Demand Letters to Chinese Companies

Demand Letters to Chinese Companies

Demand letters have become so common in the United States they seldom have the desired effect. Consequently, many lawyers have stopped sending them, believing you should always sue first and discuss settlement later.

For firms that still use them, demand letters are generally sent to attempt to resolve payment or contractual disputes. For American companies, these letters are typically long and threatening. They often contain an extensive recitation of the facts of the case and the applicable laws. They also include the subsequent legal steps the firm plans to implement if the recipient doesn’t comply.

The standard response from the recipient’s lawyer (it is usually a lawyer who responds), if there is a response or acknowledgement at all, generally points out multiple holes in the sender’s letter or claims. It provides its version of the events and relevant laws. It will also state why the client will prevail if the sender decides to move forward.

It’s Not the Same in China

Demand letters to Chinese companies have a much different impact than in the United States. Because the practice of sending these threatening missives is less common in China, the recipients take them more seriously. The communications frequently elicit a response, ranging from refuting the claims and calling the sender a liar to admitting fault, issuing a detailed explanation and ultimately making the requested payment.

Our international dispute resolution lawyers have a much higher rate of success in China demand letters than just about anywhere else. It is not clear exactly why we tend to have such a high success rate with these letters — nor on one level do we really care. But for whatever reason, in China, where demand letters (they are actually called lawyer’s letters there) are less common and companies are not as joined at the hip to their lawyers as in the United States, these letters are viewed as more important, unusual, and serious.

Cultural Differences Matter

Two Columbia Law School professors, Benjamin Liebman and Curtis Milhaupt, did a study, Reputational Sanctions in China’s Securities Market , where they posit that avoidance of public humiliation is a big behavior inducer in China. Unlike in the United States where being sued is viewed pretty much strictly as legal matter, in China it is humiliating, as noted by the Economist Magazine in Shame fills a vacuum in China’s financial law enforcement:

Over the past 18 years, China has introduced rules against market manipulation, fraud, and insider dealing, but enforcement remains patchy… The power they wield appears flimsy — the most serious penalty they can levy is a rebuke to firms and individuals through public notices.

But it is remarkably effective in a country with a long history of punishment by humiliation.

After an entity goes on the government “black list” through public criticism and shaming, raising money through equity markets and banks became more costly, and sometimes impossible. Suppliers and customers also took a tougher line. Some people lost the right to be a director or senior manager, and suffered from pariah status in a country where there is little pity for failure. The criticisms were sometimes even a prelude to formal investigations by the regulatory authorities.

This study highlights the relevance of culture in how to handle a legal matter. In the United States, being sued, investigated, and/or prosecuted is pretty much a legal matter; while in China, it is more than that. When someone gets sued in China, one loses integrity in the public eye.

It is shockingly common for Chinese companies to respond to our demand letters by admitting fault (which American companies virtually never do) and even by explaining in some detail why the problem occurred. Most importantly, these letters work to generate payments fairly frequently as Chinese companies very much want to avoid the reputational problems that come from being sued

Our Approach to Chinese Demand Letters

Our China lawyers have experienced consistent success when sending demand letters to Chinese companies. Instead of crafting lengthy letters filled with facts, figures and legal terminology, we limit ours to one or two pages, always in Chinese. We simply state that the party owes a specified dollar amount for its failure to perform and we briefly indicate what will happen if the Chinese company doesn’t pay immediately or reach some sort of settlement/resolution with our client.

Though the initial response to our demand letters is often negative, a follow-up letter usually prompts the Chinese company to clarify its intentions and frequently results in an offer to settle.