Bribes, Returns and Enforcing Chinese Legal Decisions

17/11/11 UPDATE FROM THE WSJ TODAY : "China poses a high corruption risk. No secret there. But did you know it also poses the broadest risk of any country?"  And this too:

"...almost anyone could be a target. I heard this when I was in Germany and Switzerland, where there’s deep concern about protecting the manufacturing competitiveness of small and medium-sized enterprises.  If you have any type of market or price advantage based on intellectual capital, there may be a small company targeting you. And given how hard it has been for the big companies to develop effective cyber security, the small companies are going to be even more vulnerable."

___________________Before the Q&A, a quick follow up on some of the content from last week's webinar.  Here is a link to both the book and blog list that I shared in my presentation about "Preparing to work in China."  There is supposed to be a limited-time posting of the audio content and the Power Point presentation up sometime soon too.  I'll link to that when it's available.__________________Q. Do I need to give gifts (pay bribes) to get done what I really want in China?A. Let me start by saying this, after 15 years of business in Asia, I personally have never knowingly  paid or approved of paying a bribe to get a project done or to by-pass a standard or get around something that was expected to complete in China or anywhere else.  But I have heard that to get an official to come give approval that a newly built-out office space in SZ meets fire code you’ll be asked to pay thousands of USD just to get the jerk to come out for 5 minutes.I was recently talking with someone doing a multi-million dollar a year business in SEA and he was just resigned to the fact that he couldn't do business without paying up.  He had even hired someone to be the runner and pay for him so that it wasn't actually him making the physical pay offs.  I'd don't buy this at all.  You don't have to participate if you don't want to.  At almost all times and in almost all situations you do indeed have a choice.China Law Blog has a great answer to a similar question here, but from a different perspective.  One of the things that I like about Dan’s post is that he points out specifically that bribe paying is so much a part of the Chinese culture that when some Chinese business people are told they don’t have to do it in other cultures they flat out refuse to believe it.In my experience, this incredulity goes both ways.  Most westerners that have no experience with this level of corruption (and usually ones that don’t speak Chinese and/or are here doing business for the first time) simply can’t believe that it’s as common as it really is.China consistently ranks low on any list of corruption.  And whenever I point this out, I get all the China apologists ignoring the fact that China is corrupt in a very different way than is the US and saying to me things like, Yea, well what about Eron or Madoff or the recent banking scandal?!  Yes, there is corruption everywhere, but as the studies show, the corruption in the US is the exception, not the rule.   In China corruption is the rule, not the exception—that’s why Chinese can’t believe it when they’re told they don’t need to pay.I completely agree that the US is NOT perfect, but I’m not saying that it is.  What I am saying is that I’ve done business in the US and in Asia for almost 20 years and I’ve never had anyone in the US offer me an envelope of cash to NOT QC a project.  I’ve never fired anyone in the US for using their position to get cash, favors, dinners, hotel-stays, etc. in exchange for not doing their job correctly.  When I do business in the US, I expect it to be difficult but I expressly do NOT expect someone to offer me an expensive way around the difficulties.  But in China—I’m used to saying no to these “opportunities” to make my business life easier.  In the US I’m not used to local low-level government officials asking for exorbitant payments just to come out and do their jobs—but in China, it’s part of the business planning. Q. One of the best questions that I received at the latest show in HK was from a buyer that was trying to get some actual enforcement of a legal judgment against a Chinese factory.  He was wondering: “Outside of the explicit legal channels, what were [his] options for getting a judgment enforced?”As this guy’s experience showed, and Mike Bellamy and I have both noted in different presentations, that the Chinese courts are getting better and you can win in China.  The problems arise when you realize that a decision in your favor isn’t much good if you can’t enforce it.  So how do you know who is following up and if anything will ever be done about your Chinese judgment?  Honestly?  No one and you can’t—meaning, no one is really responsible to enforce it and you’ll never really know if anything at all has been done.  So, are there any enforcement options available to private individuals or companies?  I’m not a lawyer but here’s what we’ve seen.A. First, who is supposed to enforce your judgment?  This is where you need to go first—the local authorities whether it be a local police or other government bureau, these folks should be your first stop.  Problem is, these folks are the least likely to benefit from taking action (actually doing their job) and helping you.  It’s work for them, it’s a local vs foreign issue, it’s likely both new and not exactly clearly defined and having a foreigner call them out to do their job isn’t exactly endearing either.Second, you need to work through your legal rep’s to see what they can do.  The threat of legal action should now (after a successful trial) have more impact.  You can also contact both the customs and the buyers in foreign countries and make them aware of the court’s decision and try make it difficult/expensive/illegal for the buyer to do business with this Chinese partner.Third, there are all sorts of extra-legal options available to you to encourage the Chinese supplier to follow though.  Everything from taking out ads in local papers, contacting suppliers to contacting HKTDC and other trade groups, posting complaints on online search engines (Alibaba, Global Sources, et al).  We’ve even seen people contact other clients directly when they come to the factory. Q. (Letter from a friend of a client)

“A Europe-based buyer entered into a contract for, and purchased manufactured products, from a PRC-based manufacturer. The orders were partially filled and shipped to buyer. Buyer asked for orders to be completely filled as per contract. Manufacturer did not. Buyer terminated contract due to manufacturer’s breach.“Buyer now seeks to bring parties back to pre-contract position, including return the products shipped to buyer.“Any insight into such an effort? Any suggestions on resources that can offer insight to such an effort? Obvious concerns include: can such products be cleared through PRC Customs; what happens if manufacturer refuses to accept return (e.g., envision truck idling outside of manufacturer’s premises and the baoan refuses to allow truck entry to premises); etc.“Best regards,”N.

A.

Dear N.,Thanks for the email and thanks to John for the kind referral.Without knowing what the product is, the current balance of payments and other relationship contractual details I can’t really give you any specific advice.  But I can tell you what I’ve seen and what I’d bet will happen next.  Before I even get started I’d ask first—can you 100% confirm that your supplier is actually a factory and actually the factory who made the product?  And is your contract with that factory?Now to my thoughts on what will happen.First, partial orders were fulfilled by the Chinese supplier—if the payments were “partial” as well, the Chinese supplier will see this as fine and not feel any obligation to complete the orders.  If everyone involved is “just about” equal with payments/product regardless of the contract, the Chinese will not want to get back involved in the project that could cost them more.  If the Chinese came out ahead, again, no reason to even talk about it.Second, if the buyer cancelled the contract (for legitimate but still somewhat punitive reasons) the supplier will have written off the relationship completely and will have no desire to work with the buyer again.  Typically Chinese see anyone that is willing to so easily terminate contracts/relationships as a very risky partner.Third, if the buyer wants to actually return product to China to be replaced/repaired at their cost there is absolutely no incentive whatsoever for the supplier to talk. Chinese suppliers do NOT believe in “potential orders” and have very little concept of “moral obligation” especially if there (their) money is involved.Fourth, even the Chinese government is working against you in this case—the ability to get rejected/defective product back into China is not just difficult but next to impossible.  There is no VAT available, there are costs involved to the original supplier just to get in back to their factory, Customs has limited processes to deal with returns/rejects, and so no one other than the buyer (and maybe their shipping company) wants to see this accomplished successfully.  Even if you could get it back into China (which you probably can, eventually) there is no reason why the factory would open their gates and accept the truck/container into their facility.Fifth, if you send product back to China and do not plan on having that exact product sent back to you it will, I promise, be sold to someone else.  No way a supplier takes a hit on usable product.Sixth, your whole premise is based on the concept that the contract means something to both parties—you’re half wrong. The contract means nothing to your Chinese supplier.  Why should it?  IF it’s actionable in China and IF you could take them to court (in China) and IF you won and IF it could be enforced and IF the penalties were significant and IF you could follow up on that enforcement and IF you could enforce any subsequent contract and IF they had any cultural legal history/context to refer back too then they might take it somewhat seriously—but they have none of that.  And chances are neither do you.Now, having said all that, if there is tangible financial incentive for the supplier (buyer still owes them money for product; supplier can re-sell rejected product) to work with the buyer you’ve got a better than average chance that you can at least have the conversation about this.  But I’d be surprised (shocked, actually) if you could get this done.  If the buyer doesn’t have significant financial leverage over the supplier I doubt that anything will ever happen.I’m not a lawyer and I suggest that you talk with one.  But if your contractual ducks were not lined up correctly from the very beginning I doubt even a lawyer can help you.Sorry for the negative response, but that’s what I’ve seen/heard over the years.  Once product is paid for and it’s left China, it just ain’t comin’ back!Thanks,DD

I’ve written about this before: Returning Products to a Factory in China.