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Chinese Commercial Law Notes

Legislation on contracts formed before 1 October 1999

 

  • Chinese contract law based on German and Japanese contract civil code
  • K law was not used by individual citizens of the PRC; selling or purchasing and borrowing or lending at a very small scale was either settle immediately or conducted in accordance with trust and a ‘gentleman’s agreement’
  • Before the Contract Law which became effective on 1 October 1999, there were five pieces of legislation dealing with contract issues:

 

  1. The Economic Contract Law of the PRC
  2. Art 2 ECL: an ‘economic K’ is an agreement concluded b/t legal persons of equal civil standing, other economic organisations, individual industrial and commercial households and rural King households in order to define mutual rights and duties and conclude Ks so as to achieve certain economic goals
  3. ECLcovers the specific issues in economic Ks of the general principles of economic Ks, conclusion and implementation, amendment and dissolution, liability or responsibility for breach, mediation and arbitration of disputes, administration and supplementary principles

 

  1. The Foreign Economic Contract Law of the PRC
  2. FECLbecame effective on 1 July 1985 however, uncertainties and ambiguities were raised and the Supreme People’s Court answered these questions and addressed the following issues regarding the scope of the FECL, namely:
    • The application of law when settling disputes involving foreign economic Ks;
    • confirmation of the invalidation and revocation of foreign economic Ks;
    • dealing with foreign eco Ks after confirmation of invalidation or revocation; and
    • liability for breach of foreign eco Ks
  3. by addressing these issues, the Supreme People’s Court interpreted and clarified the FECL which have been implemented into judicial practice
  4. ‘foreign eco K’ to exist = must be one or more Chinese companies on one side and one or more foreign companies or individuals on the other
  5. Ks b/t a Chinese party and an equity joint venture, a cooperative joint venture or a Wholly Foreign Owned Enterprise are governed by the ECL not FECL
  6. FECLcovers specific issues in foreign economic Ks of the general principles, formation, performance, liability of breach, assignment, modification, cancellation and transfer, settlement of disputes and supplementary provisions

 

  1. The Law of the PRC on Technology Contracts
  2. Chinese govt encourages foreign investment projects that involve the importing of high technology into China
  3. Art 34 TCL: ‘technology transfer Ks’ = Ks concluded b/t pties for the transfer of a patent, transfer of patent application rights and a licence to implement a patent or for the transfer of non-patented technology
  4. If the transfer of technology relates to the establishment of a joint venture, the following restrictions will apply to the foreign joint venture partners:
    1. the technology contributed as registered capital by the foreign investors should not exceed 20% of the total registered capital of the joint venture
    2. the technology transferred to the joint venture should produce new products either for export or domestic purposes where China normally has to import the products to meet the domestic demand
    3. the technology must improve the performance and quality of existing machinery and products of the joint venture
    4. the technology must be capable of saving raw materials, fuel or power

 

  • term of a technology transfer K is normally 10 yrs of less

 

  1. The General Principles of Civil Law
  2. has 60 provisions dealing with Ks, which are still applicable and co-effective with the Contract Law, but no independent chapter on K law
  3. under this, a K is a civil legal act
  4. Art 54 GPCL: ‘civil legal act’ = a lawful act by which citizens or legal persons establish, modify or terminate civil rights and duties and it must satisfy the following conditions; (Art 55)
    • The person performing the act has the appropriate competence;
    • The real intent is expressed; and
    • There is no violation of the law or the public interest
  5. bilateral civil legal act (i.e. becomes legally binding only upon the meeting of minds of both pties)
  6. Art 85 GPCL: K = an agreement b/t the Kual pties that creates, modifies or terminates a civil legal relationship
  7. Art 2 Contract Law: K = an agreement by which a relationship of civil rights and obligations is established, modified or terminated b/t natural persons, legal persons or other organisations that are subjects of equal status
  8. K is an agreement, however an agreement is not necessarily a K; i.e. some agreements may not have commercial value (eg. govt decisions or social arrangements) and thus do not create a civil legal relationship and therefore are not Ks
  9. Art 88 GPCL: parties to a K must fully fulfill their obligations pursuant to the terms of the K, however if the following occurs:
    1. The K contains ambiguous terms re: quality, time limit for performance, place of performance or price;
    2. The intended meaning in relation to the above matters in point (1) cannot be determined from the context of relevant provisions in the K; and
    3. Pties cannot reach an agreement about such matters through consultation
  10. Then the following rules are provided under Art 88 to clarify these uncertainties:

1 a. If quality requirements are unclear, state quality standards must apply and if there are no state quality standards, generally held standards will apply.

1 b. If the time limit for performance is unclear, the debtor may perform his or her duty to the creditor at his or her convenience. The creditor may also at any time demand that the debtor perform his or her duty, but sufficient notice must be given to the debtor.

1 c. If the place of performance is unclear, and payment is in cash, the performance shall be effected at the place of residence of the recipient party. If the payment is other than cash, the performance shall be effected at the place of residence of the party fulfilling the obligation.

1 d. If the price provision is unclear, the state-fixed price shall apply. If there is no state-fixed price, the price shall be based on market price or the price of a similar Art or on the remuneration for a similar service.

  • Art 88GPCL: if a K does not provide for the identity of the person who has the right to apply for a patent, the pty who has completed an invention-creation has the right to apply for a patent
  • If a K does not contain an agreed term regarding rights to the use of scientific and technological research achievements, every pty to the particular K has an unfettered right to use such achievements
  • Art 91 GPCL: if a pty to a K transfers all or part of his or her Kual rights or obligations to a third pty, he or she must obtain the other pty’s consent and may not seek profits therefrom
  • Such transfers must also be approved by the relevant authority that originally approved the K where it needs approval by the State according to law
  • Art 87 Contract Law: contains the same rule with regard to the transfer of rights or obligations by one pty to another

 

Liability for breach under the GPCL

  • Art 106 GPCL: breach of K bears civil liabilities
  • Art 107 GPCL: if failure to perform a K or damage to a third pty is caused by a force majeure, neither pty will bear civil liability
  • Art 111 GPCL: If a pty fails to fulfill its Kual obligations or violates the terms of a K while fulfilling these obligations, the other pty has the right to demand fulfillments or to take remedial measures and claim compensation for any losses
  • Art 112 GCPL: limits the amount of compensation to the losses consequently suffered by the innocent pty
    • pties may specify in a K that damages are paid for a breach of K
    • allows pties to specify in the K the method of assessing the compensation for any losses resulting from a breach of K
  • general rule is that the pty at fault will undertake civil liability to compensate the innocent pty: (Art 106 GCPL: deals with both civil liabilities based on fault and liability w/o fault)
  • Art 113 GCPL: if both pties breach the K, each pty must bear is respective civil liability
  • Art 114 GCPL: comprises the rule of mitigation – the pty that suffers any loss must take prompt measures to prevent further losses, otherwise the pty will not have the right to claim compensation for any additional loss
  • Art 115 GPCL: pty’s right to claim compensation for losses is not affected by the alteration or termination of a K
  • If breach occurs because of amendment of a  State plan or change in govt decision, pty that breached must first compensate the other pty
  • Art 116 GPCL: However, the govt authority responsible for amendment must indemnify the pty who breaches because of the compulsory nature of the amendment/breach

 

  1. United Nations Convention on Contracts for the International Sales of Goods (the Vienna Convention)
  2. major international treaty governing Kual transactions relating to the sale of goods b/t countries
  3. Chinabecame a signatory in 1988
  4. Art 154 Contract Law: allows the Kual pties to a foreign-related K to choose the governing law for their K
  5. However if both are signatories – Vienna Convention governs the K
  6. If any conflict b/t VC and Chinese domestic legislation, VC will prevail except for the provisions clearly excluded by China before the ratification – this is the general principle adopted by the Chinese govt in ratification of international treaties

 

Formation of K

 

  • Three basic elements:
    • Offer
      • Art 14 VC: ‘offer’ = a proposal addressed to one or more specific persons and it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance
        • For a proposal to be a sufficient offer is must indicate name, quantity and price of goods
    • Invitation to treat = if proposal not clearly addressed to one or more specific persons, , not capable of being accepted
    • Difficult to determine whether proposal is offer or invitation to treat
  • Acceptance
    • Art 15 and 16 VC: an offer becomes effective when it reaches the offeree
    • An offer can be withdrawn at any time before acceptance
    • Even irrevocable offer can be withdrawn if the revocation reaches the offeree before or at the same time as the offer
    • An irrevocable offer cannot be revoked if a fixed period for acceptance is provided by the offeror or where the offeree starts performance in reliance on the offer
    • Art 18 VC: an acceptance is a statement made by the offeree indicating assent to an offer
    • ‘silence or inactivity does not in itself amount to acceptance’
    • A valid acceptance has to be made within the period required by the offeror or within a reasonable time
    • An oral offer normally should be accepted immediately
    • Art 19: a reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and therefore constitutes a counter-offer
    • Conditional acceptance is allowed subject to the additional conditions not materially altering the terms of the offer, namely: the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes relating to the offer
    • Cl postal rule also adopted in VC
    • Late acceptance will be effective if the offeror recognises it
    • Acceptance can be withdrawn if the revocation reaches the offeror before or at the same time as the acceptance would have become effective
    • If a K is reached via telegram, telex or fax, VC will recognise it as a written K

 

  • Intention to create legal relationship

 

 

 

 

The New Contract Law passed on 15 March 1999

 

  • Every different kind of K in the PRC will be governed by the Law and the relevant provisions of GPCL
  • It repealed the ECL, FECL and TCL.
  • Not clear whether Ks entered into prior to Oct 1999 under the 3 pieces of K leg will be governed by the new Contract Law.
  • Also uncertain as to whether any K entered into in China b/t 1 March 1999 and 1 October 1999 will be subject to those three pieces of leg or CL.
  • Seems that the relevant provisions of the GPCL that deal with Kual matters are not repealed by the new CL and will therefore cont to operate after Sept 1999.
  • No differentiation b/t Chinese nationals and foreign nationals in the new CL, as it gives equal treatment to both foreign companies and local enterprises.
  • If a K has a foreign element, that is if:
    1. one or both King pties are foreign nationals, foreign companies or stateless people
    2. the subject matter is located in a foreign country or performance of K takes place in a foreign country; and
    3. Kual facts that create the rights and obligations b/t the pties have occurred in a foreign country

the Kual pties can choose how their K is governed, unless otherwise stated by law (Art 126).

  • Art 126:allows the law of the country having the closest connection with the K to be applied if the pties of a foreign-related K fail to choose the governing law.
  • Art 126:also clearly states that the Chinese law must be applied to Ks of equity joint ventures, cooperative joint venture Ks and Ks involving joint exploration and development of natural resources b/t Chinese and foreign parties.
  • Art 128:Kual dispute – pties to a foreign related K can choose to submit their case to either a Chinese arbitration commission or foreign arbitration bodies, based upon the arbitration agreement reached b/t them.
  • If a K does not have a foreign element, the Kual disputes are generally handled by the Chinese dispute settlement bodies using the methods of consultation, conciliation, arbitration or litigation in China.

 

Structure and content

  • CLcomprises 428 Arts and is initially divided into two major parts: the General Provisions and the Specific Provisions
  • General Provisions:

Ch 1: Basic principles

Ch 2: The concluding of a K

Ch 3: Validity

Ch 4: Performance

Ch 5: Modification and assignment of Kual rights and obligations

Ch 6: Termination of rights and duties

Ch 7: Liability for breach of K

Ch 8: Other provisions

  • Specific Provisions (i.e. covers various specific types of Ks):

Ch 9: sales Ks

Ch 10: Ks for the supply and use of electricity, water, gas and heat

Ch 11: Ks in relation to gifts

Ch 12: loan Ks

Ch 13: Ks for leases

Ch 14: Ks for financial leasing

Ch 15: Ks for work including processing, making, repairing, testing and other similar types of works

Ch 16: Ks for construction projects

Ch 17: carriage Ks

Ch 18: technology Ks

Ch 19: Ks for deposits

Ch 20: warehouse Ks

Ch 21: mandate Ks

Ch 22: commission Ks

Ch 23: brokerage Ks

 

FORMATION OF A CONTRACT

 

  • When parties enter into a K (i.e. to establish, modify or terminate a legal relationship) they must use two elements – offer and acceptance; Art. 13.
  • An intention to create a legal relationship is assumed by the seriousness of the content of the contract; Art. 12.

 

 

Offer

 

  • Under Article 14 an “offer” is defined as being a manifestation of the willingness of one party to enter into a K with another person or organisation, though this manifestation is subject to the following conditions, namely:
    1. Its contents are ascertained and definite; and
    2. In the case of acceptance by the offeree, it will have a binding effect on the offeror.
  • An offer is an indication of willingness for the purposes of reaching a K.
  • If the contents of an offer are ascertained, they must be stated specifically and clearly without ambiguity.
  • The offer must be presented in a way that the offeree is able to understand the offeror’s true intention.
  • In addition, the contents of the offer must include certain important provisions of the K.
  • Art 12 CL:the contents of a K generally cover the following major matters:
    • Names and addresses of the pties;
    • The object/s of the K;
    • Quantity;
    • Quality;
    • Price or remuneration;
    • Time limits, place and manner of performance;
    • Liability for breach of K; and
    • Methods of dispute resolution.
  • Under Art 15 CL an “invitation to treat” is defined as an expression that invites other people to make an offer; it is therefore not an offer and cannot be accepted.  It also specifies that a commercial advertisement can be treated as an offer if its contents satisfied the requirements of an offer.
    • An advertisement or brochure containing the developer’s descriptions of houses to be sold and facilities to be provided with the houses is regarded as an offer. The descriptions should be regarded as parts of the sales contract whether they have been actually incorporated or not.

 

Form of offer

  • Art 10 CL:K can be in oral or written form, so offers can be also.
  • Art 11 CL:K notes or memorandum of a K, mail and electronic documents such as a telegram, telex, facsimile, electronic data interchange and e-mail are written forms of a K.
  • When offer is written – offer effective when offeree receives offer
  • When offer is oral – offer is effective once offeree is aware of the contents of the offer
  • Art 16 CL:offer becomes effective at the time it reaches the offeree/
    • If electronic – the time of reaching the offeree is the time when the electronic data message enters the designated system if the offeree has one, or if not, when the message first enters into any system of that offeree.

 

Withdrawal/revocation

  • Art 17 CL: an offer may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer
    • Therefore offer has not become effective so it can be withdrawn.
    • Once the offer becomes effective, the offeror can only revoke the offer.
  • Art 18 CL:revocation of an offer is possible if it reaches the offeree before the acceptance is dispatched.
  • An effective offer can be revoked under the condition that the revocation does not put the offeree at a disadvantaged position
  • Art 19 CL:an offer cannot be revoked under the following circumstances:
    1. If the offeror has stated a fixed time limit for acceptance in the offer or indicated that the offer is irrevocable; or
    2. If it is reasonable for the offeree to rely on the offer as being irrevocable and the offeree has made some preparation for the performance of the K.

 

Lapsing of an offer

  • Art 20 CL:an offer will lapse in the following circumstances:
    • A rejection of the offer reaches the offeror;
    • The offeror revokes the offer in accordance with the law;
    • At the expiration of the time limit, the offeree does not accept the offer; and
    • The offeree makes a substantial modification to the content of the offer.

 

Acceptance

 

  • Art 21 CL:“acceptance” = a manifestation of assent to an offer made by the offeror.
  • An acceptance must meet the following requirements:
    • Only the offeree can accept the offer;
    • Acceptance must be communicated to the offeror, but not to anyone else; and
    • Acceptance must be on the same terms as the offer; Art. 30.
  • The acceptance becomes effective when the acceptance notice reaches the offeror; Art. 26.
  • Acceptance must be in the form of a notice, unless in light of trade practices or as indicated by the offer, the offeree may indicate the assent by performing an act; Art. 22.

 

Counter-offer

  • Generally when the offer is accepted with conditions attached it will be a counter-offer (i.e. offeree is making a new offer that modifies the original offer); Art. 30.
  • Each counter-offer will destroy the previous offer and create a new offer.

 

 

Standard Form K

  • Standard form Ks are commonly used in business transactions – leads to counter-offers due to negotiations.
  • CLrequires that the pties providing the standard form Ks must ascertain the rights and duties of the parties pursuant to the principle of fairness.
  • Pty providing the standard form K must also bring to the attention of the other pty any exemption or restriction clauses.
  • Art 39 CL: If required an explanation of the said clauses must be duly made.
  • Art 40 CL: If standard form K contains clauses that exclude one party’s major duties and increase the other party’s responsibilities, it is void.
    • If a dispute arises as to the meaning of a standard clause, it shall be interpreted in accordance with its common understanding. If it is capable of more than one meaning, it shall be interpreted in the way more unfavourable to the party providing it; Art. 41.
  • Substantial modification to the contents of the offer made by the offeree constitutes a new offer.
    • Art 30 CL: ‘substantial modification’ = namely to the objects, quantity, quality, price or remuneration, time limit, place and method of performance, liabilities for breach of K and methods of disputes settlement of the K.
    • Art 31 CL: unless the initial offeror objects to the discrepancy or the offeror has indicated that no modification is allowed, an acceptance is effective if it does not substantially alter the contents of the offer - contents of acceptance will be taken as the contents of the K.

 

When is acceptance effective

  • Art 23 CL:Acceptance must be made within a reasonable time limit.
  • Offeror may inform the offeree that the late acceptance is effective without undue delay – otherwise a late acceptance is treated as a counter-offer.
  • Art 29 CL:Where acceptance:
    • Has been sent by the offeree within the time limit for acceptance, and
    • In normal circumstances would have reached the offeror, but
    • It reaches the offeror beyond the set time limit for some other reason.

acceptance is deemed effective unless offeror informs offeree that he cannot assent to the acceptance as the time limit has lapsed.

  • Art 26 CL:Acceptance becomes effective when it reaches the offeror.
  • Art 23 CL:when an offer is in oral form, the acceptance takes place immediately.
  • Art 24 CL:Offer made by telephone, fax or other instantaneous method, time limit begins to run from the date on which the offer reaches offeree.
    • Offer made by way of letter or telegram, time limit for acceptance begins to run from the date shown in the letter or telegram.
  • Arts 26and 16(2) CL: Time of an effective acceptance is the time when the electronic data message enters the designated system if the offeror has specified the designated system for the purpose of receiving electronic data messages – if none, the effective acceptance is the time when the electronic data message first enters into any system of the offeror.

 

Withdrawal

  • Art 27 CL:Notice of withdrawal must reach the offeror before, or at the same time, as when the notice of acceptance reaches the offeror.

 

Concluding K

  • Art 32 CL:when a K is in a written form, the formation of it is concluded as soon as the pties sign and seal the K
  • Art 35 CL:This place is where the K is regarded as where the K is formed.
  • Art 37 CL:part performance forms K, this is an exception to Art 32.
  • Art 33 CL:K is not formed until the confirmation letter is signed by all parties.
  • Art 34 CL:the place where the acceptance takes effect is the place where the K is formed.
  • Art 36 CL:where K not concluded in written form, the K is deemed to have been formed, so long as one pty has performed its major duty and its performance has been accepted by the other party.
  • Art 38 CL:in cases where the State issues a mandatory assignment or an assignment for Govt procurement according to its needs, Kual pties must conclude the K b/t them in accordance with their rights and duties as stipulated by laws and admin regulations.

 

Liability

  • Art 42 CL:A contractual party is liable for the losses caused to the other party if:
    1. Under the guise of concluding a K, the particular pty negotiated in bad faith;
    2. The pty actively concealed an important fact related to concluding of the K or supplied a false face; and
    3. Performed any other conduct that violated the principle of good faith
  • Art 43 CL: pty must not disclose or improperly use any business secrets he or she obtains in the course of concluding a K.
  • Breach of this will result in the offending pty being liable for compensation where the disclosure or improper use of business secrets causes any loss to the other pty
    • CLhas recognised that a trade secret is a type of intangible sasset, which is important to companies in commercial competition.

 

Validity of a Contract

 

  • Validity of a K refers to the legal binding effect created among the Kual pties by properly formed Ks.
  • Art 44 CL:Rule = K takes effect at the time it is formed in accordance with the law.
    • This also means that a foreign investor cannot commence preparation for a joint venture before receiving official approval of the venture as the joint venture K will not be legally binding on the pties should they fail to receive such approval from the relevant authority.
  • Validity of K may be subject to a set time limit agreed upon by the pties.
  • Art 46 CL:pre-arranged conditions, the time limit, upon being reached can either render the K effective or discharged
  • Art 45 CL:validity of a K may also be subject to agreed conditions b/t the pties
  • These conditions have the following characteristics, they:
    1. Are pre-arranged by the Kual pties and inserted in the K as clauses of the K;
    2. May involve certain events that may occur in future;
    3. Must be legal events; and
    4. Are attached to the K and used by the pties to restrict the validity of the K
  • Art 45 CL:further stated that the pre-arranged conditions shall be deemed to have been satisfied when one party improperly prevents them from being satisfied.
  • K entered into by a minor or mentally ill person etc, takes effect after it is ratified by his or her legal representative
  • Art 48 CL:silence of the legal representative on ratification is regarded as a refusal.

 

Agency

  • K will not bind the principal in the absence of his or her ratification
  • Person who entered into the K will be liable
  • Art 48 CL:Silence by the principal on ratification is deemed to be a refusal
  • Art 49 CL:if TP believes that the person who entered the K has ostensible authority to sign the K, the principle is liable even if the agent has no actual authority
  • Art 50 CL:where signatory has exceeded his or her power, K is deemed to be valid unless the other Kual pty knows or should have known that the legal representative or director has exceeded his or her power
  • Art 66 GPCL:agency issues dealt with in GPCL.

 

Void K

  • Art 52 CL:K is deemed void if any of the following occur, i.e. where the K:
    • Is concluded through fraud or duress by one pty so as to harm the State interests;
    • Involves maliciously conspiring to injure the State, the collectively owned enterprises or any third party’s interests;
    • Uses a lawful form to conceal an illegal purpose;
    • Impairs the social and public interest; Hunan Loudi Prefecture Post v Zeng Taipang (‘incompatible with public morals’).
    • Violates the compulsory provisions of laws or administrative regulations.

 

Exemption clauses

  • Art 53 CL:an exclusion clause cannot exempt one pty’s liability from personal injury or property losses caused to the other pty due to any intention of that first pty or their gross negligence.
  • Art 54 CL:allows the innocent pty to apply to the People’s Court or the arbitration commission to modify or rescind the K.
  • Art 56 CL:states that the invalid K or rescinded K has no legal binding effect ab initio.
  • If one part of the K is void, the other parts remain valid.

 

 

 

 

Performance of a Contract

 

  • Performance of K is the central element of the law of K because:
    1. The purpose of the formation of a K is its performance as the establishment of a K is the pre-condition of such performance;
    2. The validity of a K is the ground for is performance; and
    3. Even when a K is modified or transferred, it does not necessarily mean that performance of the K will be terminated.

 

Ambiguous terms

  • Art 60:pties must fully perform their obligations in accordance with the K.
  • Art 60:pties must also carry out their duties of notification, assistance and confidentiality by:
    1. Observing the principle of good faith; and
    2. Acting in accordance with the nature and purpose of the K and trade usage.
  • Art 61 CL:pties are allowed to enter into a supplementary agreement or to adopt trade usage to clarify the uncertainty or ambiguity (concerning major terms such as price, quality, remuneration or place for performance) after the K has become effective.
  • Art 62 CL:rules have been provided for cases of ambiguity:
    • If quality requirements are unclear – State standards or industrial sector standards apply
    • If price is unclear – market price of the place for performance at the time of forming the K will apply
    • If place for performance unclear – payment is to be concluded at the receiver’s residence or place of business, any other object of the particular K is to be performed at the place of the performing party
    • If time limit unclear – debtor may perform it at any time and the creditor may require performance at any time, but an amount of time necessary for preparation is to be allowed by the other pty
    • If method of performance unclear – method favouring the realization of the Kual purpose will apply
    • If cost of performance unclear – cost for performance is to be borne by the debtor

 

Kual liability

  • Art 64 CL:when the parties agree that the debtor should perform his or her obligations to a third party, the debtor shall be liable to the creditor for breach of K if the debtor fails to perform that obligation to the TP or the performance does not conform to the agreement.
  • Art 65 CL:where TP performing obligation to creditor, debtor liable to creditor for breach of K if no performance has been made by TP or performance fails to conform to agreement.
  • Parties are expected to perform their obligations at the same time if no order of performance has been agreed by the parties; Article 66.
  • Art 68 CL:only allows the first pty to suspend the performance of their Kual obligations when he or she can prove that the other pty’s situation falls within any of the following circumstances:
    • A serious deterioration in business operations;
    • A transfer of ppty and capital to evade their obligations;
    • A loss of commercial reputation and
    • Other circumstances where loss, or possible loss, of capacity to perform their Kual obligations has occurred
  • Art 68 CL:first pty is liable for breach if s/he mistakenly suspends the performance of his/her Kual obligations or has no evidence to support the cessation of performance.
  • Pty suspending performance has 3 duties:
    1. Notification;
    2. Provision of evidence; and
    3. The presumption of performance when the other pty provides a guarantee.
  • Pty suspending must promptly notify the other pty; Article 69.

 

Early or partial performance and non-performance

  • Art 71 & 72 CL:performance before the time is due, or p-p is not acceptable unless those two kinds of performance do not harm the creditor’s interests.
  • Art 76 CL:once the K takes effect, changes of names, legal representatives or the responsible persons do not give the pties sufficient excuse to stop performance of the K.

 

Donation contracts

  • The donor may cancel the donation; Art. 186.
  • Cancellation will not be possible where the donation was for public welfare or there is a moral obligation. Thus, the done may demand delivery by the donor; Art. 188.

 

Modification, assignment and termination of a Contract

 

  • Upon agreement, K can be modified or assigned.

 

Modification

  • Art 77 CL:prior approval or registration of the K is required, any modification must comply with the laws or administrative regulations.

 

Assignment

  • Art 79 CL:creditor may transfer whole or partial Kual rights to a TP except where it may not:
    1. By the nature of the K;
    2. In accordance with the pties’ agreement; or
    3. By law.
  • Art 84 CL:debtor must obtain consent from creditor when the debtor assigns all or part of his or her obligation to a TP
  • Art 87 CL:if approval or registration of the K is required, the assignment of Kual rights or duties must comply with the law and administrative regulations.
  • Art 88 CL:upon other pty’s consent, one pty may transfer all his or her rights and obligations in the K to a TP.
  • Therefore original Kual relationship ceases.
  • TP takes over from the transferring pty and forms a new Kual relationship with the other original Kual pty.
  • Assignment of all rights and obligations by one pty must comply with the relevant provisions of the CL that deal with assignment.

 

Termination of a Contract

 

  • Art 91:lists situations under which Kual rights and obligations will be terminated, namely where:
    • Performance of the K is fulfilled as agreed;
    • The K is discharged;
    • The debt is set off;
    • The debtor deposits the subject matter in accordance with law
    • The creditor relieves the debt;
    • Kual rights and obligations are ‘mixed to one pty’; and
    • Other circumstances of discharge occur where provided for by law or when agreed upon by the Kual pties
  • Art 93 CL:a K can be terminated upon agreement by both pties.
  • Art 94 CL: pty may discharge the K if:
    • The Kual purpose cannot be realised due to force majeure
    • Prior to the expiration of the period for performance, the other pty explicitly expresses or demonstrates through their conduct that he or she does not intend to perform the main Kual obligation;
    • One pty delays the performance of the main obligation of the particular K and fails to fulfill the performance after receiving some warning and being given a reasonable extension period for performance;
    • Due to the delay in performance of obligations or any other breach of K by one party, the purpose of the K cannot be realised; and
    • Any other conditions for discharge provide by law are met

 

Notice of termination

  • Notice of termination of the K must be communicated to the other pty promptly and termination becomes effective once the notice has been received by the other pt; Art. 96.
  • Art 96 CL: the other pty can seek clarification of the validity of the termination notice from the People’s Courts or arbitration commission if he or she does not agree with the termination
    • Also, in some cases, the termination of K must be approved or registered if those two processes are required by law or administrative regulations

 

Effect of termination of the K

  • If K is terminated, that part of the K that has not yet been performed ceases.
  • Art 97 CL:as to the part already performed, the pty may, based upon the actual performance and nature of the K, seek restitution or some other remedy, as well as make a claim for compensation for any losses.
  • Art 98 CL:when the Kual pties’ rights and obligations cease to exist due to termination of the K, it does not affect the validity of the clauses on settlement and liquidation.

 

 

Liability for breach of Contract

 

  • Some scholars define this liability for breach as a civil liability involving remedies such as specific performance and compensation undertaken by the Kual pties as a result of the breach
  • When one pty does not perform the Kual duty,  or performance does not comply with the K, there is a breach
  • Questions and Answers on the Implementation of the Contract Lawclassified breach activities into different kinds such as:
    1. Breach by a single Kual pty
    2. Breach by both Kual pties
    3. Anticipator breach
    4. Fundamental breach
    5. Non-fundamental breach
    6. Non-performance
    7. Performance that does not comply with the K
    8. Performance that does not meet a particular standard
    9. Performance that causes injury to others
    10. Delayed performance by the debtor
    11. Delayed acceptance by the creditor; and
    12. Breach due to a third party
  • Art 107 CL: Pty liable for the breach must undertake specific performance, adopt remedial measures or compensate the other pty for his or her losses.
  • The innocent pty can request the liable pty to:
    • Art 109 CL: make payment
    • Art 110 CL:Perform any Kual duty, and
    • Art 111CL:Remedy any problems associated with quality

 

Amount of compensation or damages

  • Art 113 CL:Amount of compensation is the actual loss caused as a result of the breach, including those foreseeable profits if the K is performed properly.
    • The damages will not exceed that amount anticipated or ought to be anticipated by the breaching party at the making of the contract.
  • Pties may agree that one pty must pay liquidated damages to the other in the case of breach of K or they may agree on the methods of calculating the amount of damages if a breach occurs
  • Art 114 CL:Liquidated damages may be agreed upon. If liquidated damages incorrectly agreed upon (i.e. less than the actual loss – the party can apply to People’s Court or the arbitration commission for an adjustment
  • Pties may agree that one pty pays a deposit to the other as warranty for the creditor’s rights in accordance with the Law of Guarantee of the PRC
  • Art 115 CL:if creditor, who holds the deposit, fails to perform his or her part of their duties, he or she must repay double the amount of the original deposit back to the debtor
  • Art 116 CL:when the Kual pties have agreed on both liquidated damages and a deposit, the innocent pty can choose to enforce either option if the other pty breaches the K
  • Art 119 CL:concept of mitigation of loss – i.e. innocent pty must mitigate any losses when a breach of K occurs
  • Pty at fault is liable for the compensation of the innocent pty
  • Art 120 CL: when both pties breach the particular K, they are both at fault and therefore must assume liability respectively
  • Art 121 CL:when one pty breaches the K due to the fault of a TP, the former must undertake liability to compensate the other Kual pty
  • Art 122 CL:where one pty’s breach of K infringes upon the other pty’s personal or ppty rights, the aggrieved pty is entitled to choose compensation based upon the new CL or liability for tort according to any other law
  •  
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  • LAWS ON FOREIGN INVESTMENT: EQUITY JOINT VENTURES

     

    Reasons for attracting foreign investment

     

    • Chinese govt adopted the ‘Open Door Policy’ in the late 1970s but had no legal framework to attract and protect foreign investment.
    • Was no law on corporations or any other regulations governing foreign ownership or foreign legal entities.
    • To fulfill the ‘four modernization goals’ (modernization of industry, agriculture, national security and science and technology) the govt introduced foreign direct investment (FDI) as the most appropriate method of overcoming the shortages.
    • By 1996, China had attracted more foreign investment that any other developing country and the project quality of foreign investment is improving every year.
    • Foreign investment accounted for 14.79 % of China’s total investment on fixed asset expansion at the end of 1997 while the ratio was a mere 4.2 % in 1991.
    • Also, foreign investment enterprises are encouraged by the Chinese Government to export their products rather than have them absorbed by the domestic market.

     

    Laws governing domestic business organisations in China

     

    • 1990s privately owned and collectively owned enterprises gradually became a stronger force in China’s national economy and emerged as equally important as State-owned enterprises (SOEs).
    • Thus, SOEs began to lose their comparative advantages because only 1/3 of SOEs makes a profit, 1/3 break even and the rest are bankrupt.
    • Therefore, govt, while establishing more complete system for private and collective business organisations, it is also undertaking reform of its SOEs
    • Laws have been passed to deal with ordinary business entities as well as SOEs
    • Law of the People’s Republic of China on Industrial Enterprises Owned by the Whole People (the SOEs Law)passed by NPC on 13 April 1988 to guide the business activities of the SOEs
    • Art 2 SOEs Law: an SOE is required to ‘take full responsibility for its profits and losses and [to] practice independent business accounting
    • an SOE has the status of a legal person
    • Art 3 SOEs Law: its primary tasks are ‘to develop commodity production, create wealth, increase savings and satisfy the ever-growing material and cultural needs of society, in accordance with State plans and market demands

     

    Regulation of non-SOEs

     

    1. The General Principles of Civil Law (GPCL)
    2. GPCLdeals with some general matters of civil law issues and sets out general guidelines on rights and obligations of individual citizens, business entities and non-business organisations when involved in civil legal activities

     

    1. The Provisional Regulations of the PRC on Private Enterprises (Private Enterprises Regulations)
    2. Art 3 PER: aimed at dealing with the private economy, which was regarded as a complement to the State-owned and planned economy
    3. Art 2 PER:  ‘private enterprise’ = means a privately funded economic entity that employs at least eight workers

     

    1. The Company Law
    2. deals with the corporate issues such as the establishment and organisation of companies, issuing shares, corporate bonds, accounting, merger, liquidation, branches and foreign companies
    3. ‘companies’ = limited liability companies and companies limited by shares
    4. ‘limited liability company’ = a company whose shareholders assume an amount equivalent to the amount of contributed capital to offset its total assets against liability assumed for company debt
    5. ‘company limited by shares’ = a company whose total capital is divided equally amongst shares of equivalent value to offset its total assets against liability assumed for company debt
    6. A company is a legal entity
    7. Art 11 Comp Law: a company must formulate and register its articles of association
      • These have binding force on the company and its shareholders, directors, supervisors and managers
    8. Art 13 Comp Law: allows a company to establish branch companies but states that they shall not have separate legal entity status and their civil liability must be borne by the parent company
    9. However a subsidiary company may be formed and it will have its own legal entity status and therefore must bear its own civil liability
    10. Art 18 Comp Law: laws governing FIEs are co-effective with the Company Law

     

    1. Partnership Law
    2. Was passed to standardize the activities of partnership enterprises.
    3. Art 6 PL: ‘partnership enterprise’ = a profit-seeking organisation in which all the partners must ‘sign a partnership agreement, thereby agreeing to jointly contribute capital, jointly manage business operations, jointly share profits and bear risks, as well as jointly assume unlimited joint and severable liability for partnership debts.
    4. Art 8 PL: the following requirements must be satisfied in order to establish a partnership enterprise in China, namely it must have:
      • Two or more partners, all of whom are able to bear unlimited liability in accordance with the law;
      • A written partnership agreement;
      • The paid-up capital contributions of all the partners;
      • A partnership enterprise; and
      • Business premises and the facilities necessary to run the partnership operations
    5. Various changes to the partnership, such as any amendment to the registration, changes to business scopes or dissolution and liquidation of the partnership enterprises, must be registered with the original approval authorities otherwise the business licence of the partnership may be canceled.
    6. Pursuant to Article 3, wholly owned SOE, SOC and public institutions shall not become ordinary partners.
    7. The partnership agreement must be lawfully concluded in written form, on consultation by all partners; Article 4.

     

     

    Laws governing Foreign Investment Enterprises (FIEs) in China

     

    • now more and more areas have been opened for foreign investment
    • foreign investment enterprises have been granted permission to engage in full or limited activities in retailing, banking, finance, insurance, legal and accounting services
    • also able to establish investment-type companies, companies ltd by shares, construction companies, foreign trade companies, asset assessment institutions and joint-venture research and development companies
    • There are three types of ‘foreign investment enterprises’ (FIE):
      1. Equity joint ventures;
      2. Cooperative joint ventures; and
      3. Wholly Foreign Owned Enterprises.
    • Major laws = Equity Joint Venture Law, the Cooperative Joint Venture Law and the Wholly Foreign Owned Enterprise Law
    • Ministry of Foreign Trade and Economic Cooperation (MOFTEC) started to grant permission to foreign investors to set up foreign trade joint ventures in China from 30 Sept 1996.
    • Art 1 Foreign Trade Joint Venture Law: aimed at further opening up China to the outside world and promoting the development of China’s foreign trade.
    • 1997: Chinese govt gave permission to foreign investors to set up joint venture asset assessment institutions under the Certain Provisional Regulations on the Establishment of Foreign-Funded Asset Assessment Institutions (promulgated on 7 April 1997).
    • Art 1 Provisional Regulations on Foreign Asset Assessment Institutions which Conduct Asset Assessment Business within Chinese Territory: all foreign asset assessment institutions must obtain a special PRC licence if they wish to conduct asset assessment business in China and this licence is uniformly printed and issued by the State Administration of State owned Assets. They must also abide by China’s laws and statutes and accept supervision and administration from the China Assets Assessment Association.

     

    Representative offices of FIEs

    • Foreign investors can set up representative offices in China.
    • Must apply and gain approval and registration according to the Provisional Regulations of the PRC for Control of Resident Representative Offices of Foreign Enterprises
    • Art 4 Detailed Rules on Foreign Representative Offices: a foreign resident representative office must not directly engage in profit-making business operations in China
    • However, it can engage in business activities such as business liaison, product introduction, market surveys and research and technological exchange on behalf of its parent company
    • Art 8 Detailed Rules on Foreign Representative Offices:in order to establish a resident representative office in China, the foreign enterprise must meet the following basic requirements in that it must:
      • Be legally registered in its country of origin;
      • Have a sound business reputation;
      • Provide true and reliable documents and information required by Law; and
      • Carry out the required application procedures
    • Many foreign banks and non-banking financial institutions have set up representative offices since the adoption of the ‘Open Door Policy’, regulated by the Administrative Measures on Representative Offices of Foreign Financial Institutions in China

     

    Foreign investment policies

    • The Provisional Regulations on Foreign Investment Guidelineswere promulgated by the State Planning Commission for the purposes of providing guidelines for the direction of foreign investment, enabling foreign investment to conform with the planning of Chinese national economic and social development and for enhancing the protection of the legal rights and interests of investors
    • Foreign investment programs divided into four categories:
      • Encouraged;
      • Permitted;
      • Restricted; and
      • Prohibited.
    • Encouraged, restricted and prohibited are listed in the Guideline Catalogue of Foreign Investment Industries – and anything not listed belongs to the permitted category (i.e. if doesn’t fall within other 3, its permitted).
    • Overseas Chinese and investors from Hong Kong and Macao are treated as foreign investors.
    • Foreign investors can access China’s telecommunication market and also involve themselves in the internal trade of China.

     

     

     

    Laws governing equity joint ventures in China

     

    • Equity joint ventures have been governed by various general and specific legislation.
    • The Law of the People’s Republic of China on Sino-Foreign Joint Equity Enterprises (Equity Joint Venture Law)adopted on 1 July 1979, amended 4 April 1990.
    • No definition of ‘equity joint venture’ in EJVL and its Implementation Regulations 1983, although it does assign the following characteristics to that form of legal entity, i.e. that venture has:
      • Received capital contributions from both the Chinese and foreign pties, thus, joint venture partners share profits and bear risks and losses in proportion to their contribution to the registered capital of the joint venture;
      • Been established within China’s territory in accordance with relevant Chinese law and is subject to the jurisdiction and protection of Chinese law;
      • Been registered as a Chinese legal person and must take the form of a limited liability company; and
      • Foreign investors who have contributed at least 25% of the registered capital of the equity joint venture

     

    Tasks and purposes

    • Art 4 EJV Implementation Regulations: An equity joint venture is expected by the Chinese Govt to fulfill one or several of the following tasks or purposes, namely to:
      • Adopt advanced technical equipment and scientific management that increase the variety of products, raise the quality and output and save energy and materials;
      • Provide benefits in terms of technical renovation of enterprises and result in less investment, quicker return and bigger profits;
      • Expand production of commodities for export that will result in increasing income in foreign currency; and
      • Organize the training of technical and managerial personnel.
    • Any technology and equipment contributed as investment by a foreign participant must be both advanced and appropriate to China’s needs.
    • Art 5 EJVL: if losses occur due to deception resulting from the international supply of outdated technology or equipment, compensation shall be paid
    • Art 4 Implementing Measures of the MOFTEC: an equity joint venture is said to be a technologically advanced enterprise if the technology and major equipment used are both advanced and pertains to the project proclaimed by the State to be one which encourages foreign investment; the technology and equipment are in short supply in China or the products are newly developed or replace domestic products of the same kind or can expand exports or be substituted for imports.
    • Many small size joint ventures are established b/t a Chinese pty and a foreign pty from HK, Taiwan or Korea and are mainly set up to manufacture consumer goods or deal with a particular service industry.

     

    Duration

    • Duration of equity joint ventures can be from 10 to 50 yrs – depending on the nature of the venture.
    • Art 12 EJVL: joint venture pties can choose to set or not set the term of operations in the K and articles of association.
    • Even if the JV pties set the term of operations, the term may be extended subject to the agreement of all JV pties and approval by competent govt authorities.
    • Art 3 Provisional Regulations on the Duration: an equity JV in the following sectors must fix a term of operations and therefore cannot apply for an unlimited duration:
      • Service industries (i.e. hotels, apartments, office buildings, entertainment, food, taxis etc);
      • Land development and real estate operations;
      • Resource exploration and exploitation;
      • Investment projects restricted by the State; and
      • Other projects that are required to stipulate the duration of their operations pursuant to other State laws and statutory regulations
    • Art 100 EJV Implementation Regulations: also set the duration of an equity joint venture to a normal period of 10 to 30 years, or a special period of 50 yrs.
    • Art 101 EJV Implementation Regulations: the duration begins from the day when the joint venture is issued with a business licence

     

     

     

     

    Advantages

    Disadvantages

    1. Reduces business risk for foreign investors
    2. Can leave Chinese partner to obtain any necessary approvals from govt etc
    3. Chinese partner more familiar with procedures or may even have ‘personal connections’
    4. Or Chinese partner may be an SOE that receives govt assistance in both the supply of raw materials and allocation of import or export quotas àenables foreign investors to receive the special govt assistance
    5. Foreign investors can take advantage of their Chinese partners’ existing business contacts, product markets, distribution network and established business relationship to increase the likelihood of success

     

    • foreign investors have to consult their Chinese partners when handling management and production issues
    • Art 5 EJVL: foreign investors have to transfer technology or know-how to equity JV, which means that the Chinese partners will have access to the technology and know-how;
    • As the Chinese partners normally have competent authorities to oversee their business or non-business activities, the Chinese govt would have better control over an equity JV than 100% foreign owned enterprises

     

     

     

     

    Establishment of an equity joint venture

     

    Basic requirements

    1. Locating a joint venture partner
    2. A potential investor should first locate a JV partner in China as an appropriate partner and this choice is crucial to a JV project.
    3. As the Govt provides various incentives to foreign investment enterprises, many local companies are keen to set up JV with foreign investors so that they too can share in this preferential treatment.
    4. Art 12 EJV Implementation Regulations: foreign investors submit a preliminary JV plan and authorize a corporation or government agency to locate potential Chinese partners for the planned project.

     

    1. Procedures for approving the project and relevant documentation
    2. Once a partner is located, equity JV is required to obtain approval from the MOFTEC, or its authorized departments at local levels, before it can be established.
    3. Art 9 EJV Implementation Regulations: the following procedures must be followed for the establishment of a JV:
      • The Chinese pty must submit to MOFTEC or its regional offices a project proposal and a preliminary feasibility study report of the joint venture to be established with the foreign investor. A letter of intent or memo of understanding is also required by the preliminary approval body. These are not legally binding agreements as they simply contain a statement of the pties’ intention or a brief summary of the pties’ negotiations so far regarding the JV
      • Once proposal and feasibility study report are examined and approved by the govt dept in charge, they must in turn be submitted to the MOFTEC or its authorized bodies for final approval
      • The pties to the equity joint venture must then conduct work relevant to the feasibility study and, based on this, negotiate and sign JV agreements, Ks and articles of association
    4. Chinese pty responsible for submitting the following docs to the MOFTEC for final examination and approval:
      • An application for the establishment of a joint venture;
      • The feasibility study report jointly prepared by the pties to the venture;
      • The joint venture agreement, K and articles of association signed by representatives authorized by the pties to the venture;
      • A list of candidates of chairperson, vice-chairperson and directors appointed by the pties to the venture;
      • Written opinions on the planned project by the dept in charge and the People’s govt of the province, autonomous region or municipality directly under the Central Government where the JV is located
    5. Art 3 EJVL and Art 10 EJV Implementation Regulations:Once the pties follow the above procedures and fulfill all the requirements, approval authority must make a decision on whether to approve or reject the joint venture within 3 months of the submission of all necessary docs

     

    1. ‘Joint venture agreement’ and ‘joint venture K’
    2. Art 13 EJV Implementation Regulations: ‘JV agreement’ = document agreed upon by the pties to the JV on some main points and principles governing the establishment of a JV.
      • Legal doc as it must be signed by all the pties to the JV;
      • Has less significance in the process of establishing JV;
      • Can be omitted at the option of joint venture pties.
    3. ‘JV K’ = a doc agreed upon and concluded by the pties to the JV on their rights and obligations.
      • A compulsory doc in the examination and establishment of a JV;
      • If conflict b/t the two, JVK prevails.

     

    1. Contents of the joint venture K
    2. Art 14 EJV Implementation Regulations: lists what must be in a JVK and these include:
      • The names, the counties of registration, the legal addresses of pties to the joint venture, and the names, professions and nationalities of the legal representatives thereof;
      • The name of the JV, its legal address and the purpose or scope of the scale of business;
      • The total amount of investment and registered capital of JV, investment contributed by the pties to the JV, each pty’s investment proportion, forms of investment, the time limit for contributing investment, stipulations concerning incomplete contributions and assignment of investment;
      • The ratio of profit distribution and losses to be borne by each pty;
      • The composition of the board of directors, distribution of no of directors and the responsibilities, powers and means of employment of the general manage, deputy general manager and high-ranking management personnel;
      • The main production equipment and technology to be adopted and their source of supply;
      • The ways and means of purchasing raw materials and selling finished products and the ratio of products sole within Chiense territory and outside China;
      • Arrangements for income and expenditure of foreign currency;
      • Principles governing the handling of finance, accounting and auditing;
      • Stipulations concerning labour management, wages, welfare and labour insurance;
      • The duration of the JV, its dissolution and the procedure for liquidation;
      • The liabilities for breach of K;
      • Ways and procedures for settling disputes b/t the pties to the JV; and
      • The language used for the K and the conditions for putting the K into force.

     

     

     

     

    1. Meaning and contents of the ‘Articles of Association’
    2. Art 13 EJV Implementation Regulations: ‘articles of association’ = a doc agreed upon by the pties to the JV that indicates details of the purpose, organizational principles and method of management of a JV in compliance with the principles of the JVK
    3. Art 16 EJVIR: contains a list of the major items that should be in the articles:
      • Name of the JV and its legal address;
      • Purpose, business scope and duration of the JV;
      • Names, countries of registration and the legal addresses of pties to the JV and the names, professions and nationalities of the legal representatives thereof;
      • The total amount of investment, registered capital of the JV, each pty’s investment proportion, stipulations concerning the assignment of investment, the ratio of profit distribution and losses to be borne by pties to the JV
      • Composition of the board of directors; its responsibilities, powers and rules of procedure, the term of office of the directors and the responsibilities of its chairperson and vice-chairperson;
      • The setting up of management organisations, rules for handling routine affairs, the responsibilities of the general manager, deputy general manager and other high-ranking management personnel and the method of their appointment and dismissal;
      • Principles governing finance, accounting and auditing;
      • Dissolution and liquidation; and
      • Procedures for amendment of the articles of association

     

    1. Contents of the feasibility study
    2. no provisions deal with the contents but it is generally required to cover the following topics:
      • general intro: name, address, substance, terms, legal representatives, project, capital contribution, estimated profits and risk sharing of the JV;
      • details of the investment environment covering geographical location, transportation, sources of clients and supply of raw materials;
      • market research demonstrating the potential market for the JV
      • estimated budget and sources of capital showing expenditure, cash flow and capital contributions of all JV pties;
      • economic benefit and investment output analysis that states the anticipated profits of the JV and predicts the period of capital recovery;
      • additional items such as production program, conditions of the factory area, technical engineering, waste treatment, labour organisation, personnel requirements, plans for execution of the project;
      • conclusion emphasising the importance, possibility, necessity and success of the JV project.

     

     

    WHEN ESTABLISHING AN EQUITY JOINT VENTURE MUST HAVE

     

    Capital contributions of an equity joint venture

    • Art 4 EJVL and Art 19 EJVIR: an equity joint venture takes the form of a limited liability company.
    • Liability of each pty is limited to its capital contribution.
    • EJVLrequires foreign investors to contribute at least 25% of the total capital contribution of the JV; Article 4.
    • NOW: to attract more foreign investment, a foreign-invested company with foreign capital accounts for less than 25% can still apply for approval and registration – still regarded as foreign-invested companies and entitled to preference policies.
    • There is no max limit on foreign capital contribution in an EJV; Article 4.
    • Depending upon the project, foreign investors may wish to inject at least 50% of the entire capital contribution of the JV in order to have equal control over the JV as their Chinese partner.

     

    Registered capital and total amount of investment

    • Art 20 EJVIR: ‘total amount of investment’ (including loans) of a JV = the sum of capital construction funds and the circulating funds needed for the JV’s production scale as stipulated in the K and the articles of association of the JV
    • Art 21 EJVIR: ‘registered capital of a JV’ = the total capital registered at the registration and administration department of the JV and it must be the capital subscribed by all pties to the JV (can be expressed in either Chinese RMB or an agreed foreign currency)
    • Art 3 Provisional Regulations of the SAIC: general rule is that the smalldf the total investment figure, the larger will be the proportion of the registered capital – this can be 50% or less of the total amount of investment if the latter is over US$10 mil

     

    Amount of, and time for, payment of capital contributions

    • Art 4 Subscription of Capital Regulations: capital contributions can be made either in one payment or by installments
    • Respective pties to an EJV must stipulate in the JVK the time limit for subscription of capital
    • If capital contribution is to be made in one payment, the respective JV pties must settle their subscription in full within six months of the day of issue of the JV business licence
    • If subscription is to be made by several installments, pties must make all necessary payments within 3 months of issue of the business licence
    • In addition, the first installment must not be less than 15% of the respective capital contribution of each pty
    • JV pties must subscribe in full their contributions within the time stipulated in the K
    • Otherwise, the innocent pty might treat the non-subscription or subscription after the time limit by the other pty as breach of JVK
    • Art 2 Supplementary Regulations: reiterated the principle that both foreign and local investors in an EJV must synchronise their payment of capital contributions in accordance with the ration and time limit stipulated in the Ks
    • If foreign investment is made by way of purchasing the domestic company’s assets or share ownership rights, the foreign investor must pay the total purchase money within 3 months of the day of issue of the business licence
    • Art 1 Supplementary Regulations: any delay or extension of payment will have to be subject to the approval of the JV administration authority
    • Art 31 EJVIR: delay in payment will be subject to a payment of interest on arrears or a compensation for the loss as defined in the K
    • Neither EJVL nor EJVIR state to whom the interest or compensation is to be paid
    • It will be acceptable if the payment of interest is paid into a joint account of all pties to the JV.

     

    Reduction in, or assignment of, capital contributions

    • Art 22 EJVIR: Generally speaking,a JV must not reduce its registered capital during the term of its operation.
    • Art 23 EJVIR: a JV pty can assign all or part of its investment to a TP if that assignment is agreed to by the other JV pties and approved by the govt administration authority.
    • Any variation of capital (either increase or decrease) has to be registered with the original registration and administration office.

     

    Adjustments to the amount of capital contributions

    • Authorities will not approve an application for adjustments of the total investment amount and registered capital figure if:
      • There is a minimum registered capital requirement by law, and the proposed reduction in registered capital would result in falling below such a minimum;
      • The foreign investment enterprise involves any arbitration and litigation procedure for economic
      • The foreign investment enterprise’s own business scope or production scale set out in the JVK or articles of association require a minimum level of total investment and the adjustment would result in falling below that minimum; or
      • The foreign investor has priority rights to retrieve his or her or its investment and this retrieval has been completed. This circumstance applies only to a cooperative JV, and the issue of early retrieval of capital contribution by a cooperative JV
    • These regulations were introduced to ensure that any changes to the allotment of investors’ capital contributions complied with all relevant Chinese laws and were approved by, and registered with, the relevant government authority
    • Art 3,4 and 5 Certain Regulations on Changes to Shareholders’ Rights in FIE: Any changes to shareholders’ rights in a FIE must not affect the nature, status, party’s position and minimum capital contribution of a pty in the foreign investment company

     

    Methods or forms of capital contribution

    • Art 5 EJVL and Art 25 EJVIR: capital contributions of pties to a JV can be in the form of cash, buildings, equipment or intangible ppty such as IP, ‘know-how’ or land use rights.
    • Price of the machinery, equipment or intangible property must be ascertained or valued on the basis of fairness and reasonableness.
    •  

     

    àCash and machinery

    • Cash investment by a foreign investor must be in foreign currency
    • Art 5 EJVL and Art 27 EJVIR: Machinery or equipment investment by a foreign investor must meeting following conditions:
      • Such properties are indispensable to the production of the commodities of the JV;
      • China is unable to manufacture such machinery or equipment, or manufacturing costs are too high, or their technical performance and time availability cannot meet the demand; and
      • The price fixed must not be higher than the current international market price for similar equipment or materials

     

    àIntellectual property

    • Art 28 EJVIR: foreign investor can also contribute capital to the JV in the form of IP or ‘know-how’, if they are capable of:
      • Manufacturing new products urgently needed in China or products suitable for export;
      • Improving markedly the performance quality of existing products and raising productivity; and
      • Notable savings in raw materials, fuel or power
    • Art 29 EJVIR:Certificates and other documentation in relation to the TP must be presented to the Chinese pty by the foreign investor and form part of the annexures to the JVK.

     

    Other procedural requirements

    • Art 30 and 32 EJVIR: EJV can start its operations after the pties’ capital contributions are made and a certificate of verification of capital contributions is issued by a Chinese registered accountant
    • Local office of the State Administration of Industry and Commerce (SAIC) will permit the JV to commence its operation once the certificate of capital contribution is completed and lodged
    • The Notice on Strengthening the Assessment of the Value of Foreign Investment Assets was circulated in order to prevent foreign investors, who use goods in kind as their investment contribution, from:
      1. Under-declaring the value of high-priced items or
      2. Under-declaring the number of items imported in order to evade customs duty or
      3. Over-declaring the value of low-priced items for the purpose of deceiving commodity inspection authorities when they are importing such goods into China

     

    Approval and registration of an equity joint venture

     

    Agencies responsible for examination and approval

    • Approval authority of an EJV is the MOFTEC.
    • Art 8 EJVIR: some JVs can be approved by a local govt authority or a relevant ministry under the State Council, (still need to be approved by MOFTEC) if the venture project fulfill the following conditions:
      • The total amount of investment is within the limit set by the State Council and the source of capital of the Chinese pty has been ascertained;
      • No additional allocations of raw materials by the State are required and the national balance of fuel, power, transportation and foreign trade export quotas is not affected
    • MOFTEC passed a Notice to control the quality of FDIs, protect State-owned assets, reduce the differences in investment incentives and preferential treatment that existed b/t the local and central governmental policies and to ensure prompt capital contribution subscriptions by both foreign and Chinese investors.

     

    Grounds for non-approval

    • Art 5 EJVIR: an EJV will not be approved if its establishment will cause or result in:
      1. Detriment to China’s sovereignty;
      2. Violation of Chinese law;
      3. Non-conformity with requirements for the development of China’s national economy;
      4. Environmental pollution; and
      5. Obvious inequity in the agreement, Ks and articles of association signed or impair the rights and interest of one pty

     

    Time limits for approval process

    • Chinese partner must submit all the required docs to MOFTEC or its regional offices for final approval – MOFTEC has 3 months to approve these
    • Can reject application if required docs are not in order
    • Within a month of obtaining the approval certificate from MOFTEC, JV must be registered with the SAIC or its local branches
    • After registration, the JV will be granted a business licence
    • Date on the licence will be the date of the establishment of the JV

     

    Foreign companies operating in their own name in China (instead of JV or WFOE)

    • To do this the foreign company must comply with the procedures for approval and registration as set out in the SAIC’s Administrative Measures on the Registration of Enterprises of Foreign Countries
    • Art 2 Admin Measures:Accordingly, a foreign company must apply for registration in China when engaging in the following production and operational activities:
      • Exploration and exploitation of on-shore and off-shore oil and other mineral resources;
      • King for projects such as construction or renovation of housing or civil projects or installation of lines, pipelines or equipment;
      • King for, or accepting commissions for, the operation and management of a FIE;
      • Establishment of a foreign bank branch in China; and
      • Other production and operational activities permitted by the State

     

     

    Board of Directors and Management Office

     

    Number to be appointed

    • Art 34 EJVIR ‘the board of directors shall consist of no less than three members’ (normally has 5).
    • Art 6 EJVL and Art 34 EJVIR: JV pties are required to determine the number of directors and the distribution of the number of directors b/t the local and foreign pties with reference to their respective capital contribution.

     

    Appointment process

    • Art 6 EJVL and Art 34 EJVIR: the chairperson of the board of directors should be appointed by the Chinese pty and the position of the deputy chairperson of the board of directors is to be taken by the foreign investor
    • NPC amended EJVL to allow a foreign investor to be appointed as the chairperson of the board of directors – now very common for chairperson to be appointed by the foreign pty and the deputy chairperson to be appointed by the Chinese pty.
      • In practice: pty that made maj of investment appoints is rep as chairperson
    • If foreign investor contributed more than 50% capital investment of the JV, the Chinese pty will accept the foreign director as the chairperson
    • It has taken more than 10 yrs for the Chinese pty to accept this practice, which reflects the relaxation of government control over EJV to a certain degree
    • Term of office of director is 4 years renewable upon consent of the pties to the JV

     

    Powers of the chairperson

    • Art 45 Company Law: Chairperson of the board of directors is the legal representative of the JV.
    • Calling and chairing of the JV’s board meeting must be convened at least once a year.
    • The chairperson can be Chinese or a foreigner.

     

    Powers of the board

    • Board of directors is the decision-making body of an EJV. The scope of its powers are stated in the articles of association.
    • Art 6 EJVL: the board of directors makes decisions on all important issues of the JV such as development plans, production and operational projects, budge of income and expenditure, profit distribution, labour and wage plans, and suspension of business operations of the JV, as well as appointments, remuneration and dismissals of the general manager, deputy general manager, chief engineer, chief accountant and auditor of the JV
    • Art 36 EJVIR: states that the following matters of an EJV must be decided unanimously by all the directors of the board meeting before they can become effective:
      • Amendment of the articles of association of the JV;
      • Termination and dissolution of the JV;
      • Increase or assignment of the registered capital of the JV; and
      • Merger of the JV with another economic organisation.

     

    Board Meetings

    • Over 2/3s of directors must attend meetings
    • Art 35 EJVIR: must generally be held at a location of the JV’s legal address.

     

    Management office

    • Responsible for daily operation of the venture.
    • Art 38 EJVIR: management office must have one general manager and one or several deputy general managers.
    • The Board must appoint the general manager (GM). The GM is in charge of the daily operation of an EJV. He or she is only responsible to the Board of Directors. No party shall influence the GM’s management authority.
      • It is usually advisable to appoint a foreign GM for the first several years of the operation.

     

     

     

     

    Balance of foreign exchange

     

    • Foreign exchange is subject to various controls in China.
    • Art 9 EJVL: JVs are encouraged to export their products overseas rather than supply the domestic market.
    • Art 75 EJVIR: JV is required to maintain a balance of its foreign exchange.
    • If JV cannot balance its foreign exchange, it will have greater difficulty in getting approval from MOFTEC or the regional approval authority.
    • Govt generally does not assist a JV to balance its foreign exchange income and expenses.
    • Art 75 EJVIR: sometimes approval authority will grant approvals to some JV projects knowing that the venture will have problems in balancing its foreign exchange.
    • First step in remedying any imbalance in foreign exchange will normally involve the relevant local govt body using its own foreign exchange reserves
    • Art 2 Regulations of State Council Concerning Balance of Foreign Exchange Income by EJV: the view that EJV companies should balance their own foreign exchange by generating foreign exchange through the exports of their products to overseas markets
    • Upon approval, certain JV projects may receive assistance in balancing foreign exchange from the central or local governments, namely those projects:
      • Using advanced technology;
      • Involved in the production of competitive products at an international level;
      • That produce substitutions or imports on a long-term or urgent basis; and
      • That can obtain permission to sell all or a large percentage of their products in China domestically

     

     

     

    Dissolution and Liquidation

     

    • Art 13 EJVL and Art 102 EJVIR: a JV may be dissolved in the following situations:
      • On completion of duration of the venture;
      • Inability to continue operations due to heavy losses;
      • Inability to continue operations due to the failure of one of the King pties to fulfill an obligation prescribed by the agreement, K and articles of association;
      • Inability to continue operations due to heavy losses cause by force majeure such as natural disasters and war;
      • Inability to obtain the desired objectives of the operation and at the same time to see a reasonable future for the project; and
      • Occurrence of other reasons for dissolution prescribed by the K and articles of association.
    • Dissolution of an EJV must be determined by the board of directors of the venture and the decision must be submitted to the examination and approval authority.
    • Art 103 EJVIR: board must decide the principles for the liquidation process and nominate candidates for the liquidation committee.
    • JV shall be liable for its debts by the use of its assets.
    • Art 106 EJVIR: The remaining ppty after the clearance of debts shall be distributed among pties to the JV according to the proportion of each pty’s investment unless otherwise provided by agreement, K and articles of association of the JV.
    • After paying income taxes, the foreign pty can remit abroad its portion of the net assets or remaining ppty.
    • When a JV is dissolved, its remaining ppty after the clearance of debts will be distributed among JV pties according to the proportion of each pty’s investment, unless there is a special arrangement in the JVK or the articles of association.
    • If the value of the remaining ppty exceeds the registered capital, JV pties must pay income tax on any excess above their original capital contribution.
    • JV pties can follow the Measures on Liquidation Procedures for FIEs when they dissolve their ventures.

     

     

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Deakin University
Deakin University
  • Faculty of Business and Law
  • School of Law
  • MLL344 - Chinese Commercial Law
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Resource Sample

TOPIC FOUR LAWS ON FOREIGN INVESTMENT: EQUITY JOINT VENTURES REASONS FOR ATTRACTING FOREIGN INVESTMENT Chinese govt adopted the `Open Door Policy' in the late 1970s but had no legal framework to attract and protect foreign investment. Was no law on corporations or any other regulations governing foreign ownership or foreign legal entities. To fulfill the `four modernization goals' (modernization of industry, agriculture, national security and science and technology) the govt introduced foreign direct investment (FDI) as the most appropriate method of overcoming the shortages. By 1996, China had attracted more foreign investment that any other developing country and the project quality of foreign investment is improving every year. Foreign investment accounted for 14.79 % of China's total investment on fixed asset expansion at the end of 1997 while the ratio was a mere 4.2 % in 1991. Al...

Resource Topics

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  • Joint venture
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  • Wholly Foreign Owned Enterprise

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