A while back we brought on a fully qualified Chinese attorney as a paralegal in our law firm. This person was working on obtaining her paralegal certificate at a local university. I asked her why she was pursuing a paralegal certificate, rather than going for an LLM degree (an advanced law degree), as is commonly done by China licensed lawyers in the United States. Her response was that she knew many Chinese lawyers who had obtained an LLM degree in the United States and not a single one of them had been offered a lawyer job in the United States. I told her that I too was not aware of any foreign lawyer who had obtained a US lawyer job.

I then went on to tell her that our firm does not hire LLM graduates for three reasons. The first is that we have no idea how qualified they are for practicing law in the United States because the LLM programs vary so much in what they teach.  The second is that we have no idea how qualified they are for practicing law in the United States because it seems that just about everyone graduates from US LLM programs with a 3.8 G.P.A or higher, leading us to believe that LLM grading is neither rigorous nor meaningful. Third, and oftentimes most importantly, most US states (at least as far as we know) do not allow LLM graduates to sit for their bar exam.

Which is why our lawyer hires have US (or US equivalent) J.D. degrees.

And this is NOT to criticize LLM degrees. Rather, it is to highlight how much they have changed in the last twenty years, without really having changed at all. Twenty years ago, foreign lawyers came to US law schools for LLM degrees and then they returned to their home countries. Their reason for securing a US LLM degree was to improve their English language skills, increase their understanding of American culture, and make connections with American lawyers and potential clients. All of these reasons made (and still make) complete sense and for that reason, a number of the top international lawyers in Asian countries like China, Vietnam, and Korea, have US LLM degrees.

But maybe around ten years ago, there was a large influx of China attorneys seeking US LLMs with the idea of securing jobs in the United States. US law schools — who make small fortunes off each foreign LLM — generally do nothing to dissuade these students from coming. And so they keep coming with the hope of American lawyer jobs that seem pretty unattainable. What then happens to these LLM graduates from China? It is my understanding that many (Most?) return to China and some get non-legal jobs.

What are you seeing out there and what do you think?


Went to dinner with a Shanghai friend the other night.  This is someone who has been living in China nearly twenty years and speaks fluent Mandarin and Shanghainese.  This is a “China guy” who really knows China.

A couple of his stories resonated.  One was about how his best client fired him.  Here’s that story.  My friend was tasked with making sure that his client’s product was made right and  delivered on time. To a large extent, this meant that his role was antagonistic to that of the Chinese manufacturer.  My friend constantly had to make sure that the Chinese manufacturer did things a certain way, and especially that no bad product pass through. To put it more bluntly and relevantly, my friend was costing the Chinese manufacturer money.

The Chinese manufacturer didn’t like that and so it mounted a campaign to get him fired.

For months, the Chinese manufacturer would tell my friend’s client of how my friend didn’t know China, didn’t know the product, and wasn’t doing a good job. These comments were the softening blows.

Then one day, the Chinese manufacturer intentionally did whatever it could to anger my friend.  It worked and he got angry.  The Chinese manufacturer secretly taped my friend yelling and swearing at them and they sent that video to my friend’s client, explaining how this was what they constantly were having to face from my friend.  The client fired my friend.

My friend also talked of how when he visits Chinese factories, it is fairly common for someone to run ahead of him, screaming that he speaks Shanghainese so as to be sure that nobody reveals anything to him that he should not know. He talked of how the Chinese manufacturers are always trying to undercut him because he knows what he is doing and knows how to keep them on the strait and narrow.

Before Shanghai, I had breakfast in Beijing with another very experienced China guy — a European who has spent the last 13 years in Beijing assisting European companies who also.  This person also speaks fluent Mandarin. He had two great “China stories” for me, both very similar. In both, he had, simply by being “a white guy who speaks Mandarin” been able to hear about large scale bribery taking place.  And in both cases, when he reported what he had heard to the European companies, they both got angry at him and ceased to have anything more to do with him.

I know it may be stretching things a bit, but I see a commonality running through all three incidents, and I also see something with which we as China lawyers often must deal. Oftentimes, when we are trying to help our clients better their negotiating position vis a vis their Chinese counter-party, the Chinese company tells our client that we are not licensed Chinese lawyers and therefore we don’t know Chinese law.  We typically deal with this by pre-empting it; we tell our clients early in the process to expect the Chinese counter-party to say things like this and we describe how dividing and conquering is one of the oldest and most used tricks in the book.  Then when it happens, our clients usually just take it in stride.

I don’t want to get all nationalistic here, but the reality is that the person you hire to assist you in China is a lot more likely to be looking out for your interests than the Chinese company with whom you are doing business or seeking to do business.

That just makes sense, doesn’t it?

What do you think?

Ancient as it may seem, this blog still has around 1,000 people who read us via email.  Many of those readers have been subscribing virtually since our inception in January, 2006.  What I have always liked about email subscribers is their ability to respond directly to us (and our posts) simply by writing a responsive email.  The typical email might be something really short, like “I agree” or “I have been seeing the same thing” or even an occasional “this is wrong.”

Anyway, I got an interesting two emails yesterday.  One was from an email subscriber, a solo practitioner who is learning Chinese in Pittsburgh, PA (yes, I know most of you know that Pittsburgh is in Pennsylvania, but as someone who listens to E Street Radio pretty much every day, I can’t say Pittsburgh — even in my head — without adding P.A.), asking us to write about getting Chinese clients.  The other was from a young lawyer in New York City, about to go to China, asking us essentially the same thing.

I responded to the New York lawyer via email and I am going to give a similar response to the Pittsburgh, PA, lawyer here.

I don’t know.  When it comes to China, my firm’s focus is on mostly American (that includes Canada and Latin America) and European companies looking to go into China, looking to do business with China, already in China, or already doing business with China. Less than one percent of our “China work” involves companies from China.  We long ago determined that our time would be better spent focusing on representing companies from these countries than from China.

Though we do from time to time get business from Chinese companies, that work has nearly always come as referrals from Chinese lawyers with whom we regularly work in China or from Chinese (and Chinese-American) businesspeople that we know in the United States. We are certainly not opposed to representing Chinese companies, but we have found far too many of them (including very large companies) to be unsophisticated in how to use American lawyers and unappreciative of what it takes — and, yes, most importantly, what it costs — to practice law in the United States.  Put simply, we have found it to make economic sense (for us) to focus on working with foreign companies going to China, rather than on the reverse.  As a result of that, we are not the people to ask about marketing to Chinese clients.

So people, especially you lawyers out there that represent Chinese clients, can you help?  How do you get your Chinese clients?  Do you market to them mostly in China or in the US?  What are Chinese companies looking for in an American law firm?  Does a solo practitioner have a chance?  What about small law firms?

The mainstream media has given massive coverage to workers in China holding Chip Starnes, the president of an American company, hostage for alleged non-payment of wages.  Just as we usually do whenever a hostage taking hits the press, we ran our own blog post, The Single Best Way To Avoid Being Taken Hostage In China, setting out how to avoid getting yourself into just such a situation.  And just as we always do, we link back to all of our prior posts on the subject, to let everyone know that “we told you so.”

But how common are these foreigners being taken hostage situations and how worried should you be?  I was called by three reporters yesterday asking me the commonality question.  I told all of them the same thing, which was essentially as follows:

We learn of a foreigner getting held hostage in China probably once a month.  We learn about this from the media (as in the case of Chip Starnes), from spouses and co-workers calling us to see what we can do, and from readers who simply email us.  My law firm has worked on a handful of these cases over the last five years.  They really are not all that complicated in that one almost never has any choice but to negotiate.  We have used Chinese lawyers to try to get the police to end the stand-off, but that has never worked. Heck, in at least two of the cases we have handled, the police were actually assisting.

The common theme in every hostage taking we have handled (and I think of which I am aware) is money; money allegedly owed for a breach of contract, for wages, or for a personal injury. But the person with whom you really should be talking is my friend in Shanghai at an international risk consultancy company because I know that his company constantly handles China hostage situations.

As for whether these hostage takings in China are getting more or less common, my answer is yes and no.  How’s that for a lawyer answer?  I do not think they are getting either less or more common in the sense that they are either increasing or tapering off due to societal or legal or cultural reasons. Instead,  I think that they are starting on a new increase and I expect that they will continue to increase as China’s economy slows.  As I mentioned earlier, these hostage situations stem from money allegedly owed and now that China’s economy is in a downturn, we can expect there to be more situations where Chinese companies and individuals believe they are owed money and more situations where Chinese companies and individuals will feel compelled to take things into their own hands to get paid. With this we will no doubt see more hostage situations.

Does this sort of thing happen outside China and as much?  I don’t know enough to make comparisons, but I assume this sort of thing goes on in most emerging market countries.  I know it has happened in Vietnam and I know it has happened in Russia, where someone I know was held upside down out a third floor window until he agreed to pay a dubious debt.  So yes, it definitely happens outside of China but I just cannot quantify it.

So what is the answer then about the numbers?  Who really knows?  But what I find so interesting is the initial response my China risk consultancy friend gave by email to the first reporter that contacted him (I was cc’ed):

We work on several cases of unlawful detention like this per month (and, depending on the month, sometimes several per week) … this kind of thing is that prominent in China these days.

I look forward to seeing the articles.

In the meantime though, how worried should you be?  Not that worried. And here is why.

First off, not a single client of my firm has ever been involved in a China hostage situation.  Every time we have been called in to assist on one, it is for a new client. And much of the time, assisting consisted of little more than telling the company that they probably would be better off paying the USD $10,000 claimed, as opposed to paying my law firm to try to contest the amount owed while their employee indefinitely remains guarded in an office by three men or in jail for an indefinite stretch.  But the real point is that all have avoided this problem and the reason they all have avoided it is because they simply do not go to China when there is that risk.

Just the other day, a client of ours called us while walking down the street in a smaller Chinese city.  He told us that he had gone over there to look into what his company should do now that one of its suppliers had just shut down.  During the conversation we learned that the Chinese company had shut down owing its employees all kinds of money and our client was calling us to discuss our assisting in his company possibly buying the factory.  We quickly told him to leave town.  Now.  We explained how if he went to the factory and explained who he was, the workers might well kidnap him.  We have dealt with this exact situation.

Foreign company buys product from Chinese company.  Chinese company shuts down and foreign company goes to Chinese factory to see what is going on and to see if its already paid for (or not) products may be sitting in inventory.  Chinese workers learn of the foreigner in their midst and grab him or her (it is almost always a “him” but I am aware of at least two cases involving a “her”) and demand that the foreign company pay the outstanding wages. The foreigner explains how they too have been hurt by the shutdown and they certainly do not owe anyone in China any wages.  The Chinese workers see things very differently.  Their explanation is that they worked hard to make product for the foreigner and the foreigner got the product and the workers never got paid and so now the foreigner needs to pay the workers and if it does so, he or she will be freed and they can even leave with their product.  The fact that the foreign company already paid once for the product is simply irrelevant.

Anyway, our client left safely.

Not only are these hostage situations generally preventable, but (and I know this is only small solace) these situations in China do not typically involve violence in that the person taken hostage is usually not beaten nor killed.  I am not saying violence never happens, but I am saying that I am not aware of an instance where it did.  Should you be so worried about being taken hostage in China that you do not try to conduct business there?  No.  Should you at least consider the possibility of a hostage situation.  Yes, you should at the first sign of any sort of potential dispute.

What do you think?

UPDATE:  One of the articles for which I was interviewed just came out and I was provided a copy of it.  This article was written by Leslie Pappas of Bloomberg BNA.  I was provided with a pdf of the article, but it is hidden beyond a paywall.  I wanted though to highlight the portion of this article quoting my Shanghai risk consultancy friend, who I can now reveal to have been Kent Kedl of Control Risks.  Kent highlighted the commonality of these China hostage situations and the benefits of thinking and planning before acting when a hostage situation is possible:

The commercial element of the Starnes case is “typical” of other hostage situations in China, which are increasing as the economy slows, according to Kent D. Kedl, the Shanghai-based managing director for Greater China and North Asia for Control Risks, a global risk consultancy based in London. ”

“We work on several cases of unlawful detention like this per month — and, depending on the month, sometimes several per week,” Kedl told BNA in a telephone interview June 26. Unlike countries such as Mexico and Nigeria, it is extremely rare in China for a company executive to be kidnapped and held for ransom, Kedl said. In China, cases usually arise because of a commercial dispute, which may involve a company’s employees, distributors, suppliers, or other affiliates. “It’s someone who gets upset and doesn’t know what to do,” Kedl said.

Control Risks has seen a “sharp increase” in hostage situations in China in the past two years, Kedl said, and has seen an increase in threats and actions against company management and foreigners. Kedl attributes the change in part to China’s slowing economy, as companies reassess their businesses in China and in some cases start to restructure–news that often comes as “a shock” to workers. Restructuring “is an anathema to most Chinese employees,” said Kedl. “It’s been nothing but growth for the past 10 years. . . . In China, business hasn’t come and gone. It has only come.”

Companies need to think through all aspects of a downsizing or restructuring, including the compensation strategy, the communications strategy, and relationships with local officials before they undertake a restructuring, Kedl said: “It is the company’s responsibility to think through what they’re doing and think through what could happen.”

I agree.

It is widely believed by American lawyers that their clients should do whatever they can to avoid finding themselves in a Chinese court.  This widespread belief is usually wrong.  It is usually wrong because most of the time it is the American company that will want to sue the Chinese company, not vice-versa. That being the case, the best place to sue a Chinese company is in China.  Is suing a Chinese company in China a great thing? No.  Obviously not.  But if you sue a Chinese company in China and you win, you have at least a decent chance of collecting on your judgment.  If you sue a Chinese company in the United States and win, you have almost no chance of ever collecting.  Chinese courts do not enforce US judgments.  Ever.  So unless the Chinese company against whom you get your judgment has assets in the United States (or in some third country that enforces US judgments), your US judgment is of zero value. Zero. For more on this, check out the following:

So if suing Chinese companies in China usually makes the most sense, your contract with that Chinese company should be written in such a way as to maximize your chances of prevailing in China at the lowest cost.  How do you do that?

Well the most important thing is to put that contract in Chinese.  We have always done this and we have done it because if it is in English the Chinese court will translate it into Chinese itself.  This effectively means that you will not know the exact contract on which you are suing until after the court comes back to you with the Chinese version.  Certainly it makes better sense to have your lawyers dictate what your contract says as opposed to some Chinese court.  But lately I have been hearing that a number of Chinese courts will not enforce English language contracts at all.  There is no law that says no enforcement, but various courts have taken it upon themselves to hold English language contracts void.  I have heard this from two “China people” I greatly respect but I have no personal experience to back this up.  One of these people told me that a number of Chinese lawyers had told him that “English language contracts are only admissible only IF the court so chooses. They also have the right to dictate how and who translates the contract.”  Another person told me that he had his English language contract rejected by a court in Chengdu as invalid.

Would love to hear other experiences with trying to enforce an English language contract in a China court.  In the meantime though, do your China contract in Chinese.  Okay?

By: Steve Dickinson

This post is Part Two in our two part series on how Chinese companies typically view investments and how this view impacts Western companies that invest in Chinese companies, and even how this can impact all companies doing business in China.

As I explained in Part One of this series, Chinese companies simply do not value investment to the same extent as Western companies.  Chinese companies value work. I ascribe this, at least in part, to Communism, which values the worker over the investor.

China’s pervasive attitude towards investment explains many of the difficulties foreign investors have in joint ventures in China. The typical failed joint venture works as follows. A failing Chinese state owned company is desperate for working capital. However, the enterprise has been cut off from life support from the state and no bank loan is possible. Or a private enterprise finds itself on hard times and no bank loan is available.

The venture then sets out hat in hand and finds a foreign joint venture partner. The foreign partner contributes cash, technology and markets. The Chinese side contributes land, buildings, staff and management. The foreign side takes the position that the Chinese side ought to know what it is doing and so it becomes only  minimally involved with the Chinese domestic operations. Through the hard work and dedication of the Chinese staff and management, the joint venture business succeeds. Often this success is won only after years of struggle and financial losses.

With financial success finally achieved, the foreign joint venture partner now thinks: finally, we can relax and earn a return on our investment. However, the Chinese side thinks exactly the opposite: finally, we can be rid of our foreign partner. The response to the success of the company is exactly the opposite. Why is that? The foreign side is of the view that without its investment, the company would have failed. The Chinese side is of the view that it has already paid the foreign joint venture back for its investment with a small profit. The foreign investor is doing no work and has done no work. Work is all that counts. The foreign joint venture investor is acting in bad faith by insisting on being paid when it has done little or no work. The Chinese side with then go to extraordinary lengths to get rid of its foreign partner, even if it damages the company in the short term. In doing this, the Chinese side thinks it is doing the right thing and the foreign partner that insists on staying around is the one acting in bad faith.

This attitude has been pervasive in China since I started working here in the 1980s. I have seen little or no change and I therefore expect little change in the immediate future. My discussions with Chinese businesspeople and Chinese lawyers only confirm this. The reason is obvious. China was and still is very much a communist country. Labor counts. Investment does not. This fundamental value assessment must be taken into account in designing your investment program in China.

By Steve Dickinson

This is part two of a series on a White Paper on Judicial Reform in China just published by the PRC State Council Information Office. The purpose of the White Paper is to provide a snapshot view of the progress of legal reform in China over the past ten years. This White Paper provides insight into what the top level of the Chinese government believes is important about China’s legal system and its future development. In the first part of our series,, Judicial Reform In China And Its Impact On Foreign Investment, we talked about four civil law issues in the White Paper that are of particular interest to foreign investors in China. In this, part two, we look at the White Paper’s view on Chinese criminal law.  Though China’s criminal laws are obviously less connected to foreign companies doing business in China, we still think a look at the criminal law section of the Paper is important because China’s criminal laws sometimes reach into what Americans and Europeans typically consider to be the civil arena.

Chapter III of the White Paper is entitled Strengthening Human Rights Protection and it primarily focuses on criminal law and procedure. The chapter lists series of major changes in the law that are intended to substantially improve Chinese law in this area.

There are four major areas of improvement:

  •  The rights of a defendant to counsel are clarified and the right of the accused to early representation is established.
  •  The rights of lawyers to access their clients is guaranteed.
  •  The use of the death penalty is severely curtailed.
  •  The system of providing relief to victims is strengthened and a system for protection of witnesses is implemented.

Many foreign observers will be skeptical about whether such reforms will have any real impact in China. Much of this skepticism arises because foreign observers become aware of Chinese criminal cases only in highly charged political settings. This provides a skewed impression of how the system works. The fact is that most criminal cases in China have no political background.

The test for the Chinese efforts to improve the criminal justice system must concentrate on such non-political cases. My law firm is often called on to work with Chinese lawyers representing foreign parties in criminal matters in China and so we have had involvement with China’s criminal justice system. Unlike in the United States, where there is usually a fairly clear line between civil and criminal lawyers, Chinese lawyers are often called on to assist their civil law clients in criminal defense. It is considered part of their legal duties. In seeing what they do on a daily basis and in discussions with them as they work through major cases, it appears to me that Chinese government efforts to improve China’s criminal justice system are sincere.

There has been a dramatic change in procedure over the past 20 years, with much of the major change occurring in the past five years. Based on my personal experience, I think it would be wrong to dismiss recent changes in criminal law as mere window dressing. Sincere efforts at reform are in progress and changes are already being seen on the ground. Of course, the fact that political cases are excluded from these positive changes is a major challenge for the Chinese legal system. This is particularly true as political cases become more common and more public. The Chinese government is currently facing the challenge in many arenas. Whether or not the issue can be resolved will determine a lot about China over the next decade. The leaders of the Chinese government are aware of this, which is of course why the White Paper was published in the first place.


This is part four of our three part series on how to negotiate with Chinese companies.  Yes, you read it right. Part four of three. How To Handle Chinese Negotiating Tactics, part one is here, part two is here, and part three is here. We originally planned a three part series, but when a reader alerted me to a post by Andrew Hupert on how American negotiators are viewed by their Chinese counterparts, I could not resist piling on a part four.  So here goes.

In Hupert’s post, entitled American Negotiating Culture – Through the Eyes of the Chinese Counterparty, Hupert writes on how Chinese companies see their American negotiating counterparts. Hupert has taught Chinese negotiating tactics at NYU’s Business School, conducted extensive research on the subject, and recently wrote a book on it, entitled, The Fragile Bridge: Conflict Management in Chinese Business. In other words, when it comes to negotiating with Chinese companies, he knows whereof he speaks.  And his speaking says that how Chinese companies view American companies influences negotiations between them.  So if American companies can better understand their own negotiating tendencies, and more importantly, how their negotiating tendencies play out to a Chinese audience, they can better handle negotiating with Chinese companies.

Hupert’s article sets out the “American cultural quirks” with which Chinese companies have to deal when negotiating.  Remember that the below is how Chinese companies view American negotiating tactics; it does not mean that their views are accurate.

  • “First and foremost – we are the only negotiating culture that leads with the lawyers. Europeans consider negotiation to be an exercise in diplomacy while Asians consider it the province of paternalistic company leaders to build lasting relationships. American negotiators – even when they are salesmen or purchasing managers – are fixated on contracts and legal institutions (like courts and regulations). Whereas traditional Asian negotiators feel that relationships are the key to business and that contracts are merely written records of agreements between individuals, Americans put more weight on the document than on the human bonds between business leaders.”  We wrote about this in The Lawyer’s Role In China Business Transactions.
  • We are the only negotiating culture that believes that liability can be assigned in advance through a contract. This is one of the many aspects of international negotiation that has become “normal,” but it still strikes traditional Asian negotiators as crazy that Americans consider contracts binding even as the market environment changes. Asian negotiators in general, and Chinese in particular, feel that as the external situation evolves, so must a business relationship. Many Chinese partners have been bewildered and disappointed when their American partner stated waving a piece of paper in their face instead of responding fairly and maturely to new market realities.
  • Americans believe that negotiations end. To Chinese, the negotiation is part-and-parcel of the business relationship. As long as the counterparties are still engaged in business, the negotiation is supposed to continue. What’s the point of taking the time to build a connection if you aren’t going to grow the relationship through continuous give and take?
  • Americans want to decide everything in advance and put procedures ahead of human decisions. Chinese (and most other Asian) negotiators understand that conflict and differences of opinion are inevitable, and their business agreements usually assume that the leaders or concerned parties from each side will work things out informally. American contracts, with their penalty clauses and rigid requirements, are not only insulting and arbitrary, but seem designed to undermine any kind of positive relationship.
  • Americans love deadlines, timetables and schedules, even when there is no business rationale for them. They can be arbitrary and illogical.
  • Most disturbing of all, American negotiators are adversarial and rude. We insist on running everything and taking control of situations that we don’t understand. We are famous for coming to China and trying to sell inappropriate products or services at ridiculous prices. Our technology and designs are nice enough, but we expect people to pay over and over for the same thing – even after their people have figured out how to make the same thing.

According to Hupert, American companies should at least recognize that Chinese companies are “struggling just as hard as you are to successfully manage the yawning gap between your cultures.” Okay….

What do you think?

Nearly a year ago, we wrote about the importance of including “seal confirmation” in your China due diligence:

One of our recurring themes is the need for due diligence when working on any business matters in China. Most foreign companies think of due diligence only when they are planning to make an investment. Most companies are not aware that due diligence is required whenever you do any kind of business with a Chinese company. If you do not already know the Chinese company with which you will be conducting business, you must confirm that the company really does exist and that you are dealing with the actual company and not an impostor.

I want to share a conversation I had yesterday with some young Chinese lawyers who work for the one of the largest and best law firms in Shandong province. I was discussing with them the question of whether or not the company seal on a particular document was valid or not. It seemed like a simple matter. The resulting conversation was not so simple.

When asked how they go about confirming the validity of a seal, the lawyers told me that “you have to go the town where the company is located.” Once there, you then have to determine if the seal is registered. Often the seal is not registered as registration of seals is not mandatory in China. Then you inspect various documents filed with the local authorities to determine if the same seal was used on those documents. If the seal is registered, or if the same seal was used on all company documents filed with the local authorities, you know that the seal is valid.

Even this is not enough. Even though the seal is valid, you still have to determine if the seal is being used in an authorized manner. Just on the surface, there are two possible issues. First, an impostor may have created a fake company seal. Second, someone within the company may be using the seal in an unauthorized manner. The only way to resolve these issues is to actually visit the company at its headquarters and to ask: is the person who stamped this document employed at your company? If the answer to this is yes, you then must ask whether the person is authorized to do this particular business.

An affirmative answer to both these questions is the only way you can be assured that the signature and the seal on your document are valid and will effectively bind the company. There is no other way to do it: a visit to the relevant  government office and to the company office is required. There is no service available to do the work. You have to hire a Chinese licensed attorney to do it. A Chinese attorney is normally required because local governments rarely open their files to a private person and they certainly will not open their files to a foreigner.

My first response to all of this was to say that this is far too expensive a procedure for normal commercial transactions. The Chinese lawyers looked at me with a mixture of amusement and contempt. They said that they understand my response since it is typical of their North American and European clients. They further stated that they are amazed at the naivete of their foreign clients on the need for basic due diligence in commercial transactions. One lawyer looked at me and said: “What do you think we do all day at this law firm. Most of our young lawyers and legal assistants are primarily engaged in basic due diligence about potential business partners of our Chinese clients. We travel to the local offices and we charge for the expense. Our Chinese clients willingly pay the fee because they know the risk is too great to act in any other way. We constantly see foreign companies enter into contracts without doing any such investigation and it continues to surprise us. You say that our form of due diligence is too expensive. We say that being cheated is far more expensive. Given that the chance of being cheated in China is extremely high, it makes no sense to us to take the risk. Our Chinese clients would never enter into an important contract without a personal investigation of the other side and we find it very strange that these foreign clients who know even less about China will willingly take a risk that virtually no Chinese company would take.”

It makes sense to take seriously what these young Chinese lawyers are saying. Let me give you just one example of what can go wrong in China. Say you are dealing with a large and well established Chinese company. There is no question that this company exists and that it makes the product that you wish to purchase. Now ask yourself this: are you really dealing with that big company? Or are you dealing with an impostor? How do you know?

It is easy in China to fake company seals, business cards, bank accounts and even a website. The unsuspecting foreigner makes a deal with the impostor and sends funds to the bank account. Product never arrives. The foreigner contacts the well established Chinese company and that company truthfully responds by saying “we have never heard of you.” It turns out the foreigner had been dealing with a fake, virtual company the entire time. This happens all the the time in China. Trust me when I tell you we see instances of this at least once a month.

One of the services we are constantly providing for our clients is what I call the “first pass review” of a company seal. In this review, one of our China lawyers who is fluent in Chinese and very experienced with Chinese contracts will review a seal for our client. This review consists of pretty much nothing more than looking at it to determine whether it may be fake or not. If this review cannot determine that the seal is fake, we then suggest our client conduct a more thorough review to confirm that it is real. This is because our first pass review is good at spotting obvious fakes, but it certainly is not good at making sure that a seal is real or that the seal really did come from the company it represents or that it really was authorized by the right company. But as a gratis first pass, it does have its benefits. Shockingly often in fact.

Let me explain.

As stated in the post above, at least once a month we come across an instance where there is something very wrong with the seal/Chinese company with whom our client is thinking of entering into a  deal. My favorites are when we detect that the seal is a fake, which has been happening more often in the last six months than in the past — it is amazing how direct and quick a correlation we see between a declining economy and a rising incidence of fraud. Just last week, I was cc’ed on some emails between two of our lawyers doing a first pass review of an alleged company seal. The email exchange was as follows:

First email:  Attached please find one of our OEM agreements, signed and stamped by the Chinese side. Please note the following that seem out of whack to me:

1. The seal is in blue and not red ink
2. The seal is rectangular and not circular
3. The seal is almost illegible — does that matter?
4. The signature is the Chinese manufacturer representative’s English name

Also, the client tells me that he signed it and scanned it to them for their signature, but they sent back a copy with their signature but without his, and asked him to sign the copy they had signed. Is that normal?

Second email:  None of this is normal or legally binding. The seal should be circular, the ink should be red, and the company name should be entirely in Chinese. The seal should also always be completely legible.  And why is the manufacturer signing with his English name?  A lot is not right here and you should so instruct the client.

Aww snap. You didn’t know?

My firm has been gearing up for a couple of CIETAC commercial arbitrations against Chinese companies and one thing we can state with near certainty is that neither will settle. The reason for this is Chinese companies virtually never settle their in-country litigation matters. In the United States, something on the order of 97% of all cases in the United States settle or are otherwise resolved before trial.  I actually think the settlement numbers are even higher on business litigation matters, but I am not aware of any study on this.  Nearly every litigation matter settles in the United States because the costs are so huge for litigating a case through trial and both parties usually have a pretty good idea of how the court or arbitral body is going to rule.

Neither of these things hold true in China where so many of its laws are too new to have clear Supreme Court decisions on them.  Without clear and established law, nobody knows how a court will rule.  Parties in the United States can settle cases because they essentially agree on the likely outcome.   There is always a 10% chance of an aberrant verdict either way, but within the 80% of expected rulings, the numbers are usually close enough so that both sides can reach agreement at some number near the top of the bell curve.  But since China cases have no bell curve and no 80%, settlement is as much of a gamble as trial.  Since going to trial often costs only marginally more than not going to trial, there is little incentive to do anything but see the case through.

Adding to this is that many cases in China do not require an outside lawyer (this is also true of CIETAC arbitration) so Chinese companies often fight their lawsuits without having to pay for any lawyer at all.  Chinese courts rarely award the winning party its attorneys fees and they are also slow to award much in interest, further reducing the risk of going to trial and further reducing the incentive to settle.

On top of all this, even when one company prevails in a China lawsuit, collecting from a Chinese defendant company is typically anything but easy.

We hear that around 90% of the business cases filed in China actually go to trial. So if you are going to sue in China, you must be prepared to participate in the litigation for the long haul.

All of this only increases the need to have a well-written (preferably in Chinese) clear-cut contract with clearly set out liquidated damages provisions for breaches.  Such a contract will not only decrease your chances of ever needing to litigate, the certainty it will bring will make settlement of any dispute far more likely.  A contract that is so clearly written that both sides will have an easy time predicting how the court will rule increases the chances of settlement.  A contract provision that requires the losing party pay the winning party’s attorneys’ fees also helps, but such a provision may not always make sense.

China litigation. Have fun with that.

For more on litigating against Chinese companies, check out the following: