Litigating or Arbitrating Against Chinese Companies: Settlement May Not be an Option

American and European companies often reach out to my law firm after having spent 4-6 months trying to reach a settlement with their Chinese counter-party and then given up. These companies tend to be quite frustrated and I find telling them that what has  happened to them is actually quite common because Chinese companies rarely settle disputed matters early. Reaching settlement with a Chinese company without a live case or arbitration is very difficult.

Chinese companies tend to view litigation differently from Western companies. Western companies generally know litigation to be expensive, risky, and time-consuming, and they typically strive to avoid it. Chinese companies tend to be reluctant to engage in serious good faith settlement negotiations for fear the opposing side will see that as conceding their position is not that strong.

Western companies often will engage in months of settlement negotiations with the Chinese side barely budging and/or constantly changing its negotiating position. Eventually the Western company gives up and calls one of our China litigation lawyers for help in deciding whether it should just walk away or pursue litigation.

Faced with these matters, our international litigation attorneys typically do the following:

  1. Review all relevant contracts.
  2. Gather up all relevant facts.
  3. Research the Chinese company.
  4. Conduct any necessary legal research.
  5. Review the settlement negotiations. Carefully.

Items 1-4 above are going to look very familiar to Western lawyers, but item five less so. This is because, settlement negotiations in the Western world usually cannot be used as evidence at trial or arbitration, but this evidentiary exclusion generally does not apply in Chinese courts or before Chinese arbitral bodies. Because of this, Chinese companies will sometimes drag out settlement negotiations in an effort to get YOU to put forth even lower (or even higher) settlement amounts and then use YOUR lowest/highest settlement offer to argue that YOUR case is worth a lot less or a lot more than you are now claiming. They will also use your factual admissions against you.

Western companies tend not to be prepared for this and we constantly see them saying things in writing like “though we admit we could have been clearer in our instructions to you” or “we do not dispute that if we had spotted this sooner our damages would have been less.” Very roughly speaking, Western negotiators often use “win-win” tactics in an effort to meet their opponent half-way. Using this sort of tactic in trying to settle with a Chinese company can be dangerous. In Chinese Business Negotiation – Guarding Your Virtue [link no longer exists], China negotiation expert Andrew Hupert extorts companies “to stop bargaining like an American and give away nothing for free”:

Are you a withholding, passive-aggressive manipulator who makes promises he can’t or won’t keep? Well, maybe it is time to start — at least in China. No one buys the cow when they can get the milk for free. In China, technology, IP and business methodology is the milk of profitable transactions. If you’re giving it away too early or too cheaply, then you are the expensive cow no one buys. Sorry.

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Americans new to Chinese negotiation think they can build up a bank of good will and trust by “front loading” their benefit package. Novices think that doing business in China is about having Chinese partners owe them favors. They are kidding themselves — and forcing conflict. If the Chinese side of the deal feels that it is ahead of the game, their best move is to terminate the partnership and lock in their gains — not wait around for you to collect on what you feel is owed to you.

Hupert is correct. According to Hupert, Americans seek to demonstrate their good will be over-delivering, hoping to build up a goodwill bank that will be reciprocated by the Chinese side. The Chinese side often encourages this by talking up the importance of the relationship or by acting as though it really truly does want to resolve the dispute. I have found that Korean and Japanese companies value “the relationship” considerably more than the typical Chinese companies, but far too many Americans think China and Korea and Japan are pretty much the same on this, but they most certainly are not. Hupert explains China “relationships” in the real world:

Win-Win type negotiators often feel that the best way to approach a negotiation is to demonstrate their good will, trust and value by “over-delivering.” They feel that if they provide the Chinese side with what it wants now (technology, brand, product designs), that the Chinese side will feel obligated to reciprocate later (distribution, execution, quality control). The western side has read up on guanxi and harmony, and believes this is the way to develop loyalty and respect.

Hupert sets out five ways to protect yourself in and from China and the following portions of his advice apply to settlement negotiations as well:

  • Don’t project your desires on your Chinese partners. Find out what they really want. Assume nothing.
  • Know what you want. Withholding is easy. Knowing what you want from your China counter-party is tougher. Good negotiators in China are able to articulate a graduated list of goals and demands. Prepare for a “YES” when you negotiate.
  • Ask for a specific plan for your future together and negotiate the specifics of what the Chinese company is offering.
  • Walk away smiling, if you have to. Some Chinese negotiators are too grabby for your own good. Don’t stick around hoping things will magically get better on their own because they won’t. If a China deal is going to die, than quick and clean is the best way. Don’t hang around to get abused and battered, praying that they’ll eventually see what a great partner you could be. Get the hell out of there now.

Despite the long odds of settling with a Chinese company without first filing for litigation or arbitration, our China dispute resolution lawyers usually (but certainly not always) counsel our clients to at least try, but to be careful when doing so. Among other things, we urge them to do all that they can to protect the confidentiality of their settlement communications and yet still be mindful of every communication they send. Make clear on all your settlement communications that they are “Without Prejudice and for Settlement Purposes Only.” Doing this will make it less likely your communications show up at trial or arbitration, but it will not guarantee it. We also urge them not to move too quickly off their initial positions, unless and until they see real and permanent movement from the other side. We also work with them to help figure out when good faith settlement negotiations have ended and why at that point the risk of continuing to talk usually outweighs the possible benefits of doing so.

What have you seen when trying to settle with a Chinese company before litigating or arbitrating?

For more on negotiating with Chinese companies check out the following: