Losing A Lawsuit In The Philippines

http://empireflippers.com/losing-a-lawsuit/

by anthony_franco • 12 years ago

49 29 12 years ago

jacquesm2• 12 years ago

When in Rome...

Dealing with the institutions in a country where you have no knowledge of how things are done and where who you know is as important (or even more so) as what the law says means you have to be vigilant from day one.

The biggest error in this case was that they did alright on the 'trust' bit but they failed the 'verify' bit right from day one.

If there had never been so much room for maneuvering in the first place then this would have likely never happened. It's sad but in situations like this you're setting yourself up for long term trouble if you do not actively seek to control things right from day one.

I have a couple of cases quite comparable to this one in my immediate surroundings and some of it sounds eerily familiar.

The OP is in good company, big corporations fall for things like this and usually it costs a lot more than it did here. Chalk it up to your educational fund.

If anybody is in a position to attempt to replicate this experiment you may want to do the following:

- incorporate through a lawyers office and if local law requires a resident or national as a director make sure they are accountable

- prepare to go there when incorporating and get yourself educated with respect to the local situation (corruption, graft, how foreign companies usually get plucked)

- be prepared to spend a lot of time in the target country from the moment that you incorporate

- get your ducks in a row, don't put the responsibility of doing that in the hands of someone at arms length.

- if you want to keep things simple do not create a subsidiary, instead aid someone else in creating a company and hire them for a service they provide. This makes departures so much easier to deal with. It removes all of the responsibility from your end but you keep control at the level of the customer. Not happy? Then deal with someone else.

- spread the responsibilities over several people, make sure they check up on each other and report to you.

- trust but verify, repeatedly, continuously

This is not meant as a 'Philippine people can't be trusted' line, or even a 'foreigners can't be trusted' one. The sad fact is that if you, a rich western company lands to do business unprepared in a foreign country you are simply a very fat goose waiting to be plucked. So you need to be aware of that and act accordingly.

As these lessons come this one was remarkably cheap.

I've had something similar happen and I wished I could take my own advice above retroactively, my lesson was a lot more expensive than the one detailed here:

http://jacquesmattheij.com/stick-to-what-you-know-a-tale-of-...

justincooke10• 12 years ago

Thanks for sharing your thoughts on this.

I think you're right - we got off relatively cheap here. Much more than that and we likely would have just shut down the Philippines corp and would have run it from the US side.

We ended up having our ducks in a row on all later hires, but we were SO early with her that things were messy from the start. (As they often are) We should have cleaned up that paperwork and documentation as soon as we were able to do so.

MikeTaylor• 12 years ago

I couldn't find the bit corresponding with "6. Was arrested and put in a Philippines jail cell". That links to the section entitled "Retaliation" which doesn't say anything about being arrested or imprisoned. What am I missing?

justincooke10• 12 years ago

Hey Mike,

After our connection agreed to have some people stake out her house, we think "Karen's" neighbors let her know what was going on. The next day she appeared at the police station, was booked, and was put in jail.

That didn't last very long, though - I believe she was out the same day with her attorney.

A big sticking point on coming to an agreement with us was that we gave up any interest in pursuing the criminal case against her. That's a bit weird, because criminal cases come from the government not us, but I think the lawyer knew nothing would come of it if we left it alone.

sumedh2• 12 years ago

The original business was established under Karen’s name and we switched everything over to the corporation a few months down the road.

Did you meet Karen physically before or just began to trust her virtually.

justincooke10• 12 years ago

We'd never met Karen when she was working for us with our mortgage company.

A few years later we hired her and a couple of other VA's to help us with work. As we started to ramp that out, both Joe and I flew out to the Philippines to meet up in person, check out office space, etc.

rwallace• 12 years ago

Your choice of question implies you think it's better to trust people you've met physically. This certainly matches typical human intuition; most people think they can tell all sorts of things about other people from a face-to-face meeting.

Intuition turns out to be wildly wrong in this regard. Whenever the results are actually measured, the strong feelings we get about people from face-to-face meetings are just noise; they aren't significantly more accurate than random chance.

Objectively you're probably better off to trust people you've only met online because that way you know you're working with little data (and therefore should be cautious about degree of trust, and seek objective feedback before committing large sums of money); you're not lulled into a false sense of security.

sumedh2• 12 years ago

Your choice of question implies you think it's better to trust people you've met physically.

I knew someone would point that out. You make a fair point but body language can tell you a lot about the other person if you know how to read it.

kovrik• 12 years ago

named Karen (not her real name)

Why don't you tell her real name and other info?

justincooke10• 12 years ago

Even with everything she did, we didn't think calling her out by name was something we should do. The lessons learned were there without mentioning her directly.

Besides, with around 100M people in the Philippines, it's highly unlikely anyone reading this would need her name to avoid, heh.

jacquesm2• 12 years ago

Because that would open them up to further trouble and because there is no gain from it.

I write quite extensively about stuff that happened in the past and I'm always very careful to write it in such a way that the various people involved (even if they've done terrible things) can not be identified easily. People change.

rayiner3• 12 years ago

Here's the thing: people involved in an acrimonious breakup never have the same story about what happened. As much as you think you're viewing the situation objectively, any narrative you give is biased. If you name names unnecessarily, you deserve any further trouble you get into.

vohof• 12 years ago

$1.8M pesos (over $40K USD).

The confusing dollar sign.

justincooke10• 12 years ago

Ack - thanks for pointing that out. Corrected!

meric• 12 years ago

Would you say from her perspective, the issue was as simple as "Let's try extort some more $$ as I leave, because I can.", or could it be more complicated?

justincooke10• 12 years ago

My business partner and I disagree a bit on this part. If you asked him, he'd say it was definitely a case of her looking to get out of it what she could. Both of us agreed, though, that it seemed like the lawyer was really pushing/driving the issue towards the end. She looked/sounded like she was done with it and just along for the ride at that point.

I didn't think she set out to screw us. After we'd given her paid leave and she was so stressed out with some of the employees (internal bickering) she likely went to speak to an attorney pro bono due to some prompting from friends/family. When she heard what might be possible she got greedy, IMO. She also hated my business partner - there was some bad blood there, especially towards the end of her working with us.

broolstoryco• 12 years ago

Lost in court

We stopped returning calls from his office. We ignored requests... we simply ignored the situation and continued to grow our business.

Really?

justincooke10• 12 years ago

I know what you're thinking - sounds pretty stupid, right?

But...in the heat of things and being right in the middle of it, we thought it was likely or probable that our attorney was in on something with her attorney.

The fact that he was asking for all that money to be place din escrow had us thinking we'd NEVER see that money again if we handed it over. Who knows where it would really go - so we stopped contact.

Over time our phone numbers had changed (common in the Philippines) but the address remained the same. We figured if it was a major issue, he could still get in contact.

mathattack• 12 years ago

To get out with such a cheap payoff when they stopped returning their lawyer's calls is amazing. I'm surprised he didn't fire them as a client.

gexla• 12 years ago

Interesting case. I also live in the Philippines and I have been looking into starting a company here.

I have been looking into info on "PEZA" - the Philippines Economic Zone Authority. It appears that for corporations which have 100% income coming in from abroad (which I assume you qualify for) you can get around many of the painful things that other corporations have to do.

For example, your corporation could be 100% foreign owned. Could you have just started a new corporation and simply started all business as part of that new corporation without "Karen's" involvement?

I don't think this is a PEZA item, I believe this is the case for any business in this situation.

ETA:

You probably can't answer this, but I noticed that if you are in a free economic zone with the same situation as above, you can get a tax holiday for X years. To get this, your business has to be physically located in one of these zones though. I'm wondering about the possibility of setting up a mail drop with a virtual office company which is located in a "PEZA" building.

ETA ETA: I can definitely identify with the feeling you get when you believe someone is trying to rip you off. I think that's unfortunate and may hold people back. In some cases, I see foreigners lose their professionalism and take things way too personally. Good job on getting through this.

justincooke10• 12 years ago

Joe knows a bit more about the details here than I do, but I can say that we've qualified for the tax exemption status.

Additionally, our corporate structure in the Philippines is like this:

- 95% owned by a US Corporation - 1% owned by each of us (2% total) - 1% owned by 3 individual Filipinos (3% total)

This approach is less common for companies as small as us, apparently, but we're pretty happy with how it worked out. I think we lucked out working with a law office that was aware of and familiar with this setup.

I DON'T think we could have necessarily avoided the lawsuit by just setting up another corporation here in the Philippines. We COULD have set it up, of course, but our attorney said it was likely to catch up with us. Something about the new business being a mirror/shell of the old one. The worry being that, at some point in the future, they'd latch on to our new corporation's bank account again.

rayiner3• 12 years ago

There's two business lessons here, and neither are specific to doing business in the Philippines:

1) Don't be sloppy (and don't get emotional, because that'll make you sloppy);

2) Whenever you're dealing with a counter-party, try to understand where they're coming from.

There was clearly a mismatch between how the author saw Karen's position and how Karen saw it, one that was undoubtedly aggravated by the lack of documentation. Look at the situation from Karen's side. She started out running the business in the Philippines. Joe came in a year later and took over, effectively demoting her. After discussing the situation, the owners proposed an 80% pay-cut and 4-month leave of absence, something most reasonable people would interpret as a signal that they were being pushed out. Depending on Philippine law, this could have qualified as wrongful termination (most countries are not as employer-friendly with regards to terminations as the U.S.) When Karen sued, the author assumed it must have been some sort of shakedown, because he couldn't see how it could be a legitimate grievance. This established the paranoia that ultimately led them to ignoring calls from their own attorney.

If the authors had tried to empathize with Karen in the first place: 1) they could've taken actions to avoid the lawsuit; 2) realized that Karen had a pretty compelling case, and treated the suit with the seriousness it warranted. All this probably could have been avoided by some thinking and a severance payment that was less than the time and money wasted on the legal proceeding.

justincooke10• 12 years ago

You're right in that it was painful and frustrating and I'd be lying if I said there wasn't any emotion involved during the process. I think some of your criticisms are fair and provide an interesting counter-argument. (Likely closer to her perspective)

One clarification though - we weren't looking to push her out. She informed us (me, actually) that she was looking to quit and wanted to walk away. I'd asked her to stay on for a while and she did. In the end, she was planning again to quit and, instead, I offered the paid leave of absence.

We definitely could (should?) have taken steps to avoid the lawsuit early on and we probably didn't treat the case as seriously as it ended up being, but that's much easier seen in hindsight, I think.

I wonder if a clean break (with severance) would have avoided this issue altogether - I'm not exactly sure that would have worked either.

hluska2• 12 years ago

As I read your article, it sounded like Joe showed up to run a company that she had previously run. If that is correct, it was (as the OP said) a demotion. She didn't decide that she wanted to quit until after this demotion. When she said that she wanted to quit, she complained about Joe's management style.

Do you realize that saving face is incredibly important in Philippine culture? Or, more generally, how much do either of you really know about Philippine culture? Just because they have a strong American influence, it does not mean Philippine people are American.

Sorry you went through this, but based on what you wrote, this sounds like a case where you didn't know enough about the culture before you set up shop.

rayiner3• 12 years ago

I didn't mean to come across as faulting you as much as I probably did. Personnel issues are difficult, and it's valuable to look at stories like yours with the benefit of hindsight. An expensive lesson for you is a free one for your readers!

On that note, your comment that "[you] weren't looking to push her out" is worth unpacking. If you've ever broken up with a boy/girlfriend, you know that afterward, each person has his or her own narrative of what "really happened," which each person believes with total sincerity. It's a valuable to to step out of your own head, and try to understand enough about the other person's situation to be able to articulate their narrative. Third parties, whether juries or your own employees, will judge you based on the strength of those competing narratives.

Dayanan• 12 years ago

It's very simple they tried to start on the cheap and when they saw things were working out they decided to incorporate. That's when they started doing everything wrong. The first wrong thing was not understanding Filipino culture. Second thing not knowing the labor and business law.

Find out more here on how to register your business the correct way in the Philippines.

http://www.dayananconsulting.com/philippines-business-regist...

Losing A Lawsuit In The Philippines

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