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China Lawyer Ethics — Perils And Pitfalls For Foreign Companies

foreign direct investment FDI lawyers

Brad Luo over at the China Business Law Blog recently did a two part series on legal ethics in China. Bear with me here people, because this post is highly relevant to anyone who uses or is thinking of using a Chinese lawyer or law firm. The first of Brad’s posts is entitled, Time to Raise The Professional Ethics Bar for Lawyers in China? and Brad starts out answering his own question, with a “You bet!”

In part I, Brad’s biggest beef with Chinese lawyer ethical rules relates to their duties of loyalty to their clients and their duties of confidentiality. China’s ethical rules for lawyers have a “bright line” rule forbidding them from representing both sides in the same conflict, but they go little beyond that. A proposed law would expand this to require lawyers “avoid conflict of interests in joint representations, and to shun conflicts between the lawyer, his close families, and the lawyer’s clients.” As Brad points out, such a revision would be helpful “in China where family ties are stronger than those of some other countries, and a close relationship generates a higher possibility for conflict of interests where the lawyer and his client’s interests diverge if the lawyer’s family members are involved in the same transaction in question.”

Brad is troubled by how China does not require lawyer loyalty to former clients, nor is there a proposed rule change to that effect. As Brad points out, “without the affirmative duty of loyalty to former clients, a lawyer can turn on his own clients while not offending his duty of confidentiality to them.”

In Time to Raise The Professional Ethics Bar for Lawyers in China? (II), Brad rightfully describes “confidentiality” as “the bedrock of an open and trusting relationship between a lawyer and his clients” and notes American lawyers must keep client confidences “strictly confidential and secret.” Chinese lawyers, on the other hand, are prohibited from divulging only “’national secrets, clients’ trade secrets, and privacy of parties’ learned by the lawyer during representation.” “Personal privacy is not defined and Brad sees it as being fairly limited and he concludes that the “duty of confidentiality as stated in [China’s] Current Lawyer’s Law and Ethics does not provide sufficient protection to clients.

Brad concludes the post by saying “if I were a client, I’d hesitate talking about certain things, not even with my Chinese lawyer.” Brad is dead on with this advice and foreign companies using Chinese lawyers must be cognizant of this and this is something I constantly have to explain to my somewhat disbelieving American clients. I think concrete examples will be helpful here.

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 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.

When my law represents Korean and Chinese companies here in the United States, our foreign direct investment lawyers (FDI) have to work with them to convince them that whatever they tell us is privileged and that telling us everything can only work to their benefit. They just are not used to that.

Be careful out there.