Legal Considerations when Doing Business in China

Legal Considerations when Doing Business in China

Paul Lavery

Tuesday 3 September 2013

3 September 2013 – Legal Considerations when doing Business in China


Issues/considerations depend on manner in which you wish to do business

Are you establishing on the ground in China – e.g. establishing Chinese subsidiary, representative office or a Joint Venture with local company; or

Are you remaining established solely outside China but proposing to enter contracts with local Chinese companies (e.g. with Chinese outsource service providers, manufacturers, distributors or agents)



Establishing on the ground – Need to consider full array of issues from Chinese law perspective (incorporation/establishment options, employment law, contract law, tax law, local regulatory authorisations/approvals etc);

Remaining in Ireland but contracting with Chinese company – Considerations primarily relate to ensuring that agreements are binding and enforceable and clearly set out the commercial terms


Contracting with Chinese CompaniesOutsourcing Agreements

Manufacturing Agreements

Distribution Agreements

Agency Agreements


Chinese Contracts

Contract serves as:

Guiding star – overriding principles for the parties’ co-operation under the contract (similar to recitals in Irish contract)

Road map – on how to proceed towards the parties agreed goals

Check list – of rights and obligations

Trouble shooting manual – dealing with situations where matters go wrong – e.g. dispute escalation and resolution in amicable way


Contracting with Chinese Companies Example: Distribution Agreement with Chinese company

Chinese Company will be licensed to distribute your goods within China (and possibly manufacture those goods?)

Negotiation and agreement of commercial terms

Reflect the commercial terms in legally binding agreement

Consider how to ensure that the agreement will be valid and enforceable


Contracting with Chinese CompanyAvoid:

Oral agreements

Agreements with no express governing law or jurisdiction

Signing

Use of blue ink better than black ink

Company stamp/seal often expected


Contracting with Chinese Company Questions to Consider when contracting

Clarity of Terms (Do both parties accept the commercial terms of the deal – Are the commercial terms clearly set out?)

Consider Governing Law and Governing Jurisdiction of agreement

Chinese law or foreign law?

Chinese jurisdiction or foreign jurisdiction?

Reliance instead on mediation/arbitration?

If foreign law and jurisdiction chosen, will a judgment given in a foreign country be enforceable in China? If not, no point specifying foreign law and jurisdiction


Contracting with Chinese CompanyOption 1:

Provide that contract is governed by Chinese law

Submit to the exclusive jurisdiction of the Chinese courts

Ensure that the contract is written in Chinese

Chinese law firm will need to advise on drafting and negotiation of contract


Contracting with Chinese CompanyOption 2

Specify foreign law and foreign jurisdiction

Article 126 of Contract Law of the People’s Republic of China – Recognises Choice of foreign law subject to conditions

Article 244 of Civil Procedure Law of People’s Republic of China – Recognition of Choice of Jurisdiction subject to conditions


Contracting with Chinese Company Option 2 – Specify foreign law and foreign

jurisdiction – ConditionsAgreement in writingJurisdiction chosen has actual connection with the

contract and disputeDispute involves contract with foreign element or

foreign property rights Contract is not contrary to basic principles of

Chinese law or public interest and is not designed to evade mandatory Chinese laws and regulations

Enforceability of Foreign Judgment in China still needs to be considered


Contracting with Chinese CompanyEnforceability of Foreign Judgment in China still needs to be considered

Generally only enforced where reciprocal treaty agreement with China for the mutual recognition and enforcement of judgments – Only a few countries have such a mutual recognition

France, Italy, Spain have mutual recognition but not Ireland or the UK


Contracting with Chinese CompanyOption 3 – Arbitration

Provide for dispute to be referred to arbitration in a country which is party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”)

Governing law and place of arbitration should be clearly set out

Number of conditions to be satisfied which should be vetted by local counsel


Establishing on the Ground

Establishment will be subject to and governed by Chinese law

Consider Legal, Tax and other requirements for establishment

Appoint Chinese law firm to advise on establishment and ongoing obligations

Employment LawTax LawChinese company and contract lawLocal Regulatory Approvals/Authorisations



Establishing a presence – Range of approvals required for investment projects in China from local, municipal, provincial and state authorities

Consider options for establishment in China



Consider options for establishment in China:Local branch of foreign company - Chinese company law permits this, but is in practice only done for companies engaged in financial services or oil exploration

Representative Office – Option for those in the trade agency and service industries – restricted t0 “liaison and marketing activities”

Acquire local business - Certain restrictions are laid down by the Ministry of Finance etc on the extent to which foreign investors can hold interests in Chinese businesses.


Establishing on the Ground Consider options for establishment in China:Incorporate a new company locally – the set up of a

Chinese company (classified as a WFOE – wholly foreign owned enterprise) – simplest approval process with complete management control.

WFOE:- Limited liability; - no Chinese partner required so may be owned entirely

by foreign investors; - minimum capital requirements apply (for sole

shareholder company – approx US$16,000);- application reviewed and approved by commerce

authority in locality of proposed establishment;- up to 90 days approval processJoint venture with local company


Establishing/Investing in China

Foreign Investment Industrial Guidance Catalogue (2011 Amendment)

Divides industries/sectors into “encouraged”, “permitted”, “restricted” and prohibited” categories

Examples of “Encouraged”:Upgrading China’s manufacturing industryPromoting foreign investment in new energy, new materials and high end equipment

Encouraging development of the service sector



Manufacturing sector

Encouraged: - “green” garment production

Restricted: - rice and flour processing (Chinese investment must be in controlling position)

Prohibited: - Various categories of battery production



Healthcare sector

Encouraged: - Biological vaccine production

Permitted: - Clinic construction; medicine wholesaling

Restricted: - Blood product or drug production (Chinese investment must be in controlling position)



Modern services sector

Encouraged: - IP services

Permitted: - Commodity futures

Restricted: - Legal consulting


Establishing or doing business in ChinaEnsure you are aware of whether particular business is encouraged, permitted, restricted or prohibited

Ascertain regulatory requirements

Seek advice from Chinese law firm (either directly or via your existing lawyers in Ireland)

Remember importance of clearly drafted and enforceable written contracts


Paul Lavery

Tuesday 3 September 2013

Legal Considerations when Doing Business in China

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