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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.

16 responses to “China Lawyer Ethics — Perils And Pitfalls For Foreign Companies”

  1. Fascinating story. Although stories like this in Asia aren’t uncommon–somehow they continue to be alarming each time I hear, read, or experience something like this. From a sourcing perspective–I think a similar strategy applies in terms of building a relationship with suppliers. While we don’t just “trust” things will be fine because we have an established track record with a vendor (as you mentioned in your “Don’t trust–Verify” post), the promise of repeat business is an important reason why Asian factories are less inclined to try and cheat us. As a sourcing company, we not only represent the possible business of one or a few product lines, but an ever-growing portfolio of multiple product lines for many companies. Our vendors know this and we’re happy to bring more and more business to those that perform well.

  2. Fascinating story. Although stories like this in Asia aren’t uncommon–somehow they continue to be alarming each time I hear, read, or experience something like this. From a sourcing perspective–I think a similar strategy applies in terms of building a relationship with suppliers. While we don’t just “trust” things will be fine because we have an established track record with a vendor (as you mentioned in your “Don’t trust–Verify” post), the promise of repeat business is an important reason why Asian factories are less inclined to try and cheat us. As a sourcing company, we not only represent the possible business of one or a few product lines, but an ever-growing portfolio of multiple product lines for many companies. Our vendors know this and we’re happy to bring more and more business to those that perform well.

  3. Yikes. What a story. I’ve experienced similar shocking episodes where Korean lawyers’ professional ethics were not well matched with my expectations. But they were definitely exceptional — this is NOT “par for the course” in Korea. (These incidents did, however, manifest themselves much more frequently than I would imagine they would in the States.) Still, I think you’re correct to note that we American lawyers are terrified of our bar associations and Codes of Professional Conduct. If I lost my license, I don’t know what I’d do. I don’t know who I’d be.
    Anyway, my partner Mr. Doil Son is one of the good guys. I feel blessed to have a Korean partner I can trust completely, and who trusts me completely.

  4. CLB, I doubt you will get much comment to this post from Chinese or Korean attorneys. Partially this is a cultural issue, and partially it’s a “local counsel” issue which exists in numerous places, even in smaller places in the USA where the attorney community tends to know each other well. The lesson is that foreign clients need to give their lead counsel, not local counsel, more authority to supervise the matter. When Chinese counsel tells me the old “look, this is China” routine, I tell them, “Sure, but this is the client, and it has to go our way.” Don’t let local counsel take the reins; the ground rules for our expectations of attorney conduct have to be established from the start. You would be surprised how fast local counsel adapts and learns when confronted by a client and its lead counsel who set the ground rules.

  5. hmm, confidentiality is also the top ethics rule in my professional universe. Another similarity is that telling us interpreters everything would only work to the clients’ benefit.
    Forum speakers sometimes refuse to send their speech texts, especially when it’s propriety research results not yet made public. The IPR concern is a legitimate one. For one thing, speakers and interpreters are for some unknown reason kept insulated from each other, so that all files have to be passed on through some intermediary, who don’t feel strictly bound by interpreter’s ethics. Then, there are plenty non-professionals on the market , who are merely moonlighting and don’t take the name of the interpretation seriously. It’s not their profession after all. Still worse, even well trained professional might not be able to keep their mouth shout.
    Especially where there’s a personal stake.
    Interpreters sometimes get advance access to policy and business information that affect their own or family/friends’ interest. To tell or not to tell?
    The decision might be particularly hard when telling means gains for their own people without hurting others.
    I lately worked for a client in the fund management business. This, without identifying the client’s name of course, I told my parents. My father thinks it’s no big deal if I hear some good stock picks and let him know. He’s no market mover with his petty investment. I did hear a lot of talks about stock. These fund managers love their job and can’t stop talking about it even at dinner table after work. I also heard shareholder change plans with stock price implications. Yet I decided not to tell. But I couldn’t not talk to my parents about this experience. So I shared with them what learned from books I bought in preparation for this job. Approaches to better analysis of stocks and funds. That’s all.

  6. Yikes. What a story. I’ve experienced similar shocking episodes where Korean lawyers’ professional ethics were not well matched with my expectations. But they were definitely exceptional — this is NOT “par for the course” in Korea. (These incidents did, however, manifest themselves much more frequently than I would imagine they would in the States.) Still, I think you’re correct to note that we American lawyers are terrified of our bar associations and Codes of Professional Conduct. If I lost my license, I don’t know what I’d do. I don’t know who I’d be.
    Anyway, my partner Mr. Doil Son is one of the good guys. I feel blessed to have a Korean partner I can trust completely, and who trusts me completely.

  7. CLB, I doubt you will get much comment to this post from Chinese or Korean attorneys. Partially this is a cultural issue, and partially it’s a “local counsel” issue which exists in numerous places, even in smaller places in the USA where the attorney community tends to know each other well. The lesson is that foreign clients need to give their lead counsel, not local counsel, more authority to supervise the matter. When Chinese counsel tells me the old “look, this is China” routine, I tell them, “Sure, but this is the client, and it has to go our way.” Don’t let local counsel take the reins; the ground rules for our expectations of attorney conduct have to be established from the start. You would be surprised how fast local counsel adapts and learns when confronted by a client and its lead counsel who set the ground rules.

  8. hmm, confidentiality is also the top ethics rule in my professional universe. Another similarity is that telling us interpreters everything would only work to the clients’ benefit.
    Forum speakers sometimes refuse to send their speech texts, especially when it’s propriety research results not yet made public. The IPR concern is a legitimate one. For one thing, speakers and interpreters are for some unknown reason kept insulated from each other, so that all files have to be passed on through some intermediary, who don’t feel strictly bound by interpreter’s ethics. Then, there are plenty non-professionals on the market , who are merely moonlighting and don’t take the name of the interpretation seriously. It’s not their profession after all. Still worse, even well trained professional might not be able to keep their mouth shout.
    Especially where there’s a personal stake.
    Interpreters sometimes get advance access to policy and business information that affect their own or family/friends’ interest. To tell or not to tell?
    The decision might be particularly hard when telling means gains for their own people without hurting others.
    I lately worked for a client in the fund management business. This, without identifying the client’s name of course, I told my parents. My father thinks it’s no big deal if I hear some good stock picks and let him know. He’s no market mover with his petty investment. I did hear a lot of talks about stock. These fund managers love their job and can’t stop talking about it even at dinner table after work. I also heard shareholder change plans with stock price implications. Yet I decided not to tell. But I couldn’t not talk to my parents about this experience. So I shared with them what learned from books I bought in preparation for this job. Approaches to better analysis of stocks and funds. That’s all.

  9. In light of Handan’s worthy comment, I had a bad experience with an interpreter I hired in a case, to interpret a hostile defense witness’s testimony. By the end of the day’s deposition, the interpreter was trying to work out a business deal with the defendant to sell its merchandise! Ethical? And trustworthy interpretation, in light of potential self-dealing by the interpreter?
    How about a lawyer stealing his client’s business idea and implementing it in his own name before he had helped his client do it, then proceeding to assist his client to do so, and competing with his client? Such a case occurred here in NY Chinatown about 15 years ago with respect to running a Chinese movie rental company (or should I say, two companies?). Ugly case.
    Ugly world out there. “Ren chi ren.” All we can do is be vigilant and try to promote higher standards of professionalism.

  10. In light of Handan’s worthy comment, I had a bad experience with an interpreter I hired in a case, to interpret a hostile defense witness’s testimony. By the end of the day’s deposition, the interpreter was trying to work out a business deal with the defendant to sell its merchandise! Ethical? And trustworthy interpretation, in light of potential self-dealing by the interpreter?
    How about a lawyer stealing his client’s business idea and implementing it in his own name before he had helped his client do it, then proceeding to assist his client to do so, and competing with his client? Such a case occurred here in NY Chinatown about 15 years ago with respect to running a Chinese movie rental company (or should I say, two companies?). Ugly case.
    Ugly world out there. “Ren chi ren.” All we can do is be vigilant and try to promote higher standards of professionalism.

  11. Wall Street Journal on Korea Legal Market Opening: "Free the Lawyers"
    Today&aposs Wall Street Journal carries an editorial on the draft Foreign Legal Consultants Act ("FLC Act") which is up for a vote in the National Assembly. This is not a fisking, per se, but additional &#045&#045 hopefully informed &#045…

  12. Wall Street Journal on Korea Legal Market Opening: "Free the Lawyers"
    Today's Wall Street Journal carries an editorial on the draft Foreign Legal Consultants Act ("FLC Act") which is up for a vote in the National Assembly. This is not a fisking, per se, but additional -- hopefully informed -…

  13. You are right saying :
    Especially where there’s a personal stake.
    Interpreters sometimes get advance access to policy and business information that affect their own or family/friends’ interest. To tell or not to tell?

  14. You are right saying :
    Especially where there’s a personal stake.
    Interpreters sometimes get advance access to policy and business information that affect their own or family/friends’ interest. To tell or not to tell?

  15. Lawyer Ethics With Chinese Characteristics. It Matters.
    Second year SMU law student, Jing “Brad” Luo, recently had an article of his on China lawyer ethics published in China Law & Practice Magazine. A law student getting an article published in such a prestigious magazine (in his second language, no less) …

  16. Lawyer Ethics With Chinese Characteristics. It Matters.
    Second year SMU law student, Jing “Brad” Luo, recently had an article of his on China lawyer ethics published in China Law & Practice Magazine. A law student getting an article published in such a prestigious magazine (in his second language, no less) …

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