Getting money out of ChinaOur China lawyers have of late been getting a massive upsurge in emails and phone calls from American and European companies and lawyers seeking our assistance in determining the strength of their claims for getting paid on indemnification or settlement agreements or for breaches of investment or merger contracts. China’s tightening of capital controls has made getting money out for these things difficult. To get a better sense of the issues related to China’s crackdown on money leaving the country, start with Getting Money Out of China: It’s Complicated, Part 6 and read the first five parts of this series also. And if you think this is not going to get even worse, I urge you to read China regulators plan to crack down further on overseas deals.

A problem in these situations is that the Chinese government may be preventing the money from leaving or perhaps the Chinese company simply has decided it does not want to pay and is using “China government capital controls” as a convenient excuse. Another problem in these situations is that it can be difficult — often impossible — to know whether payment is not occurring due to the fault of the Chinese company or because the Chinese government has blocked it.

Chinese companies virtually never carry insurance for indemnification or for most (pretty much all) sorts of settlement payments and we are skeptical about their getting permission from the Bank of China to convert RMB into dollars for these kinds of payments. This means your odds of getting money for these things are not so good to begin with, but in every instance in which we have been contacted, the American and European companies (and their lawyers) have already done things to reduce their odds of ever getting paid. In most of these cases, our “sense” is that the Chinese companies deliberately had the contracts written to make payment difficult. And why not? What company that has been sued and had to settle for millions of dollars will not try to set things up so that it does not actually end up having to pay? This holds true with equal force on the indemnification side as well. And on the transactional side, Chinese companies tend to encourage contracts that make payment difficult, figuring that if they do end up wanting to complete the deal, they can agree to a revised contract that will make government approval of payment more likely.

We are seeing this problem of non-payment quite often these days in investment deals as well. The Chinese side will enter into an agreement with a foreign company to buy that company or invest in it. The contract will require the Chinese company make an X dollar (or Euro) payment at some early stage and it oftentimes will also include a liquidated damages provision setting forth what will happen if the deal does not close. The Chinese company never makes the first payment, claiming the Chinese government is not letting them do so. The American or European company then wants to sue for breach of contract damages (one company that contacted us even went bankrupt waiting to get paid!) and/or for the liquidated damages. These companies and lawyers often come to the China lawyers at my firm expecting us to bless their pursuing litigation against the Chinese companies, but in most instances, we throw cold water on those plans by pointing out how the applicable contract(s) make prevailing and collecting on any claim difficult or even impossible.

We typically see two main problems in these contracts, one of substance and one of procedure. The substantive problem is that the contracts’ force majeure clause broad enough to be able to claim that their inability to pay due to Chinese government capital controls is a force majeure. And if the American/European company cannot prove non-payment is for some other reason — and as I stated above, this is usually not possible — the Chinese company may very well prevail on this argument. For more on this issue, check out China Payment Risk. And for some ways you can reduce these risks, check out China Payment Risk, Part 2. The typical procedural problem is the dispute resolution clause. See e.g., Enforcing US Judgments in China. Not Yet.

For you to be able to get paid from China in the situations described above, you need to think about how that is going to happen before you draft your contract, not after you have not been paid. This holds true for any sort of contract with a Chinese company that involves payment leaving China. You need to draft these contracts with extreme sensitivity to China’s hard currency controls, otherwise the Chinese company be able to point to the Bank of China as its reason for not paying and then what can you do? You should not enter into any agreement, even one that seems “purely domestic” without accounting for the payment from China issue and for what is required to get paid under Chinese (not domestic) law and practice.