Our China lawyers regularly get contacted regarding China hostage situations. So often in fact that they have become relatively routine.
I will set the typical hostage scene by harkening back to a 2009 article, entitled, China Hostage Situation. Now IS A Good Time To Pay Your Debts [link no longer exists]. That article involved an email I had received setting forth the following scenario:
Consumer product company had a rep office staffed with people with US passports. Company had financial problems and needed to file for bankruptcy. Company sent one of their executives to China to advise their suppliers that they were declaring bankruptcy and would be unable to immediately pay their outstanding balances.
The Chinese suppliers did not take this well. They stormed the American Company’s Rep Office and are now holding the US citizens hostage — literally. It has been days now, and neither the police nor the embassy will help extract the people. The whole thing was obviously not handled properly from the start, but this has turned ugly quickly. Each factory is mainland owned.
I’ll let you know how this turns out.
I hope to write a happy ending to this story when/if it resolves itself in a way that protects the US people but I am not so sure it will.
Have you encountered similar experiences?
I responded to that email by saying that my law firm has been involved with many similar situations had we been retained on this one, “our advice would have been so different that things would have never reached this point. We would have told this company to get ALL its personnel out of China before letting suppliers know (from far far away) about the bankruptcy filing and the upcoming slow payments. That is actually always our first advice (orally and in writing) whenever a foreign company contacts us for help with their China debt issues.
I then discussed a somewhat similar situation my firm had handled and how I had written on that in a post, entitled, China, We Have A Problem. A Mostly True Story [link no longer exists]. The key takeaway from that article was the need to get everyone out of town.
The situation in that article was as follows:
Young Chinese Child falls from a window in a room in which an American employee is one of the few adults. Child is very badly hurt, though the child’s injuries will probably not be permanent. His medical expenses by US standards were fairly low, but they are astronomical by Chinese standards. A day later, the injured child’s come with a lawyer and tell this American employee they want USD$250,000 from him and his employer for the injuries that have befallen their child.
The parents make clear to the American employee that many in the town support the parents and that things will get much worse for the American employee if payment is not received. The employer (an American company) calls my law firm and we spring into action. We determine that the police do not seem to be buying into the parents’ story of guilt, yet they have not told this employee and all of the other American employees that they must remain in town because they are suspects or witnesses.
We learn that our client is not happy with its Chinese joint venture partner and that it has no problem taking its employees out of this town and sending them back to the United States to sit this whole thing out. Though they feel terrible about the kid’s injuries, they do not consider themselves responsible. Our research of the facts and the law all indicate our client is not liable.
We determine the best course of action is to get the American employees out of this town as quickly as possible, and on their way back to the United States.We figure that getting them out will change the leverage game entirely and once they are gone we are proven right, as the settlement amount demanded by the parents immediately plunges. Now we can talk with the child’s parents and the joint venture partner (who owns and maintains the building from which the child fell) from afar, pretty much stripped of any imminent threats. Our client agrees to pay the parents something towards the medical bills and we (fairly publicly) ask that instead of the Chinese joint venture partner paying what it owes our client, it instead pay all of that to the family of the injured child. Written agreements in Chinese are signed on all this and we move on.
If you are a foreign company without a China presence and you owe money to a Chinese company, you do not need to worry about a hostage situation (so long as you never send anyone from your company to China), but you do probably need to worry about Sinosure, and for how to deal with that you should read China Sinosure as Existential Threat.
Chinese Law Prof blog did an excellent post on this same topic, entitled, Debt Hostages, on how the Chinese police often look the other way (or even assist) with these kidnappings:
When is kidnapping not kidnapping? Apparently when it’s for the purpose of getting a legitimate debt paid. This, at least, seems to be the social understanding of kidnapping in China, and there’s even legal support for it (the law calls it unlawful detention in that case). The latest case is reported in the Dongguan Times: a couple can’t pay the hospital bill for the wife’s delivery of a baby, so the hospital is holding the baby hostage until the parents pay up. They’ve had the baby for over 100 days so far. One amazing thing about it is that this is apparently a government-run hospital, and the hostage-takers have even held a press conference to justify their actions (apparently they felt the father had not been “sincere” in his efforts to pay). The other amazing thing about it (to me) is that this is seen as relatively acceptable. The newspaper report uses quotation marks around the word “hostage,” as if the baby somehow is not really a hostage. And the most a local lawyer can bring himself to call this is “inappropriate.”
The post notes how taking debt hostages isn’t a big deal in China and the police even sometimes assist:
I’ve been seeing reports of creditors taking debt hostages for years, and they are always similar in key points: the creditor keeps a human being in forcible detention and demands payment of a debt as a condition for release. What’s more, the hostage-taking and the identity of the kidnapper are not secret; that would defeat the whole purpose. And finally, the police do nothing. They think of it as a civil dispute having nothing to do with them. For example, back in 1992 I read of a case where a jilted suitor took a woman’s baby as hostage for the return of over 1,000 yuan in gifts. The police didn’t immediately arrest this known kidnapper; instead, the go-between, the village committee, and “judicial departments” tried for five months to persuade him to return the child. Only then did they finally give up and arrest him.
Actually, I was wrong to say the police do nothing – sometimes they actively assist in taking debt hostages. In a book entitled One Hundred Strategies for Using Law to Clear Up Debts (运用法律手段清债百策), the writer mentions as an aside that a plaintiff trying to collect a debt asked the police and the procuracy to assist. They helpfully detained three people from the defendant organization for up to eight months, but were unsuccessful in collecting.
So what is the new twist? We are increasingly hearing of situations where someone calls up the partner (with that term so broadly defined as to include a life partner and a business partner and really anyone else who might be relevant) of the hostage and says if that person pays x dollars (usually ⅓ to ½ of what is actually owed), the hostage will be released. The partner then pays the money and the company owed the debt then claims it never received any of it. Lacking any proof that any money was paid on the debt and without anything in writing actually from the company, the hostage and its partner(s) are right back where they started from in terms of getting the hostage released, but now they are out a good chunk of money.
So what are the takeaways from all of this?
1. If you are in a debt dispute with a Chinese company and you have people in China, you should get them all out of China as quickly as possible.
2. If you are in a debt dispute with someone in China you should not go to China to try to resolve it.
3. If you must go to China or if your employee(s) must remain in China, think about getting a bodyguard and think very carefully about where you or your employee(s) stay and go. Be careful with whom you meet.
4. Consider preemptively suing the alleged creditor somewhere outside China so you can plausibly claim to the Chinese police and other authorities that you (or your employees) have been seized and held hostage not because of a debt, but to retaliate for your having sued. If you are going to sue, carry proof of your lawsuit with you at all times in China.
5. Take these situations seriously and get experienced assistance immediately.
6. Do not pay money to anyone without a good mechanism in place (and in writing) to ensure that your payment will resolve the debt and immediately lead to a release of the hostage. We typically structure these resolutions where full payment of any settlement amount does not occur until all hostages have been released and are out of China.
For a more academic take on China hostage taking, check out Commercial Hostages in International Business Disputes.