China Law as California Law: There be Wolves out There

A loyal reader sent me a Bloomberg News article, titled China’s Grocery Trolls Make Giant Piggy Banks of Wal-Mart and Carrefour. The article was how grocery “trolls” purchase food from China’s large grocery store chains, knowing the food does not comply with China’s Food Safety Law. The buyer of the out of compliance food then sues the grocery store chain for ten times the purchase price and, apparently, usually wins:

Xue Yanfeng went shopping in a Carrefour SA supermarket in western China in May 2015 and bought 20 bottles of honey for a total of 892 yuan ($134). He then left the supermarket with his groceries and sued the French company. In court filings, Xue alleged the nutritional labels said each 100-gram serving contained 1,326 kilojoules of energy. But, according to his calculations using nutritional data on the label, each serving contained only 1,102.

Xue, who couldn’t be reached for comment, argued that the error violated China’s Food Safety Law, which guaranteed him compensation of 10 times the purchase price. The Xinjiang court agreed, and a week after his purchases it awarded him a refund of 892 yuan and compensation of 8,920 yuan.

That was one of 40 lawsuits Xue has filed against supermarkets and retailers for violating the Food Safety Law since late 2015, when China introduced a strengthened version to tackle the country’s well-publicized food safety woes. The new version removed a clause in the previous law that said victims must prove personal injury or loss to be eligible for compensation. The change has spawned a cottage industry of professional complainers who’ve developed sophisticated operations to challenge food manufacturers and retailers for compensation.

I immediately thought of California’s Proposition 65, which is constantly snaring unwary businesses for failing to provide adequate notice of the potential harm their products may cause. Ironically, Chinese companies are prime targets under this California law because they so often are unwilling to pay lawyers in drafting the required notices.

I then thought of the similarities between California’s and China’s employment laws, both of which are also classic traps for the unwary. Years ago a very large Chinese company sought help from my one of my firm’s California lawyers in drafting a settlement agreement with a soon-to-be terminated California employee. We quoted a very low fee (these agreements are a piece of cake) but the Chinese company thought it too high so it pushed on by itself. A month later, the Chinese company called us back, this time to retain us for sure. It turned out that the by-now terminated employee knew California law and that his settlement agreement did not comply with one certain provision in that law. So even though our client had paid him $100,000+ as a severance and unpaid commissions, he was now suing them for $50,000+ in unpaid commissions, plus his attorneys’ fees. Our client had zero chance of prevailing in this lawsuit and it settled quite quickly for the full $50,000+ and it also had to pay its attorneys fees, which were at least five times higher than they would have been for us to draft the simple settlement agreement, correctly. NOTE: I have changed the facts of this matter so as to remove any possible identifier.

We see this same sort of thing on the China employee front as well. See China Employee Termination: Avoid These Mistakes and China Employee Terminations: Don’t Get Lazy. Just as in California, there are a boatload of China employees who will agree to a termination or other settlement (either in writing or orally), get paid under the settlement and then walk down the street, retain a lawyer and then sue (with really good cause) for more.

This happens with Sinosure matters also. See How to Survive Your China Manufacturer Dispute. Sinosure Too. A foreign company  allegedly owes money to a Chinese manufacturer and Sinosure (China’s export insurance company) comes calling to collect. The foreign company then contacts its manufacturer to resolve the matter. The Chinese manufacturer and the foreign company orally (or via an ineffective writing) agree to resolve the matter with the foreign company usually paying anywhere between 70 to 90% of what is allegedly owed. Then when Sinosure calls again, the foreign company explains how the matter has been resolved and Sinosure essentially says, like hell it has.

The other day a British company wrote me after having fallen for a fake settlement with its manufacturer for the second time in the last year. When I essentially chewed them out for having messed up once and then instead of seeking legal help the second time, merely “doubling down on their initial mistake,” their response was to say that “obviously foreign companies cannot get a fair shake in China, where it would seem everyone is out to rip you off.” I respond to that comment now (because there was no point then). Not exactly. If you are going to do business in China it is incumbent upon you to know the laws and if you do not know the laws to get help from someone who does.

Yes, doing business in China is difficult and its laws are complicated, but that is true of pretty much every country I know. Be it California or China, it’s on you. People the world over — and that most certainly includes China — are ultra-litigious and that is not going to change soon if ever. Your defense to this is to know the laws and abide by them, to the letter. Saying that the laws are difficult or that there are bad people out there does not cut it and you ought to know that. Oral agreements in China are not worth the paper on which they are not printed and written agreements drafted by anyone not experienced with Chinese language contracts have no greater value.

You have been warned (yet again).

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.