The "Your Lawyer Doesn’t Understand China Excuse" And Why You Should Never Buy It.
David Dayton over at Silk Road International has just written a great post on China lawyering, without even knowing it or trying to do so. His post is entitled, “Reasons why a factory doesn’t want you to come see things,” and the main point is the conclusion: if a Chinese factory does not want you visiting, it has to mean something bad is afoot.
Dayton sets out the excuses he hears as to why it is not the time for him to come to the factory and then he lists the following as the only possible real reasons:
Regardless of the words used, my experience tells me that there are really only a few reasons that you can’t go into a factory to see your product for a scheduled QC visit (or any other reason):
1. They are not as far along as they should be.
2. They are not actually making the product.
3. They don’t want you to see how some part of the process is done.
4. They don’t want you to reject product or change processes.
5. They are busy and have scheduled legitimate appointments with others on your requested day.
6. They are closed (no power?), have repairs/inspections/other issues that would not allow you to come see product on your requested day.
Dayton then talks about how since you are the one buying the product, you should be able to come visit and if the reason is numbers 5 or 6 above, then you should be able to come out soon in any event. But since this is really a post on handling legal issues in China you will need to read Dayton’s post if you want more information on the factory side.
Dayton’s post is about the legal side in that we lawyers constantly have to deal with similar excuses, only with far more vituperation (try using that word on your kid sometime when they are really angry at you). With us lawyers it is documents or a demand to see a law. Here are some real world examples:
1. Client of ours is trying to buy a Chinese factory. We are conducting due diligence and determine the first set of books are totally rigged. We demand the real set and are told we already have it. We say “no deal” and then we are given a second, slightly better set, but not the real one. We ask for various documents the factory is absolutely required to provide the government to operate. The factory tells our client that we do not understand China and says there is no such thing as those documents and that nobody actually provides them to the government. We tell our client that we had no issue in getting those exact same documents in our last five such deals and our client (wisely) chooses to walk away from this particular deal.
2. Client of ours is seeking to lease a factory and form a WFOE (Chinese Wholly Foreign Owned Entity). When forming a China WFOE, it is critical that the WFOE-to-be’s lease be one that complies fully with various requirements for leases of WFOEs. We tell our client that we need proof that the alleged landlord actually has authority to lease the factory and we set out the various documents that would prove that authority. The “landlord” tells our client that it has approval from the mayor to lease the factory (it did) and that we American lawyers do not understand China (we were working with one of our favorite Chinese law firms on this deal) and that if we persisted in requiring these documents, the deal would be off. Our client said it would have to abide by our advice and the Chinese “landlord” then produced documents which showed that the property was actually part of a collective and could not be leased out to a foreign entity. So again no deal.
3. Client of ours was looking to do a joint venture with a Chinese entity. Our impression was that the Chinese entity was not really interested in our client for the long term, but only to strip it of its valuable intellectual property. The deal the Chinese entity was proposing seemed almost too good to be true in that our client needed only to contribute its IP to the venture. We told our client that such a contribution would not be sufficient to make the joint venture legitimate (there has to be a monetary contribution) and we counseled against going forward. The Chinese company (you know the drill by now) told our client we knew nothing about China and its laws (and again, we were working with a top-flight Chinese law firm) and that the Mayor was behind all this (and again he was). We asked the Chinese company to come up with some law that would justify such a deal and they came back to us with a bizarre and incredibly tortured interpretation of the statutes which forbid this. Our client (wisely) walked.
Now I am not saying that the Chinese company that says you cannot see their factory or documents that day always is out to put one over on you, but I am saying that most of the time if you have a valid basis for wanting to see the factory or the documents, there is a lot to be gained and learned by sticking by your guns.