U.S.--China Rule of Law Forum

Today, I had the distinct pleasure of attending the U.S.-China Rule of Law Forum. The U.S.—China Rule of Law Forum is an exchange program, sponsored by Senator Kaye Bailey Hutchinson (Texas), and it is hosted by Dean Attanasio at the SMU Dedman School of Law. Because of the high profile of the Chinese delegation and the lively discussions during the program, it is one hour well spent, and I’d like to share what I witnessed.

First, the Chinese delegation consists of a group of people from various legal backgrounds. Some are law professors, such as Professor Lixin Yang; some are from the Standing Committee of the People’s Congress; some are from the Ministry of Justice; some are from the Supreme People’s Procuratorate of China; and a few are from private practice; and a Grand Justice, Mr. Liu Jiachen of the Supreme People’s Court, was also a member. In sum, the delegation is good mix of people with substantial knowledge about the development and reform in China’s legal system.

Second, Madam Liu gave a 30 minute keynote speech, titled the Legal Situation and Law Reform in China. During her speech, she briefly highlighted China’s achievement in comprehensive legal reform since the late 1970s. She cited some interesting statistics: in the past 30 years, China enacted about 230 laws, 1000 administrative regulations, and over 10,000 local rules and regulations throughout the country. In the meantime, China also amended and appealed many laws to weed out those no longer in sync with the Chinese society. As a result of these developments, China has established political, social, economic relationships in a brand new legal system governed by law. And the establishment of the legal system has led to specifications of rights and duties of parties, methods of dispute resolution, and a fundamental state policy—rule by law.

Madam Liu was also quick to note the long way ahead of China’s efforts to build a society ruled by law. Much has been accomplished, yet much remains to be done. In the long way ahead, China is willing and ready to borrow from legislative successes from other nations, including those in the common law system. She specifically noted the legal accomplishments of the United States in building a system of the rule of law that works for the U.S., and in training “an army of a million lawyers.”

Her identification with the U.S. legal system quickly turned into a discussion about the importance of building individual legal systems appropriate for each sovereign nation. Each nation has the right to choose a legal system based its own historical, social, and economic backgrounds. And a recognition of the uniqueness of legal systems in different countries help build a world with diverse and colorful legal systems.

Then, Madam Liu calls on the U.S. and China to cooperate in building stronger mutual understanding on the rule of law. In the context of increasing globalization, nations need to work together to achieve justice, build equality, and resolve conflicts. To achieve that, many Chinese students are choosing the study of law, making law practice a fast growing professional area.

Third, I post only the highlights of the Q & A session that I was able to jot down.

Question 1 (SMU law student)—How much deference do courts give to the Chinese communist party opinions/directions in reaching their decisions?

Answer (Grand Justice Jiachen Liu)—Judicial independence is protected by the Chinese Constitution. The judiciary works very hard to try cases independently and their work is in line with the will of the people. Some people in the West misunderstand judicial independence in China, and ignores that China has chosen its own path for its judiciary, which serves China well.

Question 2 (SMU law student)—How will Hong Kong’s common law system mesh with China’s legal system in the coming years?

Answer (member from the Standing Committee of the People’s Congress)—Hong Kong is currently governed by its own Basic Law, under which judicial judgments are independent and final. Even though the judicial systems in China and Hong Kong are widely different, the Central Government and Hong Kong (SAR) Government can operate under the Basic Law to resolve differences. However, if issues concerning technicality cannot be resolved that way, the Standing Committee of the People’s Congress has the power and authority to issue its own interpretation, which will be controlling in resolving such technical differences. This has been done and been accepted by the people of Hong Kong.

Question 3 (SMU reference librarian)—China currently has a compilation system for laws based principally on the date of promulgation. What kind of progress has China made in creating a comprehensive code, like the US Code, to make research on Chinese law easier?

Answer (Member from the Standing Committee)—It is still a work in progress; and it has been a problem for our own researcher as well. We have made some progress in building a comprehensive legal database of laws and regulations. That should make researching easier if you have the URL to that website.

Question 4 (SMU student, me)—China recently revised its Lawyer’s Law to make lawyers’ lives easier. But one persistent issue still seems to loom at large. Article 34 of the Lawyer’s Law requires a lawyer to keep his client’s secret information confidential (i.e. past crime), but Article 84 of the Criminal Procedure Law requires any individual to report any information about crimes to law enforcement authorities. If we consider lawyers as individuals in the sense of the Criminal Procedure Law, there is an apparent conflict between the two laws. How should a lawyer deal with this issue in his/her practice?

Answer 4 (Law professor, Bingzhi Zhao)—As a law professor and a part-time practicing attorney, I hope to answer this question. On the surface, there seems to be a conflict. However, there is no direct conflict. If you look at the apparent conflict in the frame of the relationship between laws, it looks very different. Some laws are special, such as the Lawyer’s Law. Because lawyers enjoy an immunity from the reporting duty under the Criminal Procedure Law while representing a client, the conflict goes away in that situation. In the past decade since the promulgation of the Lawyer’s Law, this apparent conflict was consistently dealt that way.

[Sidebar: another delegate told me in private conversation that the Criminal Procedure Law will soon be amended, which will probably deal with the conflict.]

Question 5 (SMU law student)—Would you please talk about China’s efforts in intellectual property protection?

Answer—IPR protection is both a Chinese and a global issue. Since China’s entry to the WTO, China has paid more attention to IPR protection in a three-pronged approach: legislation, administrative agency enforcement, and police involvement. In terms of progress made in China, here are the statistics:
2002—2006, about 54,321 IP cases were filed in various courts; 52,000 cases were adjudicated by courts. Compared to the same 5 year period between 1997 and 2001, those numbers represent a growth of 145% and 141%, respectively.

By 2006, China has 172 courts devoted to try IP cases.

China has 16,600 judges specializing in IP cases.

Question 6 (SMU law student)—What type of legal regime does China have in dealing with product liability in light of the recent product recalls?

Answer (Professor Lixin Yang)—China actually borrowed heavily from the American and British common law in creating its own product liability law. In 1986, the General Principles of Civil Code was passed, whose Article 122 is devoted to tort liability. While China is in the middle of creating its comprehensive Civil Code, the Tort Law will be lifted out of general provisions and be an independent body of law in the Civil Code. In a civil law system, it is rare to have an independent Tort Law. And the Tort Law will probably come out either next year or in 2009.

I hope that you enjoyed my long notes from this function. It was an incredible experience for me.

China’s Judiciary: Past, Present, and Future

China Law Professor Blog’s recent post alerted me to the video recording and outline of a speech delivered by Justice Wan Exiang (万鄂湘) at the Organization of American States.

Justice Wan Exiang had his legal training in Wuhan University in China and at Yale Law School, and he is recognized as an expert in international law. He is a Grand Justice of the Supreme People’s Court of China, and teaches at the Wuhan University Law School. Here is his resume in Chinese; here in English.

On September 25, 2007, he delivered his speech, in his own words, as a law professor so as to promote open discussion on the reforms of China’s judiciary. The speech last about an hour, but he did a nice job of sketching out the grand schemes of reforms undertaken by China as well as work that remains to be done.

It is well worth the time to listen to the speech in its entirety. I advise you to read the outline first so that you don’t miss anything in listening to it.

Astute Advice for All Advocates Dealing with China

I just read through the feature article in the May 07 issue of the New England In-House. Titled “Made in China: In-House Lawyers Confront Explosion of Chinese Business Activity”, this is a well researched article with insightful advice that transcends the in-house counsel circle. I tip my hat to John Cunningham for packing so much good stuff in so little space. His article proceeds in five subsections: cultural adaptation, laws & regulations, potential risks, China’s lures & attractions, and due diligence & planning.

He starts off by establishing the background of his article: "The China boom is in full swing, and sooner or later your company will be doing business in China. If you aren’t there now, one of your competitors probably is."

Citing the explosive growth of the Chinese market and its attractions to U.S. companies, Cunningham advises that:

in-house lawyers have to get up to speed now on the intricacies of doing business in China – from bridging the cultural divide to knowing the key differences between U.S. and Chinese laws and regulations.

Then he delves into “crossing the cultural divide” by stating that adapting to the Chinese culture is “perhaps the biggest hurdle” for many foreign firms. To illustrate how to adapt, Cunningham has a few excellent quotes from some experienced China hands (Zhong guo tong, 中国通):

“You must be flexible in your approach to business, and learn to do things the Chinese way,” said Edward Epstein, who works in the new Shanghai office ofAtlanta-based Troutman Sanders.

For example, “time is not money there,” Epstein explained. “And deadlines can’t be
used as a negotiating lever because they just have to get comfortable with you.”

“You must establish a relationship before you negotiate a contract, because in China you only do business with friends,” said Lucia Lian of Goulston & Storrs in Boston...and “you should never talk business during meals.”

Cunningham wraps up the cultural adaptation part with:

“Companies who fail don’t adjust to Chinese culture and values, don’t understand the [Foreign Corrupt Practices Act], don’t localize supply, don’t train and promote Chinese to top levels of their business, or don’t make a commitment that top management physically go there at least four times a year,” Daniels said. [Jack Daniels with Eastbridge Partners]

With respect to Chinese laws and regulations, the article stresses the differences between the U.S. and China; it calls for good Chinese counsel in any “entry team”, because,

For Americans, the Chinese system may look similar, but it is not. While both the U.S. and Chinese systems have central, provincial and local levels of government, and many written regulations, the similarities end there.

Because China has a civil law system, the codes, statutes, and regulations are readily available in Chinese on Chinese websites. Two big problems are inherent: the ability to read and understand them; the accurate interpretation of the law. With assistance of a China-trained lawyer, the first problem will dissolve, but the second problem presents greater challenges, since,

“The rule of law means something different in China,” said Robert Woll of WilmerHale’s Beijing office. “It is more of a planning and control mechanism than a predictor of outcomes. The regulatory framework looks very complex, but you have to understand the agency motivations more than the language to get interpretations
right.”

Additionally,

Epstein explained: “An enforcement or approval authority interprets the law with
great discretion there, and that can work in your favor or it can work against you. You can often get an approval in one place and a rejection in another based on the same law.”

Other legal issues with potential for trouble in China-related deals, dealt with in the article, include IP protection, dispute resolution, U.S. anti-corruption law (FCPA), export controls, anti-dumping enforcement. He cautions that U.S. companies need to take these into careful consideration.

Risks abound in a China deal, but the most salient point made in the article is “vetting your partners in any transaction”, which I touched upon in one of my past posts. Another good point made here is the mindset about doing business in China, which is, according to Lian (a bilingual lawyer from China), not just about competition and is also about building relationships.
Cunningham then highlights the lures of the China market. An expanding middle class of more than 200 million is a big piece of consumer pie to grab. Besides the known areas of attraction such as, real estate development, venture capital, low cost manufacturing, sectors like financial services, alternative energy could present huge opportunities because of government incentives and market potential. Therefore, "weaving China into investment strategies is now practically a given."

However, he also cautions:

The best time to go is before you’re pressured into it – when you have good markets and technology, but have time to plan your future in China.

Because of the lure of the China market, Cunningham offers wise counsel through his China experts:

“China has a seductive appeal, but you can’t check your common sense at the
border,” warned Edward Epstein.

(It is hard to imagine that people would do that, but stranger things have happened. Really.)

Cunningham then quotes Samuel Shafner of Burns & Levinson in Boston, who suggests that Americans heed the Art of War-- Know yourself and your enemy, and he said:“It is much more important to have intelligence on the ground in China than anywhere else in the world. You have to find people who know China, who know your business and are trustworthy.”

Beyond that, tax and currency repatriation should also be part of the due diligence and strategic planning.

Overall, this article is an excellent checklist for those in China-related deals, not just in-house lawyers.

Read the whole article here.

Hepatitis B Carriers: Will Chinese Law Protect Your Job & Dignity?

Hepatitis B is the nemesis of more than 100 million people in China. Having this disease often means you face blatant discrimination in your job, career, and education. Due to the large number of people affected by the disease and the “disgrace” associated with it, more and more people have begun to speak out against discrimination of Hepatitis B carriers in China. Thus, on May 18, 2007, the Ministry of Labor & Social Security and the Ministry of Public Health jointly issued an administrative document. Bearing the title, Opinions on the Employment Rights of Hepatitis B Carriers, this document represents the first step taken by the Chinese government in protecting the rights of more than 100 million of its own people. (Applaud!)

This opinion provides that:

Employer shall not refuse to employ or cease to employ a worker for being Hepatitis B positive except for fields of employment as provided in the laws, administrative regulations, and mandates issues by the Ministry of Public Health.

国家法律、行政法规和卫生部规定禁止从事的易使乙肝扩散的工作外，用人单位不得以劳动者携带乙肝表面抗原为由，拒绝招用或辞退乙肝表面抗原携带者。

It also gives the employees a right to privacy and employers even though it recognizes that employers have the right to conduct physical exams.

Overall, this opinion is a feeble measure in light of the magnitude of the problem. For those 100 million plus Chinese folks, it is not just the torture of the disease itself that wears them down; what is worse is the stigma associated with Hepatitis. And the worse of all, their livelihood is in jeopardy just because they have the disease. Stronger and more comprehensive legislation must be introduced to protect the rights of more about 1/10 of the Chinese population.

Currently, a new law, Employment Enhancement Act (Draft) (《就业促进法》（草案)）(Chinese only), which is under debate and consideration in the National People’s Congress, does contain prospective measures aimed at employment discrimination in Article Five:

Employees shall not be discriminated on the basis of nationality, race, sex, religion, age, and physical disability.

草案第五条第二款规定：“劳动者就业，不因民族、种族、性别、宗教信仰、年龄、身体残疾等因素而受歧视。”

Prominently missing from protection under this proposed law is discrimination of people with Hepatitis B.

These 100 million strong people deserve equal treatment, a right to employment, a right to a decent livelihood, and most importantly social dignity which often flows from employment, education, and a decent livelihood.

Besides ending with a plea for protection for these folks, I also want to recount one of my personal encounters with a Hepatitis B carrier. It is one that I shall never forget.

She [to protect her identity, I will not reveal her identity] was my best friend’s girlfriend. Young, pretty, diligent, and smart. After years of study, and after passing the grueling Chinese college entrance exams, she made it into her dream college in the wondrous city of Wuhan, Hubei Province.

One day, I got an emergency phone call from my best friend, who was in a state of shock and panic. He pleaded for help for her girl friend, who just arrived in Wuhan for official enrollment. When she got to Wuhan, the school notified her that she had to go through a physical exam. That notice was like lightening out of the blue, or in Chinese, a bucket of cold water over her head that chilled her burning desires to embark on a path to a bright future for a country girl. The notice had put her hopes, dreams, and the possibility of a decent life in jeopardy because she is a Hepatitis B carrier. If the physical revealed her little secret, her acceptance to the college would be revoked.

In China, when your best friend calls for help, you do whatever you can to help. As simple as that. I had to find a solution for my best friend’s girlfriend. [Before I proceed further, I plead 5th Amendment protection. ] Someone came up with the brilliant idea of finding someone that looks like my best friend’s girlfriend, and let the look-alike go for the Hepatitis B part of the physical…

Yes, you guessed it. A replacement was found and my best friend’s girlfriend kept her little secret and a chance to a better future.

Years have passed since the date of that physical exam. I have always struggled with that incident. Something seemed wrong and out of place. She should not have to hide a medical condition probably caused by an incompetent doctor or nurse. She should not be robbed of a chance to a better life if she had not committed fraud.

So, will the Chinese law protect people like her in their employment and safeguard their sense of dignity?

It should. But I don’t know.

China’s New Labor Contract Law (II)

After the promulgation of the Labor Contract Law of the P. R. China, the legal community interested in Chinese law is abuzz with excitement and curiosity. For those who have not been able to view the full text in English, get it here. If you can read it in Chinese, get it here. Further, I suggest that you read the Labor Contract Law in conjunction with the Labor Law of P. R. China, and for that in Chinese view it here. (English version, here.) If you are a labor and employment lawyer in need of a thorough understanding of Chinese labor law, you might also want to read the Ministry of Labor’s Several Opinions on the Implementation of the Labor Law of the P. R. China (Chinese only). For regulations on minimum wage in China, you may want to read the order issued by Ministry of Labor and Social Security in 2003. (Read it here.)

Sweeping the New Labor Contract Law is on paper, but I agree with the sentiment expressed by Dan Harris of China Law Blog where he stated “Enforcement is Key.” As the law aims to extend protection to multitudes of workers from China’s vast countryside, enforcement of this law would be more problematic since so many of those from the countryside sleep on their rights for many reasons. They might simply not know what their rights are; or, they might not care to have their rights protected for the sake of getting or keeping a job.

For another comment I wrote on China's Labor Law, please read:

What Foreign Companies Need to Know About Chinese Labor Law

China's New Anti-Bribery Measures & More

Zheng Xiaoyu’s execution yesterday, amid China’s perfect storm of food and drug safety concerns from inside the country and beyond, did not surprise me. He died not just for accepting more than $850,000 in bribes for giving approval to sub-standard drugs. His death serves multiple political purposes, one of which I discussed here.

Corruption in the Chinese FDA is but a small mirror reflecting deep-rooted problems on a ginormous (gigantic + enormous) scale in China. In fact, corruption has become so rampant that even the President knows and admits that it affects the ultimate fate of the Communist Party. Thus, the government has put forth efforts, utilizing conventional and unconventional means to combat corruption among governmental officials, such as Zheng Xiaoyu, the former FDA chief of China. One of the most recent measures taken by the government appears in the form of a joint opinion issued by the Supreme People’s Court and Supreme People’s Procuratorate of the P. R. China. Titled Several Opinions on the Relevant Laws in Dealing with Accepting Bribery (“Joint Opinions”), this document spells out the types of activities to be under watch. It lays out six categories of emerging bribing venues and how they would be combated.

Here, I will try to summarize the Joint Opinions.

The six categories of bribing activities are as follows:

1. Bribery in the form of transactions whereby governmental employees assist a bribing party gain interests by:
a. selling the governmental employees automobiles or houses at prices markedly lower than reasonable market rates;
b. buying the governmental employees’ automobiles or houses at prices markedly higher than reasonable market rates;
c. or other illegal transactions of properties.

2. Bribery in the form of acquiring corporate stocks without monetary payment or investment.

3. Bribery in the form of establishing joint ownership in companies or investments whereby governmental employees assist a bribing party gain interests.

4. Bribery in the form of receiving payback from stock market investments, stock options, or other types of investments entrusted to a bribing party who in return acquires interests due to the governmental employees’ position in the government.

5. Bribery in the form of income gathered from illegal gambling whereby the bribing party gains interests from governmental employees for providing interests in return.

6. Bribery in the form of obtaining employment for family members in return for furnishing the bribing party with conveniences or interests whereby the family members receive salary without actually working.

Government employees engaging in activities listed above would be, theoretically, prosecuted and bear criminal liability. I do not have a lot of sympathy for corrupt officials who abuse their offices of trust and responsibility, but I do share the concerns that Mr. Nicholas Zamiska raised in his WSJ article titled China Targets Bribe Takers, But What About Givers? (subscription may be required.)

Mr. Zamiska states:

But what is less certain is China's commitment to addressing the possibly more-widespread practice of offering bribes, not just the high-profile government officials who take them.

He then quotes a Hong Kong law professor who sheds a little culture light on the reasons behind the Chinese government’s apparent disinterest in going after bribe givers:

"As a policy, the Chinese prosecution -- they normally don't go after the people who bribe. It's been very consistent," says Fu Hualing, an associate professor on the faculty of law at the University of Hong Kong." It doesn't matter if it's the lawyers bribing the judges or the companies bribing the officials."

Dr. Fu says bribery is a part of Chinese society and that the public and the government look at those who bribe with more sympathy than the government officials who accept bribes." If you talk to people on the street, they will think that it's the government officials who should be prosecuted, not the people who bribe," Dr. Fu
says.

No matter how insightful and incisive Dr. Fu is in his observations and assessment of the bribery scene in China, there needs to be, in my humble opinion, a resolve on the part of the government to sew up this gaping hole in the country’s crusade against corruption.

With respect to “bribery is a part of Chinese society,” I keep wondering whether Dr. Fu meant it is something that cannot be changed easily. If people are sick and tired of bribery, as I am sure they are, they might welcome a fresh idea of prosecuting bribe givers. And in response to “If you talk to people on the street,” I’d argue that people on the street 1) do bribe every day; 2) are probably ill-informed of incidents where some people bribe regularly for government contracts or approvals. If provided with a new way to look at curing the country of this cancer, the people might just buy it.

China’s New Labor Contract Law (I)

On June 29, 2007, the Standing Committee of the National People’s Congress passed the new Labor Contract Law of the P. R. China (“Labor Contract Law”). After four committee rounds of reading, consultations, and 190,000 or more public pieces of comments, the new law will go into effect on January 1, 2008, and it is expected to be a milestone for protecting workers’ rights across China.

Through a series of blog posts, I intend to introduce a snapshot view of the key clauses set forth in the Labor Contract Law. I hope that readers will have a better understanding of what the new law requires and expects of parties to an employment relationship, and that the enactment of another piece of legislation is but one small step forward in China’s long struggle to build a country under the rule of law.

Statutory Scope of the Labor Contract Law

This law applies to all corporations, privately-owned entities, Private, non-enterprise units and organizations who establish labor employment relationship with workers. Likewise, government agencies, institutions and social groups must comply with the labor contract law in their labor employment relationship with employees.

The net cast by the legislators is wide enough to afford broad protection to employees, workers, especially migrant workers from the countryside. Prior to the enactment of this law, most migrant workers enjoyed little to no legal protection, and they fell through the crack of the Lab law. In recent years, there have been widespread practices of abuses, mutilations, and downright savage treatment of those migrant workers. The slave worker scandal that broke out last month in Shanxi and Henan Province involved hundreds of migrant workers being abducted or forced into slave labor with little to no pay. The savagery gripped the world and shocked conscience of the country. At the same time, it revealed the extent of labor abuses despite the existing labor laws and regulations. In a sense, this law could not have arrived at a better time.

Time to Raise the Bar on Professional Ethics for Chinese Lawyers? (II)

Duty of Confidentiality

Confidentiality is the bedrock of an open and trusting relationship between a lawyer and his clients. Confidential information is what a lawyer learns from or as a result of representing a client. Such information should be kept strictly confidential and secret unless exceptions apply. See ABA Rule 1.6

The Current Lawyer’s Law and Ethics prohibit a lawyer from divulging “national secrets, clients’ trade secrets, and privacy of parties” learned by the lawyer during representation. What is protected by confidentiality is, as seen, limited to national secrets, trade secrets, and personal privacy; to further comprise the safeguard of confidentiality, personal privacy is not defined and its scope not delineated. In China, personal privacy does not get as much protection as in the west where a higher premium is placed on it. Additionally, in representations where trade secrets are not of concern (i.e. an ordinary breach of contract case), clients are out of luck in term of confidentiality. Simply put, duty of confidentiality as stated in the Current Lawyer’s Law and Ethics does not provide sufficient protection to clients.

Amendments to the Current Lawyer’s Law expand the scope of information to be protected by confidentiality. Article 42 § One maintains the original confidentiality language; but Section Two inserts the difference. It provides that: “With respect to information gathered during the course of the representation which is adverse to clients’ interests, lawyers have no duty to testify and report such information unless…crime or against public interests…”

Positive step forward this amendment is, but this new provision does not go far enough to impose an affirmative duty to maintain the secrecy of information adverse to the interests of clients. Contrary to the ABA Rules, which allow disclosure under limited conditions, the Amended Law states apparently that a lawyer has no duty to disclose under most circumstances (excepting info about criminal activities and that which affects national security and major public interests), which makes such disclosure permissive. Will permissive disclosure of clients’ confidential foster better communication between clients and their lawyers? One surely hopes so. But if I were a client, I’d hesitate talking about certain things, not even with my Chinese lawyer.

Time to Raise the Professional Ethics Bar for Chinese Lawyers?

You bet!

Undoubtedly, many Chinese lawyers adhere to their code of professional conduct, and they operate with utmost ethical conviction. Co-existing with such honorable professionals in China is, however, an often times unclear set of ethical rules insufficient in regulating a fast growing profession—lawyering. At the end of 2006, China had more than 130,000 lawyers and 13,000 plus lawyer firms. Law on Lawyers of the P. R. China (“Current Lawyer’s Law”) was last amended in 2001. Rules of Professional Ethics and Discipline (“Ethics Rules”) was accordingly revised in 2001 to reflect the changes in the law. On June 24, 2007, amendments to the Old Lawyer’s Law were discussed and some higher standards might be adopted for Chinese lawyers.

Duty of Loyalty

Under the Current Laywer’s Law and Ethics Rule, a lawyer is forbidden to represent both sides of the same conflict. Similar to the American Bar Association Rules (“ABA Rules”), the Chinese rule is a bright line rule, disallowing representation where a concurrent conflict of interests is present.

The new proposed law adds some more restriction to a lawyer’s scope of representation. It requires a lawyer to avoid conflict of interests in joint representations, and to shun conflicts between the lawyer, his close families, and the lawyer’s clients. See Article 43 Draft Amended Law on Lawyers 2007. Obviously, this is a big problem in China where family ties are stronger than those of some other countries, and a close relationship generates a higher possibility for conflict of interests where the lawyer and his client’s interests diverge if the lawyer’s family members are involved in the same transaction in question. This additional requirement is, to my mind, a bold step toward clearly drawing the line in the sand for the lawyer where conflict of interest might surface in his/her practice.

Furthermore, the new amended law expressly calls for lawyers to conduct conflict checks prior to representation. In actual practice, many lawyers probably have already been doing this to avoid conflicts. However, an affirmative duty to run a conflict check sets a bright line rule easier for all to see and follow.

Unfortunately, this amended law still does not address loyalty to former clients. The ABA Rule 1.9 states that a lawyer shall not represent new client in the same or substantially related matter whose interests are materially adverse to a former client absent written informed consent from a former client. Without the affirmative duty of loyalty to former clients, a lawyer can turn on his own clients while not offending his duty of confidentiality to them. Hopefully, this issue would be raised before the formal adoption of the new Law.

Duty of Confidentiality—(to be continued…)

American Passport & China Franchise Registration

What do getting an American passport and registering a franchise in China have to do with each other? Normally, I would say NOTHING unless you have to register your franchise personally in China (which by the way is totally unnecessary).

Now, I think one word accurately describes them both---hard.

If you are an American and you need a passport to travel this summer, my deepest sympathy goes to you for what will have to endure to acquire it. Images of people encircling a passport office in the summer heat makes me feel lucky about my passport experience in China seven years ago.

The Bush Administration initiated a new security rule requiring all U.S. citizens to show their I.D. and proof of U.S. citizenship at border crossing. (Read about it here.) This requirement threw Americans quiet a bit, and a large number of Americans began to apply for a passport at the beginning of 2007. Passport offices, faced with a sudden increase of applications, are not equipped with the necessary personnel and equipment to process the applications, thus generating a back log of applications. When travelers figured out that if they do not do something to speed up the application process, they would not be able to leave the country as planned. Hence, the long lines.

The root of the problem is governmental regulations without the requisite resources to carry them out.

Chinese franchise regulators have created just the same problem. Three pieces of franchise regulations went into effect on May 1, 2007:

Regulations for the Administration of Commercial Franchising Operations
Commercial Franchise Registration Management Measures
Commercial Franchise Information Disclosure Management Measures

These new regulations did away with pre-approval in order to franchise in most industries in China. However, they impose mandatory registration and disclosure duties on franchisors. For American franchisors, registration and disclosure are nothing new because disclosure is required under the FTC Franchise Rule, and 15 states require registration as well. Registration of franchises, however, is new to both Chinese franchisors and regulators in that it has not been done before, and administrative glitches abound, to say the least.

Both local and central governments are not adequately equipped and prepared to implement the registration rules. Registration of a franchise in China involves a large quantity of paper work to be reviewed by regulators, and documents filed by franchisors are to be archived by the government. In addition, franchisors are required to amend material changes and file annual reports with the regulators. These mandates inevitably necessitate personnel, equipment, office space, and other resources.
A lack of planning and preparation is not the end of the story. At the end of 2006, China has about 26,000 franchise systems in place according to an industry report. Mandatory registration requirement means all of the 26,000 plus franchise systems must be registered before May 2008 to avoid administrative penalties. Imagine the amount of documents, the volume of phone calls, and number of inquiries that the regulators would have to keep up with. I am not even counting all of those foreign franchisors impatiently waiting to cash in before the 2008 Olympic gold rush.

The Chinese franchise regulators are not prepared, if not overwhelmed, to carry out rules made by the government.

With due respect to regulators in China and the U.S or elsewhere, regulating personal or commercial activities ain’t as simple as passing a law (sorry to state the obvious). Before making people do or not do something, it benefits all if the government would do a little bit more planning.

Please!

China’s Anti-monopoly Law: A Second Look

The Standing Committee of the People’s Congress read the draft anti-monopoly law for the second time on June 24, 2007. Six new proposals (Chinese only) have been added onto the draft law. Since there is so much hype about the much anticipated law, I will detail what was added in the 2nd read.

1. The central government shall formulate and implement regulations to strengthen and improve macro control, and to effect a unified, open, competitive, and orderly market system.

国家制定和实施与社会主义经济相适应的竞争规则，加强和完善宏观调控，健全统一、开放、竞争、有序的市场体系。

The overall policy concern underlying this addition is to achieve a balanced and coordinated relationship between anti-monopoly and other economic policies.


2. Operators can legally combine and merge through fair competition and voluntary association to expand the scale of operations, and improve their market competitiveness.

经营者可以通过公平竞争、自愿联合，依法实施集中，扩大经营规模，提高市场竞争能力。

This addition is aimed at achieving a balance between combating monopoly and allowing Chinese companies to join forces against global competition. However, in order to accomplish large scale mergers, operators must face a proposed western-style legislative hearing in order to effectively prevent monopoly.


3. Operator in dominant market positions may not abuse their position to exclude or restrict competition.

具有市场支配地位的经营者，不得滥用市场支配地位，排除、限制竞争

This new rule corresponds with # 2. As many developed countries allow companies to gain dominant market positions yet at the same time regulate against the manipulation of such position to the detriment of trade, China sees that it should adopt similar antimonopoly rules that keep companies in check once they become big enough to be able to abuse its market power. During the 2nd read session of the law, the issue of price fixing was also raised.


4. State-owned companies with a national franchise are to be scrutinized in their pricing.

专营专卖将被严格监控

There has been growing dissatisfaction in China with state-owned companies in many industries, i.e, telecom, oil & gas, and other utilities. These companies seem to be immune from market forces in that they charge unreasonable fees for their products and services. This new provision represents an attempt to keep state-owned companies in strategic industries on the national pedestal yet scrutinize their commercial activities relative to consumer protection.


5. Industry associations should strengthen self regulation to guide the operators to compete legally, and to maintain the market competition order.

行业协会应当加强行业自律，引导本行业经营者依法竞争，维护市场竞争秩序。

Industry associations wear a semi-governmental hat. It has been given the responsibility of guiding players in relevant industries to play by the rules of the Pricing Law fair competition regulations.


6. Foreign mergers and acquisitions may not endanger national security

外资并购不得危及国家安全

This provision places national security checks on acquisitions of domestic firms. Mr. Paul Jones has a very interesting comment on this, and I quote here in full:

The draft has been amended since the first reading to include provisions regarding a review of mergers and acquisitions with regard to security considerations. The Chinese version of the article on this topic specifically mentions the concern expressed in the U.S. regarding the proposed acquisition of Unocal by a Chinese company. This aspect does not appear in the English language news stories that I have seen.

Pepsi’s Storm in China Rages on

In my last post about Pepsi’s “Blue Storm” trademark infringement litigation, I summarized the Zhejiang Province People’s Supreme Court’s holding. The Court basically ruled Shanghai Pepsi Co., Ltd. (“SH Pepsi”), one of Pepsi’s joint ventures in China, infringed on Lanye’s rights in the “Blue Storm” trademark, and it ordered SH Pepsi to pay damages in the amount of ¥ 3 million. It also ordered a public apology to be issued by SH Pepsi in a Zhejiang newspaper. The deadline for SH Pepsi to comply with the orders has passed.

SH Pepsi is in the process of applying for the Zhejiang Province People’s Supreme Court to reconsider its decisions. So, it seems that the storm continues.

On the one hand, I understand why SH Pepsi has determined to storm on. It probably has spent millions in the “Blue Storm” advertisement campaign, which might have involved contracts that obligate Pepsi. Given the high stakes, SH Pepsi does not want to and cannot afford to throw in the white tower yet.

On the other, SH Pepsi’s perseverance in this case, judged from the outside, seems misplaced. Litigation of this scale and consequence generates bad press from all sides. Often times, big companies try to avoid bad press at all costs. Pepsi apparently does not share the same PR strategy here.

One more thing about this case that keeps bugging me is why Lanye did not join the other Pepsi joint ventures in China in the lawsuit. They are all involved in the same alleged infringement in various parts of the country. For the life of me, I failed to see the reason behind it other than legal malpractice.

Wahaha v. Danone: My Arbitration is Better Than Yours

Ok, this is getting really interesting!

Remember that Danone submitted the whole dispute to the Stockholm Institute of Arbitration on May 9, 2007? The arbitration is pending there in Sweden.

Remember that Wahaha also applied to have the Wahaha trademark transfer portion of the dispute with Danone arbitrated in the Hangzhou Arbitration Commission (“HAC”) on June 13, 2007?

In my last post, I was not sure whether HAC would take the case since the matter, on a bigger scale, is pending in Sweden.

But, surprise!! HAC accepted the petition for arbitration the very next day on June 14, 2007.

According to a report, Wahaha wants the HAC to determine whether the trademark transfer agreement, as a matter of law, is void since the Chinese Trademark Law requires such transfer to be approved by the China Trademark Office at the time of transfer (1996).

My hunch is that this might be Wahaha’s strongest argument. Wahaha Group in fact competed against Wahaha-Danone joint ventures; Wahaha Group actually used the trademark without the approval of the joint venture pursuant to the joint venture agreement. Therefore, without attacking the legality of the contract, Wahaha will have a very tough job in convincing the tribunals or a jury.

The next question that I anticipate to be raised after the “verdict” on the transfer issue is whether the contract in its entirety will be held as void. In my previous post, I discussed that Chinese Contract Law allows per se illegal clauses to be stricken in an otherwise enforceable contract. Assuming that the trademark transfer agreement is held as void by the HAC, will the original joint venture agreement (“Original Agreement”) survive the ordeal?

From a legal perspective, the rest of the Original Agreement should stand and continue to be effective given Article 56 of the Chinese Contract Law. But the really issue is what good is there for Danone if the Trademark transfer portion of the contract is void. Without the right to the Wahaha trademark, Danone’s joint ventures in China would only be a shell without its core value with which the Chinese consumers identify. Of course, Danone can rely on its own trademarks acquired elsewhere, but that is the topic of another day.

Wahaha v. Danone: Partnership at Grace’s End

When Danone Asia Pte Ltd. (“Danon Asia”) and other Danone subsidiaries located in Asia submitted the dispute to arbitration in Sweden, things between the two partners have turned from the good, to the bad, then to the ugly. And Danone has hired the British law firm Freshfields to represent it in the Swedish arbitration deal. As a side note, Article 26 of the Joint Venture Agreement stipulates that disputes between the contracting parties, if unresolved, are to be arbitrated in the Arbitration Institute of the Stockholm Chamber of Commerce.

My research reveals some of the details of Danone’s contentions and complaints in the arbitration. The plaintiffs/petitioners are: Danon Asia, Jinjia Investments Ltd., Myen Ltd., Novalc Ltd. The defendants/respondents are: Wahaha Group Ltd., Wahaha Shiye Ltd., Hangzhou Food Ltd., Hangzhou Wahaha Investments Ltd.

The pith of Danone’s complaints is that Wahaha Group and its non-joint venture companies violated the original Joint Venture Agreement (“Original Agreement”) between Danone and Wahaha Group, and that such violation consequently resulted in the infringement of the trademark transfer clauses of the Original Agreement. Danone alleged that the defendants, without approval from the joint venture companies, manufactured products that are same as those of the joint venture companies. These products competed against the joint venture companies’ products, injuring the interests of the joint venture companies.

In addition to the corporate defendants, Danone also joined Mr. Zong, the former chairman of the board of directors of the joint venture companies and the man behind all the non-joint venture companies, as a defendant in the arbitration. Danone, expectedly, complained of Zong’s violation of the non-compete agreement (“NCA”) and non-disclosure agreement (“NDA”). And it also alleged that Zong created conflict of interests, violating his duty to the joint venture company as a board member.

In an attempted strategic move, Zong submitted the same case to the Hangzhou Arbitration Commission on Wednesday (June 13, 2007), hoping to capture a little bit of the home-court advantage. He avers that the trademark transfer clause in the Original Agreement is void for violation of the Chinese law at the time of contract in 1996, and that Danone fraudulently induced Wahaha into the contract.

From a legal stand point, Zong is caught in a tight spot. First, his choice of venue for arbitration is against the express provisions of the Original Agreement, notwithstanding his “need” of a friendly forum. Second, the disputes have already been accepted by the Stockholm Arbitration Institute, where Zong and the other four non-joint venture companies are defendants. So, whether the Hangzhou Arbitration Commission will dismiss the petition remains a very curious legal and possibly political riddle.

And then, to make thing a little more uncomfortable for Mr. Zong, Danone lit a fire in his back yard where he could not even get to. Danone’s lawsuit in Los Angeles against Ever Maple Trading Ltd., Hangzhou Hongsheng Beverage Co Ltd., and Zong’s daughter & wife really added “insult to injury.” Zong’s immediate response to this suit is to resign his position on the Danon-Wahaha Joint Venture board, which demonstrates how enraged he might have been. Aside from making him comfortable, Danone’ choice of forum in California could not have been better since here Danone is immune from the heat of nationalism manipulated by Zong, local politics in Hangzhou (the city is a shareholder of Wahaha Group, remember?), and unpredictable courts.

Good move, Danone! Smile…

[Tomorrow, I will talk about what I think Danone did wrong. Don’t laugh yet.]

Wahaha v. Danone: Who Will Have the Last Laugh?

The Wahaha and Danone dispute appears to have been kicked into high gear.

Following Danone’s lawsuit in California state court against a subsidiary company of Wahaha, the former board director of the Danon-Wahaha Joint Venture, Zong Qinghou, announced on June 13, 2007 in a press conference that he would submit the dispute between Wahaha and Danone to arbitration in China. Specifically, the dispute involves a trademark transfer agreement Wahaha and Danone. The venue of arbitration is the Hangzhou Arbitration Commission.

In order to follow the development of dispute, which has gone global literally, it is better grasp the chronology of the relationship between Wahaha and Danone.

First, the occasion warrants a brief intro of the players. Danone is currently one of the world’s leading global corporations in fresh dairy products and bottled water, and its production and sales spans around the world. Wahaha is a bit more complicated. Wahaha Group consists of three large blocks of corporate entities. The first is the original Wahaha Group Ltd., and the City of Hangzhou owns 46% of the stock, and the rest of stocks of the company are unevenly distributed among Mr. Zong, the management, and employees (before 2000, Wahaha Group was a solely state-owned enterprise). The second one is the Wahaha-Danone Joint Equity Venture Group. Wahaha Group Ltd. Controls 49% of the shares, and Danone holds 51%. The third bunch is a host of non-joint venture companies established and operated in essence by Wahaha Group Ltd. and Hangzhou Wahaha Food Products Ltd.

Second, the following is the chronology of the relationship between Danone and Wahaha.

1. 02/29/1996-----Joint Venture Agreement between Wahaha Group Ltd. and Danone, including trademark transfer agreement, non-compete agreement, and confidentiality agreement

2. 03/28/1996-----Wahaha Group Ltd., Danone, and a Hong Kong enterprise agreed to form five joint ventures in China.

3. 04/1996-----Mr. Zong became the chairman of board of directors of the said five joint ventures.

4. From 1996—2007, the original five joint ventures evolved into 39 joint ventures, and everybody made a ton of money.

5. Problems began to surface in 2000 after the reorganization of Wahaha Group Ltd., which became a private entity with the Hangzhou government holding 46% of its stocks. The reorganized Wahaha Group Ltd. began to establish its own joint ventures and separate subsidiary entities, which totaled 17 entities in a span of six years. Apparently, Wahaha Group Ltd. used the Wahaha-related trademark in violation of the Wahaha-Danone Joint Venture Agreement.

6. Danone kept quiet with respect to Wahaha Group’s use of the trademark and apparent breach of the non-compete agreement inherent in the Joint Venture Agreement.

7. In late 2006, Danone initiated an offer to buy all of Wahaha Group Ltd.’s companies which are developed outside of the Joint Venture Agreement, and Wahaha Group Ltd. rejected the offer. The dispute went public in early 2007, escalating into a full blown fight over the ownership and usage of the Wahaha trademark.

8. 05/09/2007, Danone Asia submitted the disputes with Wahaha Group Ltd. with respect to the Joint Venture Agreement to the Stockholm Arbitration Institute.

9. 06/04/2007, Danone sued, in the Superior Court of Los Angeles County, Ever Maple Trading, a company based in the British Virgin Islands, and Hangzhou Hongsheng Beverage, as well as two individuals related to these companies. The two companies are believed to have ties with Wahaha Group Ltd. and Mr. Zong.

10. 06/05/2007, Mr. Zong tendered his resignation as the chairman of the board of directors of the Wahaha-Daone Joint Venture.

11. 06/13/2007, Mr. Zong announced his plan to submit the trademark dispute arising out of the Joint Venture Agreement to the Hangzhou Arbitration Commission.

As can be seen, the facts of this dispute are complicated and convoluted, and both parties are engaging in interesting tactics to gain procedural advantages. I am trying to get my hands on the Joint Venture Agreement to see exactly what they agreed to in 1996. Tomorrow, I will blog about the thrust of both parties’ contentions in their respective arbitration, trial proceedings.

Choice of Law and Contracts in China

Disputes happen. It certainly happens to foreign companies doing business in China. The multinational company Danone is in a huge one now.

I think it is safe to say that conflicts and disputes are unavoidable in doing business in a foreign country, but one can control the risks involved and minimize the damages thereunder. Choice of law in contracts with foreign parties can be of strategic importance if and when disputes arise in commercial activities.

Article 126 of the Contract Law of China governs foreign-related contracts. It provides that “parties to a foreign related contract may choose the applicable law for the resolution of their disputes, unless the law provides otherwise.” As it is clear from the contract code itself, the contracting parties' express provision on choice of law will be enforceable in case of a dispute later. Whether to choose Chinese law, the law of your own residing jurisdiction, or a neutral third jurisdiction is a difficult decision. The best thing to do is to get competent counsel who understands, comprehensively, the laws and regulations of all the three possible jurisdictions. Only upon a careful examination of all the applicable laws of the various possibilities can one make an educated choice.

The Contract Law of China also contemplates that if the parties fail to expressly state in the contract the choice of law, the disputes between the parties shall be governed by law of the country with the closest connection (nexus) to the contract. Simple it might seem, but the two words “closest connection” have generated voluminous commentaries among contract law and international law scholars. Some suggest that the connection is one that should be assessed in terms of both the quantity and quality of the connections, while other suggest that the presiding judge over the case should have wide discretion to determine by weighing the interest of the parties involved. Still others argue that the contracting parties’ intent warrants some consideration in determining what law governs. My two cents worth on this is that if the scholars cannot figure it out over years of research, the contracting parties REALLY need to expressly provide the choice of law clause for their own good.

Not all contracts in China can be governed by laws selected by the parties. According to the Contract Law, the following three types of contracts shall be governed by the law of P. R. China:

Chinese-foreign joint equity venture contracts to be performed in China
Chinese-foreign cooperative joint venture contracts to be performed in China
Chinese-foreign contracts for joint exploration and development of natural resources in China

If you really do not want a piece of the Chinese law over your contract, consider structuring your business deals around the contract law by avoiding forming a joint venture in China. But a deal, as I understand, is often more complicated than that.

For more on Chinese Contract Law, check out my earlier posts.

Freedom of Contract in China: Not So Fast Yet

Freedom of Contract in China: Not So Fast Yet (II)

Freedom of Contract in China: Not So Fast Yet (III)

Freedom of Contract in China (IV): The Role of the People's Court

Chinese “David” Brought Down American “Goliath” for Trademark Infringement

Pepsi "Blue Storm" Litigation in China

Zhejiang Province Supreme People’s Court rendered its fascinating opinion after months of trial. This case involves yet another two beverage companies. It seems that the beverage industry in China is a highly contentious one in light of the Starbucks case and the Wahaha v. DANONE dispute. Before I digress further, let me get on with the tale of “David” and “Goliath” in modern day Chinese battle ground for market share and trademark protection.

Plaintiff / appellant is a little known alcohol & beverage company named “Lanye Alcohol Beverage Co., Ltd.”, hereafter “Lanye” and/or “Chinese David.”

Defendant / appellee is the well known Shanghai Pepsi Cola Beverage Co., Ltd, hereafter “Pepsi” and/or “Goliath.”

Another Defendant / appellee is a local supermarket that sells beverage drinks, including Pepsi Cola. And the company’s name is Hangzhou Lianhua Group, Ltd. (hereafter “seller”.)

On December 14, 2003, Lanye registered its trademark “蓝色风暴” with the Chinese Trademark Office, which can be translated as “blue storm.” The registered trademark consists of the Chinese characters, phonetic spelling of the characters, and graphic designs associated with the trademark. Lanye produces bear, bottled water, cola, etc.

In 2005, Pepsi began using the Chinese characters in its massive advertising campaign in China. The characters were also printed next to the well known Pepsi trademark itself to promote the Pepsi coke.

Guess what? Lanye sued Pepsi for trademark infringement. One of the reasons for initiating the suit was that local Industry & Commerce Administration where Lanye is located seized its beverage drinks because Lanye was suspected of infringing on Pepsi’s trademark. (How can anyone stomach that?)

The Hangzhou Intermediate People’s Court held for Pepsi on two operative issues:

a. whether Pepsi’s use of “Blue Storm” constitutes trademark infringement according to the Trademark law since Pepsi utilizes its own well-known trademark in connection with the Lanye’s trademark in question

b. whether Pepsi’s use of “Blue Storm”caused confusion among consumers, thus injuring the plaintiff.

On appeal, the Supreme People’s Court reversed the lower court’s holding on both issues. On the first issue, the court cites Article Three of the Implementation Measures of the Chinese Trademark Law, stating that trademark use is a broad concept, which encompasses the use on product, product packaging, company stationery, product advertisement, and trade shows. Therefore, Pepsi’s use of the “Blue Storm” falls within the purview of trademark use.

In addition, whether a logo constitutes a trademark is determined by the function of the logo in commercial activities. If the logo is capable of assisting consumers in distinguishing products or the origins of services received, the logo is a trademark. Based on discovery, Pepsi’s use of the “Blue Storm” did function as a tool for consumer to identify the logo with the overall brand name of Pepsi, irrespective of the Pepsi trademark.

With respect to the issue of consumer confusion, the court concluded that Pepsi’ use of “Blue Storm” as a trademark did create confusion among consumers relative to Lanye’s registered trademark. The Court noted that because of Pepsi’s extensive use of “Blue Storm” Lanye’s registered trademark has all but lost its value and function—brand name identification for Lanye.

In its conclusion, the court ordered Pepsi to pay ¥ 3,000,000 to Lanye and to issue public notice of the infringement. The Seller was, according to the court a bona fide purchaser, not liable for monetary damages, but has the responsibility to stop selling any infringing products manufactured by Pepsi. Curisously enough, the Court did not order the destruction of the existing infringing Pepsi cokes; it reasoned that would be impractical and would constitute waste.

For some reason, this case did not generate a lot of hype. Maybe Pepsi has done a good job of P.R. so that the embarrassment will not expand back home. After all, being held accountable for infringing on the trademark of a little known local company is not as tasty as a Pepsi Coke.

A few observations about the case:

a. Not all Chinese courts are willing to bend over backwards to protect foreign companies if they do not follow the Chinese law.

b. Chinese companies are getting savvy about protecting their IP rights.

c. Why Pepsi failed to perform a basic check on the “Blue Storm” with the Chinese Trademark Office totally and completely beats me.

d. Even if you own your own registered trademark and you are a big company, you still cannot take the trademark of another small company without due process of law. Not in America, not in China either.

e. Don’t assume anything, especially when you are a foreign company in China.

Official Translation of the New Chinese Franchise Law

The official translation of what is generally known in the West as the Registration Guidelines came out recently on the Ministry of Commerce website. It can be accessed here.

Freedom of Contract in China (IV): The Role of the People's Court

Don’t get me wrong. Freedom of contract is one of the fundamental principles of the Chinese contract law promulgated in 1999. However, as Professor Hsu states in his article Contract Law of the People’s Republic of China, the freedom of contract “is not absolute.” The freedom is restricted to contracting within the metes and bounds of the law, societal values, and basic public policy. Provided that such freedom veers off course in the eyes of the Contract Law, the people’s courts (tribunals, alternatively) have jurisdiction and authority to invalidate the contract or illegal clauses therein.

One conspicuous question here is what standard a people’s court or tribunal applies in determining whether a contract or its clauses are per se void for violating other laws or regulations. This question, very naturally, turns on the issue of conflict of laws. Where the law of a locale comports with the law of the land on a particular issue, no concerns arises in terms of the conflict of laws; where the law of a locale conflicts with the law of the land, the concern for inconsistent judicial decisions is well-founded.

In response to the above question, the Supreme People’s Court opined and ordered that when invalidating a contract or clause, the courts must consider the laws and/or administrative regulations adopted by the National People’s Congress, its Standing Committee, State Council, and various underlying ministries, commissions of the State Council. No local regulations or rules should be applied by the courts while invalidating contracts. This Supreme Court rule symbolizes a bold step toward unifying judicial standards across the country. But I’d caution contracting parties about relying exclusively on this Supreme Court opinion.

Assuming that Chinese law is the law of choice in a contract, here is what I suggest in this regard:

1. Get local counsel and know the local law governing all aspect of the contractual relationship;

2. Make sure that your contract and its clauses comply with the laws and regulations of the Republic;

3. Harmonize the contract and the relevant form contracts drafted by local Industry and Commerce Administration.

Freedom of Contract in China: Not So Fast Yet (III)

To continue my musing on the topic of governmental, executive intrusion to the freedom of contract in China, I intend to discuss the origin of such power to regulate contract formation, and to shed a little on how the power has been exercised in some locales in China.

Legislative Designation of Executive Power to Regulate Contracts

Article 127 of the Contract Law of the P. R. China designates contract enforcement authorities to departments of the Industry and Commerce Administration and other relevant administrative agencies. However, such authority and power is restricted to “monitoring and handling illegal acts that harm the State or public interests through the conclusion of a contract, in accordance with the relevant laws and regulations.” See 16 Minn. J. Int’l L. 115, 142.


工商行政管理部门和其他有关行政主管部门在各自的职权范围内，依照法律、行政法规的规定，对利用合同危害国家利益、社会公共利益的违法行为，负责监督处理；构成犯罪的，依法追究刑事责任。

In other words, these administrative institutions and agencies are granted a restrictive authority to monitor and handle illegal activities associated with contracts. By inference, they do not have the power to invalidate either contracts or contract clauses unless a crime or illegal acts are involved which injure the State or public interests.

The Exercise of Executive Power in Regulating Contracts

In practice, however, local Industry and Commerce Administration departments enjoy greater power and authority than what is defined in Article 127 of the Contract Law. “Monitor” and “handle” were the two key words that define powers designated, but the power and authority exercised by the Beijing Municipal Department of Industry and Commerce, to my mind, far exceed powers granted by the Contract Law.

For instance, the Circular Regarding Intensifying the Supervision of Contract Terms and Provisions (“Beijing Order”) mandates the usage of form contracts drafted by Department of Industry and Commerce alone or along with other administrative agencies. Such form contracts cover a wide range of commercial agreements:
1. landlord-tenant contracts;
2. home renovation contracts;
3. utilities contracts;
4. business operations training contracts;
5. TV, communications services contracts;
6. Consumer loans, life and property insurance contracts;
7. Travel, transportation contracts;
8. Automobile purchase, lease, and repairs contracts;
9. franchise contracts;
10. Supermarkets transactions contracts.

These contracts, according to the Beijing Order, are under scrutiny. And the governmental scrutiny manifests in two ways. First, contracting parties are encouraged to adopt the form contracts already drafted and circulated for use. Second, parties engaged in the above-list commercial activities can expect to be targeted in inspection. Violations of local enforcement regulations can result in heavy penalties.

Conclusion

The People’s Congress through the Contract Law grants Industry and Commerce Administration and other agencies the power to monitor and handle illegal acts associated with contracts. In reality, however, the power has been expanded beyond its designated sphere of law enforcement. It morphed into the power to draft form contracts for use in a wide range of commercial transactions. Although the use of such draft contracts is not yet mandatory, it surely would not surprise a business person in China when they do some day.