A China Coast Guard ship (top) and a Philippine supply boat engage in a stand off in contested waters. (Photo by Jay Directo)
Normally, advising a sovereign state in a major dispute with another nation would be a prestigious, highly sought-after assignment for a law firm. But when the adverse party is China, there are different calculations to take into account.
“I doubt we would want to get involved with something like that,” says one Hong Kong-based litigation partner with a large international law firm. “There could be ramifications.”
The partner was talking about the international arbitration case initiated last year by the Philippines against China over competing territorial claims in the South China Sea. China, which claims a vast swath of the sea based on disputed historical maps, has steadfastly refused to participate in the proceeding in the United Nations Permanent Court of Arbitration in The Hague, and did so again last week after the court ordered it to respond to Philippine submissions by Dec. 15. Vietnam has said it is considering bringing a similar case against China over those two countries’ maritime boundaries.
For international firms focused on growing their practices in China, such cases would be truly radioactive. Taking them on would risk offending the Chinese government on an issue fraught with national pride. Foreign law firms haven’t really faced that kind of wrath before, but few doubt the Chinese government’s willingness to take retaliatory action. In an example that hits close to home for lawyers, The Financial Times reported last month that the Chinese government was ordering state-owned enterprises to stop using U.S. consulting firms such as McKinsey & Co. and Boston Consulting Group in a move widely seen as part of the payback for the recent U.S. indictment of five Chinese military officers for alleged cyberespionage.
Citing the sensitivity of the topic, most of the lawyers who spoke to The Asian Lawyer requested anonymity.
The law firm representing the Philippines in its arbitration with China is Boston’s Foley Hoag, which doesn’t have any offices in Asia. But Washington, D.C.-based partner Paul Reichler, who is leading the case, says a number of his partners have spent years trying to establish themselves in the China market.
“It wasn’t without cost,” he says of the firm’s decision to take on the case. But Reichler says none of his partners objected. Instead, his email inbox was flooded by supportive comments from colleagues.
“Foley Hoag has a different mentality,” he says. “We had a client that came to us that had a very good case, and we had expertise that we thought could help them. Bring on Goliath.”
But for firms that have made large investments in their China practices, such bravado would be unthinkable. The dominance of state-owned enterprises in many industries, including energy, banking and telecommunications, means that staying on good terms with the government is of paramount importance. And the government’s influence goes far behind the companies it directly controls, a Hong Kong disputes partner with a U.S. firm points out. “Even with private companies, the government saying, ‘These guys are not friendly to China’ would be really harmful,” he says.
Though most partners agree that taking on a case like the Philippine arbitration would have consequences, some also think smaller-scale litigation directly against individual state-owned enterprises would be risky.
“As a business, you have to make a decision,” says the U.S. firm’s Hong Kong disputes partner. “SOEs buy a lot of stuff, and that generates a lot of work. If you’ve killed them on a big dispute and then come back and try to get some [mergers and acquisitions] work, you might not be welcome.”
But another litigation partner says his U.S. firm has “historically been adverse to China” on a variety of trade and investment disputes. Though he says the prospect of some kind of retaliation “obviously crosses our minds,” the partner says he’s seen no evidence of any to date. He notes that his firm, which has offices in Asia but not mainland China, has received some work from Chinese SOEs.
“My experience is that, in its treatment of law firms, the Chinese government act like grown-ups,” he says. But he thinks the firm probably would be more careful if it had offices in China.
“You’ve 200 foreign law firms set up in China worrying about getting business there,” the partner says. “If we had offices there, we would absolutely be concerned.”
Of course, it’s not just law firms that fear being adverse to China. Their potential clients among multinational companies also worry that suing SOEs or the Chinese state might trigger retaliation or at least cost them opportunities down the line. Lawyers say such timorousness is a major reason such suits are rare, and the low volume makes it unlikely that anyone could build a lucrative niche suing China, as some firms have done suing global financial institutions. “I don’t think there would be enough cases,” says the partner whose firm has been adverse to China.
There may be more on the horizon as more international investors start to sour on China. An investment fund principal who is currently planning a lawsuit against a Chinese state-owned bank says he grew frustrated that no one else seemed willing to challenge SOEs’ flouting of international norms.
But he did find it difficult to find big law firms willing to take on his case, despite being a former lawyer with a top New York firm himself. “Most of my lawyer friends even informally advised me not to take on [the bank],” says the fund manager.
“I did eventually secure a boutique litigation firm to represent us that is willing to play hardball against our foe,” he adds.
Hardball may not always be the right approach with China though. Reichler notes that both the five-judge arbitral panel and the Philippines need to be extra cautious in how they proceed with the South China Sea dispute, given China’s refusal to participate.
“You need to make sure all the procedural steps are taken to the letter,” he says. “You don’t want to create any opportunity for the absent party to challenge the legitimacy of the process.”
Even without China’s participation, the panel will reach a decision interpreting the United Nations Convention on the Law of the Sea. The Chinese arguments for its territorial claims have been put forward in various scholarly articles that the judges are sure to read, says Reichler. Those judges were chosen for their sterling international reputations and credentials. Last June, when Christopher Pinto, the Sri Lankan president of the tribunal, came forward and disclosed that he was married to a Filipino woman, the Philippines objected and had him replaced.
“If it was an arbitration between the Philippines and some other country, no one would have cared,” says Reichler. “But, because of the situation with China, we felt we had no choice.”