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Do not visit your China counterparty if you have a problem with them

by Dan Harris

A few weeks ago, a China risk consultancy contacted us regarding their own China legal matter. During our conversation, the caller went off and said that he really liked our posts on how to avoid getting kidnapped in China. He then told me that so far this year, not a single week had passed without his company having been called in to deal with a “hostage or hostage-like situation.” He told me that such incidents are way up this year from 2012 and that 2012 had double the incidents of 2011. He said that nobody seems to believe how prevelant this incidents are but that we should keep writing about them because they are “happening like crazy and with China’s economy continuing to soften, they will only increase.”

I forget about that phone call until today, when I received my second “hostage” call in two days. Both are very similar to each other and both are very similar to those we have handled in the past. I am going to merge the facts surrounding these two recent ones and throw in a bit of the previous ones so that nobody can be recognized. Those two and pretty much all of them go as follows:

  1. US company gets into some sort of dispute with Chinese company involving money the Chinese company claims it is owed by the US company. Usually this “debt” has arisen after the Chinese company has provided the US company with terrible quality product and for which the US company refuses to pay.
  2. The Chinese company makes all sorts of threats against the American company, typically including the threat that the Chinese company will make is so that the American company will no longer be able to do business in China ever again.
  3. The American company becomes convinced that the Chinese company is acting unreasonably (because it is) and that if it can simply meet with the Chinese company, reasonableness will prevail and a compromise can be reached. This is somewhat encouraged by the Chinese company, who goes along with the plan of at least having a meeting.
  4. The American company agrees to go to the Chinese company’s hometown for a meeting.
  5. One person from the American company goes to the Chinese company’s hometown for a meeting, at which point the Chinese company (usually with local police right there) makes clear that it is not willing to compromise in any way and angerly demands that the American company pay the Chinese company every single dollar the Chinese company claims to be owed (and sometimes even more than that). The representative for the American company refuses, at which time the “quasi-kidnapping” begins.
  6. The Chinese company/local police will then seize the American’s passport, tell the American that they have already sued their American company for the alleged debt and alerted the border police not to allow them to leave China.
  7. The “partner” of the person being held hostage in China then calls us to assist, always letting us know that they wished they had read our blog posts on this subject before their partner had left for China.

So I am writing about this yet again in an effort to reach as many as possible before they go over to China. What should you do if you have a problem with your China counterparty?  What should you not do?  How can you avoid being held hostage in China?

In How Not To Get Kidnapped In China, we set out the following three rules to follow if you or your company are alleged to owe money to a Chinese company:

  1. If you are in a debt dispute with a Chinese company, think about not going to China at all.
  2. If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.
  3. Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

We really should have added a fourth rule, which rule we discussed in “Shanghai Thugs Forcibly Remove Shanghai Residents. Why This Matters For YOUR Business”:

Though China is relatively safe, one should absolutely not write off the possibility of violence in one’s business dealings in China. My law firm has been called in at least a half dozen times where violence was either threatened or occurred. We tell our clients that if they owe money to a Chinese company or are involved in any sort of dispute with anyone in China (partner, employee, etc.), they should avoid meeting to discuss the dispute/problem anywhere other than in a neutral, very public place in the day time. A high end hotel lobby in Shanghai or Beijing is a good choice. Singapore or Tokyo or Seoul are an even better choice.

In other words, if you really think it necessary for you to go to China to try to resolve your company’s debt issues, at least seek to have the meeting in a hotel lobby in Beijing or in Shanghai, rather than in Xiamen in the conference room of the company to whom the debt is allegedly owed.

In “Bo Xilai’s Lessons For Your China Business,” we wrote of how arguing that the hostage does not personally owe the debt is usually not the fastest/best way to resolve these sorts of situations:

I say this because we have been involved in at least two cases where this was the case. U.S. company owes money to Chinese company. U.S. company ceases to do business and so its key figures assume the issue is resolved in that the company has no assets to pay any debt.  They then get on a plane to a foreign country (one was a China case, the other was a Russia case) and they both get seized and “held hostage” until we negotiate out their release. They wanted us to argue that they personally did not owe the debt; their companies did. Our response was to tell them “that would be an excellent argument if we had the luxury of filing court briefs and waiting months for a judge’s decision, but our goal here is to get you released as quickly as possible.”

We deal with this issue in its nascent stages all the time when we work with our clients to shut down their Chinese entities (which for some reason has been happening like crazy of late). We always instruct our clients never to reveal that they will be shutting down their China operations while anyone from the home office is in China. We also tell them that if they or their company ever wish to return to China, they should pay off all their debts and usually the best way to do that is to announce from outside of China the plan to gradually shut down the China office and then, using that as leverage, negotiate down all of the debts. We always stress that once a reduced debt is agreed upon, there should be a written agreement on that and there should be proof of payment on that agreement as well.

All of this is necessary if you want to formally close your China entity, which is, in turn, necessary, if you want to be able to return.

For more on hostage situations in China, check out the following:

I cannot emphasize enough how serious this is and how little the US Embassy and Consulates can do to help Americans being held. China law actually allows for keeping people in China for the debts of their companies. And trust me when I tell you that accomodation quality can vary.

What are you seeing out there?

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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