Four Common China Law Mistakes To Avoid

China lawyer mistakes

This post highlights four common and somewhat egregious mistakes my law firm’s China lawyers often see lawyers make when representing their clients in doing business with or in China, along with a very brief analysis of what causes each sort of mistake.

1. Not Realizing that China’s Bureaucracy Puts Form Over Substance

Many years ago, a U.S. lawyer called us to discuss his client’s desire to form a company in China. The lawyer asked us the minimum capital the Chinese government would likely require his client put into a Chinese bank to be able to form a China WFOE. Based on the nature and size of the business, we estimated $6 to $8 million — this was back when the Chinese government was much more concerned with the registered capital of foreign companies. The lawyer then asked us to confirm that a portion of the required $6 to $8 million could come from factory equipment not cash, and we assured him that it could. At that point, he said, “good,” because his client had already purchased $5 million in equipment and shipped it to China.

We then had to tell him those equipment purchases could not count towards the WFOE’s minimum capital because they had not been previously designated as going to the WFOE. The lawyer then complained about how his client could not afford to come up with another $5 million and how China was putting form over substance. To which we could say little more than, “yeah”…

This is just one of countless instances where an inexperienced foreign lawyer has done poorly by his or her client by just assuming he rest of the world views the law the same as in their own country. China almost always places form over substance and it does that because it views giving its bureaucrats discretionary authority gives them the discretion to solicit bribes to influence the exercise of that discretion.

2. Not Realizing that China Does Not Enforce U.S. Court Judgments

A lawyer calls us with an airtight $2 million dollar breach of contract lawsuit against a Chinese company. This lawyer had drafted a contract calling for disputes between her client and the Chinese counter-party to be resolved in Boston Federal Court and she had already sued the Chinese company in Boston and secured a default judgment against it. She was now seeking our law firm’s help in domesticating the judgment in China and then enforcing it there and It was clear she expected our international litigators to jump at the opportunity to take this case on a contingency fee basis.

That is until we told her that China does not enforce U.S. judgments. Pretty much never.

She then came up with the idea that we start all over by suing the Chinese company again in China. We had to tell her that could not work because the Chinese court would have two strong grounds for throwing out that lawsuit. First, improper jurisdiction because the contract clearly called for the lawsuit to be in Boston. Second, res judicata because the entire case had already been tried (and won) in Boston (the proper jurisdiction). I have no idea how she explained all this to her client.

Foreign lawyers commonly assume that what makes sense for a domestic transaction necessarily also makes sense for an international transaction. Boston would have made sense in the above instance if the counter-party had been in Los Angeles, but the rules and the issues are different when doing business internationally.

3. Not Realizing that Legal Disputes in China are Conducted in Chinese

Lawyers often call us for “tips” on handling an arbitration in China (usually with CIETAC). We always quickly ask whether the contract calls for the arbitration to be in English or whether the lawyer calling us (or some other lawyer) on the case is fluent in Chinese. This virtually always elicits a really long silence and then they say something about how they had just assumed their case (usually set for hearing in a few months) would be in English.

If you do not specify that your China arbitration is going to be in a language other than Chinese, it will be in Chinese. This mistake stems from the lawyer’s inability to grasp that China is not all that different from the rest of the world. I mean, would anyone ever think that an arbitration in Kansas City is going to be in Chinese even though the contract calling for arbitration there is silent on the language of the arbitration? Generally, arbitrations around the world will be in the language of the country in which the arbitration is taking place OR in the language of the contract. Generally, for Asia, it is in the language of the country. Generally, for Latin America, it is the language of the contract. Generally, for other countries it can vary.

If you want your arbitration in China to be in a language other than Chinese, you must specify that in your contract. See How to Write a Bad International Arbitration Clause.

4. Not Realizing that Chinese Courts Often do NOT Recognize “Standard” Contract Terms

American lawyers often call us our law firm on behalf of their client who has received a product from their Chinese manufacturer, claiming that the product does not meet the contract specified quality. We then determine that the specified quality to which they are referring is “reasonably good quality” in such and such an industry. To their surprise, we immediately beg off working on the case and we then have to tell them how Chinese courts tend to be very literal in interpreting contracts and are not comfortable with what to them are vague terms like reasonable. We then say that there really is no such thing as “reasonably good quality” in a country where you can buy a 50 cent t-shirt that falls apart after its first washing. And/or we tell them of the U.S. company that had us call a Chinese factory (many years ago) from which the U.S. company had received a couple million dollars worth of laptop bags whose handles were not strong enough to hold a laptop. The Chinese factory’s explanation was that if our client had wanted laptop bags strong enough to truly hold a laptop, our client should have ordered the $5 bags, not the $3 ones.

This mistake usually stems from the belief that the U.S. way of looking at the law applies universally, when it does not. China is a civil law country and a phrase like “reasonably good quality” is almost meaningless.

 

If you are not familiar with the ins and outs of China law, just be sure to use a China lawyer of “reasonably good quality” to assist you. That’s a joke.

What do you think?