The China Predicament

By Boettcher, Jacques G. | Multinational Business Review, Spring 2001 | Go to article overview

The China Predicament


Boettcher, Jacques G., Multinational Business Review


American businessmen, drawn by the lucrative markets and investment potential of the international scene, are flirting with disaster because they tend to ignore the laws of foreign countries. The bait is foreign countries need for \new products, modern technology and hard dollars. The trap is the legal ramification of their ignorance.

In November of 1999, the American business community was shocked by the announcement that a Class Action lawsuit had been filed in Manhattan naming Union Carbide as defendant in a case arising from the 1984 disaster in Bhopal, India, when thousands of people died when a poisonous gas was released into the air from a pesticide plant. The initial civil case against Union Carbide was settled in 1989 for $470,000,000.00. Union Carbide had considered the case closed but had ignored the fact that the case, originally filed in New York had been transferred to India and that the Indian Supreme Court had ordered Union Carbide to stand trial under criminal charges. The suit claims that Union Carbide and its former chief executive officer, Warren Anderson were totally liable for "fraud and civil contempt for their total failure to comply with the lawful orders of the Courts of India. The suit also claims that Union Carbide operated with a "depraved indifference to human life." For the Supreme Court of India it made no difference that the plant in Bhopal was located in India, that it was built by Indian companies, that it conformed to Indian Building Codes, that it was inspected by Indians, and that it is was operated by Indians.

Union Carbide had taken attractive bait and fifty-one percent of the plant was owned by Union Carbide India. This was a concession to Union Carbide since this amount of ownership violated India's limited foreign ownership to forty percent. The trap lies in the fact that the Indian government cared little about anything but the fact that Union Carbide was involved, and while, normally, this would be case in "Negligence," the Indian government was apparently moving into an area of "Strict Liability" for damages. Under "Strict Liability," which is generally imposed by Statute, motive or intent is immaterial, and if a company is responsible for an act it is liable. This responsibility could be by way of manufacture, sale, use or negligence. In more simplistic terms, if you make it or sell it you are liable. Union Carbide simply failed to understand that when it had the case transferred back to India, Indian interpretation of Indian law prevailed.

This is not a new situation. All too often American companies seeking to do business in foreign countries fail to examine the laws of those countries, and they fail to understand the consequences of their acts. An American company, for example, realizing the lucrative potential of fast-food restaurants in Beijing, China, ignores that fact that Chinese law is not American law, that Chinese interpretations of contract are not the same as American interpretation of contracts, that the Chinese do not have the same Housing Codes, Building Codes, Health Codes, Food and Drug laws, etc. as they are accustomed to in the United States. They do not understand that Chinese law permits the application of "Strict Liability" for damage recovery. Thus, under Chinese law, if you make it or sell it you can be held liable for any and all damages.

The past decade has produced a history of consequences for this ignorance, and virtually every company seeking to enter the international manufacturing or marketing ring has a repertoire of horror stories.

An American manufacturer left China thinking it had a contract for the manufacture of mini-vans only to find that no contract existed. On a far lesser scale an American university negotiated a contract with the People's Republic of China for the presentation of a number of seminars for Chinese government officials and Chinese industrial managers. A part of the contract dealt with food services, and it specifically covered the types of food to be served, the quantity, preparations, etc. …

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