Introduction
In 2022, a U.S. company with a new and unique product forged a relationship with a Chinese manufacturer, placing their trust in a well-regarded Chinese law firm for their contractual needs. But within just eight months, they were shocked to discover their proprietary technology had been replicated and commercialized by their Chinese manufacturer. My explanation of how their contract had been crafted to facilitate this theft of their intellectual property only increased their dismay.
Regrettably, such narratives of seeming collusion between Chinese law firms and businesses, to the detriment of foreign clients, are becoming disturbingly commonplace.
China’s Geopolitical Tensions Are Impacting Foreign Companies
On platforms like Twitter, there’s a growing divide between critics of China’s policies and Chinese nationalists. To say these two “sides” don’t like each other would be an understatement. This animosity is straining business relations between foreign and Chinese companies.
The rise of nationalism in China is presenting unique challenges for foreign companies doing business with Chinese companies. As tensions mount between China and the global community, many Chinese lawyers are prioritizing their country’s interests over that of their own clients. This is all made possible by China’s distinct legal framework, which allows Chinese lawyers to disclose confidential client information.
This post is not so much about growing dislike between China and the rest of the world—it is an attempt to help companies safeguard against the fallout from such animosities, which increasingly involves Chinese lawyers working against the interests of their foreign clients.
The Rising Trend of Questionable Practices by Chinese Lawyers
A few years ago, in China Contract Drafting Scams: From Bad to Much Worse, I wrote how questionable, if not entirely fake, lawyers are charging dirt-cheap rates to review, draft contracts, or provide “contract templates.” The quality of contracts emerging from these so-called “service providers” is typically so appalling that I’ve become convinced some of these practitioners are receiving compensation from the Chinese end of the transaction as well.
However, what’s even more alarming is a new and concerning trend of Chinese lawyers drafting contracts for their foreign clients that are designed to compromise the foreign company’s intellectual property or leave them without legal recourse if their Chinese counterparts breach the agreement. These seemingly reputable Chinese lawyers are drafting contracts for their foreign clients that blatantly favor the Chinese party.
This tactic of using language discrepancies in contracts to aid the Chinese side of deals is neither new nor uncommon, and we previously addressed it in Do You Know What Your Chinese Language Contract Says? Historically, Chinese lawyers representing the Chinese side in a deal would employ this strategy, not those representing the foreign company in those deals. Such maneuvers went unnoticed primarily because the foreign entity either did not have an attorney or their attorney wasn’t proficient in Chinese and/or lacked experience with China-specific transactions.
Drafting contracts to favor the Chinese party has always been prevalent, especially with joint venture contracts. However, this typically arose only when the foreign participant in the joint venture permitted their Chinese partner to oversee all legal matters. This new uptick in unscrupulous behavior by Chinese lawyers is likely due to a confluence of factors: the heightened friction between China and the global community, surging Chinese nationalism, and a plunging Chinese economy. Whether it be nationalism, xenophobia, or greed, the bottom line is that Chinese lawyers are increasingly taking money to represent foreign companies and then working against them, and the repercussions of this are dire.
Companies that are deceived by their Chinese lawyers virtually always lack legal recourse because unlike most other legal systems, China has no attorney-client privilege prohibiting Chinese lawyers from revealing client confidences to opposing parties and their lawyers. See The Attorney-Client Privilege Really Matters When Doing Business Internationally, Especially in China. Rather than prohibiting these actions by Chinese lawyers, Chinese law encourages it. Article 54 of China’s Constitution requires its citizens “safeguard the security, honor, and interests of the motherland”, upon penalty of prison.
Given this mandate, one can see why Chinese lawyers increasingly favor China’s interests over that of their foreign clients. To put it bluntly, the Chinese attorney who represents your company and then reveals your IP to your Chinese counterparty is more likely to get a medal for serving “the interests of the motherland” than to get into trouble.
Bad Circumstances Make Bad Lawyers
Though it’s essential I write about my concerns regarding Chinese lawyers, it’s equally important that I acknowledge there are plenty of reputable and ethical lawyers in China who have never engaged in, nor condone, lawyers taking actions counterproductive to their clients’ interests. It’s deeply unfortunate discussing how Chinese lawyers are increasingly selling their foreign clients down the river because doing so casts a shadow on these professionals who are doing their best to uphold the highest standards of their profession.
But the changing landscape in China, influenced by policies and priorities set by the CCP, has placed lawyers in difficult, sometimes untenable situations. A dear friend of mine, a Chinese lawyer with whom I have worked for more than a decade, once shared his growing disillusionment with his place in China’s legal profession due to the increasing constraints set by the government. This sentiment underscores the complex reality many lawyers in China face, making them, to at least a certain extent, victims of the circumstances themselves.
Common Pitfalls in China Contracts
Our lawyers have encountered countless tricks used to disadvantage foreign companies in their dealings and contracts with Chinese companies. The below are the ones we see most frequently:
1. Language Mismatch: As discussed above, a common tactic is to have discrepancies between the English and Chinese versions of a contract. The Chinese language section is the legally binding version in China unless explicitly stated otherwise in the Chinese language section. It is common for that section to be both legally binding and to have terms less favorable to the foreign company than the English language section—often, without the foreign company’s awareness.
2. Jurisdictional Traps: The contract dictates disputes be resolved in a foreign court where the Chinese company has no assets. This is also often done by Chinese lawyers who know Chinese courts do not recognize or enforce judgments from the specified foreign country. (See here where Chinese Law Professor Donald Clarke writes that to “the best of . . . [his] knowledge, Chinese courts have not yet enforced a U.S. judgment against a Chinese national and in favor of someone with no connections of birth or citizenship to China”).
3. Misleading IP Arrangements: The contracts appear as though the foreign company is licensing its IP to its Chinese counterparty, but actually transfer IP ownership to the Chinese entity.
4. Unfavorable Termination Clauses: The contract has terms that make it virtually impossible for the foreign company to terminate the agreement without incurring significant penalties, even if the Chinese counterpart fails to meet its obligations. See Do Not Let Force Majeure be a Major Force In Your China Contract.
5. Concealed Exclusivity Clauses: The agreement appears to be a non-exclusive deal, however hidden or carefully worded clauses actually grant the Chinese company exclusive rights to certain products, markets, or technologies. Conversely, the contract may be drafted to make the foreign party believe it has exclusive rights to certain products, markets, or technologies when in reality, it does not.
6. Ambiguous Quality and Delivery Standards: The contract, especially in manufacturing, has poorly defined quality standards that allow the Chinese company to produce inferior products. Similarly, the contract may seem to require on-time delivery when it actually does not.
7. Risky Payment Terms: The contract legally requires the foreign company to pay for product or services even if the Chinese company never delivers as promised. Relatedly, the contract may require the foreign company to deliver even if the Chinese company fails to pay. On multiple occasions we’ve had foreign companies come to us after being sued for failing to deliver technology without having been paid for it.
8. Undermining NNN Protections: Our attorneys constantly address attempts by Chinese entities to dilute our Non-Disclosure, Non-Use, and Non-Circumvention (NNN) contracts and clauses. Chinese lawyers often propose minor adjustments or new terms that enable the Chinese party to appropriate the foreign company’s IP without consequences. At least 2-3 times a month, I have to tell a company seeking my assistance with their stolen IP that the NNN Agreement they thought protected them actually did not.
9. Clauses that Don’t Work: The contract contains provisions in the Chinese version (or sometimes even in the English version) that simply don’t work for China. My law firm recently informed a company that the contract this company believed protected them against currency fluctuations actually did not, and if it wanted its product, it would need to pay its Chinese counterparty an additional ~$130,000.
Foreign Company Solutions
China’s growing tensions with other countries mean that foreign companies need to exercise extreme caution when contracting with a Chinese company or even in sharing sensitive information with their own counsel.
Though the motivations behind the questionable lawyer behaviors are nuanced, the risks to foreign companies are clear and real, and finding advisors who will prioritize your interests is crucial.
If your company will be contracting with a Chinese company, you should use qualified counsel to help you navigate potential pitfalls and ensure that your contract works for your particular situation. Retain counsel you are certain will neither work against you nor reveal your information to your Chinese counterparty without your permission. It is equally important that this trusted advisor is an expert in Chinese law and business practices applicable to foreign companies doing business in or with China, and is fluent in both Chinese and English.
When doing business with China tread with caution, arm yourself with knowledge, and retain trusted and qualified counsel.
