How NOT to Handle Your China Legal Matters

There is an expression applied to those who do something particularly unwise in China: “checking one’s brain at the gate.”

I got a call the other day from an American who told me he was owed more than $250,000 by someone in China. The American told me he had given this person in China the money so the two of them could start a business in China together. The Chinese person was now holding on to the money, claiming it as a gift. The American was exploring his options for getting the money back. I asked the American to send me any writings that indicated the purpose of the more than $250,000 he had transferred. He told me he had no such writings. He then said that he had been told written agreements were of almost no value in China so he had not bothered with any.

Unfortunately, this is not an isolated example. We are always getting contacted by companies that bought millions of dollars of product from a Chinese manufacturer with no written mention of quality standards. We are aware of American companies that brought their “great idea” to China for production, showed their great idea to a Chinese manufacturer without requiring the signing of any sort of trade secret or confidentiality agreement (NNN Agreement), and then had their great idea stolen from them. We have had calls from companies claiming to be owed millions in commissions from Chinese companies, but without any written commission agreement. We are aware of companies whose former employees have taken nearly all of their China business for lack of any employee trade secret or non-competition agreements. We know of an American company that was blocked from exporting its product from China because someone in China had registered in China the trademark the American company had been using for the last five years.

And the excuses are nearly always the same:

  • “We were told business in China is based on relationships and written contracts would interfere with that and are just not done.”
  • “We just felt we did not have time to do these sorts of things.”
  • “The whole reason we went into China was to save money.”
  • “Nobody told us.”

I thought of all this today after coming across an interesting New York Times article, entitled “Crouching Corruption, Hidden Fraud,” James Ku writes this article in the first person about his stint as the manager of a Shanghai start up company. Mr. Ku writes that he, like “some of the world’s most experienced business people made the mistake of ignoring basic business principles when chasing China’s seemingly limitless potential for profit.”

In addition to my law firm’s China work, we do a ton of legal work for other emerging market countries and I cannot remember a single instance involving a country other than China where someone checked their brains at the gate. I bet nobody woke up this morning and said to themselves, “hey, everybody else is going into Cambodia so I better go there today.” I wish I could say this about China.

Everyone knows China is booming, but everyone should also know it has plenty of risks that require mitigation just like everywhere else. In other words, don’t check your brains at the gate. What do you think?