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On The Importance Of "Face" In China Legal.

By Dan Harris and Steve Dickinson

China Daily did an article the other day on how China's courts are now going to post its unpaid judgments online. It is entitled, "Court launches website showing who hasn't paid." A bit of background is in order. China's court system (and I am talking about commercial disputes ONLY) is not as bad as is so widely believed in the West. Foreign companies can sue and win against Chinese companies and they can and do. All the time. But winning a lawsuit and getting paid on a lawsuit are two very different things, both in China and everywhere else in the world. Many years ago, my firm brought a cross-border lawsuit against a foreign company on behalf of about 35 mostly foreign companies. The clients would often ask me if I thought we were going to win the lawsuit and my response to that was always, "yes, we are almost certainly going to win. Defendant took money that should have gone to you without your approval or authorization. This is about as blatant a breach of contract as one will ever find. But that is not really the right question here. We are almost certainly going to win, but the real question is whether our winning in court will lead to everyone getting paid. In other words, does defendant have the mult-millions necessary to pay everyone and will the court in X country really enforce the judgment. The problem with that is that we will not know the answer to that until months after we win." We eventually settled that case, compromising the various claims based in large measure on the uncertainty of collection. China is notorious for being a country in which it is very difficult to collect on a judgment. Had someone asked me what percentage of Chinese court judgments actually get paid, I would have guessed around 50%. Turns out more like 75% of judgments get paid, at least according to the China Daily article. Now, in an effort to improve that figure, China's courts are going to put online the names of all judgment creditors who have not paid the judgments issued against them. This is big. Really big. Here's what China Daily has to say about the need for this online dunning and the results it is likely to achieve:

The public can log on to http://zhixing.court.gov.cn/search/ and search individuals and groups to see if they have any pending obligations from civil court rulings nationwide, Jiang told a press conference yesterday. Prior to the online service, members of the public who wanted to search civil cases had to submit paper-based enquiries to local courts. "An online platform is the most direct and effective method for the public to learn the results of court rulings nationwide," Ren Jin, a law professor with National School of Administration, told China Daily. An individual will face moral and mental pressure and even lose employment and economic opportunities for poor credibility if he or she fails to carry out a court ruling, Ren said. As the global financial crisis expands, it becomes more important to establish a system of credibility to prevent and resolve social and economic crises of all kinds, Ren said. The online platform will help lower risks of market management and solve problems from the start, Ren added. The failure of the courts to enforce verdicts on civil cases has been a significant challenge for the country's judicial system, with many litigants possessing limited awareness of legal proceedings and refusing to fulfill their legal obligations, Jiang said. "The fundamental reasons lie in the lack of a deterrence," Jiang said. "Those refusing to comply with court rulings should face heavier costs in their morality, creditability and property than the costs of an enforcement." The website is a prelude to a systematic improvement of the enforcement of court rulings nationwide.

Interestingly, within hours of my having read this article, I found myself in a discussion with Sam Goodman on the importance of "face" in China business. Sam is a long-time China-based entrepreneur who will soon be out with a book on doing business in China. And I am betting it will be a really good one. Sam is of the view that face is critical for China business. I generally agree with him, but with many caveats. First off, I do not like the word face. I do not like that word because I am not sure I understand what it means and I do not think most Westerners understand it either. It is just too loaded with exotic connotations. I prefer using everyday words like "respect" or "reputation." Sam and I agreed on how Americans doing business in China so often get frustrated by a Chinese company's unwillingness to admit it made a mistake. I told Sam that I thought the unwillingness to admit a mistake has to be put on a spectrum in that some Chinese will admit their mistakes and some Americans do not. I talked about how I once worked with a law firm associate (not from the United States or Asia) who would always fight me when I would criticize his work. Most associates simply agree with whatever a partner says, but this one (this was not at my present firm) would dispute my assertions. The more he would dispute my assertions, the more I would talk about how horrible his mistakes were. It was not unusual for me to conclude our discussions with a throwaway line along the lines of "I just am really worried we are going to lose the client over this." Our discussions were not productive. I eventually complained to my psychologist wife about this associate and her response was to ask whether this associate was incorporating my suggested changes and improving in his work. I told her that he was. She then asked me why it was so important to me that this associate essentially break down and admit to his wrongdoing and I told her I did not know. She told me to focus on the change going forward, not the past. I started doing so with this associate and our relationship greatly improved (no surprise!) and his work continued to improve. I had learned to "let it go" and it worked. Had this been from China (or many other places in Asia), many might say that I had let him "save face." I would say I had simply improved my management skills. Now back to the collection of judgments in China. When I told Sam about this new online plan, we both immediately vehemently agreed that we thought it would be hugely effective. Sam talked again about the importance of face. I argued that this online posting of judgment creditors would work not so much because of face, but because one's reputation is so important in China because for so many who do business it is all they have. I said the reason for this was not so much something inherent in Chinese culture as it was an outgrowth of an undeveloped legal system. I talked about how this same sort of thing would work well in Russia. In both China and Russia, companies place huge importance on the reputation of the companies with which they conduct business because they know the court system is not a great remedy should something go wrong. Getting one's name posted online as a someone who does not pay one's bills is just plain bad for business. No matter what you call it, there is now increased justification for pursuing litigation against Chinese companies that owe you money. What do you think?

Full post as published by China Law Blog on April 01, 2009 (boomark / email).