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How to Execute a Chinese Contract So It Will Work

Posted in Basics of China Business Law, Legal News

A China-centric written contract is an effective tool for doing businesses in or with China. A first step in creating this effective tool is to carefully follow the rules for execution. Chinese courts are bureaucratic and formalistic. Make use of that tendency so that you can prevail. Don’t blunt the edge of your instrument with sloppy execution procedures. A casual approach to execution is neither appropriate nor effective for China. A failure to follow China contract law formalities can lead to a Chinese court not enforcing your contract.

Get your Chinese company counter-party to properly seal your contract.

Get your Chinese company counter-party to properly seal your contract.

The basic rules for execution by the Chinese side are as follows:

1. The date of execution must be specified for each entity that signs. Do not rely on a single date at the top. Each party should enter a date indicating when that party signed.

2. The legal name of the signing entity and the legal, registered address of that entity must be stated, in the Chinese language, in the document. Many Chinese companies will only provide their common name or English-language name, or provide a business address rather than the registered address. Failing to request the proper information is a major mistake.

3. The individual who signs on behalf of the Chinese entity must have the authority to sign that contract on behalf of the Chinese entity. If the individual is the legal representative of the Chinese entity, his or her authority is clear. In other cases, however, that person’s authority must be demonstrated by the title given to the individual by the Chinese entity. If that title is sufficient to show authority, then the Chinese entity is bound to the contract, regardless of the individual’s actual status with the company. Care is getting this right is required. A person with the title “foreign acquisitions manager” clearly has authority to purchase from foreign buyers. But what if the title is “accounting department manager” or “research and development department manager”? It is not certain that these persons have any authority at all with respect to executing contracts.

4. The contract should be stamped with the official, registered company seal. Chinese entities often have seals in addition to the standard company seal. For example, many companies have seals specifically designated for executing contracts. Such seals are acceptable, provided they are registered and provided that they are individually numbered if the Chinese company has more than one, which is common. Chinese entities may have other seals such as technical verification seals, tax department seals and banking/financial seals. These additional seals should never be used for sealing contracts. Only the official company seal and registered contract seals should be used on a China contract. Every legitimate Chinese company has documentation of the registration of their official company seal or their registered contract seal(s). Just ask for a copy. If they do not provide that, it means they are planning to use an unofficial seal, with predictable results in the event of a dispute.

The area that causes the most confusion is the requirement of a seal. An unsealed contract is not invalid on its face but it can cause you all sorts of trouble. Chinese law on the issue of seals and contracts provides as follows:

  • Article 10 of China’s Contract Law provides that contracts may be oral or written.
  • Article 32 of the Contract Law provides that contracts must be executed by the company legal representative OR by a person with authority  to execute the contract. It also provides that execution may be by signature OR by seal.
  • Article 50 of the Contract Law provides that if a person with apparent authority executes a contract beyond that person’s actual authority, the contract is still valid with respect to a third party who had no knowledge of the scope of actual authority.

Thus, by the terms of the Contract Law, a contract that is not sealed is still a valid contract if it was executed by a person with apparent authority. So why is it so important to get your China contracts sealed? The purpose of a written contract with your Chinese counter-party is to provide you with an effective tool that you can use in a Chinese court to obtain swift and certain relief against a Chinese entity that has breached the terms of your contract.

The first thing Chinese courts usually do in any contract action is determine the authenticity of the contract. Where a contract is sealed with the official, registered company seal, the contract is prima facie valid. Chinese courts nearly always rule against a Chinese entity that argues that the seal is false or that the seal has been lost or similar if a registered company seal was used to seal the contract. This is the situation that you want to be in when you are a plaintiff in a Chinese court: the authenticity of your contract is clear and certain. Any contract that lacks any of the four elements I set out above is subject to challenge. Though you may prevail over that challenge, this will lead to considerable delay that can extend over many years. You also might not prevail and the uncertainty alone can be enough to give the Chinese company enough comfort to fight you hard and to force you into a less than favorable settlement.

But why is a seal “required” when China’s Contract Law clearly provides that a signature is sufficient. Again, this is matter of proving authenticity. It is the custom in China to have ALL contracts sealed. Every company in China, no matter what size and no matter what form of ownership is issued a registered company seal upon its formation. Government regulation requires state owned enterprises to seal all contacts. This practice is followed by all legitimate private companies.

For this reason, a document that has not been sealed is immediately suspect. Chinese courts have lots of experience in determining the authenticity of seals. They have virtually no experience in determining the authenticity of signatures. For this reason, it is virtually certain that if a Chinese defendant questions the validity of a contract that is signed but not sealed, the court will deem the contract invalid. I have never read or heard about a case in China where the validity of a non-sealed contract was upheld by a Chinese court in the face of a challenge from a defendant. Now just imagine how the Chinese courts will treat your “email contract,” your PO/Invoice contract or your oral contract.

What happens if the seal is not in fact the official, registered company seal? Litigation in this area has been common in China over the past fifteen years. The usual facts involve a Chinese or a foreign entity that enters into a contract with a Chinese company for the provision of goods or services. The entity provides the goods or services to the Chinese company, but the Chinese company then  that has received the benefit refuses to pay because the written contract was not properly sealed. The following are standard seal defects:

  • The wrong type of seal was used: perhaps a technical seal instead of a contact seal.
  • The Chinese company has many unofficial seals and one of these unofficial seals was used rather than an official seal.
  • The party who signed the contract for the Chinese company is an agent of the Chinese company, but not an employee, but the seal is an official seal.
  • The primary contract is improperly sealed but its supporting receipts are properly sealed.

In all of these cases, the courts have held that for the defendant to prevail the defendant must prove that the plaintiff falsified the seal and sealed the document with such a false seal in to defraud the defendant. This burden has been impossible to meet in cases where the goods and services have already been delivered.

Even though plaintiffs have prevailed under these circumstances, this is not a reason to depart from the basic rule. Even though the plaintiff eventually prevailed under these circumstances, the defects in contract execution turned a routine, six month collection case into an expensive, multi-year ordeal. Note also that in all of these cases, the goods/services had already been provided. Finally, in all cases the contract or other documents were sealed in some way. I have not found any China court cases* where a bare signature was sufficient.

Chinese courts are hyper-technical when working with written documents. If there is any surface flaw, a party will object to the authenticity of the document and then force the party offering the document to prove its authenticity. Chinese lawyers will seek out all of these minor surface flaws and then object to authenticity even where that objection is clearly ridiculous. The courts in China then reward them for this behavior because this is a good way for them to clear the docket of commercial cases, which allows them to concentrate on their real job of doing criminal work. But if you follow the above rules the Chinese courts will almost certainly find your contract to be authentic and because of this, you will have leverage against your Chinese counter-party should something go wrong between the two of you. Most importantly, you will in most instances forestall an authenticity argument entirely. If you don’t follow the above rules, you will likely create create uncertainty and added costs.


* If you are now thinking that the way to avoid all of the above problems is to draft a contract calling for disputes to be resolved in a U.S. or some other foreign court, DON’T. China does not enforce U.S. court judgments so even if you prevail against your Chinese counter-party in a U.S. court, unless that Chinese company has assets in the United States, you probably will never collect a penny from that Chinese company. The same is true with respect to most other countries as well. Arbitration outside China has its own special risks as well.

China Guanxi: You Want Complicated?

Posted in China Business
Study Guanxi. become more enlightened.

Study Guanxi. become more enlightened.

Back in the day when I was working at a Chicago mega law firm, a good friend of mine there was a Sicilian who grew up in New York. While in high school this friend worked at a New York deli, where he learned to subsume his Italian accent in favor of the accent and intonations required for that particular line of work. Is the corn beef lean, my friend would be asked. Lean, he would reply, you want lean? I got lean. If you don’t find this funny, I guess you had to have been there.

I can’t help thinking along similar lines whenever someone talks or writes about guanxi. Complicated? You want complicated. I got complicated. guanxi is one of those things that is borderline impossible to fully comprehend if you did not grow up in China, or at least grow up in a Chinese family. Yes, those of us who are not from China can grasp portions of the meaning of guanxi by studying it and seeing it “in action,” but the non-Chinese who truly understand are few and far between (far less than the number who claim full understanding) and I most certainly do not include myself in that rarefied company.

But that does not mean we neophytes cannot benefit from learning as much as we can about guanxi, and towards that end I recommend you read this just out post: Is Guanxi China’s Cultural System of Grass Roots Business and Justice? And in reading this post, I also recommend that you read that to which it links, including the videos. If you do all that, you will not achieve total guanxi comprehension but you will be closer to that sort of enlightenment.

For more on guanxi and, in particular, how it relates to doing business in China and with China, check out China Guanxi: You Don’t Have It.


China Product Sourcing Writ Large

Posted in Basics of China Business Law, China Business, Recommended Reading
Tell Mark Rothko that color shades don't matter.

Mark Rothko knew that color shades matter.

Yesterday’s post, China’s New NGO Law and Calculating China Business Risks, talked of how really good micro posts on what at first appear to be small topics can when done well serve as a great platform for understanding how to do business in China overall. Today’s post has the same theme.

The micro post is by Jacob Yount, who helps foreign companies source their promotional products from China. That alone is micro but the post is more micro still in that it talks about how to avoid color confusion. That’s right, the post, appropriately entitled Color Confusion in China Manufacturing is about how to make sure that your China manufacturer gets your color right? Now before you stop reading believing that this post has nothing to do with you, let me tell you that it most certainly does.

One of my standby speeches is on How to Succeed in Sourcing Product from China and one of my favorite stories in that speech involves — you guessed it — color confusion. The story goes something like this:

Many many years ago, a U.S. company out of North Carolina called me wanting my firm’s China lawyers to pursue litigation against a Chinese company that had provided the U.S. company with “bad” shirts. What was bad about the shirts was the color. This U.S. company had sent a sample shirt to a Chinese manufacturer and the Chinese manufacturer in turn had made its own sample shirt (or maybe it had just bought a sample shirt elsewhere, something that is not terribly uncommon) and sent that to the U.S. company. The U.S. company liked the sample shirt and then ordered another million dollars or so more of them.

Well when the shirts arrived the U.S. company had a major problem. You see we are talking North Carolina here and as every college basketball fan knows, the University of North Carolina has its own specific shade of blue, with its own name. It’s called Carolina blue and my just mentioning it here immediately conjures up images of Indiana University’s Dan Dakich holding Michael Jordan to 13 points. But that color obviously holds a different but equally visceral meaning for the people who would buy a blue University of North Carolina jersey. And let me tell you, those people are not going to buy a North Carolina jersey that is not the exact color of Carolina blue.

And that was the problem with the million dollars of shirts this U.S. company had bought and paid for. They were blue all right, but they were not Carolina blue. That meant that instead of this U.S. company being able to sell them for maybe $30, he would maybe be able to get $3 a shirt. The U.S. company had obviously suffered major damages.

But my firm turned down the case because we did not want it on a contingency fee basis and we also did not want to charge our hourly rates on a case we did not think could be won? Why would it be so difficult to win? Because generally if you are in front of a Chinese court and something is not specifically in your OEM contract (in Chinese) with your Chinese manufacturer, it essentially does not exist. What you want if you are going to be suing a Chinese manufacturer in a Chinese court is a written contract, in Chinese, sealed/chopped by your Chinese manufacturer (see China Contract Signing Formalities: You are not in Kansas anymore) that describes in excruciating detail exactly what the product you are having manufactured should be. In other words, you need a China contract that works. This poor guy in North Carolina had only some emails written in English saying that he wanted his shirts to be like “the samples.” What samples?

Note that this North Carolina company could have sued its Chinese manufacturer in a U.S. court and won. However, because China does not enforce U.S. judgments, and because this Chinese shirt manufacturer did not have any assets in the United States, the U.S. judgment would have been worth less than the paper on which it was printed. Yes, the NC company was stuck, out nearly a million dollars over a few shades of blue.

I tell the above story to emphasize how China and its laws are so different from the United States and Europe and how Western companies so often lose big money by just assuming that they can do things with Chinese companies just as they do things with American or European companies. I use this micro story to writ large on how to operate when doing business with China.

Jacob Yount writes about sourcing promotional products from China to instruct on how to source promotional products from China, but he so knows his stuff and explains it so clearly that what he writes often goes well beyond that, and his color post is a great example of that. Yount starts his post describing what both he and the China attorneys at my firm so often hear and then recognizing that his post likely will apply well beyond promotional products:

“But I gave the factory the Pantone number!”

In the trials and tribulations of China manufacturing when a buyer finds out the color of their sample, or, even worse their production is “off”, this is a common exclamation.

Perhaps not completely wrong, but not completely right.

The result is a color that is deemed different from the official Pantone. Why is this?

Is it the typical that “factories don’t care”. Or, “they didn’t pay attention”.

Or is there more to it?As always, most of my posts are geared towards the Promotional Product Industry, but undoubtedly this will ring true across the board where color matching is critical.

Going in to my 15th year of working and manufacturing from China, here are some of the basic points and lessons I’ve learned on color mixing and matching.

Yount then explains in painstaking (but necessary) detail how you can minimize your risk of getting the wrong color product from your China supplier. To summarize, Yount emphasizes the need to use multiple strategies to make sure that your Chinese factory knows exactly what you want and the importance to you that you get it.

To which I would only add that once you have done all that Yount mandates, you appropriately memorialize it in a China-centric contract. Do all that and you will greatly minimize the likelihood of your seeing some variation of red the next time you have your product manufactured in China.

China’s New NGO Law and Calculating China Business Risks

Posted in Uncategorized
David Wolf on China NGOs, China law, and calculating China risks

David Wolf on China NGO law and calculating China business risks

There are a handful of China people (note that I am not using the term China expert) who just seem to nail China every time they write about it. And by nailing it, I mean that I read what they write and when I am done I think to myself little more than, “Yes.” And then my next thought is “I wish I had written that because that expresses better what I am thinking than anything I have written — or probably could write — on the topic. I had that reaction the other day to a Linkedin post by David Wolf, entitled, NGOs in China: Seeing through a Law, Darkly.

I have known David ever since we both were on an AmCham panel a long long time ago on the topic of writing about China. David has doing business in China since the 1980s and he has lived there for around 20 years. David is managing director of the Global China Practice for Allison+Partners LLC, and he just came out with a book Public Relations in China (published by Macmillan) in October. I have that book on order and I hope to eventually review it on here.

Back to David’s Linkedin post. The post is on NGOs but like so many good “micro” posts, its value goes way beyond that. It as a great post on Chinese law and, more particularly, on how foreign businesses should incorporate Chinese law into their business calculations. The other day a reporter asked me how foreign companies should plan their businesses in light of the TPP. This reporter wanted to know how a foreign business can make plans in light of the “huge uncertainty posed” by whether TPP will or will not pass and what it will mean for international businesses either way. I explained that businesses always operate in a world of risk (even the most local domestic business must deal with multiple risk factors) and that each business must  gather up as much information as it can to analyze TPP and then decide for itself how it might or might not impact its particular business. It then must act accordingly.

When I first saw David’s Linkedin post, I left the following comment: “Great article! I am sure I will at some point quote you on this: “As always with Chinese regulations, it is unwise to panic when word of new laws or policies are announced. Such occasions call for questions rather than statements, study rather than action, and engagement rather than estrangement.”

This is what I am talking about! So without further ado, here is David’s post:


Over the past six months, there has been a great deal of consternation about the new law being drafted in Beijing covering the operation of NGOs, both domestic non-profits and foreign organizations. The NGOs I work with have been, each for their own reasons, concerned about what to make of both the law itself, and, perhaps more important, what it signals about the broader policy environment around China’s nascent civil society.

As always with Chinese regulations, it is unwise to panic when word of new laws or policies are announced. Such occasions call for questions rather than statements, study rather than action, and engagement rather than estrangement. For a start, The Economist offers some clarification:

The draft law represents a mixture of limited progress and major party retrenchment in a sensitive area. Under Mao Zedong, China had no space for NGOs. But they have multiplied in the past decade to fill the gaps left by the party’s retreat from people’s daily lives. Officials say the law will help NGOs by giving them legal status, a valid claim. But it will also force strict constraints on foreign or foreign-supported groups. No funding from abroad will be allowed. And all NGOs will have to find an official sponsoring organisation. They will then have to register with China’s feared public security apparatus, which will now oversee the entire foreign-backed sector.

The article goes on to explain that while in practice the government may back off from enforcing some of the more draconian clauses, they will keep those provisos in place to use selectively against groups they seek to censure.

This means that international NGOs in China, from the American Chamber of Commerce to environmental organizations like Greenpeace, will live under a sharper Sword of Damocles than ever. Worse still, the law could be used as a device to quell discussion and debate about China abroad by holding an NGO’s right to operate in China hostage against better behavior overseas.

International NGOs operating in China not only need to understand how the law will regulate their operations in China, but also how the exigencies of their China operation may compel them to alter their behavior abroad. At some point, many NGOs will face a hard choice between sticking to their principles globally on one hand, and continuing to operate in China on the other.

The wiser NGOs will not wait for that choice to come, but will address it now, and preferably before even venturing into China. The sooner all of an NGO’s stakeholders understand the potential scenarios, the sooner the organization can delineate the terms under which it is – and is not – prepared to operate in China. This is also a good time for international NGOs to identify and engage their allies, partners, and supportive voices.

This is not to say that the worst will happen. China’s government is not a monolith, and there are regulators and bureaucrats in Beijing who understand that a healthy civil sector, and even a degree of foreign participation therein, is an essential part of the solution to many of the problems China has encountered in its development and growth.

But that support offers no guarantee against turbulence ahead. For international NGOs in China, the coming year should be spent preparing for the worst while working to make the situation better.

Copyright Takedowns in China

Posted in China Business, China Film Industry

China has a pretty good system for takedowns of copyright subject matter stored or posted online without the approval of the copyright owner. Our China lawyers are have helped motion picture producers, motion picture distributors, gaming companies and other copyright owners invoke this process and the results are generally good when the copyright owner is well prepared.

This is the first in a series of posts looking at online takedowns. In this post we provide a general summary of the regulations that establish the takedown procedures for copyright subject matter.

China take down notices.

Copyright takedowns in China

The copyright takedown regulations protect the right of “communication through an information network.” This right is one of several comprising the copyright in audiovisual recordings and sound recordings under Chinese copyright law. References below to “recordings” include both sound recordings and audiovisual recordings.

The right of communication through an information network means the right to make recordings available, by wire or wireless means, to members of the public from places, and at times, chosen by them individually. Making recordings available to the public through an information network requires permission of the right owner. The right owner is entitled to remuneration when the right is exercised.

The regulations apply to “network service providers” (网络服务提供者)and to “service recipients” (服务对象), but neither term is defined. A service recipient can be any person or any legal entity that causes content to be posted online.

There seem to be two kinds of network service providers: Internet access providers (IAPs) and Internet presence providers (IPPs).

IAPs are entities that provide access to the Internet. Examples of Chinese IAPs include China Telecom, China Mobile and China Netcom.

IPPs provide network space for users to upload information. They also provide search engine services. IPPs often provide the disk space, high-speed Internet connection, or even the web site design, for those wanting an Internet presence. Youku, v.qq.com and www.letv.com are examples of Chinese IPPs.

This is how the copyright takedown system applies to network service providers and service recipients:

  • The right owner may give written notice to the network service provider requiring the removal of a recording if the right owner believes that the information network is infringing the right by allowing the recording to be stored, searched or linked without approval. The notice must contain certain details, including preliminary proof of infringement.
  • After receiving a notice, the service provider must promptly remove the recording or disconnect the link. The service provider must then forward the notice to the service recipient.
  • The right owner is liable in damages if, as a result of a notice, the service provider wrongly removes or wrongly disconnects and this causes loss to the service recipient.
  • If the service recipient believes the network communication right has not been infringed it may deliver an explanatory statement to the service provider and request reinstatement of the recording or the link.
  • If the service provider receives such a statement it must promptly replace the recording or reinstate the link and then send the explanatory statement to the right holder.
  • On receiving an explanatory statement the right owner cannot issue a fresh complaint and would, we presume, need to initiate court proceedings to take the matter further.
  • A service provider that does not follow these procedures can be required to cease the infringement, issue an apology, eliminate the “bad effects” or compensate the right owner for losses. If the public interest is affected the authorities can confiscate any illegal gains and impose fines. In serious cases, computers and other equipment used to provide a network service can be confiscated.

The regulations draw a distinction between service providers that provide searching or linking services and those that provide storage space. The liabilities of each are different. We look at this distinction in our next post.

China Property Guide and the Rest of the World Too

Posted in Recommended Reading
Shanghai's French Concession. A nice place to live in Shanghai.

The French Concession: a nice place to live in Shanghai.

For years now, I have been recommending the Global Property Guide as a good first stop to my residential real estate developer clients and to anyone else who asks me about China residential real estate. I did so yet again today. And then I realized that I have never listed it on here for everyone else, so I am doing so now.

This site is a terrific first (maybe even second) stop for anyone interested in international residential real estate. Within its site it contains just about every residential real estate statistic and prediction on just about any country you could ever want.

If you are contemplating buying, selling, or renting a property in any major city in the world, I recommend you at least check out the Global Property Guide. It makes for a good initial China property guide as well, and here is their China real estate page.

Six Strategies for Exporting to Asia/China

Posted in China Business
It's a big world out there, so export. (Infographic is from FedEx)

It’s a big world out there, so export. (Infographic is from FedEx)

I love to talk about what I call our “accidental exporter” clients. These are companies (mostly in the United States, but also in Europe) who literally lucked out into becoming China exporters. And by “lucked out,” I mean that they were quietly going about their own business when literally out of the blue they were contacted by someone in China who wanted to buy their products and did, and then things took off from there. The interesting thing about this club is the diversity of the products they sell. The below are the ones that immediately spring to mind:

  • A relatively small, very high end cookie maker that was approached by a Chinese company in a completely unrelated industry about buying $800,000 worth of cookies every month. Our China lawyers thought this was so crazy that for weeks we all but forbid our client from doing anything beyond engaging in massive due diligence to make sure that the whole thing was not a fraud. It wasn’t.
  • A Midwest USA factory machine equipment company that makes million dollar machines that was approached out of nowhere by a large Chinese company and now this company sells 3-4 of its machines to China every year, without anyone from the company ever having set foot in China.
  • Many years ago, an East Coast Canadian environmental equipment company (I’m being intentionally vague here) was contacted by a quasi-competitor that makes similar (but different) equipment and told that a large Chinese municipality was looking for XYZ equipment and since the competitor did not make that equipment (but our client-to-be did), the competitor was letting our client know. Our client then sold at least five million dollars worth of its equipment.
  • And my favorite (and I wish I did not have to be so vague here), but a small (like $100,000 a month in total revenue small) Pacific Northwest woolen company (with a speciality) started becoming really popular with Asian consumers, like to the tune of amazingly quickly doubling their monthly sales from Asian consumers alone.

Now obviously most exporters to Asia have to do a lot more work to become Asia exporters than the above four companies, but I mention these four to highlight the plethora and the diversity of Asia export opportunities. If these four companies can succeed as exporters to Asia by accident, just imagine what companies that work at it can accomplish.

Anyway, I am focusing on exporting to Asia today because East-West Bank sent me a really good article listing out six good strategies (really more like tips) for exporting to Asia. Here are their six from their article, 6 Strategies for Exporting Successfully to Asia, with my comments.   

1. Assess your potential to export. If you are going to export to Asia (other than by accident), the first thing you need to determine is whether there is a market (and where) in Asia for your product. The E-W Bank article recommends you secure help on this from U.S. SBA Export Assistance Centers . and/or the U.S. Commercial Service. This is really good advice, and most (all?) European countries and U.S. States have similar offices that also can provide substantial assistance at sometimes ridiculously low prices. There are also many excellent consultants who provide similar and more in depth services.

2. Protect your ideas first. Protecting IP is the issue dearest to my heart and so I will just quote the whole thing from the article:

Asian countries have different laws regarding intellectual property than the United States does, so make sure you get legal advice on how to safeguard your brand and product before you start marketing it. “If you are going to mess up on anything, don’t mess up on your intellectual property,” says attorney Dan Harris, a partner and founder at Harris Moure PLLC in Seattle and author of the well-known China Law Blog. It can be very hard to undo the damage, by his account.

Some American exporters lose rights to their intellectual property in China, for instance, because they don’t realize they must actively file to protect their IP there – or it does not belong to them, says Harris. “Americans will go into China, sell on Tmall and all of a sudden, someone will have their name,” says Harris. “Then they will call us and say they want to sue this company in China.” These U.S. firms are generally out of luck, because they failed to register the Chinese version of their brand name in China, according to Harris. “The only exception is if you are a well-known brand, like Coca-Cola,” says Harris.

All true.

3. Invest in relationships. The article rightly recommends you “meet potential business associates and clients at least once before you make a deal, and ideally more than that.”  I agree. Oh, and choose your relationships wisely.

4. Proceed carefully with partnerships. This is the other issue closest to my heart and so I will quote liberally on this from the article:

[M]any U.S. companies look for a distributor to sell their products overseas. That can be a good approach if you don’t plan to open an office in the Asian country, but it is important to vet distributors carefully. Be wary of any distributor that demands an arrangement to sell exclusively in one country with no minimum sales requirement of your product. “They are probably selling for your competitor and will block you out of the market,” says Harris. “We have had brands blocked for years from China. Americans are so eager to get in there [that] they sign these agreements.”

If you plan to license your brand name to a distribution partner overseas, do you your due diligence—especially on the partner’s history of quality control—and invest in good legal advice on how to draft the agreement. “Americans fail to realize that a distributor can destroy their reputation,” says Harris. Some American companies have found that such a distributor has put their brand name on an inferior or even dangerous product, according to Harris. “They’ll try to stop the company from selling it, but their contract doesn’t allow them to,” he says. Enforcing even a carefully drafted contract can be tough. “It’s not as simple as people think,” he says.

All true.

5. Consider selling online. “If you sell a consumer product, marketing it through a large e-commerce marketplace – or more than one of them – may be the easiest way to break into Asian markets…. In addition to eBay, Amazon and Tmall, sites such as Alibaba.com, JD.com and exportnow.com work with American entrepreneurs. These sites make getting started on selling to China much much easier. However, two important things to know are that (1) you still need to protect your IP and (2) unless these sites really push your products, there is a good chance that they will simply languish.

6. Minimize financial risks. “If any disputes arise over sales you make from a distance, it will be harder to resolve them than if you and your client were both in the United States, operating under the same legal system. Many experts recommend getting trade receivables insurance and putting safeguards in place to make sure you get paid. Getting paid in full upfront is almost always best and easiest, but if that isn’t possible, try to get paid enough before you ship so that your costs of production and shipping are covered and you will at least break even even if you never receive any additional payments.

Just do it….

What strategies or tips would you add to the above?

China Employment Contracts and the Double Wage Penalty

Posted in Basics of China Business Law, Legal News
China Employment Contracts. Do them right.

China Employment Contracts. Do them right.

China’s labor laws mandate that China employers must have written employment contracts with all of their full-time employees. If an employer goes more than one month without having a written employment contract with an employee, the employer will be required to pay the employee double the employee’s monthly wage and immediately execute a written labor contract with the employee.

Essentially, PRC labor laws do not hold the employer “on the hook” for the first month without a written contract, instead the clock starts running the second month. For example, an employee who starts work on April 1, 2014 but does not enter into a written employment contract with the employee is not entitled to double wages for the month of April. In other words the employer gets a one month “free pass.”

But suppose there is still no written employment contract in place come May 1, 2014, and that continues to be the case. In that circumstance the employer will be liable to the employee for double the employee’s monthly wage for every month without a written contract. Is there any limit on how many months an employer must pay double wages for not having a written employment contract with an employee? Most jurisdictions end the double wage penalty after the first year (that is, 11 months, as the employer gets a “free pass” for the first month), but at that point the employer will be deemed to have entered into an open-term labor contract with that employee. And since this is about as close as one can get to lifetime employment this is not a situation in which any employer wants to find itself.

How long can an employee wait before pursuing a claim for double wages? The usual statute of limitations for China labor law disputes is one year. When though does this one-year clock start ticking? Some jurisdictions in China tend to categorize a double wage payment as labor compensation but others categorize it as a penalty for violating the law. If it’s the former, then the one year statute of limitations does not begin to run until after the employee ceases his or her employment. But if it’s the latter, the one year statute of limitations begins to run as soon as the employee knows or should have known the injury has occurred.

To make things even more complicated, some China labor arbitrators use a third method to calculate the one year statute of limitations. They calculate from the last day of the employee’s first year of employment.

Bottom line: It cannot be stressed enough: You should use a written employment contract with all your employees AND use an appropriate one. Oh and one more thing: just about anyone in China who is doing work on behalf of your company as an individual is your employee. For more on this, check out China’s Tax Authorities Want You.


China Film Revenue: Who Watches the Watchers?

Posted in China Film Industry

11/11/2015: This post has been updated to reflect that the MPAA did not make an announcement at the US-China Film Summit about the agreement referenced below.

As reported last week, the Motion Picture Association of America has signed an agreement with China Film Group Corporation that will allow US rights owners to realize more money from film exhibition in China.

The agreement was immediately hailed in the trades as solidifying and stabilizing the market for US films in China. And for good reason: if everything in the agreement comes to pass, it will be a significant step forward for US studios and other rights holders.

China Film Revenue: Is China finally addressing the elephant in the room?

China Film Revenue: Is China finally addressing the elephant in the room?

The agreement (titled, in typically awkward bureaucratese, “Agreement on Cooperation in Importation and Distribution of Revenue-Sharing Films,” or “分账影片进口发行合作协议”) addresses three longstanding sore points for US rights holders with respect to quota films (i.e., films that qualify as one of the 34 revenue-sharing films under China’s quota system):

  1. US rights holders will receive 25% of net revenue without any additional withholding for taxes or marketing expenses. Among other things, this addresses China Film Group’s unilateral move in 2013 to withhold a new VAT, which led to monthlong delays in the payment of hundreds of millions of dollars.
  1. US rights holders will get paid in reasonably timely fashion. This addresses the same situation noted above.
  1. US rights holders will be able to audit Chinese distributors, sub-distributors, and exhibitors with regard to ticket sales and revenue. This addresses, for example, last month’s revelation that Chinese exhibitors had misattributed millions of dollars in box office revenue so that a Chinese propaganda movie, The Hundred Regiments Offensive, would top the box office instead of Terminator: Genisys.

Much credit should go to the MPAA negotiators for getting China Film Group to execute an agreement. But this deal must also be viewed in context. China lost face when it got caught fudging at the box office, and at the same time they wanted to give face to the MPAA during the US-China Film Summit and the simultaneous China International Co-Production Film Screenings. It’s of a piece with last week’s announcement of a special task force to combat counterfeit Disney goods in China, which will give Disney face before next year’s launch of Shanghai Disney.

Moreover, this deal is not self-executing, and China has a long history of agreeing to implement reforms and not following through. IFTA, the consortium of independent film and television companies, has a laundry list of complaints about China’s failure to honor its WTO commitments.

Don’t get me wrong–it’s certainly better to have this agreement than nothing at all. And the language about auditing could prove to be the most influential of all. We have been fielding an increasing number of requests regarding the auditing of Chinese film producers, distributors and exhibitors, and not all of the requests have been from foreign companies. As more Chinese companies see the value in audits—and in drafting agreements that specifically address the accounting tricks in the Chinese film industry—enforcement will follow, and the benefits will redound to everyone.

China’s Film Industry Promotion Law: The New Draft

Posted in China Film Industry
China's Film Industry Promotion Law: The New Draft

China’s Film Industry Promotion Law: The New Draft

China’s National People’s Congress issued a draft of the Film Industry Promotion Law for public comment on November 6, 2015. The law is to apply to “film activities” such as film development, production, distribution and release within the PRC. The published annotations indicate the law is intended to simplify the regulation of screenplays, film productions and exhibitions and the holding of foreign-related film festivals.

Fundamental changes to the existing regulatory framework, as it affects foreigners, are not proposed in the draft law. Foreigners will still be prevented from engaging independently in film production in China. Foreigners will still be prevented from engaging in film distribution in China. No mention is made of any lifting of the quota on importing foreign films on a revenue-sharing basis. Still, many of the changes would definitely streamline the official co-production process for foreign producers. There is also now express official recognition of the need for improvements in the system of film finance and the need for tax incentives for local producers.

From our perspective as China film lawyers, the most interesting features of the draft law are as follows:

  • A screenplay will no longer be subject to approval if the film will deal with “general” themes. For such films it will only be necessary to file a synopsis. A screenplay review is still required for movies with “special” themes.
  • Production licenses will no longer be required for each individual film. Chinese enterprises with the “appropriate personnel, funds and other resources” will be allowed to engage in ongoing film production activities if they have approval from the relevant authorities at the provincial, regional or municipal level.
  • Approval after completion of production is still required but may be obtained from the authorities at the provincial, regional or municipal level.
  • Relevant authorities of the State Council must formulate applicable review standards and make them available to the public.
  • China will implement preferential tax policies to promote development of its film industry. Specific measures are to be promulgated by the tax authorities of the State Council.
  • Financial institutions are to be encouraged to provide financing services and film-related IP pledge services for film activities and improvement of film infrastructure. Insurance and completion guarantee companies are to be encouraged to develop the products needed to further develop China’s film industry.

Let us know what you’re hearing about the draft law.