Japanese firms should make better use of local legal services to control the risk of doing business in China as the country continues its progress toward the “rule of law,” a Shanghai-based lawyer said at a recent seminar in Tokyo.

Fan Yuntao, a senior managing partner at Shanghai Smoothness Law Firm, practices law in a city where 5,000 to 6,000 Japanese firms have launched operations since the late 1990s.

However, unlike their Western counterparts, many of those companies are very poor at using Chinese lawyers to deal with legal disputes involving patents, trademarks and other local troubles that are cropping up as economic relations deepen between the two countries, Fan said at the seminar organized Aug. 6 by the Keizai Koho Center.

They are also failing to fully explore the new business laws Beijing introduced under the terms of its entry into the World Trade Organization, he said.

According to Fan, a key point of a constitutional amendment China made in May 1999 was to shift from rule by politicians and bureaucrats to rule by law.

“A consensus has since been established among central and local Communist Party leaders that, without legalism, China would not be able to become a full member of the international community or win in international competition,” the lawyer said.

China’s judiciary system has made rapid advances in recent decades, he said. The bar examination, first introduced in the late 1980s, was reorganized last year into a unified national exam covering the entire legal profession — defense lawyers, judges and prosecutors — just like the system in Japan, he said.

About 6 percent of the roughly 330,000 applicants pass the exam each year, he said, and there are now some 110,000 lawyers in the country, serving a population of 1.3 billion.

In 2000, then President Jiang Zemin called for raising that number to 500,000 by 2010 as a key measure for making China more competitive in the global economic arena.

In particular, the justice authorities are making an effort to boost the number of lawyers well-versed in international business and foreign languages to meet the growing demand for legal services in Beijing, Shanghai and Guangdong Province, Fan said.

There are around 100 such lawyers nationwide who can speak fluent Japanese, and about 40-50 of them are based in Shanghai. That number will rise when Chinese studying in Japan return and take up legal work, he said.

Nevertheless, Fan said that Japanese firms in China often fail to make sufficient use of Chinese lawyers.

“If Japanese companies would only make better use of Chinese legal experts — including judges and prosecutors — as they cope with legal matters, they would be able to make their Chinese operations more successful and less trouble-prone,” he said.

Compared with their counterparts in the West, Japanese companies display several shortcomings when it comes to working with laws, Fan said.

Whereas Japanese firms generally spend copious amounts of time making business decisions, they tend to give up quickly and easily whenever they get involved in legal disputes, he said.

And when they get into local arguments over investments or contracts, their typical reaction is to avoid a major escalation and seek a mutually agreeable — and flexibly interpretable — compromise, rather than a clear-cut settlement, Fan said.

Even when they have every legal reason on their side, they will not dare to attack the weak points of the other party, he added.

Another problem with many Japanese firms is that they tend to think of information as a commodity that is obtainable free of charge, like air and water, he said. They seem to think legal advice need not be paid for unless it involves taking action.

Many Western firms, on the other hand, sign advisory contracts with local legal offices to constantly gather information on whether their plans will be feasible in China’s rapidly changing legal environment. “They use the law offices as a tool in their business strategy and as an adviser for risk control,” he said.

Japanese firms also lag behind when it comes to hedging risk, Fan said.

Earlier this year, a group of electronics makers from Japan and the United States, including Hitachi Ltd. and Toshiba, threatened to take legal action against Chinese manufacturers who were using their patents without paying royalties to produce and export DVD players. After negotiating with local industry associations and Chinese administrative authorities, the companies succeeded in collecting about 3 billion yen from the violators, according to media reports.

But this case alone doesn’t mean all the intellectual property disputes that arise between Japan and China will be successfully resolved, Fan pointed out. Rather, there is a strong possibility that legal disputes will get tougher and more complicated.

Managers at Japanese companies in China need to learn how to prevent disputes from occurring and how to properly deal with them when they arise, he said. “As the first step, they should start by understanding China’s culture and legal systems,” he said.

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