputable court. However, all legal proceedings in China are much more rough and ready than we are used to in the United States and we must be prepared for the fact that the situation can be unpredictable. If anyone can keep things under control for us, it is our local Chinese lawyer, Mr. XYZ.

Please let me know if you have any questions about this matter.

I hope this will be just the first in a series of memoranda on the different stages of Chinese litigation.