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China Contract Damages: More Art Than Science

Posted in Basics of China Business Law, Legal News
Our China lawyers often stress to our clients the importance of a well-crafted contract damages provision that contains a “just-right” amount of damages should there be a breach. We are often asked what the just right amount should and our answer is that depends on the specific facts and to what the Chinese side will agree.  
The other day, one of our China attorneys wrote the following to a client regarding a contract damages provision in an NNN Agreement we had drafted. We had recommended one figure for the contract damages, but against our advice, our client had insisted on a much higher figure. The Chinese supplier rejected the higher figure and out of a desire to get going quickly, our client suggested that we just dispense entirely with the provision. The below email is our response to that:
With regard to our proposed language about minimum damages, I can understand why this supplier is balking at our $350,000 figure. As we discussed when drafting the initial NNN agreement, that is a relatively high amount, and considerably more than the $100,000 to $150,000 figure we recommended be used. This amount is more art than science. It is not supposed to be a penalty, but rather a realistic assessment of the damages that you would incur if the Chinese side were to breach this NNN agreement, say by selling a container full of your products directly to a third party. I would strongly advise against deleting this language entirely, though as specified contract damages are what helps to give this agreement real teeth, not least because they allow the Chinese court to impose a pre-judgment seizure of assets. That is a big advantage for you, and not one that you should give up willingly.
In a subsequent discussion among our China law group regarding this situation, one of our China attorneys wrote the following email to the rest of our group:
This shows yet again the importance of NOT making the contract damages an unreasonably high amount. It seems that whenever our clients push for a higher amount then what we are recommending, the Chinese side resists and then all sorts of problems begin. It is far better to come in with an entirely reasonable amount right off the bat. If the Chinese side resists that, we then know that our client has a problem with its Chinese counterpart. But when we come in at the start with an unreasonable amount for contract damages, the Chinese side quite correctly concludes that 1) our client has little to no experience in China and is basically an unreasonable company that will be difficult to deal with in the future. It is just a bad idea all around. And the thing is that most of the time the clients who insist on numbers much higher than we are recommending are disproportionally inexperienced and difficult to deal with.

China VIEs: A Bibliography From The Last Few Days

Posted in China Business, Legal News, Recommended Reading

The recent news about China VIEs has thrown many (most?) China lawyers into a bit of a tizzy. We all know that what is happening is complicated and important and we are all scrambling to figure it all out, knowing that whatever we conclude now will no doubt differ from what we conclude six months from now. Because this issue is so important and so complicated, I thought it appropriate to gather up the best writings on it and list them below. This is truly a situation where the more you read the more you will understand, though if you think you have it completely figured out, I think you are wrong. 

So with the goal of advancing understanding of these changes, we are going to use this post to maintain an up to date list out the sites that have engaged in a high level analysis of the situation. The below are what we have so far, and we urge you to let us know in the comments section below of any other articles or posts you think we should add to this.

Again, please let us know of any additional writings we should be adding to this.

China VIEs Are Dead. Done. Over. Stick A Fork In Them.

Posted in Basics of China Business Law, China Business, Legal News

January 19, 2015 marks the date of the death of the VIE investment structure in China. The death blow was dealt by the PRC State Council itself, the highest authority on such matters in China. Now that the issue is settled, we can all move on to figure out the effects. 

How was the VIE killed? On January 19, the State Council issued a discussion draft of legislation setting out the plan for overhauling the antiquated Chinese foreign investment legal regime. The new system is set out in the PRC Investment Law Discussion Draft (the “Draft”), a massive document in 178 Articles and 11 Chapters. The underlying philosophy of the Draft is explained in the Explanation of the PRC Investment Law (the “Explanation”).

Draft makes clear that the State Council understands how VIEs work and that their sole function is to evade the requirements of Chinese law. The Draft makes clear that such evasion is illegal and will be prohibited upon the effective date of the new investment law.

The new system will work as follows:

  1. The nationality of any business entity will be determined by the place of formation of the entity. The nationality of the shareholders, the directors or the management is not relevant. The only issue is where the company is formed. Thus, a Cayman Island corporation owned and controlled by Chinese citizens is still foreign for purposes of the law. A Chinese company formed by such foreign investors is therefore treated as a foreign owned entity.
  2. The Draft introduces the concept of “effective control”, a principle borrowed directly from the VIE structure. The Draft provides that any Chinese entity effectively controlled by a foreign owned entity will be treated as a foreign entity. This means that if foreign entity participation in a sector of the economy is prohibited, this prohibition extends to Chinese entities effectively controlled by foreign investors.
  3. It is illegal for an entity effectively controlled by a foreign owned entity to operate in sectors of the Chinese economy that are restricted or prohibited to foreign investors. In other words, the restriction or prohibition applies to effectively controlled Chinese companies in exactly the same way that it applies to a foreign owned entity of any kind. Any effectively foreign controlled Chinese entity that enters into a restricted/prohibited sector is in violation of law. The operations will be shut down and penalties will be imposed as provided by law.

As we know, the core of the VIE is structure is that a foreign owned entity (a WFOE) effectively controls a Chinese owned entity through an elaborate series of contracts. Without such effective control, the foreign owner of the VIE is not permitted to consolidate the earnings of the Chinese entity into its books. I have argued in the past that the contracts are void under Chinese law. The State Council takes a different and even more devastating approach. The State Council has said that it will accept that the contracts are legal and enforceable.

All those opinion letters you have received say that. However, since the Chinese entity is effectively controlled by a foreign investor, it is obvious that the Chinese entity is in fact a foreign controlled entity. Therefore, that foreign controlled entity is prohibited from operating in a prohibited or restricted sector.

The effect of the Draft is to kill the VIE structure as an investment vehicle in China for the future. It is important to fully understand the impact. Even if the Draft is never adopted, for the future at least, the VIE structure is dead. The VIE structure is dead because it is now clear that the State Council understands how the VIE structure works as a contractual device and it is clear that the State Council understands that the only reason VIEs exist is to evade the clear requirements of Chinese law. Most importantly, it is also clear that the State Council has firmly concluded this behavior is wrong and it will not be tolerated in the future. So it does not matter whether or not the Draft is adopted in its current form. Whatever happens, the VIE structure is dead.

Now we come to the more interesting and difficult question. A large number of very large companies operate in China’s Internet and telecom sector as VIEs. Baidu, Sina and Alibaba are only a few of the hundreds of VIEs currently operating in China. These VIEs control the China’s Internet, e-commerce and cloud computing sectors. They are the only significantly large privately owned companies in China.

Yet, the remarkable fact is that these highly capitalized, powerful companies are all operating illegally (as we have pointed out many times on this blog). However, all of this illegal activity has been conducted openly and with the tacit acquiescence of the PRC regulatory authorities. As a result, the big issue for now is what is to be done about the existing VIE entities in China that will be rendered illegal if the Draft is adopted in its current form.

The VIEs have seen this coming, and beginning in 2013 Robin Lee of Baidu led the charge in seeking to have then existing VIEs be formally declared legal under Chinese law. Mr. Lee argued that the State Council should declare VIEs legal under Chinese law so long as Chinese citizens control the management of the foreign owned entity. Mr. Lee did not propose that the limitations on foreign participation in the Internet sector be removed. His plea was simply that his particular device be declared legal. After Mr. Lee made his plea, other owners of large Internet and telecom VIEs joined in to propose various “get out of jail free” techniques to leave them in control of an otherwise closed sector.

From a legal standpoint, the proposals of Robin Lee and others put the Chinese government in a very difficult position. If the government accepts the proposals by making a blanket ruling that VIEs are legal, then open violation of Chinese law is tolerated. On the other had, to declare already existing VIEs to be illegal would involve acting against large and successful Chinese companies in critical sectors such as the Internet, e-commerce and telecommunications. However, the issue must nevertheless be confronted. Here is what we know so far on how the regulators intend to proceed:

1. Article 158 of the Draft states that the issue of what to do about existing VIEs will be resolved in accordance with the Explanation.

2. Article 3.2 provides the following “solution”:

  • A principle of “actual control” will be adopted. A Chinese entity under the actual control of foreign investors will be treated as foreign. A foreign entity under the actual control of Chinese investors will be treated as Chinese. How this analysis will be performed is not explained.
  • For existing VIEs, the government will NOT provide a blanket statement that existing VIEs are in compliance with Chinese law. In this sense, the request from Robin Lee and others has been denied.
  • The rule will be as follows. The decision on whether or not to allow effectively foreign controlled Chinese entities to continue to operate will be made on a case by case basis by the PRC government agency with control over the area of concern. The rule is:
    • If a specific permit is needed to operate in a sector, that permit must be obtained.
    • With respect to VIEs, the effectively controlled Chinese entity must go to the regulator in their field and request a special exemption on the grounds that the VIE WFOE and its parent are actually effectively controlled by Chinese investors. If they can make this showing, then they will be allowed to continue to operate.
    • Article 3.2 provides that if the regulator issues a license in this situation, the State Council will not intervene. If a license is granted by the regulator, then registration will be processed (or maintained) in accordance with the grant of such license.

This means that that the State Council has punted on the very difficult issue of what to do about existing VIE entities. We can imagine the State Council saying: You guys created the problem by turning a blind eye to this illegal activity. Now you need to figure out what to do. However, by directly citing the “effective control” standard, the State Council has provided the various regulators with an escape from their difficult situation.

The stock response to this situation is that the PRC regulators will “knuckle under” and provide the required licenses to the existing VIE operators. Virtually everyone says: There is no way that the PRC regulators will shut down Baidu, Sina, Alibaba and the other major PRC VIE entities. I believe that this assessment is correct.

There are, however, a number of problems for the regulators if they knuckle under and grant a get out of jail free pass to the existing VIE entities, including the following:

1. It is now been formally acknowledged that the VIE structure is a violation of Chinese law. If the existing VIE entities are permitted to continue to operate, then the PRC regulators will be rewarding open violators of the law. This then weakens or destroys the legitimacy of those regulators. If you do not understand the threat this poses to the PRC regime, please go back and read Max Weber on the issue.

2. Competition within China is the much more important issue. Let’s assume that Baidu and others obtain/maintain their license to operate with foreign funds in a restricted sector in absolute violation of Chinese law. Now consider the situation of other Chinese “entrepreneurs” that want to do exactly the same thing. Now that the escape hatch has been opened for the existing VIEs, a similar work around should be provided for other Chinese entrepreneurs. If this escape mechanism is not provided, then Baidu (Robin Lee) and the other existing VIES will have been granted even more benefits than they even requested.

3.  The solution being proposed is something like the following. The PRC government will use the effective control analysis. If a foreign company is effectively controlled by Chinese investors, then for PRC regulatory purposes, that company will be treated as a Chinese company. This Chinese controlled company will then be permitted by the Chinese authorities to raise funds in the overseas capital markets. Under this approach, a VIE will not be necessary, since the foreign parent will be treated as Chinese for PRC restricted/prohibited industry analysis. There will therefore be no need to rely on the complex and questionably enforceable set of contracts that are central to the VIE structure.

While solving one problem, this approach raises the following other issues:

1. Companies raising funds on foreign markets are doing so as public companies. It is the core of the public company concept that the company is operated on behalf of the shareholders and that the shareholders exercise effective control over the management of the company. Taking away shareholder control in favor of management by Chinese nationals would therefore violate basic principles of public company law and policy. This is the reason that the Hong Kong stock exchange recently refused to host the Baidu IPO. Though it may be legally possible to impose this kind of restriction on nationality of manage on a public company listed in the United States, the restrictions would need to be fully disclosed. If properly disclosed, it is not clear whether such stock offerings would be attractive to investors.

2. Following this approach puts the Chinese government in the business of assessing the affects of complex corporate control structures implemented under the laws of foreign countries. It is not clear that the PRC government has the expertise to make an appropriate analysis of complex corporate structures that would challenge the analytic skills of even the most seasoned corporate lawyers.

3. The fundamental principle behind all of this is that the Chinese want to be able to raise money in foreign markets to fund business sectors closed to participation by foreign businesses. It is not clear whether foreign governments who regulate the capital and trade markets will find this approach to be acceptable.

The situation for now is very messy. We can conclude the following for now:

1. VIEs are illegal. We disagree with those who are saying that what is proposed is a two tier, foreign/Chinese system.
2. For the future, if a foreign entity is in fact effectively controlled by Chinese investors, such entities will be treated as Chinese entities for the purpose of application of the negative list restricted/prohibited rules. How this effective control standard will be imposed is not clear. In any event, there will be no need to form a VIE. As illogical as it seems, the WFOE and its parent will be treated as Chinese controlled for PRC regulatory purposes. Thus, as noted, the VIE is well dead.
3. For existing VIEs, they will be given a chance to convert to a model where their WFOE directly holds the required license. That is:
a. The VIE will terminate.
b. The WFOE will have the opportunity to apply for the applicable license directly from the applicable regulator. If granted, that is the end of process. If not granted, then business of the VIE must terminate. Most people don’t think that will happen, but that is just a guess.
In this way, the awkward and unenforceable contractual method (VIE) of control will be eliminated. If possible legally, the WFOE will hold the license directly. This will eliminate the uncertainty over legality and the uncertainty over who owns what. This is good. However, this system then means foreign capital markets and investors will be required to accept the listing of public stock by a company that is in fact controlled not by shareholders but rather by Chinese promoters. In a way, these entities will be a type of “reverse” VIE. It may solve the problem for the Chinese side, it is not clear if it solves the problem for foreign investors in the negative list side of the Chinese market.
What do you think?

And as proof that “we told you so” on VIEs, check out the following:

How To Get A China Business Visa

Posted in China Business, Recommended Reading

Our China lawyers are often asked China visa questions and unless they are particularly complicated or legalistic, we typically refer these questions out to China visa specialists. It is always surprising to us how little good information there is out there in English on what it takes to get a China visa of any kind.

So I was quite pleased when a loyal reader referred me to this post on the Sapore di Cina blog, entitled, Business visas for China – The complete guide. This post ought to prove helpful to anyone seeking a China business visa and we recommend it to anyone seeking such a visa.

How To Draft A Contract For China

Posted in Legal News, Recommended Reading

Contract drafting guru Ken Adams interviewed our own Steve Dickinson for a post he did regarding drafting contracts for China. The interview was in the form of a Q&A and I urge you to go herefor the whole thing.

Ancient Purchase and Sale Contract

Steve made the following points, among others, during the interview:

Language of the contract. Chinese law provides that the parties are free to choose the language of their contract. If the contract is in two languages, the parties are free to choose which language will control. If the contract is in Chinese and in English and the parties do not specifically choose a governing language, a Chinese court or arbitration panel will take the Chinese version as controlling. If the contract is in English, then the court or arbitration panel will appoint a translator to do the translation. These translators are often not very good, which causes many problems in litigation/arbitration, since the case gets sidetracked in disputes about translation.

Contracts involving a foreign party in China are almost always done in a dual-language format, with English almost always the other language. For example, every contract between Russian and Chinese parties I have ever seen is dual-language, Chinese and English.

The tradition in such contracts is to provide for the English-language version to control, for the law to be that of the foreign party country, and for litigation to be in some location outside China. These provisions seldom make sense but they are common in contracts between private parties and when the Chinese party is a State Owned Enterprise not controlled from Beijing. However, Beijing controlled SOEs normally will require the reverse: The Chinese language and law controls and disputes will be resolved in China, either in the courts or through the China International Economic and Trade Arbitration Commission (CIETAC).

American and British “lawyer” Language.  Chinese lawyers and businesspeople usually reject traditional U.S. contract language outright. The Chinese use simple contract language. Often, U.S. companies insist on using U.S.-style common-law contracts. The Chinese side never reads the English; they have the document translated into Chinese and they work with the Chinese. When litigation occurs in China, the Chinese court will often say, “This contract is just a translation of a standard U.S. contract. Obviously, the Chinese side did not understand any of it. Therefore, we are going to ignore the key provisions on which you are relying and we are not going to enforce them.” Many banks and investment funds have learned this to their detriment. For example, many foreign-drafted futures contracts have been thrown out in China because the courts concluded that the Chinese party simply did not understand the contract. The result is that the Chinese companies got a free ride, which is not a trivial issue.

It is a much deeper issue than language. Chinese courts, Chinese lawyers, and Chinese business people are not going to agree to legal provisions that have no meaning under Chinese law. If you expect to litigate in China, your document must be in accord with Chinese law. If you expect to be able to enforce your contract in China, you must have a contract that is in accord with Chinese law. Much bad U.S. contract writing involves using ten words to express one concept and drafting provisions so as to address every single possible contingency. For China, only the concept is important. Another motivation for bad U.S. contract writing is to try to draft around case law or statute. China does not care about cases or U.S. statutes. Chinese courts and arbitrators do not allow drafting around the provisions of black letter Chinese law and they do not allow for results that they think are either unfair or in bad faith. Thus, the real issue is not so much bad U.S. drafting methods. The real issue is how the Chinese court views the motivation behind the contract.

I should also add that Chinese lawyers have major problems interpreting U.S. and British common law contracts. Their standard approach is to guess at the meaning and then mistranslate and then work with the mistranslation, leading to disaster on all counts.

Again, go here for the full interview. And for more on China contracts, check out the following:

China Employee Layoff Laws

Posted in Basics of China Business Law, Legal News

China’s Labor Contract Law defines what constitutes a “mass layoff” (“经济性裁员”) as one of the following:

  1. An employer reduces its workforce by twenty or more employees, or
  2. A workforce reduction that exceeds 10% of the entire workforce.

Under the Labor Contract Law, an employer may initiate mass layoffs only under one of the following four circumstances:

  1. The employer undergoes a reorganization in accordance with the PRC Enterprise Bankruptcy Law.
  2. The employer experiences significant difficulties in its business operation.
  3. The employer switches production, adjusts its business model, and after modifying its labor contracts, still needs to lay off employees,
  4. The employer has experienced other significant changes that modified the economic circumstances which formed the basis for its having signed the labor contracts, and it is unable to perform under the contracts.

For purposes of Chinese labor law, a mass layoff is treated as termination without cause. This means that the employer must comply with the applicable provisions for such a termination, including the prohibitions against terminating certain employees including those who are pregnant or nursing.

At least thirty days before initiating a mass layoff, the employer must present its layoff plan to the labor union or to all of its employees. The employer must then consider any comments it might receive and revise and improve the plan accordingly, and file a report with the relevant authorities.

During a mass layoff, the employer must consider keeping an employee who:

  1. Has a relatively long-term fixed-term labor contract;
  2. Has an open-term labor contract; or
  3. Is the only one working in the household and needs to support elderly or minor dependent(s).

If the employer wishes to bring new employees on board within six months after it has issued a mass layoff, it must notify and give preference to its former employees in hiring.

In December 2014, China’s Ministry of Human Resources and Social Security issued Draft Regulations on Corporate Mass Layoffs. Among other things, these Regulations will, if enacted, make government subsidies available to employers that take effective measures to prevent or minimize the scale of its layoffs. The goal is to help employers pay for employees’ living allowances, social insurance, new position training, skill enhancement training and other expenses. The relevant labor bureaus will provide guidance and support services to qualified employers.

These Draft Regulations are expected to help clarify matters that the current rules have left open to interpretation. If and when new rules are implemented, we will write about them.

China-U.S. Trade Dispute Seminar. NYC on January 21.

Posted in Events
If you interested in trade disputes involving the US and China or just in need of free CLE credits you should attend the Brooklyn Law School’s “Trade Disputes Involving the United States and China” on January 21. The conference features two judges from the US Court of International Trade (the Honorable Claire Kelly and the Honorable Donald Pogue), the former Chairman of the Federal Trade Commission (Bill Kovacic), and law firm partners who represent both the pro- and anti-China side of trade disputes.  Dorsey & Whitney partner Bill Perry, who represents Chinese exporters and US importers, will be countered by Chris Cloutier, now at King & Spalding and formerly Acting Deputy Director of Trade Remedy Compliance in the US embassy in Beijing.  

The topics should be interesting to anyone involved in US/China trade work. Some people are unaware that specialized laws allow American companies to seek relief against “unfair” foreign imports by adding high tariffs. Despite China’s participation in the world economy for the past three decades, the U.S. government still treats it as a “non-market economy,” which makes it easier to slap on high tariffs in these cases, sometimes well over 100% of the value of the import. On the flip side, some American companies complain that they have a difficult time entering the Chinese market, and the U.S. government has brought cases against China in recent years at the World Trade Organization.  The result is a tit-for-tat exchange of accusations and trade obstacles between the United States and China both at home and on the world stage.

 
The event is free and open to the public, but you will need to RSVP. I am told that there are not many seats remaining, so to reserve your seat (and get your free CLE credits), go here, and fast.

Teaching China Business Courses Here At Home

Posted in China Business
This is a guest post by Jonathan Poston.
Back in July of 2013, I wrote this post for China Law Blog, asking for reader feedback on a Chinese business class I was developing.

Over the next months after my post was published, I used China Law Blog reader feedback as an aid in building out and further developing my proposed course agenda, and submitted the final course proposal to Galen, a small, private university in Belize. The course was welcomed, and soon after offered online to students. At present it has been taught for several groups of business students at Galen, the last time over the Fall 2014 semester.

Each time it has been offered, the course has evolved, based on feedback from students, most of whom loved the class. Much of the course was also augmented to meet needs specific to the Caribbean. If you’ve been keeping up with the huge Chinese-backed Nicaragua Canal proposal that is just breaking ground, then you know the impact China is making on the region.

As part of the course, students ended up networking with Chinese communities in Belize to better understand how they could play a part in the significant Sino-business affairs occurring in their own country, which prior to the class was a complete mystery to the majority of students. Though many students were already aware of the many Chinese-owned grocery and other small stores in their country, who could have guessed that the Chinese-made Great Wall Wingle, a compact pickup truck, is becoming popular in Belize. Students also learned from custom agents and bankers how Chinese businesses moved goods and money to expand current operations. And, this semester, students all worked with a China company to conduct new market research for a soon-to-launch international Chinese journal.

Slowly, but surely Chinese companies are making quite an impact in the small country that was once a British Crown Colony.

As for Americans, the Chinese business presence may not be as visible as it is in Belize, but it’s coming. And, in many ways, China is already in the USA, even it’s not so obvious. The business relationship the USA has with China is evident every time Americans go out shopping and nearly everything on the shelves is “Made in China.” One of my Chinese students (from my days teaching in China) joked once that when she was attending her last two years of university in the USA, she was hard pressed to send U.S. made souvenirs back to her friends and family in China. Everything she could find ended up having been made in China.Though there are efforts underway to teach American youth Mandarin, understanding China’s business culture is quite different from understanding its language, although there are obvious overlaps in the two. But, how many schools are teaching Chinese business culture?
And, if Chinese business culture were to become a mainstream subject, what should be included in such a curriculum? How should it be taught?These are the questions surrounding my goal of introducing a newly developed Chinese business course into high schools and colleges in the U.S. Your feedback is once again welcomed and appreciated.

 

Eating Dogs In China: It’s Relative

Posted in Recommended Reading

Got an email the other day from an American company looking to form a WFOE in China. The email started out extolling the virtues of this blog and commenting on how the sender has been “hooked” on it ever since our fabulous post on eating dog in China. I responded by talking about what is required to form a WFOE in China and by saying that post is definitely one of my all time favorites as well.

All this got me to thinking about what a shame it would be if not all of our readers could see our best posts. I’m half-kidding. Anyway, this all gave me the idea to one day a week republish straight up or update and republish some of our best/favorite posts over the years. That day will usually be mid-week and I have no idea for how long we will be doing this, but here we go with our first one, a post we did in 2011 on eating dog in China.

Earlier this year, I was on a slow highway on the outskirts of Hanoi when my daughters said something like “look at all those dogs down there being prepared for eating.  Eewww.” Without looking, (and thinking they were referring to live dogs in cages) I tried to put the best face on things for my 13 year old by saying, “those dogs aren’t for eating, they are for pets.” My daughters laughed and conclusively disputed that by noting they had “already been grilled and had their heads removed.”

For much of the car ride, we then talked about the morality of eating certain animals and not others and whether we as Americans have any right to impose our values on others. The point was in the talking, not the resolution. I have to say though that I love discussing issues like this with my children because no matter how they come down on them, it forces them to think.

The Washington Post just came out with an article that does the same thing. It is entitled, Chinese dog eaters and dog lovers spar over animal rights and it is an issue-spotters dream.

Before anyone accuses me of anything (and I know you will), let me explicitly set out my biases. I have not had any meat of any kind for nearly twenty years. I like knowing that animals are not getting killed for my meals, yet I do not think that my forsaking meat makes me any more moral than anyone else. The morality of an individual is based on the totality of the circumstances. Hitler was supposedly a vegetarian.

Dogs are by far my favorite animal. On the other hand, I have trouble distinguishing on moral grounds between the eating of dogs on the one hand, and cows and baby sheep on the other. What, other than cultural background makes one okay and the other appalling? I am not asking this as a rhetorical question; I am asking this as a question I would like to see answered.

All this make it very complex, I think.

But there is even more to this. As the Washington Post article makes clear, the eating of dog issue goes even deeper in China (and no doubt elsewhere as well) where the dividing lines are very much class and wealth based:

But in many ways, it was a battle that has been brewing for years between the rural and the urbanites, the poor and the rich — between China’s dog eaters and its growing number of dog lovers.

*   *   *   *

And the debate is the latest sign of China’s rapidly changing mores and culture. For centuries, dog meat has been coveted for its fragrant and unique flavor; it is an especially popular dish in the winter, when it is believed to keep you warm. But pet ownership has skyrocketed in recent years as China’s booming economy produced a burgeoning middle class with both money and time for four-legged friends. And with the new pet stores, a once powerless animal rights movement is slowly gaining traction.

The article focuses on a recent and highly publicized incident in China where a truck hauling dogs was forced off the road. The truck drivers and many others in China see the issue as rich versus poor:

“I still don’t understand what was immoral about my shipment. People also eat cow and sheep. What’s the difference?” he asked. Of the activists, he said, “They were just a group of rich bullies who own pets and have nothing better to do.”

Several others have also raised the specter of class warfare — a common meme in modern China amid the widening gap between rich and poor. In online debates, many have noted the symbolic nature of the confrontation: a working trucker forced off the road by a black Mercedes-Benz whose driver was on his way to a resort hotel with his girlfriend.

There is also “historical baggage” in China that says those who treat dogs well treat peasants badly:

The issue comes with historical baggage as well, notes Jiang Jinsong, a philosophy professor at Tsinghua University. “During the Cultural Revolution, having a pet was seen as a capitalist activity. Only the rich and arrogant had dogs and allowed them to bite poor people,” he said. “So there’s this implication that if you treated pets well, you will treat those who are weaker badly.”

At least one netizen has taken this argument to the extreme. Enraged by activists fighting for animals while ignoring the plight of so many rural, impoverished Chinese, a man in Guangzhou posted threats online to kill a dog a day until animal activists donate the money they raised to peasants living in poverty instead of to dogs.

“I felt I had to do something to represent the grass-roots people,” said Zhu Guangbing, 35, who recently plastered his threat on Twitterlike microblogs in China. “I grew up in a poor village. We raised one dog to watch the door and one to be killed in the Lunar New Year because we were too poor to buy pork. I don’t understand what’s wrong with that.”

The animal activists challenge this by contending that being kind to animals leads to being kind to humans as well:

But dog activists have defended their fervor as a necessity. China does not have any laws against cruelty to animals, and by some estimates, as many as 10 million dogs — some vagrant, others stolen pets — are sold for consumption each year and are often kept under horrible conditions.

“People are saying it’s a silly thing protecting animals,” said Wang, the activist. “But it is a question of civilization.

“By teaching people in this country to love little animals, maybe we can help them to love their fellow human beings better.”

Like I said, it’s very complex. And what a great wedge issue.

And where does the law fit into this? Laws can help lead people to do the right thing (witness the 1964 Civil Rights Act in the United States), but if they get too far out in front of what people want, they will usually be ignored and might actually give ammunition to those who oppose them. What should the United States’ and Europe’s role be with respect to China’s eating dog? No matter how you feel about this issue on moral grounds, the reality is that the United States and Europe have virtually no influence and, if anything, their trying to impose their will on China will only cause it to get its back up and end up being counterproductive.

What do you think? Does this issue have legs in China? Might it become a stalking horse for the rich-poor divide? Or is this just a side issue that I am blowing out of proportion?

How To Write A China Arbitration Clause. Badly. Really Badly.

Posted in Basics of China Business Law, Legal News

Our China lawyers are detecting a trend. Years ago we talked of how most of the arbitration clauses we were seeing (not drafted by us) were bad. Now most of them are incredibly bad. And Chinese lawyers are laughing all the way to the bank.

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We are more and more often seeing the following as the arbitration provision in contracts between US companies and their China manufacturers:

1. The agreement requires that the parties first try to resolve their differences on their own. It is silent on what this means. Even worse, it sometimes mandates that the parties must spend anywhere from 90 to 180 days doing this. Some even require that these discussions be in China.

2. The agreement requires that if the parties are unable to resolve their differences on their own, they then mediate. It is completely silent on what constitutes mediation and what the party seeking mediation should do to accomplish it. They do usually say that mediation must be in China.

3. If mediation fails, they then arbitrate before three arbitrators, with each party choosing one arbitrator and then those two arbitrators choosing the third. Again, completely silent on how to initiate arbitration or before what arbitral body, though they virtually also state that the arbitration will be in China and in Chinese.

An American company sent me one of these not that long ago and asked if the China lawyers at my law firm might be interested in taking on their case. My answer was essentially not in my lifetime. I figured that by the time we actually figured out what exactly we needed to do every step of the way and did it, we’d be about two years and many tens of thousands of dollars down the road. The amount of the American company’s claim simply could not support a case like this.

For more on China arbitrations, check out the following: