Why Court Corruption Does Not Mean Lights Out

Let me put it right out there: most North Americans and Western Europeans do not understand court corruption. They have heard about it, of course, but they generally do not understand how it impacts their business. Otherwise they would not so frequently say there is no point in having a contract or bringing a lawsuit in such and such a country because it’s corrupt. Corruption influences (sometimes greatly) court cases, but not as often or as much as widely believed.

When dealing with corruption, one has to be sensitive to location, type of case, and relative influence of the parties. In other words, a $100,000 breach of contract case between a U.S. private company and a Chinese private company is much more likely to get a “fair trial” in a Chinese court in Shanghai than a case against a massive China SOE (State Owned Entity) involving stolen trade secrets that might have military applications in the small Chinese city in which that SOE is based. Sometimes this is due to corruption and sometimes this is due to what lawyers commonly call getting  home-towned. There are Wall Street lawyers who are as afraid of going to trial in a rural Mississippi court as US companies are of going to trial in China.

But when Americans think of a corrupt court they usually think of the opposing party paying a judge in cash for the ruling of their dreams. But it is rarely that simple and knowing how court corruption works can be important.

I was schooled in the “finer points” of court corruption by a very smart, very honest Russian lawyer friend of mine who used to practice law in the Russian Far East — where many a prosecutor and judge live in multi-million dollar mansions on $35,000 a year salaries. What he explained to me works pretty much the same in other emerging market countries with a less than pristine court system — or at least that is what lawyers in some of these countries have told me.

My schooling on Russian court corruption was in “real time” as it involved a real case and a real client. It has been many years so I may be a bit off on the numbers, but bear with me here. It is possible things have changed in Russia since then and it is also quite possible this information held true only for this one region in Russia. It is also possible I am the King of Prussia.

My client had a contract with a Russian company under which the Russian company clearly owed my client $2 million, but the Russian company was refusing to pay and all but challenging my client to sue it in a Vladivostok court, the only place my client could pursue its claims. Legally, my client’s case was about as close to a slam-dunk winner as you will see in a business dispute. But my client was rightfully concerned how corruption would influence its case.

Our Russian local counsel explained how we should view the case, corruption warts and all, and he did so by explaining the following:

Nine of the fifteen judges are corrupt. The other six are not. So we have a less than 50-50 chance of getting a fair trial. But I still like our case even before one of the corrupt ones. Our case is so strong that none of the corrupt judges will just give it to the other side without a very substantial payment. No judge wants to be thought of as corrupt and ruling against our client in this case will definitely raise eyebrows.

The Russian company will probably need to pay the lower court judge approximately $300,000 for the ruling it wants. And then we can appeal to a three judge appellate panel, made up of judges from throughout the province. A lower percentage of the appellate court judges are corrupt and those that are require large payments, especially on a case like this. The odds of all three of our appellate judges being corrupt are quite low. The odds this Russian company has close connections with any of the judges are lower than when all of the judges are based in its home city. This means that to try to bribe two of the three appellate judges will be risky and very expensive. Risky because, though rare, people sometimes do go to jail on bribery charges. Expensive because we are talking about three appellate judges. So in the end, I estimate that for the Russian company to be assured of winning through the appellate level, it will need to pay maybe a million dollars and there is a chance no amount under $2 million will work. And this ignores our ability to at least try to appeal to the Supreme Court in Moscow.

My numbers are obviously just estimates but what I am telling you is that though corruption is a factor, our job is to not allow our client to panic in the face of it. We can settle this case on good terms and that is what we should be trying to do. The Russian company would rather pay us to eliminate risk than pay judges and take on new risks.

We did end up settling the case and at a figure not all that much lower than what we would have accepted in the United States.

I am not by any means trying to minimize the impact of court corruption; I am merely trying to show that it oftentimes is not as overwhelming as it may initially appear.

Note also that we never discussed our client paying a bribe to anyone. That is always the worst alternative because it puts people at real risk of going to jail without anything close to a guarantee that it will even work. When our Russian lawyer said that people in Russia rarely get arrested for bribery, he was talking about Russians, not foreigners. Do you really think that you have the savvy to engage in risk-free bribery in a foreign country? I can tell you that none of my law firm’s international lawyers would make that claim.

Court corruption is a much bigger threat with cases that can reasonably go either way. In those situations — or so I am told — the lower court judges in Vladivostok (and this was many years ago) would have taken $15,000 to throw a case like the one we had, knowing nobody could be certain whether their decision was due to having taken a bribe or to the facts in the case. An interesting sidelight: this lawyer also told me that if after accepting a bribe the judge no longer felt comfortable in ruling in favor of the bribe-payer, he or she would return the funds before issue its ruling against the company that paid the bribe. In other words, the judges were (as he laughingly put it) “honest thieves.” On cases that are close to 50-50, appellate courts tend to favor not overruling the lower court.

Bottom Line. If you want to negate the impacts of corruption as much as possible, you use a contract that makes it all the more likely for you to prevail, just as you would want if there were no corruption at all.

What are you seeing out there?

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.