Basics of China Business Law

China employee termination rules
China employment law: know the rules

Terminating a China-based employee usually requires good cause. A serious breach of employer rules and regulations can be a basis for an employer’s unilateral termination of an employee, but China employers have other options as well.

A China-based employer may terminate an employment contract if the economic circumstances which formed the basis for the parties’ having signed the employment contract in the first place have changed, causing the employer to be unable to perform under the contract. This sort of termination is permitted only after negotiations between the employer and employee have proven they are unable to reach an agreement on amending the contract. But does this sort of termination really work? As with just about everything related to China employment law that will depend on whether the employer handled the termination 100% correctly and a bit on the locale as well. See China Employment Law: Simple Questions and Complex Answers.

 Let’s look at an actual case out of Zhejiang province. The employer and employee signed an open-term employment contract in 2010 for the employee to work in a managerial position in Hangzhou. During the term of employment, the employer decided it needed to shut down the department this employee managed so as to cut costs. The employer provided its shut-down plan to its labor union for comments. The employer then notified the managerial employee in writing of its decision to close down his department and directed the employee to report to a new position, with pay and performance standards essentially the same as the managerial employee’s existing position. The employer’s notice clearly informed the employee that if he failed to report to his new position within a specified period, the employer would not be able to assign him to a similar position and would instead have to terminate his contract.
The employee refused to cooperate as directed and the employer then prepared a notice to terminate the employee’s contract and it provided notice to the company’s labor union for comments. The notice made clear the basis for the employee’s termination was the employee’s failure to abide by the employer’s new position assignment coupled with the employer’s inability to accommodate this employee with another similar position. These circumstances caused the parties to be unable to perform under the existing employment contract and after negotiations, the parties were unable to reach agreement on amending the original contract. The employer tried to serve the employee with his termination notice in person, but the employee refused to accept it, so the employer sent notice to the employee’s last known contact address by mail. The employer also published the termination notice in the daily newspaper and paid the employee an additional month’s wage as severance based on his years of service.
The employee sued for unlawful termination and demanded reinstatement of his position.

The courts sided with the employer and ruled as follows. After the employer decided to shut down the employee’s department and eliminate the employee’s original position, the employer provided the employee with notice specifying (1) his new position, (2) the new payment standard (which would not reduce his take-home pay one Yuan) and (3) the requirement that he report to his new position or be terminated for failing to cooperate. The employer also repeatedly asked the employee to report to the new position. The court held that the employer had handled the termination correctly and ruled entirely in the employer’s favor.

This case almost certainly would have turned out very differently had this employer not been so punctilious in following all the procedural requirements for a termination due to economic circumstances. This employer did not go full speed ahead and unilaterally terminate the employee right after it made the decision to eliminate his position. It instead got its labor union to sign off on its plan and then it sought to give the employee a similar position with similar pay.

Keep in mind that terminations because of economic circumstances require the employer pay their terminated employees statutory severance. And as always, it is important to check the local requirements before you terminate an employee.

 

China LawyersLast year we did a five part series on the difficulties in getting money out of China. Since that time things have gotten a little better and a lot clearer. They have gotten better in that China seems to have eased off the brakes ever so slightly and they have gotten clearer in that experience has taught us the kinds of deals almost certainly to go through with money sent and those that have no chance, and what fits in between.

Our original post in this series, Getting Money Out of China: It’s Complicated, we wrote on how incredibly frequently Western companies have been needing legal help in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.” That has turned out to be no exaggeration as that Facebook post alone has generated nearly 25,000 views. But as I noted in part 2 of this series, most of the interest in getting money out of China involves purchasing single family homes in the United States or in Europe and those deals are just not going to happen legally if they require money from the PRC.

In part 2, we discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. Part 2 focused on legitimacy. Part 3, focused on the “benefit to China” element and Part 4 on what is/was happening in China that is slowly down payments from China. Part 5, focused on increasing your odds of getting paid.

Since our five part series last year the flurry of companies trying to get money out of China to get paid has slowed down, but our having seen a bunch of the deals that failed have taught us the following two very important and not terribly related things:

Draft your contract with the Bank of China and the Chinese Government in mind. Two similar technology licensing deals. One has no Chinese version and talks about software that can be used to maximize retail sales. The other has a Chinese version and talks about how the software can maximize production line efficiencies. The second one has a much better chance of clearing Chinese government approval than the first one. It’s important that you get this right from the get-go because once you don’t, your odds of the money ever leaving have permanently decreased.

Draft your contract based assuming the money you need will never leave China. In other words, your contract should have a provision(s) making clear exactly what will happen if the funds never arrive.

For instance, if you are seeking equity funding for your company, you must not grant the putative Chinese funder equity in your company before you receive the money required. I know this sounds obvious, but trust me when I say that is not always the case. If you allow a Chinese company to get equity in your company before you receive the money, you will likely be facing the untenable situation of needing to sue (perhaps even in China) and argue for stripping the Chinese company of all equity for non-payment. Structure your deal so equity comes only upon payment!

Where we also often see problems is in licensing deals where the American or European company will provide some or all of its technology before receiving payment. As we wrote way back in 2011, in On Licensing your Software to China, this made sense well before China put the clamps on money leaving:

How do you plan to make arrangement for payments? I note that your normal system is 30 days net. In general, this is not a good idea in China the Chinese government has made it progressively more difficult for Chinese entities to convert RMB into dollars for payment to foreign software and service providers. The restrictions come in two forms: 1) unreasonable demands for contract registration and then delays and unreasonable documentation requirements for contract registration, and 2) imposition of withholding and other taxes, often in unreasonable amounts. All of these burdens must be met before the Chinese party is permitted to make payments. The demands and requirements vary from district to district and from bank to bank with no predictable pattern. This process can often delay payments for many months or even years.

Because of the above, it is not usually prudent in China to deliver software product or to provide services until after you have been paid or at least until after you have been paid for a significant amount of your fee. These payment problems are entirely beyond the ability of the Chinese customer to control, so even customers acting in good faith may be in a position where they cannot pay.

For more on why it always makes sense to get paid upfront when licensing your technology to a Chinese company, check out Three Myths of China Technology Transfers

Your Chinese Counter-Party Should Figure out how to get the Money out of China, not you. Our China lawyers are nearly always contacted by the American or the European side for help on getting their Chinese counterparty’s money out of China. This does not make much sense and our response is usually to tell them that my law firm’s role should be to represent the foreign party in overseeing what the Chinese party does to try to free up its own money and if the Chinese party is serious about wanting to get its money out of China, it should hire its own Chinese lawyer in China.  Guess what, if your Chinese counterparty is unwilling to hire and pay for its own lawyer to help it get the money it owes you out of China it must not want to pay you nearly as much as it claims.

China contract templatesI wrote last week on China contract templates in China Contract Templates: the Cons and the Cons. That post essentially stated that China contract templates range from worthless to dangerous. I put that post on Linkedin where it has received the following comments:

  • I could not agree more with your article. I suppose you should have also thrown in the often bragged about claim from business folks, that “hey, they signed our standard contract with no problems!” Great news! Maybe it is unenforceable against the Chinese party so of course they signed it!
  • Templates are easy to come by. They can cost you big, though, in the long run. I have seen a few such cases. Professional guidance is worth the investment!
  • Highlight: Going in-house as a ‘cost saving’ technique rather than because a team has any real China expertise can end up costing firms big time. It’s still surprising how many Western companies recognize China is a big step, but then figure they’ll learn as they go along without any major screw ups.
  • Been doing business in China for a very long-time. You are one of the few people I follow. This is because you consistently provide realistic quality advice. Everything you say about Liquidated Damages is 100% correct. Can’t emphasize this enough. However, it is very tough to get the Chinese side to sign and you must not capitulate on this term. This is coming from experience. I have been talked out of it a couple of times for various reasons and have been burned. Also, agree about diligence. If you are doing any long-term transaction requiring a significant amount of investment, you’d better make sure you know your Chinese partner. Figuring out the true ownership, power structure and financial condition of a Chinese entity can be very difficult. Thanks for the Great Read.

I also received an email from a lawyer friend who chided me for failing to provide specific real world examples of templates used to a company’s detriment. Great point. In Forum Selection Clauses. Do NOT Try These At Home, I talked about how my law firm had “made well over $100,000 the last couple of years fighting over badly written forum selection clauses in international contracts” and in all of those cases, the clients had drafted their own contracts using template provisions on forum selection. And as I stated in that post, “our clients (who consulted us for the first time only after they had signed these agreements and right before they were ready to sue on them) could easily have avoided the entire expense had they only done things right with their forum selection clauses in the first place.” The below are some of their mistakes dealing just with arbitration:

  1. One had a provision calling for arbitration before the Geneva Chamber of Commerce. Problem was that the Geneva Chamber of Commerce did not do international arbitration. In this case, our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce (at least I think that was what it said), which at that time (and today) was a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the disputes handled in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. Back then, the Geneva Chamber of Commerce did no arbitration. Zero. So when it came time for my client to pursue arbitration my firm’s arbitration lawyers had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, figuring we could argue that is what the parties meant and that arbitral body would want to keep the case. The opposing side vigorously contested our choice of forum and only many briefs and many dollars later did we prevail.
  2. A company once came to us with its “standard form contract” calling for all disputes arising out of the contract to be resolved by arbitration in the United States. This provision makes good sense sometimes and makes terrible sense other times and in the case they brought us, it made terrible sense and experienced international counsel would have instantly recognized why. Our client’s biggest risk would be non-payment by the company that was buying our client’s products. Korea is one of the best countries in the world to seize a defendant’s assets immediately upon filing your lawsuit, but we were concerned that we would not be able to do so in this instance, because the contract said all disputes needed to be resolved in the United States. When we tried to seize assets in Korea belonging to the opposing party, it made this argument to a Korean court. The Korean court did not buy it, at least not completely, as it allowed us to seize assets in Korea, but it also required us to post a much higher bond than usual for doing so. The other side made the same argument before the U.S. arbitrator, seeking damages from our client for having wrongfully seized its assets in Korea, rather than abiding by the contract that called for all disputes to be resolved via United States arbitration. We eventually prevailed there as well, by arguing that we were just seeking to protect any eventual arbitration award, not seeking to have anyone other than the US arbitrator rule on the merits. But we could have avoided all of this by explicitly putting into the contract the right to seize property as security, anywhere in the world.
  3. Then there is my all time favorite: the company that came to us with an arbitration clause that called for arbitration in South Carolina, in Chinese, under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and the need to use two lawyers (one arbitrator and one lawyer fluent in Chinese) and the added costs of researching and arguing British law, they — wisely — chose not to pursue the case. When I asked them how they came up with such a provision they explain that they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that makes sense, but such a provision is a disaster if you are the one to sue. 

It is not just in arbitration provisions where disasters happen. Many years ago, I had a very large client that made vehicles and it at one point needed to engage in a large vehicle recall due to a defective part. The part had been provided to them by a small local supplier. The client sent me the contract between them and their supplier and it was incredibly unfavorable to me client; it essentially said that the small local supplier could not be held liable no matter how bad the product and my client would have to fund every bit of any recall. I asked my client why it had agreed to such a contract and they told me that they had used it because they thought it was very well written and it came straight from their largest and best and most professional part supplier. I said that the contract was exceedingly well-crafted and that was the problem: it was exceedingly well written to favor the part supplier and since my client was the part buyer, this should have been the last contract it should have ever used as a template for other suppliers. The recall cost my client millions of dollars and the company is no more.

I could go on and on….

 

 

 

China employment law
China employment law — Watch your local regulations

Our China lawyers are always getting a slew of emails from both employees and employers doing business in China. The questions typically involve employees who are questioning their treatment or who want to change jobs or employers who want our quick confirmation of something they are planning with one or more of their employees. We can rarely provide instantaneous answers to their questions. This is because in addition to the complexity of Chinese employment law at the national level, there are seemingly endless legal twists and turns and variations at the local level.

For example, one of our regular blog readers asked “just a few quick questions” about issues related to volunteering for a company that was not his employer. He worked for a U.S. Wholly Foreign-Owned Enterprise (WFOE) and had a residence permit and the following questions:

  • Do I need a certificate or other documentation to allow me to volunteer at the company one day a week?
  • Do I have to ask my current employer for permission to volunteer at another company?
  • If the company decides to start paying me for my work, would that interfere with my relationship with my existing employer?

Though these may seem like straightforward questions, here’s a sampling of the information we would need to gather before being able to provide any meaningful guidance:

  • We’d need to know the name and location of his employer. We would also need to run a conflict check on that company because it would not be good for us to be advising an employee of one of our clients on how to work elsewhere, even if only on a volunteer basis.
  • Since employment laws in China can vary greatly from city to city (sometimes even by district within a city), simply understanding the laws in an unfamiliar city can require extensive research.
  • A key aspect of understanding local laws and regulations is actually discussing them with the appropriate governmental authorities. This is especially true when the written laws are not as clear as they should be, which is quite often the case.
  • The specific contract with the employer would also have to be reviewed in detail. What if it forbids any outside work without written permission? Our giving this employee the okay to volunteer could get him fired.

As you can see, there’s almost no such thing as an easy question when it comes to labor laws in China.

For more on this, check out this Forbes article, China’s Hourly Work Week: Think Locally, explaining how something as seemingly simple as the 40-hour workweek can trip up employers who don’t take the time to learn the ins and outs of local employment laws.

 

China WFOE LawyersI was carbon copied on the below email the other day between one of our China lawyers and a client for whom we just started working on forming their WFOE. I am posting the below email because it nicely sets out the basic first pass of information we seek from our clients when forming a WFOE under China’s new WFOE rules, which came out on October 1, 2016. Please note that even this first pass email has been tailored a fair amount to suit the particular circumstances of our client and the city in which it will be doing business. Once we know the district, we will tailor the questions even more.

1. We will need to determine what business the WFOE will conduct in China. From your previous emails, it appears you have the following two alternatives:

a. Business consulting WFOE that will engage in providing basic support services to the U.S. parent of the WFOE.

b. Trading company WFOE that would engage in __________________ in China.

If you are uncertain about which of these options to choose, we will need to work with you to examine the 1.b. option. Please advise and we will work with you on that issue.

2. With respect to registered capital, China no longer has a strict registered capital requirement. What is required is that you provide enough capital to the WFOE to cover its expenses up until such time as the WFOE is fully up and operating and is able to earn enough income to cover its expenses without capital infusions from the parent. So the question on capital is: how much capital do you need?

To determine how much capital is required, you will need to generate:

a. Estimated costs for the first two years of operations.

b. An income statement for the first five years of operations.

You can prepare this financial statements in-house or in consultation with the accountant who will be providing your accounting services in China.

Of course, the financial statements for the WFOE will depend on the type of business you end up choosing for China. Financials for a service WFOE are normally quite simple. Financials for a trading company WFOE are considerably more complex.

3. In connection with 2 above, you will need to identify the sources of income for the WFOE. For a service company WFOE, it is normal for the WFOE to bill the parent for services in accordance with a standard service contract. Capitalization comes first, and then later payments from the parent are treated as service payments which are income to the WFOE. For a trading company WFOE, the income stream depends on the structure of the trading system.

4. It is normal to provide for the shareholder of the WFOE to be the U.S. corporate parent. For you that would be ________. Please therefore provide me with the following information:

a. Registered complete company name.

b. State of formation.

c. Registered address and business address (if different).

d. Copy of most recent information statement submitted to the state of formation (if any).

e. List of directors and officers of the corporation.

f. We are required to report the name of the individual who is the “actually controlling person” of the shareholder corporation. If the chairman of the board is also a shareholder, that person will be the actually controlling person. If not, we will need to designate someone who fits that role.

4. Before we can determine the precise rules for company formation, we need to know the district in which the WFOE will be formed. It is not sufficient to provide [name of China city]. We will need to specify the specific district within __________.

5. You will need to enter into a lease for the WFOE office. The precise lease rules depend on the specific district of formation. In general, however, you can expect the basic rules will require the following:

a. Two year lease.

b. Executed before the WFOE application begins. We will need to provide a formal address for the WFOE as part of the application process.

c. Some districts require the initial tenant to be the U.S. shareholder and some require the tenant be in the name of the WFOE.

d. Premises authorized to be used as an office for a WFOE and that is of sufficient size to accommodate the number of proposed employees.

6. Please state the number of employees for the WFOE for the first three years of operations. Please state the number that will be Chinese citizens and the number that will be foreign nationals. Please also provide job titles and basic salary ranges.

With respect to employees, it is my understanding that some or all of the WFOE employees are individuals who have worked for you in an independent capacity in the past. Do you want to treat their employment as a carry over from past work done, or do you want to start fresh with these persons? By carry over I mean do you want to carry over their past work history for seniority purposes? Since much of Chinese employment law is based on the number of years of employment this is an important issue and we may want to bring on our lead China employment lawyer to discuss all this with you.

7. You will need to determine a Chinese language name for the WFOE. WFOE names are complex because they have 4 components: ABCD. “A” is the location. “B” is the company name. “C” is the type of WFOE, which in your case will be either consulting or trading. D is the type of corporation: Company Limited in this case. What we need you to select at this time is “B”: the descriptive part of the name. You may wish to consult with your Chinese staff on the name. We can assist if required.

Please advise on the above. If you need more information to respond, please let me know.

After I hear back from you on the above, I will provide you with questions that will take us to the next layer of issues relating to the WFOE formation process.

China attorneyIn talking with a China lawyer friend recently, we got to talking about some common mistakes we see foreign companies making in their China deals. Among other things, we talked quite a lot about how foreign companies too often either fail to understand the need to conduct due diligence on their China counter-party, or have no clue about how to do so.

Two of the more common misunderstandings stem from China’s registered capital and personal liability rules and foreign companies oftentimes wrongly believe the following:

  • The amount of a Chinese company’s registered capital is the minimum amount of funds that company has in the bank at any given time.
  • Shareholders of Chinese companies are personally liable for the debts of their company.

Like I said, wrong on both counts.

Nearly all Chinese companies are limited liability entities. And though each Chinese limited liability company is required to initially put up a certain amount in registered capital, that amount very quickly becomes relatively meaningless for determining the company’s financial viability. The amount of a company’s registered capital can, with varying degrees of difficulty, be determined and that number can be at least somewhat helpful in giving you some read on the size of the company with which you are dealing. But once a Chinese company has been capitalized, there is no way to know what will happen or has happened to the capital. Even if all the registered capital was actually put into the business, it may or may not still be there. And even if the Chinese company still has all of its registered capital in a Chinese bank somewhere, the company might owe fifty times that amount in debt.

Shareholders are required to contribute to the company the amount of capital stated in the company’s registered capital and their failure to do that is a crime. However, there is still no way for a creditor to do anything with that in terms of pursuing an action against a shareholder. The limited liability designation in China means what it says and means what it means outside China: except maybe in extreme situations, the shareholders of Chinese companies are not liable for the debts of the Chinese company.

There is no infallible way to determine the credit-worthiness of any company with which you are looking to do a deal, much less one in China. But in China, like just about everywhere else, the best way is to conduct a full-on due diligence review of the company. That due diligence can and should include a review of the company’s registered capital, but that information should be just one small factor in any risk analysis you do on the company.

Be careful out there.

China contract templatesWe are often asked to draft China employment contracts for WFOEs and Joint Ventures. Our first response is to ask the potential client whether their Chinese entity already has a set of Rules and Regulations (sometimes called employer manual or employee handbook). If the answer to that question is yes, our lawyers will use those Rules to determine what should go into the employment contracts.

If the answer is no, our response is to say that we cannot draft the employment contracts standing alone; we need to be retained to draft both the employment contracts and a set of Rules and Regulations (and sometimes more). Our reasoning on this is three-fold. One, nearly all locales in China now require employers to have Rules and Regulations, especially those locales with more than a handful of foreign companies. Two, having an employment contract without any Rules and Regulations is like having a car without an engine; it just doesn’t work. Without such Rules and Regulations you cannot discipline or terminate your employees and you are at great risk of your employment policies and decisions being fodder for employee-employer disputes. The third reason is both more personal and selfish: we do not want our law firm’s name associated with an imminent disaster.

Many times the potential client will respond with something like the following: “In doing our Rules and Regulations, would it be possible to use a standard template to keep costs low?” Our typical response to this is something like the following:

Every time we draft Rules and Regulations, we begin by reviewing our own Rules and Regulations to find the best one to use as a model for what you will be doing in China. This requires we gather up all sorts of facts from you even to be able to figure out which of our existing Rules and Regulations will most closely fit your situation. If you are a factory in Qingdao, do we use the Rules and Regulations we did for a an accounting firm in Qingdao two months ago? Or do we use the Rules and Regulations we did for a factory in Suzhou three months before? Or do we use the Rules and Regulations we did for a factory in Yantai six months prior, since Yantai and Qingdao are in the same province? Actually in this sort of situation we would probably research the relevant laws for factories in Qingdao and probably end up using parts of all three Rules and Regulations to create a new one that will work for a factory in Qingdao today.

An employer’s Rules and Regulations will always vary depending on the type of company, the type of employees, and, usually most importantly, its location. Just by way of an example, the overtime rules are going to vary greatly for a CEO as compared to factory workers and those rules are also going to vary greatly as between Chengdu and Shanghai. We have many Rules and Regulations that can serve as an appropriate starting point but we must first make sure everything in that document is current (the relevant laws and regulations constantly change in China) and fits your location and your exact situation, and then we must modify it in English and in Chinese accordingly.

We get the “template question” a lot on the licensing and manufacturing side too and many times in those situations, the potential client will ask whether it would save them money to have their in-house lawyer or their less-expensive local domestic lawyer draft it first and then have our law firm use that draft contract as our template. Our response to that question is usually something like the following:

We have drafted literally hundreds of China licensing agreements and manufacturing agreements and we do not really use any of them as a “template.” Instead, we spend hours gathering up the facts from our clients and then we figure out which of our many contracts — if any — make sense to use as a model in creating what will essentially be a new contract for you. Our agreements have been specifically drafted for use in China and that means they are dual-language agreements with Chinese as the official language. We draft them under Chinese law and we make sure to draft every provision to benefit you as a foreign company that is licensing its products or services in China or having its products manufactured in China. Our existing contracts are as close to ready as you could possibly find and it makes no sense for you to pay another lawyer who knows nothing about Chinese law to create a brand new English language contract which will not even be close to what makes sense for China. Not only would the money you pay that lawyer go to waste, but my law firm’s fees would soar as well, because instead of our starting with our own Chinese and English contracts as the model (not as a template, and there is a difference), we would start with an English language contract that is not even going to be close to what makes sense for what you are looking to do in China. We would have to revise nearly every provision to make it China-appropriate, and it would take twice as much time as if we just used one of our own previously drafted contracts as the model for yours.

And then there are the requests to buy one of our law firm’s templates, to which our response is always something like the following:

We never sell our templates and that is for multiple reasons. First off, it would be a huge disservice to you because we have literally hundreds of contracts for everything we do and unless you were to first retain us as your lawyers, we would not have any real basis for determining which of these contracts makes sense for you even as a starting point. Our making that determination is itself providing you with legal advice and to do that we would first need to run a conflict check and then onboard you as a client and then work with you in determining the appropriate model contract. And here’s another thing: around half the time when a company thinks it needs a particular contract for what it is doing in China, it actually needs an entirely different one, and we only discover that after gathering up all the relevant facts.

Second, whichever of our contracts we end up giving you will not be right for what you are doing and whatever changes you make to it will only make it even less right. There is a lot more to doing a deal with a Chinese company than simply sending it a contract and getting it to sign it. You first need to do at least basic due diligence to make sure the company you have been negotiating with is the same company signing the agreement and to make sure you have the company’s name and address correct. This is often far more complicated than people think. At least 30 percent of the time the contracting party is actually a Hong Kong or a Taiwan entity and in those cases a PRC contract does not make sense. At least another 30 percent of the time we find irregularities in the company information and we need to investigate further to clarify. And then there are the times we determine there is actually no company at all and the Chinese “company” was actually a complete fraud. See China Fraud Season Starts Early This Year.

And what will you do when (not if) the Chinese company says it agrees with 11 of the 16 provisions you propose in your contract, but it wants you to make specific changes to the other five? You not only won’t know how to make those changes (remember the official version of this contract is in Chinese), you very likely won’t know whether it makes legal or even business sense for you to do so.

Just by way of one example: the contract damages provision is a critically important element of nearly all China contracts. More than anything else it is what will make your Chinese counter-party abide by your agreement. See The Effective China Contract: Liquidated Damages for why this is the case. And yet we never know what to fill in as the amount of contract damages until the very last minute because that amount must be determined on a case to case basis, using all sorts of factors in making the determination. How will you fill in that amount when you do not even know the factors to use in determining it? And even if you had a list of those factors how would you know how to apply them? We could spend a few hours trying to teach you the factors and how to apply them, but in the end your choice of an amount could never be nearly as good as ours because ours is based on decades of experience and thousands of China contracts. See China Contract Damages: More Art Than Science. A bad decision on this alone would weaken or even nullify the value of your even having a contract.

So no, we won’t sell you one of our contracts as some sort of template. The last thing we want is our law firm’s name associated with something we know cannot work.

When I asked one of our China lawyers to review this post before publication, I got the following response:

We don’t use “templates” for our agreements. After a lot of analysis, IF we find what the foreign buyer is trying to do fits into a pattern from a previous transaction, then we will of course use an agreement from a previous transaction as a model. But even in the most basic transactions, what we do is to customize it for the current transaction.

In drafting pretty much any contract for China there are literally dozens of variables that can in turn be combined in a nearly infinite number of configurations. So the final contract from one transaction may have no application to any other transaction. This is why providing a contract from a past transaction will have no benefit to the Western side and would likely only harm it.

As you note, our clients also need at least one of our China lawyers involved in dealing with the Chinese response. Did the Chinese side change the Chinese and not the English as they so often do? Did they redline in a way that the changes to the Chinese portion are even apparent? More important is whether their changes are the normal technical changes that are part of normal business practice (45 days to deliver a product instead of 30 days) or are their changes destructive to the whole approach, such as: “no, you do not own the technology, we do.” Or, “no, we won’t provide any warranty at all.” Or, “no, we own the molds, not you.” I do not see how anyone without a deep understanding of Chinese law and Chinese business could even begin to deal with these sorts things.

In drafting our contracts, we do of course usually pull some language from other contracts, such as confidential information language. However, the core agreement is almost always completely unique to the specific client before us and when we do use prior language, we nearly always revise it to customize it for the specific client and the specific transaction.

From our having written thousands of China agreements we know there are certain issues that need to be resolved pretty much every time. So we work with our clients to identify those issues and then we work them on how they want to deal with those issues and then we put the agreement together to achieve the goals our client has told us it has. Of course, for some of these components we use as a base some of the language that has worked in the past in China. This is the benefit of working with us: we know what works and we know what fails. But the resulting contract in each case is unique.

So in that sense, there is no template. There is just decades of experience in drafting agreements for doing business in China or for doing business with China. This is why whenever someone asks me to send them a “template” agreement I tell them I cannot because I have no way to know which of the nearly infinite number of alternatives they should follow. How will they pick and choose from a dozen options for a relatively simple provision? What is unique about their situation? Will the most common solution we have used in the past even make sense for them? Does it make sense for their industry? Their business? Their product? Their location? What if the law has changed? What if the law changes two days after we start drafting?

I usually propose to each client three options for every important issue and I usually come up with those three from about a dozen possible. Say there are ten critical issues for their contract. Each selection of an option affects all of the other options, often in ways we have previously  encountered. Before the client answers the questions, we don’t know even what structure to use. After they answer the questions, the agreement that meets all their needs does not exist.

It is also true that in-house counsel cannot write an agreement that can serve as a basis for what our client wants us to craft. Our approach to China contracts is based on three supports: 1) Decades of China experience, 2) A deep understanding of the Chinese civil law system and the Chinese court system, 3) A deep understanding of how contracts actually work in China. Any company with an in-house lawyer who combines all three does not need to come to us for a contract and they don’t. It is not helpful to us to have a common law contract [China is a civil law system] based on a highly idealized and impractical American/European practice that has no applicability or use in China.

More succinctly, you get what you pay for.

China contract lawyers
Too many China contracts deserve this appellation

Pretty much every week, at least one of our China lawyers will — after a five minute review — have to tell a potential client their contract is worthless. We see all kinds of worthless contracts. NDA and NNN Agreements, Manufacturing Agreements, Licensing Agreements, Distribution Agreements, Product Development Agreements, Employment Agreements. It goes on and on. And as tempted as I am to ask why they would think a US law contract that calls for disputes to be resolved in Boston or Des Moines would make sense in China, I always refrain from doing so, and I have seen some doozies, including the following:

  • A Seattle company that was being sued by about a dozen of its China employees and its employment contracts were drafted in English under Washington State Law. Their Seattle lawyer had told them that he had drafted their employment contracts this way because China “has no real law.” I explained their problem by pointing out how my law firm cannot hire Chinese people in Seattle and use Chinese law to pay them a dollar an hour because that is the minimum wage over there. They got and we ended up settling as quickly as we could with all of their China employees.
  • Countless companies that have used US or European style NDA agreements and have had their IP or trade secrets stolen by the Chinese company that signed that NDA. They want to know their chances of prevailing in a lawsuit against the Chinese IP thief and I have to tell them that unless the Chinese company has assets in the United States (and incredibly few do), it would probably not be worth it to them for our China lawyers even to look at their agreement. I then explain how China does not enforce United States court judgments and if they are going to continue doing business in China or with China they can do better the next time with a China NNN Agreement.
  • An American company that was using a Chinese company to market and sell the American company’s product in China came to us after the Chinese company had started selling its own products under the American company’s name and was refusing to cease doing so, even though the distribution agreement between them prohibited exactly that. The American company wanted to retain our China legal team to make this stop, but we had to tell them that we probably would not be able to succeed at that because their distribution agreement provides for US law and US court jurisdiction and because the Chinese company had registered the American company’s brand name as its own Chinese trademark. See How To Protect Your Trademark In China; How To Stop Your Distributor From “Stealing” Your Trademark.

Oh and one more thing. Far too many times when we tell someone how their contract precludes us from being able to help them, they tell us something like “we knew it would not work but we knew we needed something.” Wrong. Many times no contract at all is better than a bad contract. 

China has its own laws and its own official languages and its own court system and its own way of doing things, just like every other country in the world. So if you are going to do business in China or with a Chinese company, you almost certainly will need a contract that satisfies China’s legal requirements. There is nothing our China attorneys hate more than having to tell potential clients there is nothing we can do, but we have to do this all the time when given contracts that were not written with China in mind.

Please don’t let a worthless contract happen to you.

China licensing lawyersIn deleting emails I came across this one from one of our China lawyers to a Latin American client for whom we very successfully drafted a China licensing agreement. I love the email because it so nicely encapsulates exactly what we try to do with pretty much every China contract we draft: balance out everything and give our clients a contract that will both protect them and get the deal done.

The email is an introduction to the contract drafting process and it describes as follows what this lawyer will seek to accomplish with the first draft of the licensing agreement:

  1. The contract has to make good business sense for you, our client. This requires I first speak with you to get a good feel for your business and what you are seeking to accomplish and avoid by licensing your technology to China.
  2. The contract has to work for China. In other words, I need to draft something that works within the confines of Chinese law and will lead the Chinese side to take it seriously and view breaching it as likely to cause it a raft of harm.
  3. The contract has to be drafted  such that your potential Chinese licensee will actually sign it. It would be easy for me to draft the “perfect” contract for you, but the other side will never sign that. What we have to do is work together so that we present your potential licensee with the best contract possible for you, but not so one-sided in your favor that the other side will not sign it.

Your thoughts?

 

 

Part-time employeesChina employment law have their own special issues in China and for that reason their employment contracts require special care. The following provisions are usually required in part-time employment contracts:

  • The working hours
  • The term/duration of the employment agreement
  • A description of the work the part-time employee will be performing
  • The part-time employee’s wages
  • Applicable labor protections and labor conditions

But as is true of so much regarding China employment law, the laws and the requirements for part-time employees tend to be very local. Nonetheless, there are a number of issues that regularly need resolution when drafting a part-time employee contract, including the below:

Working hours: You should specify your part-time employee’s working hours in the employment contract and make sure the specified hours do not exceed the legal maximum. In most places in China, this means your part-time employee’s working time cannot exceed either 5 hours a day or 24 hours a week. Since it is possible for a part-time employee to incur overtime your company should have a written policy on how your employees (both part-time and full-time) should record and report their working hours. If you have nothing in writing on this, you are setting yourself up for disputes regarding overtime payment.

No probation period is allowed for part-time employees. We constantly see China employment contracts with illegal probation periods and/or a lack of clarity regarding the term of employment. These sorts of ambiguities increase both the likelihood of an employee-employer dispute and the likelihood of the employer losing such a dispute.

Wages: Many places in China (e.g., Beijing, Shenzhen) mandate a 15 day payment cycle for part-time employees, which differs from the rules for full-time employees who are usually paid monthly. These required payment cycles cannot be contracted away and employer’s are legally obligated to pay their employees in full and on time and late payments can subject employers to administrative fines and other regulatory and litigation risks. In addition, as with full-time employees, the salary you pay to your part-time employees must meet all national, provincial and local minimum wage requirements.

Social insurance contributions: Though most places in China do not require employers to make the full range of social insurance contributions for their part-time employees, we are unaware of a municipality that does not mandate at least one type of social insurance for part-time employees. This means you need to formally enroll your part-time employee in government required social insurance program, and paying them with cash to cover their own social insurance (no matter how generous you are) will not cut it and do not believe anyone who tells you otherwise on that, and plenty of people will.

Annual paid leave: It’s generally okay to not provide annual paid leave for part-time employees, but be careful because this is not true of all locales. You need though to make sure that your documents on this are consistent. For example, if your rules and regulations state that employees are entitled to annual paid leave and there is no clear language on what document will control, you will probably need to give such a paid leave even if your employment contracts provide otherwise. It would certainly not hurt you to go search out and then root out any inconsistencies in your employment documents.

Termination: Just as is true with full time employees, ignoring required formalities and procedures in handling employee terminations will be done at your peril.

Oh and one last thing, you want all of your employment contracts to be in both Chinese (the official language) and in English so all your personnel will be able to refer to them in making employee decisions.