Foreign Law Firms Defend the Broad Scope of Their Practice in China

Foreign law firms operating in China's largest city have been on edge since April, when the Shanghai Bar Association (SBA) issued a blistering memo that accused them of illegally practicing Chinese law. The memo also called for the Chinese government to regulate and 'purify' the foreigners.

Given the hopes that firms from the United States and elsewhere have pinned on the China market, the stakes couldn't be higher. But according to several China-based partners of U.S. firms, they have agreed on a low-key response. The goal is to remind the Chinese authorities that changing the status quo could hurt the flow of foreign investment.

In other words, lobbyists are working behind the scenes. The European Union Chamber of Commerce in China has joined with its American counterpart to lobby officials in the Shanghai municipal government as well as in the local branch of China's Ministry of Justice. In this case the lawyers are counting on their clients: multinational corporations wary of being forced to rely exclusively on local Chinese counsel.

The law firms are sending their own messages. Winston Zee, the Hong Kong-based partner who heads the China offices of Baker & McKenzie, says the global firm plans to invite a number of officials to an October seminar that it is sponsoring to promote contacts between Chinese and Brazilian business leaders. 'It will remind them that we can provide these networking opportunities that the local firms can't,' says Zee.

Such arguments rankle Martin Hu, senior partner of Shanghai's Boss & Young and vice-chairman of the SBA's foreign affairs committee. Hu detects a lack of respect for Chinese lawyers and their abilities. 'Foreign investment and clients would be better served if the foreign lawyers and Chinese lawyers were cooperating with each other and following the rules,' he says.

Hu says foreign lawyers have felt too free to ignore the rules. Last fall, for example, the Ministry of Justice publicly censured Jingzhou Tao, then head of the soon-to-be-dissolved Beijing office of Coudert Brothers, for practicing Chinese law in the course of an arbitration he was handling. But no other action was taken, and Tao has moved on to become Beijing managing partner for DLA Piper Rudnick Gray Cary. Tao declined to comment.

Foreign law firms largely maintain that they are not practicing Chinese law, but are advising clients on the 'Chinese legal environment,' as permitted by both Chinese and World Trade Organization regulations. Given the still-developing nature of China's legal system, Zee says, this is a real distinction. According to him, Western lawyers' work in China often amounts to 'navel-gazing' for clients who are not as concerned with what Chinese laws are today, but what they might be in 5 years.

Hu agrees there is some leeway in the regulations, but says foreign firms have used the 'legal environment' exception to take on a host of clearly prohibited matters. As examples, he cites arbitrations like that handled by Tao, as well as corporate due diligence, drafting of Chinese-law contracts, and other tasks he says call for lawyers to render 'specific opinion or judgment on Chinese law.'

'It is time for them to see the line and exercise some self-discipline,' says Hu.

John Huang, the head of Shanghai's AllBright firm, says he played no role in drafting the memo but supports many of its arguments. According to Huang, one of the major benefits of the memo was that it sparked widespread discussion of where the line falls. But he says some of those discussions have been contentious.

Indeed, foreign and local lawyers agree that the publicity surrounding the memo and its vehement tone suggest that the Chinese government will eventually take punitive action. The targets and timing are unknown.

Huang doesn't expect any foreign firms to be shut down, but some may be forced out of lucrative practices, such as due diligence. Already, he says, major foreign firms appear to have slowed their aggressive hiring of Chinese lawyers. 'For some of these firms, it's life or death,' he says. 'If they're not allowed to do what they've been doing, they have to figure out the next step.'

Foreign law firms operating in China's largest city have been on edge since April, when the Shanghai Bar Association (SBA) issued a blistering memo that accused them of illegally practicing Chinese law. The memo also called for the Chinese government to regulate and 'purify' the foreigners.

Given the hopes that firms from the United States and elsewhere have pinned on the China market, the stakes couldn't be higher. But according to several China-based partners of U.S. firms, they have agreed on a low-key response. The goal is to remind the Chinese authorities that changing the status quo could hurt the flow of foreign investment.

In other words, lobbyists are working behind the scenes. The European Union Chamber of Commerce in China has joined with its American counterpart to lobby officials in the Shanghai municipal government as well as in the local branch of China's Ministry of Justice. In this case the lawyers are counting on their clients: multinational corporations wary of being forced to rely exclusively on local Chinese counsel.

The law firms are sending their own messages. Winston Zee, the Hong Kong-based partner who heads the China offices of Baker & McKenzie, says the global firm plans to invite a number of officials to an October seminar that it is sponsoring to promote contacts between Chinese and Brazilian business leaders. 'It will remind them that we can provide these networking opportunities that the local firms can't,' says Zee.

Such arguments rankle Martin Hu, senior partner of Shanghai's Boss & Young and vice-chairman of the SBA's foreign affairs committee. Hu detects a lack of respect for Chinese lawyers and their abilities. 'Foreign investment and clients would be better served if the foreign lawyers and Chinese lawyers were cooperating with each other and following the rules,' he says.

Hu says foreign lawyers have felt too free to ignore the rules. Last fall, for example, the Ministry of Justice publicly censured Jingzhou Tao, then head of the soon-to-be-dissolved Beijing office of Coudert Brothers, for practicing Chinese law in the course of an arbitration he was handling. But no other action was taken, and Tao has moved on to become Beijing managing partner for DLA Piper Rudnick Gray Cary. Tao declined to comment.

Foreign law firms largely maintain that they are not practicing Chinese law, but are advising clients on the 'Chinese legal environment,' as permitted by both Chinese and World Trade Organization regulations. Given the still-developing nature of China's legal system, Zee says, this is a real distinction. According to him, Western lawyers' work in China often amounts to 'navel-gazing' for clients who are not as concerned with what Chinese laws are today, but what they might be in 5 years.

Hu agrees there is some leeway in the regulations, but says foreign firms have used the 'legal environment' exception to take on a host of clearly prohibited matters. As examples, he cites arbitrations like that handled by Tao, as well as corporate due diligence, drafting of Chinese-law contracts, and other tasks he says call for lawyers to render 'specific opinion or judgment on Chinese law.'

'It is time for them to see the line and exercise some self-discipline,' says Hu.

John Huang, the head of Shanghai's AllBright firm, says he played no role in drafting the memo but supports many of its arguments. According to Huang, one of the major benefits of the memo was that it sparked widespread discussion of where the line falls. But he says some of those discussions have been contentious.

Indeed, foreign and local lawyers agree that the publicity surrounding the memo and its vehement tone suggest that the Chinese government will eventually take punitive action. The targets and timing are unknown.

Huang doesn't expect any foreign firms to be shut down, but some may be forced out of lucrative practices, such as due diligence. Already, he says, major foreign firms appear to have slowed their aggressive hiring of Chinese lawyers. 'For some of these firms, it's life or death,' he says. 'If they're not allowed to do what they've been doing, they have to figure out the next step.'