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China As Downturn Neophyte. If I Stick My Head In The Sand....

By Dan Harris and Steve Dickinson

CLB's own Steve Dickinson has just returned from the annual China Maritime Law Conference, made up mostly of China's leading maritime lawyers. This year's conference was in Wuhan. Steve reports as follows after the first day: I just finished the morning session of the first day of the All China Maritime Law Conference being held in Wuhan. The theme of this year's meeting is the shipbuilding industry. The conference was organized when Chinese shipbuilding was booming and China had plans to replace Korea as the leading shipbuilder in the world. Due to the recent economic downturn, virtually every presenter revised their presentation at the last minute to discuss the effects the current situation is having and will have on the maritime industry in China. The presenters all agreed on the following. The downturn in shipping is having a profoundly negative effect on all segments of China's maritime industry. Shipbuilders are finding that their shipbuilding contracts are being extensively breached. Since shipbuilders in China are mostly new companies, they are heavily in debt. These breaches threaten the life of the entire shipbuilding industry in China. Vessel owners are finding that charter parties are refusing to pay charter payments. Some charter parties are demanding revisions to charter agreements. In more extreme cases, the charter parties are simply abandoning vessels in mid-voyage. [Editor's note: charter party agreements are essentially agreements to rent out a ship] Shippers are finding that their customers are refusing to honor long term shipping agreements and are demanding extreme reductions in shipping rates. Ports are finding their volumes rapidly decreasing. This is an especially serious problem with smaller and newer ports. It is also a problem with ports in the middle of ambitious expansion plans. The presenters for this morning session were primarily from Hong Kong, Singapore and England. They proposed various legal solutions for dealing with the crisis situation that has developed. The Chinese lawyers in attendance spoke in near unison on the response they are getting from their clients: The clients first deny there is any problem. Once the problem is too acute to deny, the clients reluctantly consult with a lawyer on what to do. When told that they will need to retain and pay for a lawyer to pursue resolution of the issue, the client refuses. The reason: "We are already losing money. Why would we pay a lawyer and even lose more money?" What does this mean for the future? It is possible the Chinese maritime industry will wake up and start to deal with the current situation. Currently, however, the Chinese maritime industry is taking a purely passive approach to the current crisis. Since the lawyers are all new to the industry, the Chinese lawyers have little perspective on what will be the result. The industry leaders are in the same position: they have no historical perspective. If the attitude of the Chinese maritime industry does not change, it seems likely there will be a major shake out, with many companies going out of business. Only the major players who are funded by the central government are likely to survive. The other day, I wrote the following:

We are finding that Chinese companies, for a whole host of reasons, are incredibly slow to mount full scale efforts to collect on their debts. Just this week, we were contacted by two Chinese companies seeking to collect 6 and 7 figure amounts from American companies arising from long ago non-payments. In both cases, the Chinese companies had waited so long that the US companies had already ceased operations, without ever having declared bankruptcy. Though it is sometimes possible to collect in such cases, there is a greatly increased difficulty to do so.

In response to this, someone left a comment, asking the following:

Were shipbuilders that flush for that long that they could ignore 6 and 7 figure outstanding debts owed them, and for so long?

My response to that was going to be to analogize it to the dot.com boom. During the boom, companies were moving forward so fast, seeking and getting funding, and burning through cash at such a fast pace, that nobody had any time or desire to focus on bad debt. When the dot.com boom ended, however, many companies came to us with a whole host of international bad debts for us to collect on. We had one client come to us with a very fresh debt of around $300,000 from a company in Europe. We were able to recover most of this on our client's behalf and after we did so, they came back to us with two more matters: one for about a million dollars and one for about $700,000, both of which were more than two years old and both of which were with Russian companies that turned out to no longer exist. I asked the client why they had waited so long to come to us with these and their response was that the money just never seemed to matter when they had so much of it. Just today, my firm secured a Rule B arrest Federal arrest order to arrest a Singapore-owned vessel for failing to pay on its charter-party contract and spoke with a Chinese company seeking our help in collecting on a nearly million dollar debt on a vessel charter-party agreement. The Singapore arrest was for a British company that is paying us by the hour. The Chinese company was unwilling to hire us on either the hourly rate or the contingency fee basis we requested. It wanted us to pursue the claims for a 5% contingency fee, with my firm paying all the costs. I assured them that no firm in the United States, and certainly not one with attorneys and staff fluent in Chinese and Russian (the opposing party is Russian) would ever take on this case for anything approaching that amount. Many years ago, another Chinese company insisted we take its case on a 5% contingency basis. That case was for around $400,000 and it too needed Chinese speaking lawyers. I knew the company that owed the money and thought the case was extremely strong, but refused to take it on anything approaching the terms sought by the Chinese company. The Chinese company rejected our terms and I asked Steve Dickinson what he thought the Chinese company would do. Steve told me he thought it would simply never collect the money. La plus ca change....

Full post as published by China Law Blog on November 08, 2008 (boomark / email).