Tips for dispute resolution in China: Working with the authorities (2)

In my last post about dispute resolution in China we covered:

• Reporting Chinese companies to the Better Business Bureau
• Getting help from the Chinese embassy
• File a report with the local police.
• Will your embassy in China help solve your dispute with a Chinese company?
• Demand Letters

Let’s move on to some of the questions you should be asking if you are thinking about suing a Chinese company!

The following flow chart (compliments of AsiaBridge Law) will help you determine if you should walk away, conduct due diligence, issue a demand letter or go right to court.

Typical Dispute Resolution Project Steps

Step One: Confirm if you are dealing with a scam or a legit entity

If it’s a scam, your options depend on the amount of money involved

• If over $30,000, it makes sense to engage a private investigator. Most law firms don’t provide this service, but I would be happy to make introductions for any readers who need an investigator.
• If under $30,000, because of the costs involved to retain the services of an investigator, may not make economic sense to move forward. But if you are looking for a moral victory, the investigators are willing to help on any size project, so long as their fees are covered.

If it’s a legit company, your lawyer will ask you to send the key documents and they will conduct an initial review then offer a quotation for their service.

If you are not sure if the individual/company is a scam or legit, due diligence can be conducted to confirm.

Step Two: Dispute Resolution

Projects roll out as follows:

• Quotation and Service Fee presented by lawyer to client for review.
• Upon receipt of signed service agreement and payment, the project officially starts.
• Case is reviewed in detail & demand letter drafted
• Demand Letter & Strategy is presented to client for confirmation
• Demand Letter issued
• Follow up call given (if needed)
• Client updated on results. Project completed.

At the law firm where I serve on the board of advisors, 30% of cases are closed to client’s satisfaction before moving to litigation. The most effective technique involves a well-crafted demand letter from the law firm followed by a phone call. Both are done in Chinese from a respected Chinese lawyer.

Introduction to Litigation in China

Litigation in China is actually fairly straight forward and affordable compared to the US and Europe. Overseas companies can indeed win against local firms and individuals when they have the right lawyers and a solid case.

It is important to find a local lawyer who understands the nuances of the legal system of the particular jurisdiction (at city or province level).

Perhaps even more important is to be well prepared in advance.  Lawsuits are quickly settled when you can show the court Chinese language contracts which included pre-agreed penalty clauses.

Litigation Step One: Initial Case Review

In order to assess the validity of your case from a Chinese court’s perspective, the lawyer will ask for the following:

1. Overview of the situation including the root cause of the conflict.
2. Supporting documents such as: copies of the signed contracts & agreements/ proof of transactions (bank slips)/ website & contact details of the Chinese party (we will not contact them but will use this information to review the Chinese entity)

If you have a strong case, project moves to step two.

If you have a weak case from a legal perspective, the honest lawyer will offer opinions on your best next step. The unethical lawyer will charge you for a court case he knows you can’t win.

Litigation Step Two: Verify Financial Assets

In addition to a moral victory, most plaintiffs also seek financial compensation. Specialized 3^rdparty investigators are engaged by Lawyer to discreetly obtain information about ownership, assets and financial status to help determine the defendant’s ability to pay damages should the plaintiff prevail in the courts.

If the defendant is not in a position to pay damages, going to court may not prove cost effective and the lawyer will offer opinions on your best next step.

If the defendant is in a position to pay damages, and the case is strong,  the lawyer will offer a detailed proposal outlining the plan for litigation and costs involved.

Tips & best practices for suing Chinese companies

1. Keep in mind that a demand letter or threat of court action can lead to a complete communication breakdown. Once this letter is sent, walls are put up by the subject company and getting to the facts of the situation becomes very difficult. In many cases they simply stop responding to your emails and “call you bluff” if they suspect you are not willing to go to court.

2. A demand letter template adjusted by you (rather than a lawyer) is not going to do much good. If you want to go down that route, you need to get an English speaking Chinese based lawyer involved so that they at least understand the basics and can prepare a logical argument in the form of the letter addressing what the target company has done and what remedies are requested. If you cobble together some thoughts of your own using another company’s template, and even if translated into Chinese, the target company will most likely sense that you are bluffing and know that you have not actually engaged a law firm to support you. In my experience, the drafting of the letter is not very expensive, and if your situation is cut and dry, then it won’t take much time for the lawyer to get up to speed and that keeps costs down.

3. Some people think they can use a US based lawyer to scare the Chinese company into corrective action. The only person that benefits is the US lawyer. They get paid to draft a letter that has next to no impact. Chinese companies know that a US lawyer and even a US court has no authority in China. So don’t waste your money with that route, in my opinion.

4. Blacklist them!

Considering listing bad companies at Supplier Blacklist to expose their poor performance and warn others. At least you can get some emotional satisfaction now, even if it takes some time to get your money back and catch these crooks.

Tips & best practices to ensure you are well positioned if you have a dispute with a Chinese supplier.

If you have the following items in place, then there is a decent chance of negotiating a resolution that is acceptable, and you may not need to go to court.

1. A signed / chopped contract that clearly defines what is the acceptable level of quality.
2. A clear paper trailing showing proof of payment.
3. The seller named on the contract matches the receiver of the payments. (With so many trading companies out there it is a common mistake to have a contract with a supplier but pay a trading company!).
4. Your supplier has physical and financial assets (small “one-man-bands” disappear as soon as they feel a lawsuit is on the way).
5. The jurisdiction on the contract matches the location of the supplier’s assets at a city, province or country level.
6. It is always nice to have future orders you can leverage as well.
7. Also, before placing the PO did you or a 3rd party do an audit / due diligence at the factory to confirm they were legit. If yes, please keep that report on file as you may need to refer to it later.
   If you answered “no” to the questions about audit and inspection, please slap yourself hard on the wrist and pray you have not just learned an expensive lesson. And shame on you as 3rd party Audits (and even Due Diligence) are readily available and affordable.

That’s part two in the books. If you have any legal issues that need litigating in China please feel free to visit AsiaBridge Law.