Why Contract Disputes in China Can Lead to Hostage-Taking and Exit Bans

In the U.S., when lawyers or businesspeople weigh the potential risks of a contract breach or a disputed invoice, the possibility of being taken hostage or denied exit from the country is not a consideration. And for good reason, as neither possibility is legal or customary in the U.S., or, for that matter, in most other nations.

But in China, business exit bans are legal, and commercial hostage-taking is culturally acceptable, though illegal. In a new article, I analyze the Chinese legal, cultural, and historical influences that give rise to such practices, as well as legal strategies U.S. companies can use to address them.

A business exit ban can be enforced against individual executives of a U.S. company doing business in China when an ordinary commercial dispute arises (such as an alleged contract breach). The Chinese company involved can simply ask a court to impose the exit ban through a formal legal process that occurs unbeknownst to the party whose exit is to be barred. The U.S. executive typically learns of the ban at the airport when authorities stop him or her from boarding a flight home.

A different technique Chinese companies use to seek negotiating leverage in business disputes is known as commercial hostage-taking, debt hostage-taking, or soft kidnapping. No threats of physical violence are made, yet the target’s freedom of movement is restricted. Commercial hostage-taking typically occurs when a Chinese company locks a U.S. executive in a conference room or hotel room and agrees to release the executive only in exchange for payment of the amount allegedly owed (such as the amount of a disputed invoice).

Through FOIA requests to the U.S. and other Western governments, along with online media searches, my two colleagues and I documented over 100 business exit bans and commercial hostage situations,[1] a mere fraction of the total.

How can such tactics be explained? Drawing on an extensive literature that analyzes social and historical influences in the development of Chinese law, my article makes two arguments. One is that Mao’s dichotomy of “antagonistic” and “non-antagonistic” contradictions, which continues to influence Chinese society and legal norms, is a helpful paradigm for understanding exit bans and commercial hostage-taking.

In short, antagonistic contradictions are disputes between a supporter of the ruling regime and an “enemy” of the regime, and such disputes are to be resolved using government coercion. Non-antagonistic contradictions, though, are thought of as civil disputes among private citizens, and they are to be resolved with non-coercive measures, meaning government authorities are reluctant to become involved and expect private citizens to work out such disputes on their own.

Applying Mao’s dichotomy to exit bans and commercial hostage-taking, I note in the article that exit bans can be thought of as antagonistic contradictions in which government (i.e., CCP) coercion on behalf of citizens against “enemy” foreign companies is an entirely rational use of state power. In contrast, commercial hostage-taking can be thought of as a non-antagonistic contradiction (i.e., a private financial matter between private parties), which helps explain why Chinese authorities are reluctant to enforce laws against commercial hostage-taking, even though the practice is classified as an “unlawful detention.”

My second argument is that exit bans and commercial hostage-taking must be understood from the perspective of China’s system of law and order, not through Western notions of a legal system. Professor Donald Clarke asserts that the CCP does not have, nor does it intend to have, a “legal system” in the Western sense.[2] Rather, Clarke argues, the CCP fosters an “order maintenance” system that seeks the preservation of the CCP’s power.

As Xi Jinping has said, the CCP’s system of governance explicitly rejects concepts like “constitutional government, “separation of three powers,” and “judicial independence.”[3] Xi’s statement is consistent with national security expert Christopher Ford’s historical overview of the Chinese legal system, in which he notes that the CCP embraces a view of government power that combines Marxist principles with older Chinese notions of a benevolent and “omnicompetent” emperor who holds unquestioned authority to rule.[4]

From a Western perspective, should a system of governance that rejects judicial independence and embraces autocratic control be considered a “legal system” at all? Regardless, how should U.S. companies doing business within such a system prepare for possible exit bans or commercial hostage situations? Based on Professor Robert Bird’s framework,[5] my article sets forth a five-tiered approach that builds from an initial, reactionary stage in which companies seek to skirt legal obligations. The tiers advance to two mid-level strategies in which companies seek either to comply (or strategically not comply) with legal obligations, or to anticipate and prevent legal conflicts. The tiers then culminate in two higher-level strategies that leverage law to develop an enduring competitive advantage in the marketplace and, in the process, transform key aspects of the company’s business.

At the extreme, exit ban strategies have included escaping China on a jet ski or hidden in a tanker ship or car trunk. For commercial hostage situations, solutions usually involve giving in and paying the money demanded, although tricking guards and fleeing to the embassy of a friendly country has worked as well. In the end, the tried-and-true strategy of developing trusting relationships and actively monitoring potential disputes before they devolve into an exit ban or commercial hostage situation is often the wisest approach. More aggressively, transforming the company’s business model by developing a competitive advantage in a new line of business, or relocating to a different country altogether, are also worthy options.

ENDNOTES

[1] Jack Wroldsen & Chris Carr, The Rise of Exit Bans and Hostage-Taking in China, 65 MIT Sloan Mgm’t Rev. 4 (2024); Chris Carr & Jack Wroldsen, Exit Bans when Doing Business in China, 64 Thunderbird Int’l Bus. Rev. 209 (2022); Chris Carr & Dan Harris, Commercial Hostages in International Business Disputes, 63 Thunderbird Int’l Bus. Rev. 523 (2021).

[2] Donald Clarke, Order and Law in China, 2022 U. Ill. L. Rev. 541, 543 (2022).

[3] Xi Jinping, Unswervingly Follow the Path of Socialist Rule of Law with Chinese Characteristics to Provide a Strong Legal Guarantee for the Comprehensive Construction of a Modern Socialist Country, Qiushi.com (Nov. 16, 2020), http://www.qstheory.cn/dukan/qs/2021-02/28/c_1127146541.htm#.

[4] Christopher A. Ford, Xi Jinping, Foucault, and Spy Balloons? Communist China’s Theory of Control and Visions of a Post-Westphalian World Order, 11 Nat’l Sec. L.J. 1, 6, 22 (2023).

[5] Robert C. Bird, Pathways of Legal Strategy, 14 Stan. J.L. Bus. & Fin. 1, 12-38 (2008).

This post comes to us from Professor Jack Wroldsen at California Polytechnic State University. It is based on his recent article, “Legal strategy for commercial hostage-taking and business exit bans,” available here.

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