Header graphic for print

China Law Blog

China Law for Business

Getting Money Out Of China: An Update

Posted in China Business, Legal News
How to get paid by a Chinese company

What is required for Chinese companies to send money out of China.

I always love it when “my” blog posts are written for me via an email from one of our China lawyers to a client on which I am cc’ed. The following is such an email, relating to the ability of a Chinese company to invest in a project outside of China. Broken down to its most simple element, the question relates to how difficult it is for a Chinese company to send more than $50,000 (that is the yearly cut-off number) outside China. Here is the email, modified slightly to strip it of any possible identifiers:

[Client]:

Briefly.

The Chinese government must approve in advance the transfer of funds outside China in excess of USD $50,000.  Chinese government regulations state that this approval is routine and will be completed in three days. This is not true. In fact, the PRC government restricts all foreign investment by all private Chinese investors.

However, your investors will state that this investment is supported by the local government and that approval is guaranteed. In that case, they simply need to obtain the approval. However, any transfer made without approval is a violation of Chinese law and is virtually impossible in any case.

To deal with this issue, most Chinese companies (private and government owned) make their overseas investments with funds already located outside of China, usually in Hong Kong, Cayman Islands or BVI. How these funds got to these locations is never clear. However, once the funds are located outside of China, China approval is no longer required.

To answer your specific question about how to secure investment in your project from China, you essentially have the following two options:

1. The PRC person or entity should request approval as soon as possible. We can help draft the documents they will need from you to secure this approval.

2. The PRC person or entity should make arrangements for payment from a source located outside of China.

With China’s recent stock market fluctuations, the PRC government is restricting even more the investment of funds from China into the U.S. Your PRC investors are well connected and you indicated that this is a project supported at the local level. In that case, approval should be easy to obtain. Accordingly, the application should be made as soon as possible. Note, however, that any payment into the U.S. that is not approved is a violation of PRC law.

For information on the related issue of getting paid by a Chinese company that owes you money for services your company provided to it, check out Service Companies In China. How To Get Paid.

China Domain Name Scams Rising

Posted in China Business

Every so often there seems to be an uptick in what I call the China domain name scam. Now is one of those times. Our China lawyers frequently get emails from U.S. companies asking us what they should do about an email that they just received (usually in badly written English) telling them that they must register their domain name in China fast or lose it forever.

China domain name scams are again on the rise.

China domain name scams are again on the rise.

The thing about these emails is that the companies that ask us about them usually just got back from their first (or sometimes their second) trip to China and that is why they are so confused. Us too in that we do not know if there are groups in China that get the names of U.S. companies going there and then send out these emails or whether it is just the case that these U.S. companies are just particularly attuned to such emails because they are just starting to do business in China. Can anyone tell us?

Anyway, just so everyone knows, these emails usually look something like this and they are complete fakes and should be ignored:

We are China’s internet domain services company and last week, we received an application from a Chinese company that has requested we register “[NAME OF U.S. COMPANY”] as their internet name and China (CN) domain name. But after checking into it, we learned that this name conflict with your company name or trademark. In order to deal with this matter better, it’s necessary to send email to you and confirm whether this company is your distributor or business partner in China? Please respond soonest.

We first wrote about this scam way back in 2009, in China Domain Name Scams. Just Move Along…., and back then we had this to say:

If your company has done anything in China (even just sending someone there to meet with a supplier), you have probably received a somewhat official email offering, at a steep price, to “help” you stop someone from taking your domain name.

DO NOT RESPOND.

Near as I can tell, every single one of these that I have seen (and I have seen at least fifty of them because clients are always sending them to me) are a scam.

You also may get emails from someone claiming to have already registered some iteration of your company name (or one of your product names) and seeking to sell it to you. For example, if your company is called “xyz” and you already own the xyz.com domain name, your email may come from someone who has purchased and now wants to sell you the xyz.cn domain.

What to do?

First off, as soon as possible, register whatever domains necessary to protect yourself. Determine now what domain names you care about so you do not need to make this determination with a gun to your head. Right now is the time to think about Chinese character domain names.

Secondly, if someone has taken a domain name that is important to you and they are now offering to sell it to you, you essentially have three choices. One, let the domain name go. Two, buy it from the company that “took” it from you. And, three, pursue legal action against the company that took it from you.

Preemption by registration is your best and least expensive protection.

Nothing has changed since then, near as we can tell, other than that the popularity of these waxes and wanes.

So be careful out there.

Even Industries New To China Need Grounding In Past Lessons Too, Part II.

Posted in Basics of China Business Law, China Business
Getting into an industry new to foreigners in China will have its own special pitfalls.

Getting into an industry new to foreigners in China will have its own special pitfalls.

This is the second part of Ben Shobert’s post on China’s senior care and healthcare. Go here for part I.  Ben has assisted countless companies in these industries get into China and I thought it would be helpful to our readers to have him talk about the issues his senior and healthcare clients are facing in China. This sort of analysis is critical for anyone in those industries, but also helpful for anyone looking to go into China, especially if they too are in an industry newly opening to foreigners.

 

As readers of China Law Blog might guess, China’s regulatory scheme for senior care is dynamically changing. This can make it difficult for both overseas investors and local government officials to keep constant track of the changes, leading to disconnects that impact investment and operating plans.   Many parts of the legislation governing the senior care industry are unclear, leaving “gray” areas. An essential part of a foreign operator’s go-to-market strategy is an understanding of what parts within its planned services fall within the “gray” areas. Estimating and devising a way to manage the risks are essential to avoid jeopardizing the entire business in China, or breaking a contractual arrangement with a Chinese partner. Many western companies we talked to were in such a rush to get an initial MOU or LOI in place with a Chinese partner that they cut corners. Inevitably this created a problem as they ended up having to go back and start over, many times not only because they had been in too much of a rush in getting a license, but more importantly, because they had not taken the time to complete even the most basic due diligence on their Chinese partner.

The most painful lesson our research brought forward was what happens when this licensing process is not taken seriously. Licensing a new foreign owned and operated senior care or healthcare entity in China is more than a mere formality. In fact, the scope of services explicitly called out during the registration process is determinative to a number of core commercial issues. During the WFOE formation process, the most important variable a senior care operator will need to think through is the business scope of their license. In the case of home healthcare as just one example, most foreign operators want a business scope that will allow broad nurse-led interactions in the home. These interactions tend to reflect what a foreign home healthcare provider has found are most commercially and clinically valuable to both families and payers in developed markets. Examples of these higher acuity services include maintenance of IV-administered fluids and medications, enteral feeding, PICC lines, respiratory therapy, broad rehabilitation services, delivery of opiates as part of hospice care, and ventilator management,. The issue is how relevant Chinese authorities view and regulate new foreign businesses that aspire to deliver western, nurse-led care within Chinese homes.

If your company is forward thinking enough to be considering taking your senior care, home healthcare or healthcare business to China, you are likely the type of organization that is comfortable taking risks. That’s good and necessary to be successful in China. However, it isn’t enough. Taking the time, being patient and willing to spend money vetting potential partners, talking and building relationships with government stakeholders and thinking proactively about how you are going to find customers are all critical to being successful in China. The pressure to get “something” done in China can lead many healthcare organizations to under-estimate the amount of time they need to spend conducting due diligence and filling the pipeline with multiple potential suitors. In China, especially in sectors as hot as senior care and hospitals, the amount of interest from possible Chinese partners can make it difficult to maintain a disciplined strategy. Many organizations end up choosing a partner based on intangibles, things like the always thrown-about guanxi, and assume their Chinese partner can wave a magic wand and make all potential licensing, marketing and patient acquisition issues disappear. Our research over the last six months, and our in-country work over the last four years, shows these are dangerous assumptions to make. Western healthcare providers that are successful take a focused, patient approach to China, in particular around questions of how to license their healthcare business. This may slow things down in the short term, but it goes a long way to ensuring your business has longevity and is protected from China’s various ill-tempered moods towards FDI in sensitive parts of its economy, of which healthcare will remain one for the next several decades.

More information on our 200+ page report on China’s senior care and home healthcare industry is available here.

Industries New To China Need Grounding In The Lessons Of the Past Too

Posted in Basics of China Business Law, China Business
Senior and health care in China. The new thing for foreign companies doing business in China

Senior and health care in China. The new thing for foreign companies doing business in China

Today’s post covers one of the more exciting sectors that has recently opened to foreign direct investment in China: senior care and healthcare. It is written by Ben Shobert, who I typically describe as the most knowledgeable person I know about China senior and healthcare issues. Ben has assisted countless companies in these industries get into China and I thought it would be helpful to our readers to have him talk about the issues his senior and healthcare clients are facing in China. This sort of analysis is critical for anyone in those industries, but also incredibly helpful for anyone looking to go into China, especially if they too are in an industry newly opening to foreigners.  

The legal and business issues emerging as various western healthcare service providers expand into China will not be new. Questions over how to properly evaluate potential partners, licensing issues around WFOEs, and understanding how to protect your IP are as relevant for senior care and healthcare companies as they are for industries that have more experience working and getting to scale in China.

This article has been split into two parts. The first will introduce the broader context within which China’s relaxation of its FDI catalog for healthcare is taking place and the second will introduce some of the common challenges – especially around licensing – foreign operators are encountering.

When thinking about China there is always a temptation to tell yourself that your industry, your situation, your business is somehow different. Sure, you can see how an injection molding company having complex molds manufactured in China for a medical device customer needs a robust agreement between themselves and their China tool manufacturer, but you’re only manufacturing a specific type of hydraulic seal for a proprietary OEM hydraulic cylinder. Surely you don’t need to worry about having all the same agreements in place – until of course something bad happens: you can’t move your tool to another manufacturer, you find out your “proprietary” seal is – well – not so “proprietary” any more, or you can’t get product released from the manufacturer because your Chinese partner has all of a sudden decided to change terms on you. The point is this: the best-intentioned businesses that begin to work in China tend to make the same mistakes, regardless of industry.

Before I expand on this, let me provide a little bit of background. For the last several years, my firm has been helping American and European senior care, home healthcare, medical device and pharma companies expand into China. We have been particularly active in senior care and home healthcare, including successfully obtaining and project managing the very first WFOE license ever in Beijing for home healthcare, the second such license in all of China. Over a six month period that began in late 2014, we began working on the first comprehensive research project to profile the largest and what we believed to be the most important senior care and home healthcare providers in China. Most of these – but not all – are foreign invested and run.

In the projects profiled, we identified an estimated RMB 26 billion worth of investment and 1,052,630 square meters of senior living space. Our team in Beijing and the US then extracted and organized the information into a standard template that includes a summary analysis of how each particular project is viewed in the Chinese senior care space and what it may have to say about the current state of the market; a company overview that provides the background of the ownership group and, when available, the structure of the financing for each project and whether each project is profitable, losing money, or breaking even; and, a detailed summary of each project. Each detailed summary provides overview tables of key information that provides a quick-glance overview of project details, and long-form descriptions of each project, from phase build out plans and pricing details to lessons learned by management as well as insights on market positioning of the services in question.

As readers of China Law Blog already know, China’s Foreign Direct Investment (FDI) catalog has been opened to allow Wholly Foreign Owned Entities (WFOE) in both senior care and healthcare. These are significant changes to the FDI Catalog, and they reflect the government’s desire to see more FDI in these areas. However, even though 100% foreign ownership of senior care facilities is possible, many foreign entrants still find they need a local Chinese partner to access the best land, accelerate regulatory approvals, or attach themselves to a brand the Chinese consumer knows.

The evolution of China’s FDI Catalog is a well-understood process: the country realizes it has fallen behind relative to technology or capabilities, opens its economy to FDI through joint ventures (JVs), then later on opens further to allow 100% foreign ownership. But, what is in theory possible around 100% foreign ownership is many times practically impossible, as foreign companies find they still need JVs to navigate local regulations. This process of gradual opening to FDI tends to end in China when domestic and foreign companies find they no longer need or want to work together, at which time they exit the relationship. In practice, most industries that have seen this sort of process unfold have found that strategic partnerships with the Chinese will end in three to five years, simply because both parties want to build their own brands, and have gained from each other what initially made their partnership necessary.

In tomorrow’s post, we will begin to focus on how China’s regulatory scheme for senior care and healthcare businesses is changing, and the most common challenges western companies face when identifying potential partners and obtaining the proper licenses for their healthcare services.

China Product Outsourcing: Everything You Need To Know

Posted in Basics of China Business Law, China Business, Legal News
Made in China does not have to mean made badly in China.

Made in China does not have to mean made badly in China.

I just this week learned of a ChinaImportal article, Recommended import from China forums & blogs, written about two years ago. In this article, Fredrik Grönkvis, an experienced China sourcing agent, cites to the two China blogs he reads “on an almost daily basis” and highlights 13 posts from those two blogs that he sees as critical for outsourcing from China. The two blogs are ours and Renaud Anjoran’s Quality Inspection Blog, of which I too am a huge fan.

Here is what Fredrik has to say:

China Law Blog. It’s amazing these guys hasn’t written a book yet (or am I wrong?). While Chinalawblog.com is not focused only on importing (it covers a ton of China business related topics) it’s still a must read for small businesses and startups sourcing from China. Below I list a few posts I think you should read:

How to negotiate with Chinese companies.
Choosing a China OEM manufacturer: A practical guide.
How to find your China manufacturer.
Doing business in China safely. The due diligence basics.
China product sourcing problems.
Payment fraud in China. This season’s edition.

Quality Inspection Blog. This blog is focused on China importing and Quality Assurance and most posts are written for small to medium sized enterprises. I can confess that I’ve been drawing a lot of inspiration from Qualityinspection.com during the development of Chinaimportal.com. The infographics are another great reason to visit this blog. Nobody makes AQL and QC as easy to understand as these guys. These are the posts you should read today:

Best Practices For Importers.
Who is your best contact in Chinese factories?
Difficulties of foreign companies sourcing products in China.
5 ways an importer can develop an unfair advantage.
The small buyer’s dilemma in China.
Top 10 mistakes committed by importers.
The 10 components of a good quality assurance strategy in China.

I cannot resist adding two more blog posts you should read for China product outsourcing assistance:

Getting Started On Manufacturing In China. The Legal Basics.

China OEM Agreements. Why Ours Are In Chinese. Flat Out.

The above is a great list(s) of reading for education regarding China outsourcing. Anything to add to this list?

 

China Business Basics

Posted in Basics of China Business Law, China Business
The basics on doing business in China

The basics on doing business in China

I (and the other China lawyers at my firm) are always getting asked — by clients and by reporters — the “basics” of what businesses “need to know about doing business in China.” A couple years ago, I was interviewed for a China Business article, entitled, The Troubleshooter, in which I discussed some of the basics of doing business in China. That article concisely gives some of the flavor of what it is like to do business in China, while also concisely setting forth some of the basics for doing so. The below are what I see as the highlights from that interview, but I urge you to go here and read the whole thing.

What assumptions do you want to debunk about how things actually work in China?  The most important thing to know about China is that it has sophisticated laws and those laws are enforced.

Is there really such a thing as a “Chinese business culture”? There is. But like any business culture it isn’t universal and it isn’t immutable. If I had to pick one thing to define it, it would be a desire to get the deal done. Chinese businesspeople are more concerned about getting a deal done than they are about cultural niceties.

What are some of the thorniest problems you’ve solved for clients in China? Getting people out of China who are being held there against their will for allegedly having failed to pay debts. This sort of thing happens all the time.

What are the most important pointers/reminders you share for those who want to protect their Intellectual Property? One, Get a good partner that makes sense for you because IP (Intellectual Property) theft is much less likely to happen within a good relationship. Two, get a good contract (in Chinese) with your good partner so that you have a good road map on where your relationship should go. This minimizes future problems. Three, do whatever you can to protect your IP outside of anything legal. It might be as simple as bringing in last year’s model to China. Four, register your IP in China because if you don’t register it, you can’t really protect it if it gets taken.

How should a foreign business court good relations with Chinese government officials? The most basic advice here is to simply try. Go introduce yourself now, not when you have a problem. Let them know what you are doing and ask them how they feel about it. Do NOT bribe.

You once wrote, “The [Chinese] government is much more concerned with social harmony than it is with economic numbers.” Can you cite examples where you saw this in action? Try registering a high pollution foreign business in China today. That will prove this axiom right off the bat.

What has Apple done right in China? A lot. Starting with it simply being Apple in China. Many years ago, when Apple first arrived in China, a number of pundits were criticizing it for not being Chinese enough. They were saying that Apple needed to change its product and/or reduce its cost. Apple did the opposite. It kept its product and prices the same and by doing so it maintained its reputation worldwide. If Apple had made cheaper product and charged less in China, I am convinced that would have hurt its name, reputation, and business worldwide. You have to realize that there will always be pundits out there who criticize the big companies so as to try to convey that they know China business better than the big companies and therefore you should hire them as your business consultant. 

What do you think?

8 Questions For Doing Business in China

Posted in China Business, Legal News
8 questions to ask yourself when doing business in China or even with China

8 questions to ask yourself when doing business in China or even with China

I wrote the below post for Above the Law, the leading (by far) news and information and gossip site for lawyers. Since it showed up on that site this morning, I have received a number of communications from people in China saying that they have been unable to read it there. I therefore am running it here as well for everyone in China, and also for anyone who has not seen it on Above the Law yet.

The China lawyers at my firm are often asked what foreign companies should know and do to stay out of legal trouble in China. The following eight questions make for my answer:

1. Are You Operating Legally? If you are doing business in China for more than a month or two, you should be looking at whether you need to form a legal entity there (a Wholly Foreign Owned Entity (WFOE), a joint venture, or a representative office). Note though that some businesses that are perfectly legal in the United States or in Europe are proscribed to foreigners in China.

2. Do You Have a Good Contract? Written contracts are highly advisable and they generally should be in Chinese. If you entertain thoughts of enforcing the contract against your Chinese counterparty, disputes should usually be resolved in China.

3. Are You Protecting Your Intellectual Property? To protect your trademarks, patents, and copyrights in China, you should register them in China, notwithstanding ostensibly relevant international conventions.

4. Are You Bribing Anyone? Are You Sure? The United States vigorously enforces its Foreign Corrupt Practices Act (FCPA), dealing with improper payments to foreign officials. China now too has its own anti-bribery laws, and those laws are in many ways even broader. At minimum, your company also needs to be sure it is not dealing with any individuals or companies on applicable sanctions lists.

5. Are You Complying With Import-Export Laws? A company recently called me to draft a sales contract for selling their technology product to China. My first question was whether the United States would even allow their product to go to China. This question had never occurred to this company, but it turned out that exporting their product to China would indeed have been illegal under U.S. export control laws. Additionally, many products require special approvals to be imported into China and some cannot be imported into China at all.

6. Are You Complying with China’s Employment Laws? China’s employment laws are national, provincial, and local. Very local. If you are not complying with all levels of China’s employment laws and regulations, you are setting yourself up for problems.

7. Are You Paying All of Your Taxes? Like governments everywhere, China loves collecting taxes, especially from foreigners. And if it can collect interest and penalties for your initial failure to pay taxes due, it is even happier. Know what taxes you need to pay and pay them.

8. Are You Violating Any Antitrust/Pricing/Environmental Laws? I realize that grouping these together is a bit of a fudge, but analyzing them separately would take many more articles. The key point is that doing business in or even with China requires you at least consider these issues and realize that China’s laws may be very different from comparable laws in your country.

If your company cannot give good answers to the above eight questions, you should start making changes, and fast.

China E-Commerce: The New Rules

Posted in China Business, Legal News
China's e-commerce laws are constantly changing.

China’s e-commerce laws are constantly changing.

As part of its program designed to modernize the Chinese economy, the State Council has recently issued a series of opinions on development of e-commerce in China. The underlying concept is that e-commerce is one way to push China towards developing a consumer economy. The most recent opinion focuses on the development of international e-commerce in China: Guiding Opinion for the Promotion of Healthy and Rapid Development of Cross-Border E-Commerce (关于促进跨境电子商务健康快速发展的指导意见). Consistent with recent trends in Chinese law, this Guiding Opinion shows two underlying primary themes. First, e-commerce in China shall be conducted in accordance with Chinese law in a manner firmly under the control of the central government. Second, e-commerce in China shall be conducted by Chinese companies. Foreign participation in the ownership and control of e-commerce companies in China is not even mentioned in the document.

Consider how these underlying themes apply to the sale of U.S. made consumer products to China. Many U.S. manufacturers of consumer goods seek to focus on the Chinese market. Their efforts are restricted for a number of reasons. First, Chinese product safety requirements are difficult or impossible to comply with by U.S. companies. For example, the Chinese requirement for animal testing on imported cosmetics means that many foreign cosmetic products cannot receive approval to sell their cruelty free cosmetics products in China. For more on this, check out Do This One Thing Before Doing Business In ChinaSimilar issues apply to the sale of many food and beverage products. In the same way, many small volume manufacturers of consumer electronics do not wish to or are unable to comply with PRC electronics safety certification requirements.

Many U.S. companies have sought to avoid these issues by selling their product on e-commerce websites. Where the sale is made directly to the individual consumer in China, these companies have worked a loophole in Chinese regulation that gets around these restrictions. First, Chinese consumers are now able to make foreign purchases using their Chinese Unionpay credit cards. Second, the Chinese customs officials have taken a de minimus inspection approach and have tended not to inspect single purchase product shipments sold directly to the Chinese consumer. In fact, Chinese service providers have started to market use of this personal use import loophole to promote sales of non-conforming product in China.

It appears that the Guiding Opinion may be intended to presage shutting down this personal use loophole.

First, payment systems will be centrally monitored to enforce compliance with central government laws and regulations. The current system  basically allowing unmonitored credit card purchases by Chinese individual consumers and small businesses will be replaced by a centrally monitored system that enforces compliance. (See Guiding Opinion, Articles 6, 9, 10 and 12).

Second, for import of consumer goods, strict compliance with central government quality and safety standards will be enforced (See Guiding Opinion, Article 4):

  • The government will impose centralized reporting, shipping and delivery systems. The current loose and disorganized local systems will be shut down.
  • Under this centralized system, strict compliance with central government quality and safety regulations will be imposed.
  • Importers will be held personally responsible for compliance.
  • Those who import in violation of Chinese quality and safety requirements will be prosecuted.

To implement its goal of complete central control, the State Council approved model is the China cross-border e-commerce comprehensive test zone (中国(杭州)跨境电子商务综合试验区 ) established in Hangzhou with Alibaba’s cooperation. Under this model, the plan is to replace the current de-centralized individual importer system with a completely centralized operation under the careful control of the central government authorities.

Note also that under the system advocated by the Guiding Opinion, there will be no role for sales into China through most online sales websites of individual U.S. companies. The plan is for large Chinese companies to control the entire process. Chinese companies will purchase consumer goods overseas and then warehouse the goods overseas and then ship those products to China to one of the centralized cross border e-commerce distribution centers. The Chinese consumer will then purchase the products within China from an e-commerce retailer located in one of those distribution centers. Payment processing will be handled and product will be shipped to the consumer from that central location. The role of the foreign manufacturer or online retailer will be reduced. China’s e-commerce model will be very different from the decentralized e-commerce system typifying online selling in the United States.

If China implements this system, U.S. manufacturers and retailers will need to comply with the following rules:

  • No direct selling to Chinese customers.
  • All sales in China will be done through Chinese owned e-commerce companies.
  • All product must comply with Chinese quality and safety standards.

It remains to be seen what will actually happen in China but for right now, things are not looking so good for many American companies (including many of our clients) who were using e-commerce to sell their products into China using the individual use system. Interestingly though, China just last month announced that it would be opening up some e-commerce sectors to foreign ownership.

We will be closely monitoring China e-commerce developments from on the ground here in China and reporting back on what we are seeing and hearing.

Quick Question Friday, China Law Answers, Part V

Posted in Basics of China Business Law, Legal News
Putting a contract damages provision in your China contract will usually make sense.

Putting a contract damages provision in your China contract will usually make sense. Photo by Steven Snodgrass.http://bit.ly/1CPPrkp

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all these questions and then comprehensively answer them, that would soon become all that we do and we would soon be out of business. And that would be a bad thing for us and for this blog. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here.

The following was sent to us just yesterday by a lawyer based in China and it is one we get every so often (almost always from fellow lawyers) seeking help on writing a China contract.

What are commercial contract rules in China on interest for late payments? More specifically, is a contractual provision charging more for late payments or charging interest, enforceable? If these things are possible, are there restrictions voiding penalties unless they represent a bona fide estimate of loss?

The issue you are raising is usury. China has no usury law for commercial contracts; China has no law on the highest rate of interest that can be charged on a commercial contract.

2. With respect to damages in general, China does not prohibit liquidated damages. China does not have the penalty/estimate of actual damages concept like that which we have in the United States.

3. PRC Contract law provides for contract damages, or damages determined in advance by the parties to the contract. Rather than being disfavored, China actually favors contract damages since this provides clarity in litigation. For more on how to write a contract damages provision for a China contract, check out the following

4. With respect to the amount of contract damages, if litigation ensues in a Chinese court the plaintiff can argue that the amount is less than actual damages and should be increased. Conversely, the defendant can argue that the damages are too high and that the amount should be reduced. In either case, the amount of contract damages does not affect the validity of the rest of the contract. It is simply one of many factual issues decided by the judge. But as stated above, Chinese courts generally favor contract damages provisions and so if yours was properly crafted, the odds of it holding are pretty good. Also, just having such a provision should give you a lot of leverage because it will make a quick court seizure of assets way more likely.  

5. In general terms, no provision of a Chinese contract will invalidate the entire contract. If a provision of the contract is determined to be void (which is very rare), the judges will simply reinterpret the provision in a manner that is legal and move on.

The Bad Smell of China Customs Circumvention

Posted in Basics of China Business Law, China Business
Imagine eating meat from one of these cows 40 years from now. Now just imagine not having a program in place to prevent your company from buying such meat.

Imagine eating meat from one of these cows 40 years from now. Now imagine your company not having a program in place to prevent that from happening.

Last week it was reported that over $480 million worth of frozen meat – some of which dated from the 1970s – had been illegally smuggled into China where it was seized by Chinese customs officials. The frozen beef, chicken, and pork products had never passed through China Customs and, consequently, had not been inspected for compliance with required Chinese health regulations.

Is it even possible that the buyers of these frozen meat products did not know that the meat they were buying was spoiled and posed health risks to Chinese consumers? Two principal considerations should inform a buyer’s decision to buy particular products: (1) the seller’s identity and (2) the authenticity of the product.

In the case of China’s tainted meat products, it would seem that the buyers would only have needed to conduct the minimal amount of due diligence – either looking at or smelling the meat products – to know that the meat was a health risk. However, for buyers in most other cases, understanding the risks associated with purchasing certain products requires due diligence efforts on both the vendors and the actual product being purchased.

Sometimes sellers view a buyer’s due diligence as indicating the buyer does not trust the seller. In those situations, you should explain the need for due diligence as necessary to ensure compliance with various countries’ regulations. Buyer due diligence typically includes reviewing government sources and official copies of the seller’s business formation documents and business licenses, and sometimes the seller’s financial records as well.

In addition, U.S. companies should also review U.S. lists of sanctioned countries and entities to confirm that the seller is not in a sanctioned country and that neither the seller nor any of its owners or managers are on such lists. Any questions about whether an individual or entity is on U.S. sanctions lists should be resolved before you undertake the contemplated transaction.

American companies doing transactions with Chinese companies will often want to determine whether the Chinese company on the other side is a state-owned enterprise (SOE). This is helpful to know because bribery and corruption risks are always going to be greater with SOEs. American companies that do business with SOEs should ensure that their standard operating procedures minimize and address risks of bribery and corruption.

Concerning the goods themselves, buyers should ensure that the purchased goods comply with the regulatory requirements of both the exporting and importing countries. At minimum, purchasers should ensure that the goods have an official certificate of origin and are clearly documented on applicable shipping and commercial documents. In addition to obtaining documentation demonstrating your due diligence efforts, you should archive such documentation just in case you ever need it to support your position in any regulatory or court proceedings or in the event of a consumer complaint.

Not all products obtained from illegal parties or in illegal ways will look or smell as bad as last week’s 40-year-old meat. However, buyers committed to minimizing regulatory or public relations risks should undertake commercial relationships as if they did smell this bad – at least until you know and trust your business partners and the goods you are buying.