Tips for dispute resolution in China: Working with the authorities (1)

A Chinese company broke the deal, what are my options to resolve the dispute?

Will the embassy or police help me?

How do I sue a Chinese company?

Can I collect damages?

How can I avoid future disputes with my Chinese partners?

And if I have disputes in the future, what can I do to ensure I will win?

If you are asking these kinds of questions, then this blog post is for you!

My experience with dispute resolution in China

During my 20 years living in Asia, I’ve owned a number of different business entities in greater China, ranging from China manufacturing WFOE’s to service companies. Despite our best intentions with our Chinese business partners, sometimes disputes escalate and we look to the legal system for resolution.

I’ve had my share of success as well as failure in the China courts, and in this blog post I’d like to share some of the key lessons, pitfalls and best practices that I learned along the way when dealing with the local police, local lawyers, local courts, embassies and business associations.

Reporting Chinese companies to the Better Business Bureau

Unfortunately there is no Better Business Bureau in most parts of Asia where you can take your grievances. So you can cross that one off your list of options.

Getting help from the Chinese embassy

You can try to contact the Chinese embassy in your country, but in every case I have witnessed in the past 20 years, they will give some excuse why they are too busy or why they aren’t the right people to help you.

Basically, they are so overwhelmed with requests like yours that they can’t possible get involved unless the loss is massive, like in the millions of USD.

So you can cross that one off your list of options.

Most likely the embassy will suggest you contact the police in China.

File a report with the local police.

Unless you have a very clear case and concrete proof of illegal (not unethical) activities, the police in China will most likely say they can’t help you.

If you are lucky, they will ask you to file a report, which must be done in person. That means you fly to China or appoint somebody. If the target company has not disappeared and is a real company with real assets, you may have a chance to work with the police and/or have a local lawyer issue a demand letter. But if you aren’t based in China, realize you may need to appoint power of attorney to a local representative.

If you do end up working with the police, it may help to engage a private investigator. I’ve had success using a 3^rd party to collect all the facts and present to the local police. Basically I paid for my representative to do the “police’s work for them”. Investigation can cost 1000’s of USD per day, but if you have a large case and the ear of the police, it may be worth it.

Will your embassy in China help solve your dispute with a Chinese company?

Depending on what county you are from, your Embassy in China may be a bit more helpful than the Chinese Embassy back home. I’m sure they also get lots of mail from companies in situations like yours. Most of the time they will suggest you contact the police and they may give you a list of lawyers and some English speaking Chinese government offices that are, in theory, supposed to help you.  So it can’t hurt to contact your Embassy. But unless your loss has political implications or is very large, I would not expect the Embassy staff to lead the charge to get your money back.

Q: If the embassy and police can’t help, where do I turn to for support?

A: Consider engaging a local lawyer to issue a demand letter and explore litigation if necessary.

Demand Letter

In China you can sue for lost revenue caused by the subject company’s poor performance. In most countries you can only sue for direct damages.    So you go in asking for a big number, and then negotiate down to something that is still acceptable.

KEY POINT: Unlike most other nations, in China you can sue for lost revenue. Let’s say you are buying from a Chinese factory and selling overseas. Since the price you sell to your buyers is certainly much higher than the price you pay to your suppliers, your demand letter can “swing big” and put the fear of God into a supplier.

But there is one potential road block. If the subject company is a scam, meaning not a real business…just some guys pretending to be a company, then a demand letter doesn’t have much impact. The subject company needs to be legit with assets to lose for a demand letter and fear of the law to have effect.

If you are sure the seller is a real company, then you can skip the initial due diligence. But if you are not 100% sure, then I would recommend the initial due diligence first before spending money on the letter.

That is it for the first part of this two part series. My next post will help you determine if you should walk away, conduct due diligence, issue a demand letter or go right to court.