Be careful when resolving financial disputes in China

Over the years, there have been many reports about financial disputes in China gone bad. The sad tale of one such individual was recently reported in the Washington Post.

A summary of the story is: 37-year-old Steve Fleischli of Labadie, Mo., CEO of Washington, Mo.-based NorthPole Ltd., has been cooling his heels in China since January this year, after he tried to personally settle a commercial dispute with company suppliers in Xiamen China. While the merits are unclear, it is clear that Fleischli flew to Xiamen, met with some of his company’s Chinese suppliers, the suppliers were not happy and the local police had to escort him out of the building. At some point, his passport was taken, he discovered he was the legal representative of his company in China and subsequently he was fired by Warburg Pincus, the equity investor of NorthPole, for “gross misconduct.”

The human side of the story is that he has a wife and three-year-old daughter waiting for him in Missouri while he is in Chinese limbo.

Could this happen to you? Yes, if you do all the wrong things, and no, if you are careful.

To be fair in looking at this, keep in mind what would happen if the situation was reversed, and a Chinese executive showed up to settle a supplier dispute in the United States. Suppose the supplier(s) found a sympathetic judge who decided that there was reason to believe that this Chinese company was probably in the wrong, the executive was personally responsible and posed a flight risk. Would the court confiscate his passport? It might. Could he/she appeal? Yes. Would it take time, money and a lawyer? Yes. Would they be stuck in limbo until things were resolved? Absolutely.

Is there a difference between the United States and China in these types of cases? Definitely, and it is based on the standard the supplier(s) would have to show to get a passport confiscated. The other difference is that in China they reach for their connections, while we reach for our lawyers. As an old lawyer once told me, a friendly judge is worth more than a stack of legal books. In local areas of China, this is the rule rather than the exception.

As you may have already sensed, dispute resolution is still a no-holds-barred free-for-all in China.

The rule of law and legal systems are new, and China is a country that takes a different view of commercial disputes and corporate responsibility.

For example, no U.S. CEO has ever been put to death for fraud or wrongdoing, even when lives have been lost. Not so in China, where it happens on a regular basis.

You might ask, why the big difference? In part, it’s historical. Economic crimes are on the same level as violent crimes in China. Another part is smaller margins. As discussed before, many Chinese businesses operate on razor-thin margins. In such circumstances, an economic set back is not a routine bump in the road, but a matter of survival. Imagine having to borrow money at 50-percent interest for materials and then not being able to repay it. Many of these “loans” are made by people who do not tend to be the forgiving type.

Here are a few rules you should keep in mind when involved in a commercial dispute in China.

1. Do not send company people to try to settle commercial disputes, unless you really do not like them.
2. If you are the CEO, do not go to China to try to settle financial disputes, your act of heroism might turn you into a headline.
3. Understand your corporate and personal responsibilities under Chinese law.
4. Understand what will be involved if you are sued in a Chinese court and the impact it will have on your company’s business in China.
5. Understand that in China commercial disputes involving fraud could lead to serious jail time or death if there are lives lost or large sums involved.
6. Understand that the U.S. Embassy/Consulate can do nothing for you; specifically the State Department’s website says that, in regard to commercial disputes, the Chinese “may prohibit you from leaving China until the matter is resolved under Chinese law. There are cases of U.S. citizens being prevented from leaving China for months and even years while their civil cases are pending.” U.S. Embassy and Consulates General “have no law enforcement authority in China and cannot recommend a specific course of action, give legal advice, or lobby the Chinese government regarding a private citizen’s commercial dispute.”
7. Negotiate at a distance, the further away you are the more leverage you have.
8. If you want a face-to-face, invite them to the United States or use Skype.
9. If negotiations are necessary, always use a third-party intermediary.
10. You can use a lawyer but anticipate the majority of the work will be accomplished at the negotiating table, not in the courtroom.
11. Never go to their offices or factory if there are big problems. Find a public place like a five-star hotel lobby and have an exit plan in mind.
12. Get everything in writing, officially Chopped (Chinese Company Seal) and signed by the Chinese legal representative before money changes hands (You may want to check the Chop against the Chop on your original Agreement.)
13. Recheck your due diligence, carefully review the incorporation status of the company, its licenses, who the legal representative is and take nothing for granted.
14. Beware the local government. They are much more likely to want to protect a local business that employs people, pays taxes and has personal connections to the government, than a foreign company who they will never see again.

As with all things in China, take care and remember you are not in Kansas anymore.