Just came across an interesting post with a not so interesting title on the China IPR Blog: IP Developments in Beijing.  The post starts out discussing how “due to the rapid increase in IP cases in the Beijing Number 1 Intermediate Court, particularly IP cases involving patent and trademark validity, the Beijing Intermediate Court will split its Intellectual Property Tribunal in two” with the number one IP Tribunal hearing mostly trademark and unfair competition cases and the number two IP tribunal hearing mostly patent and copyright cases.

The post then notes that the Beijing court (which hears about 10% of all China IP cases) has seen its case load increase from “4,748 cases in 2008 to 11,305 in 2012, an increase of nearly 150%,” with copyright cases representing about half the total.

This is important for foreign companies doing business in China and here’s why.

  1. Rational human beings do not generally spend money on something that is not going to bring them any benefit.
  2. Bringing a lawsuit in China always costs money (China court filing fees tend to be fairly high), oftentimes a relatively large amount of money.
  3. Chinese businesses tend to be made up of rational human beings who understand the value of an RMB.
  4. Chinese businesses must believe that they can get the Beijing IP court to give them redress for alleged IP infringements or they would not pursue the lawsuits.
  5. Chinese businesses must, in increasingly large numbers, believe that they can get the Beijing IP court to give them redress for alleged IP infringements or they would not be increasing the number of IP lawsuits they are pursuing.
  6. Chinese businesses are almost certainly correct in their belief that suing before the Beijing IP court will give them redress.
  7. If Chinese businesses are correct in their belief (and they almost certainly are, see number 6 above), that means that IP enforcement, at least through China’s courts is improving.

Independently of the above, you would have a tough time finding a China lawyer who does not also believe that IP enforcement in China is improving, particularly with respect to trademarks.

IP enforcement/IP protection is improving in China for two main reasons.  First, Chinese companies and foreign companies alike are now realizing that it makes sense for them to register their trademarks, copyrights and patents in China so that they have an opportunity at being able to protect them (in the courts, among other places).  And two, China’s courts are increasingly realizing the importance of protecting IP in China, largely because Chinese companies increasingly want them to grant IP protections.

What this all means for those of you doing business in China is that you too should be jumping on the IP registration bandwagon.  For more on protecting your IP in China, check out the following:

  • How To Protect Your IP From China. Part 2. What we, as China lawyers, look at in trying to protect our clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

What are you seeing out there?

We are always telling our clients that they cannot be too specific with their product requirements when buying product (OEM product or otherwise) from a Chinese manufacturer.  Words like “blue” or “good quality” or “typical in the industry” are meaningless.  There is a wide range of blues and unless you specify the exact blue that you want, your expectation the odds that you will get the one you want or even the one in the sample are incredibly slim.  And what does “good quality” mean in a country where you can buy t-shirts for 25 cents that will fall apart after one wash?  Typical in the industry?  What industry and how do you expect some manufacturer in China to have any clue about safety or fashion or anything else in the United States.

No, what you need to do is set out exactly what you want.  If your product and all of your competitor’s products are always made with 10% copper and everyone knows this, you still make  VERY CLEAR in your spec sheet that you want your product to be made with 10% copper and then in the contract itself you make VERY CLEAR exactly what liquidated damages you will be entitled to if the product has anything less than 10% copper in it.

When I talk on what should go into Chinese contracts, I usually relay something like the following:

Many years ago, I heard a story of an American who was renting an apartment in Shanghai. Now I am not even sure if this story is true or apocryphal, but it is such a good story to illustrate how Chinese judges and arbitrators view contracts it really doesn’t matter whether it happened or not.

It was a nice apartment, that this American was renting, and it had a really nice expensive office chair (high end apartments in China are virtually always rented out fully furnished). One day, the really nice office chair broke and became unusable and the American tenant kept asking his Chinese landlord to replace it. But that wasn’t happening.

The lease on the apartment eventually came up for renewal and the American refused to renew it unless the landlord put in writing that he would replace the really nice office chair. The landlord agreed and after the new lease was signed, he came by and put in a $2 metal folding chair.

What would happen in the United States if this tenant were to sue the landlord over the landlord’s failure to replace the office chair with something pretty comparable? Anyone know?

The tenant would win because the court would essentially write into the lease contract the provision that the replacement chair had to be a good office chair like the one it was replacing. What would happen if the tenant sued the landlord in a Chinese court?

The Landlord would win because if you want something in your contract in China, you had better put it in there.

Why is this chair story even relevant? It’s relevant because American companies time and time again fail to put enough into their contracts with Chinese companies. Instead, they just assume the courts or arbitrators will know what the parties intended and re-write their contracts accordingly. But it doesn’t work that way in China.

We had a company come to us after having received a large shipment of laptop bags that weren’t strong enough to hold a laptop. We called the Chinese company to ask about getting a refund and they told us that if our client had wanted a bag strong enough to hold a laptop, it should have paid 50 cents more per bag for one that could actually do that. This company should have specified in its contract that it wanted a bag that could hold x number of kilograms.

I was reminded of all this today after reading a post by Renaud Anjoran on his always excellent Quality Inspection blog.  Renaud’s post is entitled, “Be ULTRA SPECIFIC with your Chinese Suppliers” and, needless to say, that is the advice it conveys.  What’s cool about his post though is that he shows a couple of examples where Chinese companies (his own hotel) are super specific in conveying their messages.  This got me to thinking that the need to be super specific may stem from China’s hierarchical society and the role each person sees for him or herself.  To grossly summarize, we Americans love to claim to “think outside the box” whereas in China thinking inside the box is oftentimes valued more highly.  Then again, it all just may have to do with how US courts are so willing to infer contractual terms and Chinese courts are not.

But the reason for having to be ultra-specific in your Chinese contract is not what matters; what matters is that you do so because that is THE key in how to get good product from China and to a certain extent, one of the keys to doing business in China or with China.

For more on what should go into your China OEM Agreement and how to succeed in outsourcing product from China, check out the following:

What do you think?

Came across a really good list of mistakes businesspeople make in China.  The list, entitled, “Top Ten Mistakes Businessmen Make in China,” was compiled by  Stanley Chao, of All In Consulting. It really is a nice collection of tips and I present them below, with my comments in italics.

  1. Take the trust factor out. All actions must be confirmed with proof.  Agreed.  We said the same thing in our post, Your China Product Supplier. Trust All You Want, But Systematize.
  2. Foreigners often complain that Chinese don’t understand their business intentions due to a lack of English. This is often wrong. The Chinese do understand your intentions, but wish not to follow or obey them. Not sure this is true and not sure this matters. I am not big on trying to figure out other people’s intent, preferring to focus more on their actions. If this is just another way of saying you need to verify, then I agree. 
  3. The Chinese will always want to rush you. Be patient, and make the Chinese understand your intentions. Agreed.  We talked about this just a few weeks ago as a typical Chinese company negotiating tactic in our post, How To Handle Chinese Negotiating Tactics.
  4. Don’t be too polite. It can sometimes be misunderstood. Be terse, direct and make your point in simple words or actions especially during negotiations. Business is Business! Sort of agree.  I think it is fine to be polite, but at the same time, you should not be so polite as to not make sure that you make your point and do so loud and clear.  
  5. Don’t do incoming inspections after the goods have landed in the U.S. It’s too late at that point. It must be done in China, preferably at the factory. Agreed.  You must do your inspections before you pay, not after.  
  6. If at all possible, have your own staff in China handling quality inspections. You don’t need many, just enough to handle the important issues. Sort of agree.  Using an outside firm for your QC can work just fine.  
  7. You are never protected by a contract. The Chinese, because of cultural and historical reasons, treat contracts differently than foreigners. They consider it a temporal agreement, subject to change as market conditions fluctuate. Disagree.  Contracts do protect you more than not having a contract. Our post, Chinese Contracts. Because They Really Do Make A Huge Difference, sets forth all the arguments why.  
  8. Don’t ever do a joint venture. This complicates matters by a factor of 3. Instead, seek distributors, licensing partners, or establish a WFOE-Wholly Foreign Owned Enterprise. Sort of disagree.  If you can do a WFOE, do that and not a Joint Venture.  But when you cannot do a WFOE because China does not allow it or because you cannot afford it or because you need assistance from a Chinese company for which a JV is required, then a Joint Venture can make sense.  For our thoughts on China Joint Ventures, check out Chinese Joint Ventures — The Information The Chinese Government Does Not Want You To Know.
  9. Have all important documents and contracts written in Chinese, with duplicates in English. Use the Chinese translations as the legal, binding document. This will eliminate misunderstandings, language problems, and disputes. Agreed and for our strong concurrence on this, check out China OEM Agreements. Why Ours Are In Chinese. Flat Out. Also, if contracts provide no protection, as implied in number 7 above, who cares in what language they are written? 
  10. You don’t think like the Chinese and vice versa. Understand what makes them different by observing them and learning the culture. You will know how to deal with them better. Agreed.  It is always good to know as much as you can about anyone with whom you are dealing.
So what do you think?

A member of our China Law Blog Group on Linkedin left the following comment (modified slightly) regarding Chinese company names, prompting this post:

Recently I happened to meet with a Chinese lawyer in Qingdao who told me about how the Province [Shangdong] registers the Chinese name of a company. The companies are registered only with Chinese names. Let’s say for a contract with an Indian or a US company they do use just the English name. He says it is compulsory to have the contract in English and in Chinese also. Otherwise the Chinese company simply can deny its English name to avoid participating in the arbitration. Is this true? How we can make a contract foolproof without making a Chinese contract?

Great questions.

Let me start out by saying that we are of the view that in most cases it makes sense to have your contract with a Chinese company be in Chinese.  We explain why we take this position in China OEM Agreements. Why Ours Are In Chinese. Flat Out:

Because international contracts are so often between parties from different countries, they commonly are written in two or more languages. Nearly all of the contracts we draft for our Western clients doing business in China are in English and Chinese (though about ten percent of the time, we also translate them into German, Spanish, Korean, or French as well). This duality of language can, if not handled properly, pose big problems.

When we do a contract in both English and Chinese, we always call for the contract to specify ONE official language to control if there is a dispute. We do not advise drafting a contract that is silent on the official language, nor do we advise drafting contracts that call for both English and Chinese to apply. Having two official languages pretty much doubles the chances for ambiguity and pretty much doubles the attorney time (and fees) that will be incurred in fighting over the meaning of the two contracts. It is expensive enough litigating on one contract; there is no benefit litigating on two.

So the question for us comes down to whether English or Chinese should be the official language of the contract and the answer to that question requires we first decide where we would most like to see disputes resolved. If we go for arbitration in English (and if the Chinese manufacturer actually agrees to this, which is quite rare), then we almost certainly will want English as the official language. But if we decide the Chinese courts will be the best place to resolve conflicts, then we want Chinese to be the official language.

But, having said this, it is not true (as many seem to believe) that English language contracts will be deemed invalid by Chinese courts or arbitral bodies.

But what about company names?  The only official company name is the Chinese language version and this is true as well for WFOEs in China and Joint Ventures as well.  If you are going to form a China WFOE, you must come up with a Chinese name for your WFOE and that Chinese name will become your one and only official name.

But must one put the Chinese name on any contract with a Chinese company?  No, this is not required, but it is certainly smart to do so. I have actually never heard of a Chinese company claiming it is not them who signed a particular contract using the English language version of their name, but it absolutely does not surprise me to hear that happens.  Our firm has always used the Chinese language version of a Chinese company’s name, even on the English language version of our contracts and we do so for clarity. We also typically put in the address of the company as well and sometimes its license number as well.

I can certainly imagine a Chinese company seeking to get out of a contract by claiming that it never signed one because the contract at issue does not contain its Chinese language name. But at the same time, I also think that someone facing such a claim ought to — in most instances — be able to prevail against it by marshaling evidence to show that it was indeed the Chinese company that signed the contract. This will be particularly easy if the Chinese company has a well-known and often used English language name or if the English language name is a direct translation of a unique Chinese language name.

I actually think the bigger issue regarding contracts with Chinese companies is whether the contract is sealed or not.  In How To Write A Chinese Contract That Works, we wrote on how Chinese companies were notorious for trying to get out of contracts they had not sealed/chopped:

For written contracts in China to be effective, one of the following must be true:

  1. The company’s legal representative signed it. Chinese law provides that a company’s legal representative has apparent authority to bind the company. This means that even if that representative lacks the actual authority to bind the company (maybe because the board of directors or the shareholders never gave the representative the authority to contract with you), the legal representative’s signature will bind the company. There is, however an exception to this and that is when you know that the legal representative lacks the authority to bind the company.
  2. The contract is appropriately sealed.  An appropriate seal (oftentimes called a chop) is applied to the contract. It does not matter who applies the seal, so long as it is the right seal. This means it must be sealed either with a contract seal that sets forth the name of the company or, as is more commonly done, with the Company Seal. Each Chinese company has only one company seal (no copies).

Chinese companies are notorious for trying to get out of contracts by claiming they never actually signed them or that they were signed without the proper authority and so if your contract is big enough and important enough, you should consider doing all of the following to minimize even further the likelihood of the Chinese company seeking to get out of your contract:

  1. A signature from the company’s legal representative. Of course, you must first confirm from the company’s business license who exactly is the company’s legal representative.
  2. A resolution from the company’s board explicitly approving the contract and authorizing the legal representative to sign it.
  3. The affixation to the contract of the company seal or the company’s contract seal.

In that same post, we set out the basics of what it takes to write a good Chinese contract:

If you want to greatly increase your chances of being able to enforce your contract with your Chinese counter-party, you should do the following (you should do a lot more than this, both within and outside your contract, but I am limiting this post to just those things directly related to being able to enforce the contract and its terms)

  1. Have a written contract (see this, this and this);
  2. Have that written contract be in Chinese;
  3. Have that written contract set out clearly how disputes are to be resolved and, even more importantly, pick the right forum for those disputes;
  4. Have that written contract set out in excruciating detail what the Chinese company must do to be in compliance with the contract;
  5. Set out the liquidated damages the Chinese company must pay if it fails to comply with the contract;
  6. Make sure the Chinese company signs AND seals your contract.

It is impossible to make any contract foolproof in that there will always be risks in any deal, but doing the above will increase your odds.

What do you think?

 

 

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Renaud Anjoran left the following interesting question on the China Law Blog LinkedIn Group this morning:

What is the value of the Chinese Court System?   I have been reading Dan and Steve’s China Law Blog for a while. They keep asserting the value of legally binding contracts, and note how good Chinese courts are at enforcing them. The World Bank rankings also support this view.

On the other hand, I regularly read about how useless the Chinese court system is. For example, in his latest book, Andrew Hupert writes:

“Bringing suit in China is generally considered a terrible option. It is at best a last resort.”

“A Chinese businessman, when confronted with a rigid set of rules and a counter-party he does not feel a connection with, will immediately start figuring out a way to game the system. When you give him a thick contract document, he sees an instruction manual, and that fixed corporate structure is really the set of rules to a game he plans on winning.”

“The court system offers incomplete remedies at best and has been known to be quite harmful to foreign interests.”

Opinions? Who is right?

My short answer is that both sides are right. My longer answer is that only my side is correct.

Let me explain.

Andrew Hupert says that “bringing suit in China is a terrible option.  It is at best a last resort.”  I 100% agree with Andrew on this.  As anyone who has been involved in litigation anywhere in the world will tell you, it is a horrible thing. It is expensive, time consuming, and imperfect. Litigation signifies the end of discussion between parties and, as such, it should only be undertaken after all other avenues have been exhausted. As I am constantly telling clients, “if you have to sue, you have already lost. You can win the litigation, but even so, you will have lost.”

I also completely agree with the quote about how “the court system offers incomplete remedies at best and has been known to be quite harmful to foreign interests.”  Again though, this quote holds just as true for the United States and anywhere else as it does for China. Litigation virtually never brings anyone a complete remedy.  If you are owed $250,000 and you sue and the court awards you $250,000 and the other side pays you in fairly prompt order, you still have not achieved a complete remedy.  What about the time you spent trying to settle the case before suing? What about what you might have done with the $250,000 had you received it sooner? What about your attorneys’ fees in dealing with the problem? What about all the time you and your employees had to spend on the case?  Litigation is not a complete remedy, which just underscores point number 1 on how it should always be a last resort.

As for foreigners doing poorly in Chinese courts, that too is true.  Again though, if you are Citibank, would you rather be a defendant in a court in Manhattan, New York City or Manhattan, Kansas?

But so what?  So what if litigation is horrible and time consuming and fraught with risk and not always fair?  What does that have to do with contracts in China?  Shockingly little. Renaud, everyone tells me that no matter what you do, you will always have quality problems with your Chinese factory.  Should I take that to mean that quality control is a waste of time?  Of course not.  Contracts are no different.

There is huge value in having a contract with your Chinese counterpart.  Way back in 2006, in a post entitled, China’s Courts Are Fair, we explained why corruption and unfairness and run of the mill judicial imperfections are overrated and no reason to just give up on contracts:

Every time I tout the fairness of China’s courts, however, I still feel called upon to make clear I am not a naif.  I fully realize that Chinese courts virtually never rule against the government when central government policy is at issue.  And, when I am talking about fairness, I am completely ignoring criminal and political cases.  I also recognize that even though China’s courts are controlled from Beijing, the chances of getting a fair trial are much greater in prosperous commercial cities like Shanghai, Tianjin, or Qingdao, than they are in a small city in Anhui Province.  I know too that a foreign company prevailing against a powerful local company in a Chinese court is always going to be less likely than if all parties are of the same strata.

So China’s courts are not always fair.

But, they are fair way more often than credited by the western media and I am absolutely convinced (as are all of the Chinese lawyers with whom we work) that they are fair often enough to make it as ill-advised to do business in China without written contracts or Intellectual Property (IP) protections as to do business that way in the West.

Even if China’s courts are fair only 60% of the time, this is enough to cause the rational Chinese businessperson to make decisions based on legal ramifications.

There is a commonality to judicial corruption worldwide.  Corrupting a judge is expensive.  The greater the amount at issue in the case, the more the judge will charge for a favorable decision.  The more publicly visible the case, the more the judge will charge.  The more the judge has to trample the law to reach the decision for which he or she is being paid, the bigger the bribe will need to be.  Local, trial court judges (who are most likely to know the lawyers and/or the parties) are more likely to be corrupt than appellate court judges.  Supreme Court Judges are the least likely to be corrupt.

All of this means that even in the most corrupt legal systems, the better your contract, the more it will cost your opponent to prevail and the better your chances will be as you climb each step of the court system and the more it will cost to change that.  When I tell clients this, their reaction is usually, something like, “great, all this means is that my opponent will need to pay the judges half a million dollars to beat me, rather than only $10,000. That still doesn’t help me.”

Oh yes it does.

If the other side is going to need to spend $500,000 to beat you, they should be willing to settle with you for even more than that.  They should be willing to pay you more than a judge because settling with you has a greater certainty of finality and outcome and because it has a much greater certainty of their not getting arrested for bribery.  If you have no contract or a lousy contract, the other side may be unwilling to pay you anything, figuring a small judicial bonus is all it will take to assure legal victory or that you will choose not to sue at all.

Chinese courts generally fairly resolve commercial disputes and they are continuing to improve.  China’s courts already are sufficiently fair that Chinese businesses for the most part do consider the legal ramifications of their actions and act accordingly.

Bottom Line:  There is no justification for failing to take legal precautions there (such as written contracts and IP protection) when doing business in or with China that you do when doing business in the West.  Those who justify their failure to do things by the legal book in China because “the courts don’t enforce the law there anyway” are both empirically wrong and foolish.

Even if you never intend to sue anyone in China, it makes sense to have a good contract, preferably in Chinese.  There are three main reasons to have a good contract, and suing and winning on it is only one of them.  Another reason is to make sure you and your Chinese counter-party are on the same page.  We actually wrote about this very topic just a few weeks ago, in Chinese Manufacturing. Delivery Date? What Delivery Date?

One of the most common problems we see between American companies and their Chinese manufacturers is “late” delivery.  I put late in quotes because many times I think the problem is not so much that the Chinese manufacturer was late, but rather that the contract and the American buyer were unclear on the actual delivery date requirements.

Let me explain.

When we draft an OEM Agreement (a/k/a Manufacturing Agreement or Supplier Agreement), we are always very careful regarding delivery times.  Most of the time, our clients come to us with a term sheet or an oral agreement with their Chinese manufacturer dictating something like 30 days for delivery.  We like strictly tying the Chinese manufacturer to the “agreed-upon” delivery time and we usually do that with a liquidated damages provision tied to late delivery.  Just by way of example, we might put into the OEM Agreement a provision saying something along the lines of delivery shall be within 30 days and for every day beyond thirty the Chinese manufacturer shall be required to pay US Company 1% of the purchase order price within ten days.

Perhaps more than any other contract provision, we tend to get blow-back on the delivery time provision from the Chinese manufacturer. Oftentimes when faced with the reality of having to pay a set amount for late delivery, the Chinese manufacturer gets really serious about delivery times and tells us that they simply cannot promise delivery within the previously “agreed” time frame.  Our client usually realizes it is better to get real agreement (even if longer than originally anticipated) before ordering, rather than getting late delivery after ordering.

The other, somewhat related issue we face on delivery times is that when our client comes to us and says it has agreed with its Chinese manufacturer to a 30 day delivery schedule, we then have to figure out 30 days from what.  We typically go with 30 days from the issuance of the purchase order, but oftentimes the Chinese company pushes for it to be 30 days from its receipt of payment or 30 days from its receiving proof of payment.

Bottom Line:  Certainty is important with respect to delivery dates and, without a doubt, the best way to achieve that certainty is a written contract, in Chinese (so that there is no doubt the manufacturer understands what is on the paper) clearing setting forth the delivery date.

The third reason to have a good contract is to put a little scare into your Chinese counter-party.  I call this the “bike-lock theory of Chinese contracts” and I wrote about this too way back in 2006, in China OEM the Smart Way:

The best solution for this is to prevent it from happening in the first place and the best way to do that is to choose the right supplier and use a good OEM contract.  When we draft OEM contracts for our clients, we always put in a provision precluding the Chinese manufacturer from subcontracting out production. Without exception, the Chinese manufacturers have agreed to this provision and, again without exception (at least as far as we know), they have always abided by it.  The reason for this is simple.  The manufacturer may have twenty some companies for whom it produces goods, but probably less than half of them forbid subcontracting.  When the Chinese manufacturer is so busy as to require subcontracting, it makes sense for it to first subcontract out work for those foreign companies for whom it is NOT prohibited by contract from doing so.  I am always analogizing this to bike locks.  Even the best bike lock cannot prevent all thefts, but its efficacy comes from the fact that bike thieves generally find it easier to steal a bike with a poor quality lock or none at all than one that is difficult to break.

Any contract that makes your Chinese counter-party think twice about messing with you has at least some value.  My law firm is constantly settling cases with Chinese companies based on well-written contracts.  Chinese company clearly owes our client a million dollars per a well written contract and we settle for $650,000.  Had it been in the United States, we might not have taken less than $850,000.  But had there been no contract, my firm would not have even taken the case and settlement would likely have been for nothing at all or something really nominal.

Having a well written contract does not mean you will always win your lawsuit if you are forced to sue on it. But it does mean you will have some leverage if things go wrong and it does mean you will at least have a chance. Having no contract means no chance. Hey, it’s your choice.

Ain’t no way am I gonna back down on this one.  Who’s with me? Renaud?

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.

Anything else?

My law firm is frequently contacted by American companies seeking our help in pursuing Chinese companies for providing “bad product.” We turn down at least 95% of these cases because we do not want to pursue them.

We typically do not want to pursue these claims because the American company’s contract with the Chinese company does not clearly specify the quality of product the Chinese company must provide. There are usually other problems with the contract (including, oftentimes, the lack of any contract at all), but this is usually the most glaring. I often explain the following to the American company:

I know you expected the ______ you ordered from ______ [Chinese factory] to work for more than a week, but you have to understand that China has levels of quality many tiers below anything that would be acceptable in the United States. Have you been there? Good, because then you have seen t-shirt people selling t-shirts in the street for 25 cents. Those shirts are of such poor quality that they are ruined after one wash. But nobody complains because they paid 25 cents for them and so they got what they paid for. I hate to say this here, but that is the exact argument your Chinese factory will make against you. That had you wanted your product to work for more than a week, they would have been happy to have provided you with such a product, but then you would have had to pay 50 cents more for it.  

Their response to that is oftentimes to insist that they have an email they sent at some point in the process “making clear” they wanted the product only if it is of “good quality.” I typically then point out to them that the term “good quality” in China is pretty much devoid of legal meaning and that even if it were deemed to have meaning, what constitutes “good quality” there is very different from what constitutes good quality here. 

I then sometimes lecture them as well on another difference between US/Canada/Britain contract law and China contract law, which is that Chinese courts rarely, if ever, look outside the four corners of a contract to determine how to rule on a contract dispute. Co-blogger Steve Dickinson recently explained this to a client:

If you think this may be an issue, we can include “complete agreement” language that makes clear that the Agreement documents control and that nothing outside the agreement has any legal effect. Normally, however, this is not done in China. This is because the Chinese look entirely at the written and sealed contract. They routinely ignore everything else (like emails) and they certainly do not include terms that come from a pre-contract writing from either of the parties. 

This is another of the many differences between Chinese (civil) law and U.S./Canadian common law. 

My co-blogger and fellow China Lawyer Dan Harris recently did an interview with AmCham on China joint ventures and a couple of follow up posts, entitled, Love The One You’re With. When China Joint Ventures Make Sense, and The China Joint Venture. It’s BACK!!!

We are writing about joint ventures so often these days because we are seeing a pronounced resurgence both in companies wanting to go into Chinese joint ventures and in companies coming to us needing legal assistance with their failed and failing joint ventures here in China. We have often expressed cautions about joint ventures in the past, and nothing we have seen recently causes us to change our mind.

In many cases we are not able to effectively assist the foreign party in a troubled JV because their original joint venture agreement has been so poorly drafted as to preclude any real assistance. We usually attribute this to the foreign company’s originally misinformed view that “China has no law” or that the “JV contract is not worth the paper it is written on.”

Based on these misguided views of Chinese law, the foreign joint venture participant failed to secure good legal representation when it went into the joint venture deal, leaving us with little or nothing to work with in terms of fixing the joint venture problems. The foreign joint venture participant has made basic mistakes that make it impossible to use the very effective Chinese laws and legal system to resolve the problems that have arisen in the JV. Though China’s courts do generally enforce foreign arbitral awards, the issues between joint venture partners more often hinge on issues relating to control and operations, which typically require a Chinese court ruling.

Some examples of the basic mistakes are:

1.  In order to resolve a joint venture dispute, the issue oftentimes must be resolved in China, either through litigation in the Chinese courts or through arbitration with CIETAC, BAC (Beijing Arbitration Commission), or some other legitimate Chinese arbitration body. Foreign partners often provide in the JV agreement, however, that litigation or arbitration must take place outside of China, either in the home country of the foreign partner or in some expensive and well known arbitration forum like Stockholm or London. This type of provision does little to nothing to protect the foreign partner and makes it impossible to resolve any disputes in China, where the problem exists.

By way of an example, many companies come to us complaining that the JV’s representative director has highjacked the operations of the China joint venture company and is operating without supervision and against the wishes of the board of directors. To effectively address this issue, it is imperative that we proceed in court in China directly against the rogue director. However, if the JV Agreement provides for jurisdiction outside of China, we are effectively precluded from taking such direct action.

2.  Our China lawyers are often called on to try to help foreign companies that are in deep trouble with their China JV for reasons stemming from their failure to hire their own independent legal and accounting advisor during the joint venture formation process. Instead of using their own independent counsel, these companies instead relied on the Chinese JV partner for all of the formation legal work. This is a guaranteed disaster. We have seen US companies that have put tens of millions of dollars into a Chinese joint venture, using no legal counsel at all, using the legal counsel of their joint venture partner, or using a local Chinese lawyer who has no experience with foreign joint ventures and no real incentive to protect their foreign client. We had one client who when he first came to us boasted of the great job his Chinese lawyer had done for only $600. When we pointed out how his joint venture so heavily favored the other side that his multi-million investment would likely never yield him a penny, we began to suspect he no longer thought of his counsel as such a bargain.

3.  Relying on a majority share interest to control the venture, rather than exercising effective control through the right to appoint the representative director and the general manager.

4.  Relying on a personal guarantee from the Chinese JV partner as a substitute for failing to properly document the project.

5.  Failing to provide clearly for protections for the foreign partner, assuming share ownership is sufficient to provide adequate protection.

6.  Failing to carefully monitor capital contributions and the use of contributions to capital, assuming that accounting reports will be adequate to reveal the fate of money contributed.

Though the above looks like a long list, I often see joint ventures where the foreign participant has made every single one of these mistakes and more that I have not mentioned. When this happens, we as China attorneys are severely constrained in terms of what we can do to help. But this is not because China has no law or because Chinese contracts are worth nothing. It is because the failure to properly form and manage the JV has made it impossible to proceed. The blame for this generally falls on the shoulders of the foreign JV partner, not on the Chinese side or the Chinese system.

Joint venture agreements are really no different from any other contract. The better the agreement, the less likely there will be problems and the more likely there will be a quick and inexpensive resolution to whatever problems arise.