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Law firms vie for business in Beijing
By Christopher Guly
March 27 2009 issue

Tammy Leung / The Lawyers Weekly
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By the time Robert Kwauk opened the Beijing office for Blake, Cassels & Graydon LLP in late 1998 several major Canadian business law firms had already set up shop either in mainland China or in Hong Kong — some as far back as the late 1970s.

The “big boys” McMillan LLP, Goodmans LLP, Osler Hoskin & Harcourt LLP, Stikeman Elliott LLP and Torys LLP (under various names when they first opened) were all there. “We did think we were late,” said Kwauk, managing partner of Blakes’ Beijing office, recently in an interview.

But a decade later Blakes — and Kwauk — are still there. The other Canadian firms and lawyers are not.

“At the end of the day, it’s about sustainability, the numbers have got to work,” said Kwauk.

Though it took five years to break even, the numbers now seem to be working for Blakes. Its Beijing office includes four Chinese-national lawyers, who function as legal consultants navigating Blakes Canadian lawyers through China’s regulatory environment, and Annie Lagacé, an associate from the firm’s Montreal office who specializes in mergers and acquisitions. Since under current laws foreign law firms are not allowed to practise Chinese law Blakes’ lawyers practise Canadian law on Canada-China deals.

Another Canadian Blakes lawyer is expected to join its central Beijing office this summer in an office, just over 3,000 square feet in size.
Blakes’ Beijing team represents both Canadian and Chinese clients.

“In China, there are two flows of business,” explained Rob Granatstein, the Toronto-based national managing partner of Blakes. “One is Chinese investment in Canadian natural resources and the other flow has been Canadians investing in China on the manufacturing side to achieve cost efficiencies.”

To strengthen its position in China, Blakes has also joined forces with three Midwestern American law firms — Armstrong Teasdale LLP, Butzel Long and Michael Best & Friedrich LLP — as part of the China Alliance, headquartered in Shanghai and staffed mainly by Chinese lawyers.

But a Canadian competitor — Gowling Lafleur Henderson LLP — could soon join Blakes on the ground in China.
“A decision could well be taken this year,” said former federal justice minister Martin Cauchon, a partner with Gowlings and national leader of the firm’s China group.

He told The Lawyers Weekly that even without an office in Beijing, Gowlings has maintained a strong connection with China dating back to 1985 when the firm filed the first Canadian patent application in China on the day the country’s patent office opened.

And last November, Gowlings entered into what it billed as an “unprecedented” co-operative agreement with the China Council for the Promotion of International Trade (CCPIT) — a first for a Canadian law firm, which was signed during a trade mission to China by the Canada China Business Council (CCBC) and five provinces, including four premiers.

As part of the agreement, the CCPIT, a Chinese government agency, will “open lots of doors” to Chinese companies for Gowlings, while the firm will provide legal assistance to enterprises there hoping to do business here, said Cauchon, who has at least three trips to Beijing scheduled this year. Last year, he visited the city three times.

“To be based in Beijing is key,” Cauchon admits. The city is the capital after all, and in a country where the political and bureaucratic arms of the state still flex major influence, all “high-level” decisions are made there. As a result, a city once forbidden to foreigners now pulls them in, including law firms, from the U.S. to Australia, eager to capture some of the deals flowing from China’s emerging economy.

Cleveland-based international firm, Jones Day, is in Beijing, as is Freshfields Bruckhaus Deringer LLP, headquartered in the U.K.
Kwauk estimates that in Beijing alone, there are as many as 80 foreign law firms, each with as few as two or as many as 35 lawyers. There is about the same number of law firms in Shanghai.

Yet until Gowlings follows suit with its own presence on the ground, it has its eye on Beijing from Canada. The CCPIT agreement will help the firm connect with both its Chinese counterparts and clients, on both sides of the Pacific.

“It’s such a big market — both ways,” said Cauchon.

“On the regulation side in China, we can help Canadian businesses find the right professionals through our network, and help Chinese businesses that are very much interested in the Canadian market find opportunities here.”

And, at a time when the Canada-China relationship has cooled with Prime Minister Stephen Harper’s Conservative government, Cauchon’s presence reminds the Chinese of happier days when he served in former Prime Minister Jean Chrétien’s cabinet.
“Chrétien is so well known and respected there because of his friendship with China,” said Cauchon, who visited China as secretary of state of the Economic Development Agency of Canada for Quebec and as national revenue minister.

He added that while his Chinese hosts are “always very pleased to see” him, they always raise the current federal government’s “attitude” toward China.

“Every time they can communicate their concern about Canadian policies under the Conservative government, they do it. That doesn’t help the relationship, quite frankly,” said 46-year-old Cauchon, who plans to eventually return to federal politics and run for the federal leadership of the Liberal Party.

Added Granatstein: “The Canadian government could be doing more to foster a good relationship with China, and those kinds of things filter down.”

“What Bob is seeing is that heads of state and prime ministers are making appearances in Beijing and Canada isn’t, and the Chinese pay attention to those kinds of things.”

While China’s human rights record has contributed to the current federal government’s tepid approach, thus far, to pursuing a relationship with the Asian powerhouse, Harper’s former foreign affairs and international trade minister, David Emerson, recently called for “further engagement and an intensification of Canada’s economic relations with China,” in a foreword to a recent Fraser Institute study on Canada’s economic relationship with China (which reported that only two percent of Canadian exports were sent to China in 2007). Emerson noted in the foreword while commercial relations between the two countries have grown significantly Canada has “fallen short of the vast potential for mutually beneficial trade, investment and broader bilateral opportunities.”

The absence of an appearance by Harper, or one of his senior cabinet colleagues in China, and without a strong bilateral partnership on such issues as trade, “handicaps” the competitiveness of Canadian companies doing business there — not to mention makes it difficult for Canada to raise or influence on matters, such as human rights, said Kwauk.

But the situation may soon change.

The federal government plans to open six new trade offices in China, two of which will be opened in April by International Trade Minister Stockwell Day when he visits the country.

Meanwhile, China is undergoing a major evolution. During Kwauk’s time in Beijing, he has seen “huge changes” to the practice of law. Clients and transactions more often result from entrepreneurial activity. Competition for deals continues to grow. And a new “understanding and acceptance of legal culture” has taken root in Beijing.

“Up to the early 1990s, most business entities in China were state-owned, so it was the left pocket doing business with the right pocket. There was less of a concern for liability, and contracts were important to record a transaction and tended to be very short one-page documents,” explained Kwauk. 

“But as China has evolved from a state-owned economy and the private sector has gotten bigger and foreign companies enter China, longer, more-detailed Western-style contracts are becoming more important, particularly with Chinese companies investing abroad and needing protection offshore.

“They will enter into a contract as sophisticated as any transaction we do in Canada. And that’s also true for large multinational companies entering into an arrangement with a major Chinese company.”

Yet, as he pointed out, “old habits are hard to break,” and the preference in China is still to have brief contracts that “leave a lot of terms, ideas and issues unaddressed or addressed ambiguously.”

When contracts familiar to Canadian lawyers are used, Kwauk, a Chinese Canadian who speaks Mandarin and Cantonese fluently, often has to explain standard terms, such as boilerplates, to Chinese entrepreneurs who might never have encountered them before.

That’s “quite frustrating” for the other party that takes those provisions for granted. But it’s also proven to be a challenge for Kwauk.
“You have to know why these terms are there and how they can be applied, and some of them are hard to read!” said Kwauk.

“People who’ve never seen those incomprehensible phrases or sentences before think they could be traps, so I quite often have to rephrase them in plain language.”

He also educates Canadian clients about Chinese culture — not about how to properly use chopsticks or how the word “four” sounds like the word for “death” and should be avoided — but on the “strengths, weaknesses and values” of transactions.

“The issues we see as important in the West might not be viewed as important in China,” explained Kwauk.

Yet, the East-West divide isn’t as wide as it once was. For instance, many people speak English, especially younger mid-level managers who are often educated overseas. And, Chinese businesspeople are hungry for investment opportunities abroad.

In Canada, the interest is overwhelmingly in natural resources (oil and gas, mines and minerals). In China, often viewed as the “workshop of the world,” Kwauk expects that interest from Canada will continue to be in manufacturing to “take advantage of the inexpensive labour.”

That involves transferring technology to China, and as business and the courts in that country become more acquainted with IP, there will be more legal challenges and trade disputes. “No question about it — we’re entering tough times,” said Kwauk. “China has a manufacturing base and it will need to protect jobs.”

He adds that if Chinese companies become more active as a result, a worsening economy in Canada could find law firms without a strong connection to Beijing “salivating over that piece of pie” in Asia.

“When things are not doing well back home, they’ll start combing foreign lands and looking more outward,” said Kwauk. “Just because Canadian firms don’t have an office in China doesn’t mean they’re out of the ball game.”

“It’s very competitive for law firms in Beijing — not just in getting clients but also in hiring and keeping good people.”
“I’ve joked to my friend Martin [Cauchon] that I’d like to see him become prime minister so we have one less competitor.”
Ultimately, that’s Cauchon’s goal too, but for now he’s quite focused on carving out a significant niche for Gowlings in Beijing.
“We’re a full-service law firm and can do anything to serve Chinese corporations in Canada and Canadian businesses in China,” he insisted.
“Whatever the concerns, problems or needs are, we can find the solutions.”

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