Clients, potential clients and the press are always asking me what foreign companies that do business in China need to know to stay out of legal trouble.
Next time I get such a question, I will refer them to the list below as it sets out the most common legal issues foreign companies face when doing business with or going to China. This list is not meant to be exhaustive.
Are You Operating Legally? China has all sorts of requirements for doing business in China. The basic (non-technical) rule is that If you are going to be doing business in China for anything more than weeks at a time, you probably need to form a legal entity to do so. This entity can be a WFOE, a JV, or a representative office. It is important to note that some businesses that are perfectly legal in the United States or in Europe are illegal in China.
Are Your Contracts Enforceable? It almost always pays to have a written contract and it is usually best to have that contract be in Chinese. Very generally speaking, if it is not spelled out clearly in your contract, there is a good chance the court will find it does not exist; Chinese contract law is far less willing to imply things than western law.
Are You Protecting Your Intellectual Property/Trade Secrets? IP registrations in your own country will not typically extend to China. To secure protection of your trademarks and patents in China you must register them in China. China is actually pretty good at protecting trade secrets that have been marked out by contract for protection.
Are Those Payments Legal? The United States vigorously enforces the Foreign Corrupt Practices Act (FCPA), which penalizes improper payments to foreign officials by U.S. companies. In certain situations, U.S. companies can be liable under the FCPA for payments made by their Chinese partners. The most common situation is when the U.S. company uses the Chinese company as a distributor of the U.S. company’s products. Know these laws and know how to avoid running afoul of them. I understand Canada and most European countries have somewhat similar corrupt practices acts. China even has its own ant-bribery statutes.
Is It Legal For You To Sell It? At least twice, companies have called me to draft sales contracts for their technology product sales to China where what they were selling would probably be illegal to export to China. U.S. export control laws prohibit the sale of certain products to China at all and other products (certain types of software are a good example of this) can be sent to China only with a validated license
What Happens If Your Product Injures Someone? This would not have made the list a few years ago, but in light of the recent issues surrounding toxic foods and dangerous products coming from China, it deserves to now. There are two main ways you can protect yourself from this: by contract and through insurance.
Antitrust/Labor/Tax/Termination of Business Issues. If you are going to be doing business with China or, even more so, within China, these issues are often relevant, particularly since Chinese laws on these can be so different from those to which you are accustomed.