Settling Disputes with Chinese Companies
Chinese companies approach litigation and arbitration differently from their Western counterparts.
For Western companies, litigation is often seen as a last resort—a process that is expensive, time-consuming, risky, and unpleasant. In contrast, Chinese companies are often reluctant to engage in good faith settlement negotiations. They fear that negotiating will be viewed as admitting weakness or conceding that their position isn’t strong. This fundamental cultural difference can create significant challenges when attempting to resolve a dispute with a Chinese company.
Negotiating Settlements with Chinese Companies
Western companies often spend months negotiating in good faith, attempting to reach a settlement, while the Chinese side barely budges or constantly changes its position. In many cases, this is a deliberate strategy to frustrate the other party into making concessions. Eventually, many Western companies abandon the negotiations and seek legal counsel, realizing that settlement isn’t working.
For example, one of our clients—a U.S. manufacturer—spent thirteen months negotiating with their Chinese supplier over a breach of contract. Despite the American company offering multiple concessions, the Chinese side refused to finalize any agreement. Instead, they repeatedly claimed they needed more time to consult with internal stakeholders. By the time the client reached out to my law firm for assistance, their settlement offers had become so generous that they risked undermining their position in litigation.
This is a common scenario, and it underscores the importance of caution when negotiating with Chinese companies.
What We Do When Litigating Against a Chinese Company Becomes Necessary
When settlement negotiations fail, our China dispute resolution attorneys typically follow the following steps to prepare for litigation or arbitration:
- Review relevant contracts to identify the legal obligations of both parties.
- Gather and analyze facts to establish a clear understanding of the dispute.
- Research the Chinese company to uncover information about its assets, ownership, and operational practices.
- Conduct legal research to confirm jurisdictional and procedural requirements.
- Evaluate settlement negotiations to determine whether anything said during discussions could be used against our client.
While steps 1-4 will be familiar to most lawyers, step 5 is mostly confined to disputes involving Chinese companies. This is because, unlike in most Western legal systems, settlement communications are not automatically protected from being used as evidence in Chinese courts or arbitral proceedings.
Settlement Talks with Chinese Companies: A Risky Terrain
Chinese companies often use settlement negotiations solely to gather evidence, not to settle. For example, they might push you to offer lower settlement amounts, then later argue in court that your lowest offer reflects the true value of the case. Similarly, they may exploit any factual admissions you make during negotiations.
One notable case involved a European tech company seeking to negotiate a settlement with its Chinese distributor before retaining our law firm. In an effort to demonstrate goodwill, the European company admitted in an email that their instructions on product quality specifications “could have been clearer.” Later, during arbitration before a Chinese tribunal, the Chinese distributor used this statement to argue that the fault lay entirely with the European company. The tribunal ultimately reduced the damages awarded to the European firm, partly due to this admission.
Western companies often approach negotiations with a “win-win” mindset, believing that demonstrating trust and goodwill will encourage the other side to reciprocate. However, in Chinese negotiations, this approach can backfire. As my colleague and negotiation expert Andrew Hupert once told me via email:
“Win-Win type negotiators often believe the best approach to a negotiation is to demonstrate their goodwill, trust, and value by ‘over-delivering.’ They believe that if they provide the other side with what it wants now (technology, brand, product designs), the other side will feel obligated to reciprocate later (distribution, execution, quality control). This does NOT work with Chinese companies, as they will virtually always take what is offered and lock in their gains without any intention of ever reciprocating.”
I have seen the above play itself out more times than I can count.
One of the lesser-known challenges when negotiating with Chinese companies is the role of their in-house legal teams. Many Chinese companies employ a large roster of poorly paid company attorneys, whose primary role seems to be stalling negotiations with foreign companies rather than resolving disputes. These in-house lawyers are skilled at dragging out discussions indefinitely, often without any intention of ever reaching a deal.
Foreign companies frequently misinterpret this dynamic. They assume that because the Chinese company is devoting time and resources to having its legal team engage in negotiations, the company must genuinely intend to settle the matter. However, this is often not the case. The real goal of the Chinese company is to exhaust the foreign company’s time, patience, and financial resources, while avoiding resolution. This tactic allows them to delay payment, obscure their intentions, or even force the foreign company into making unnecessary concessions out of sheer frustration.
Understanding this strategy is crucial for foreign businesses. Recognizing that the presence of company lawyers does not necessarily indicate a serious intent to settle can help avoid wasted months of fruitless negotiations and prevent critical missteps during the settlement process.
Protecting Yourself During Settlement Negotiations
To avoid falling into these traps, it’s essential to adopt a strategic and cautious approach when negotiating with Chinese companies. Here are some practical tips to protect yourself:
- Understand their motivations: Don’t project your own assumptions onto your Chinese counterpart. Instead, work to understand what they genuinely want and why.
- Know your goals: Before entering negotiations, clearly define your objectives and desired outcomes. This allows you to stay focused and avoid making unnecessary concessions.
- Avoid factual admissions: Be cautious with your language. Avoid statements like, “We could have been clearer,” or “If we had acted sooner, the damages would have been less.”
- Label your communications: Mark all settlement communications as “Without Prejudice and for Settlement Purposes Only.” While this won’t guarantee confidentiality in Chinese courts, it can help reduce the risk of your communications being used against you.
- Be prepared to walk away: If the Chinese side is unwilling to engage in good faith negotiations, don’t be afraid to end the discussions and pursue litigation or arbitration instead. Walking away early can save time, money, and frustration. After helping companies negotiate with Chinese companies for over two decades, I can confidently say that this last tip is 90% of what you need to know.
For instance, I worked with a U.S. hardware company negotiating a settlement with a Chinese partner over unpaid technology licensing fees. The Chinese side continually requested more concessions, even after several months of discussions. Twice, the Chinese side agreed to a settlement offer, only to back out at the last moment and demand more.
Eventually, I advised my client to stop negotiating and file for arbitration. This decision completely shifted the dynamics, and the Chinese partner relatively quickly agreed to a reasonable settlement.
Why Litigation May Be Inevitable
Despite the difficulties in negotiating with Chinese companies, we often counsel our clients to try settlement negotiations before pursuing litigation or arbitration. However, it’s critical to recognize when negotiations have reached their limit. Continuing to negotiate beyond this point increases your risks without yielding any real benefits.
Litigation or arbitration can reset the playing field by compelling the Chinese company to take your dispute seriously. It also enables discovery, which may reveal undisclosed assets or other avenues for recovering damages. For instance, in one case, our legal team discovered through litigation that the Chinese company owned several overseas bank accounts used to conceal assets. This discovery ultimately led to a very favorable outcome for our client.
Conclusion
Settling disputes with Chinese companies is rarely straightforward. The cultural differences in negotiation styles, combined with strategic tactics commonly employed by Chinese companies, make these discussions uniquely challenging. However, with proper preparation, clear goals, and a willingness to walk away when necessary, you can navigate this process more effectively.
For more on negotiating with Chinese companies, check out Negotiating With Chinese Companies: The Long Version.