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Turning the Tables: Chinese Companies Discover the Joys of Litigation

March 17, 1995

NEW YORK (AP) _ China, says a centuries-old adage, is a nation ``ruled by men and not by laws.″ Chinese since Confucius have put little faith in the ability of legal systems and courts to settle differences or dispense justice.

Add that to the list of exploded myths about the Middle Kingdom. For such a supposedly litigation-shy bunch, the Chinese lately have shown some brashness and sophistication about using law to defend their commercial interests.

In addition to a surge of cases in China’s courts, Chinese corporations increasingly are taking disputes with American firms to U.S. courts, hiring high-priced attorneys and mounting vigorous defenses when sued.

That’s not only a sea change in Chinese attitudes towards law, it’s an ironic turning of the tables. American firms have done most of the complaining and suing _ over broken contracts, bad-faith negotiating and patent rip-offs _ since China opened for business in the late 1970s.

Goodyear Tire & Rubber Co. slammed into corporate China’s new legal savvy on Tuesday when China Tire Holdings Ltd. and two affiliates filed a $1 billion lawsuit in U.S. district court in Los Angeles, charging the Akron, Ohio tiremaker robbed them of ownership of a north China manufacturer.

China Tire Holdings, a Hong Kong-based company whose primary operations are in China and which is listed on the New York Stock Exchange, wants compensation for business it says evaporated after Goodyear used confidential information to bust up its joint venture with Dalian Rubber and buy control of the plant.

``Goodyear acted like a claim jumper,″ said Peter J. McNulty, a California attorney for China Tire Holdings, who likened the case to Texaco’s disastrous effort to break up the Pennzoil-Getty merger in the mid-1980s.

China Tire’s suit is expected to go to trial in the spring of 1996.

Also this past week, China International United Petroleum & Chemicals Co. filed a $58 million countersuit against Wall Street’s Lehman Brothers Inc., which last November brought a federal case in New York claiming that the Beijing-based company failed to make good on derivatives trading losses.

Experts say these and other lower-profile cases now in the American courts are just the beginning of what’s expected to become a huge volume of litigation by Chinese firms in the coming years.

``We’re going to see a lot more of this,″ said Harvard University law professor William Alford, referring to the China Tire and Unipec suits. ``Chinese entities are becoming much more aggressive about defending their interests overseas. Few people would have predicted this 10 years ago.″

The change is due partly to China’s emergence in the past decade as one of the world’s biggest trading nations and the No. 2 destination for foreign investment after the United States. U.S.-Chinese commercial ties have grown exponentially _ it’s natural that more business would mean more disputes.

And as they’ve joined the global economy, the Chinese have learned that suing and defending against suits are an unavoidable part of doing business.

But big changes in China also are at work. Beijing has gradually reformed its formerly Soviet-style economy, moving toward a market-driven system. In the process, it has in large part set Chinese companies free to swim or sink.

``Companies are becoming responsible for their own profits and losses,″ said Alford, a scholar of Chinese law. ``They have a lot more on the line, so they have to pursue their interests. In Chinese courts ... there are hundreds of thousands of commercial disputes (among Chinese companies).″

In cases like Unipec’s countersuit against Lehman Brothers, said Jerome Cohen, senior partner at the New York law firm Paul Weiss Rifkind Wharton & Garrison, ``They know Big Brother won’t bail them out. Any money it costs them to pay damages is painful. They’re more likely to fight than in the past.″

They’re also more likely to have top-notch lawyers and advisers, not only Americans but from among thousands of Chinese who’ve earned law and business degrees at schools like Harvard, Columbia and Georgetown since the late 1970s.

``They go back to China with more sophistication and an understanding of how the system operates here,″ said Jim Finerman, a Georgetown law professor. Alford estimated U.S. universities have trained up to 2,000 Chinese lawyers in the past 15 years.

Experts say that while China’s courts remain backward, understaffed and subject to interference by the Communist Party government _ one reason why some Chinese companies would rather bring cases in the United States than at home _ the country has made strides in recent years to create a modern legal system.

COMING UP:

The Commerce Department reports February trade data on Wednesday; the Labor Department reports weekly jobless claims on Thursday; and Commerce announces February durable goods orders on Friday.

TICKER:

Signs of a slower U.S. economy and diminished inflation cheered investors, who sent the stock market to record highs ... the Clinton administration blocked Conoco’s oil deal with Iran ... the U.S. current account deficit surged to $155.67 billion in 1994 ... SAS ordered 35 of Boeing’s newest 737s for $1.16 billion, dealing a blow to Boeing rival McDonnell Douglas ... Procter & Gamble tapped president John E. Pepper to succeed Edwin L. Artzt as chairman and CEO ... and Paris unveiled a massive bailout plan for state-owned Credit Lyonnais, Europe’s largest bank, which has lost billions of dollars in recent years.

End adv for weekend editions March 18-19

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