Paper: Commercial Hostages in International Business Disputes

Abstract

A “commercial hostage” or “debt hostage” situation involves a dispute between a foreign company and its local partner over such matters as payment, the closing of a local office or facility, the laying off of local employees, the transfer or ownership of intellectual property, etc. Rather than file a lawsuit seeking money damages or an injunction, the local partner takes extra-judicial steps to detain the foreigner against their will, so as to pressure the foreign company into resolving the dispute. The local police may even actively assist the local partner by way of inaction when the foreign company asks for help. While this activity occurs in a number of countries, this study focuses on China.

One challenge in studying commercial hostage situations is gathering enough cases to be able to gauge the factors that drive them. Stated differently, how can scholars shift the study of this important topic from the anecdotal to a data-based approach? This study is an initial attempt to do just that – it mainly attempts to gauge the frequency of recent commercial hostage activity in the P.R.C. Secondarily, it sheds light on where that activity occurs, why, and the identity of its victims. To accomplish this, Freedom of Information Act requests were submitted to six Western countries (including the U.S.) with significant China trade. English and Chinese business and legal media reports were also searched for commercial hostage cases involving foreigners. Between these two sources, dozens of commercial hostage incidents were identified. The vast majority occurred in or near Tier 1 cities and/or coastal regions, a significant number involved foreign firms operating in the commodity goods space, and a disproportionate percentage involved ethnic Chinese.

Building on these findings, we conclude by providing a risk assessment matrix that foreign businesspersons can use to evaluate the risk of traveling to the P.R.C. for business. As trade tensions rise between the U.S. and China, the importance of this issue and evaluating commercial hostage risk may only increase.