How to Avoid International Business/Legal Problems

This post is on three potential clients whose situations were so bad I suggested they not hire my law firm. None of them liked what I told them, but two actually hired us anyway. One retained us to deal with the matter on which they initially called. One retained my law firm to deal with another matter and to prevent a recurrence of the situation that precipitated their call in the first place.

All three calls started out pretty much the same with the nearly obligatory, “I got your name from so and so. She/he tells me you are the right/perfect/best person to solve my problem.” I respond by modestly agreeing that my law firm’s International lawyers are pretty experienced with these sorts of matters. All three phone calls quickly declined from there.

The declines began when the companies started telling me the facts of their situations. Two of the companies had purchased product from their long-time Chinese suppliers and had received — for the first time — totally substandard product. They both felt that their Chinese product suppliers were becoming economically desperate and had sent bad quality because they could not afford to spend the time or money necessary to make good product. See China Manufacturing Risks are Sky-High Right Now. Act Accordingly.

Unfortunately, neither company had a written contract with their Chinese supplier. Instead, they had both used purchase orders. They both wanted my law firm to sue their Chinese suppliers on a contingency fee basis and I immediately refused. My law firm rarely takes on a bad product lawsuit against a Chinese company on a contingency fee basis unless there is a valid contract that sets forth the product specifications and the defect in the product stems from failing to meet a contractual specification. See Manufacturing in China: Minimizing Your Risks by Doing Things Right.

Both companies then asked me how much we would charge them if we were to take their cases on an hourly basis and my response to both was the same: “You are welcome to pay us by the hour but if I were you, I would not spend my money on that and I would instead suggest you spend your money to have one of our international manufacturing lawyers write you a manufacturing contract that actually works for China. That would be money well spent because it will go a long way towards prevent this sort of thing from happening again. ” Neither company took too kindly to my suggestion — at least at first. One responded by essentially saying that “my company has just fallen off a cliff and you expect me to pay you to figure out how I can do better next time, if there will even be a next time.” I totally get it. You have just lost a lot of money and the lawyer you have been told is the perfect person to get you your money back is telling telling you to essentially move on.

The third incident was with a company that had supplied its own product to a number of Chinese ships. This company had failed to confirm that the ships to which it was supplying its product were actually owed by the company buying the product and it took our lawyers very little time to discover that they were not. Very roughly, this lack of a link between the company that actually bought the product and the ships to which the product was delivered meant we could not arrest/seize the ships to secure payment and the only way our client could recover on its debt would be to sue the purchasing party directly in a country not exactly known for its rule of law. And the fact that our client had a lousy contract with that buyer did not exactly help.

I suggested to this company that it needed to change its procedures before supplying ships with its product in the future. I was going to tell this company it should in the future always require potential buyers provide a certificate of vessel ownership and then confirm that ownership with the applicable ship registry so there would be no doubt the vessel owner is putting its own ship at risk when it buys the product. But before I could say this, the person with whom I was speaking somewhat angrily told me he knew exactly what he was doing and he had never had this problem before. He made quite clear he did not think he needed any legal advice regarding his future business. In other words, I was to work magic on his problem now and not worry about him making the exact same mistake again.

In all of three of the above cases, these companies had been engaging in risky behavior for many years, apparently without having suffered any real consequences. It seems the old stockbrokers adage that “genius is a rising market” also holds true for international business. Or as I frustratingly put it to a company a few months back: “Look, my grandmother smoked a pack of cigarettes every day of her life since she was 16 years old and she lived to 92, but that just means she was lucky; that does not mean smoking isn’t harmful or dangerous.”

Having a good contract does not guarantee you will never have problems. Nor does it guarantee it will make sense for you to sue if something goes wrong. It does not even guarantee you will prevail if you do sue. But, in our experience (and that of pretty much everyone experienced in cross-border business), having a contract (1) greatly increases the likelihood that the foreign companies with which you do business will not mess with you, (2) greatly increases the likelihood that it will make sense for you to sue the foreign company if it does mess with you, and most importantly, (3) greatly increases the likelihood you will prevail if you do sue. It is the likelihood of losing at trial that causes companies to want to settle and Chinese companies are no different on this score than companies elsewhere around the world.

Lawyers are trained to think about and prepare for worst case scenarios. The current economic downturn is causing worst case scenarios to happen constantly and those scenarios are exposing those who apparently believed such scenarios could never occur. In other words, we lawyers are being proven to have been right all along. Or to put it more bluntly: We told you so.