Joint Venture in China
————————————————- Topic: Joint-Venture – China – Wall Panelling Once a foreign investor is put into the mix, a wealth of legal, administrative or operational violations that a solely-owned Chinese firm may have been able to survive with, will most likely not be tolerated by the local authorities (Devonshire-Ellise & Hoffman, 2010; Norris, 2011). Therefore an array of legal and contractual issues may arise for which a foreign party should be prepared. Some of these are outlined below.
Environmentally Friendly Wall Panelling: ————————————————- As the product involved is classed as building materials the company should make note of Austrade’s guidelines on industry standards for building materials in China (Austrade, 2012). For this environmentally friendly wall panelling the GB/T 50378-2006 regulations will apply (GCiS, 2012). The Issue of Stabilisation: ————————————————- Protection measures should also be stipulated through the creation of a Joint-Venture Contract.
One of the biggest issues may be found through the difference in law between China and Australia; China having civil law and Australia having common law. Therefore in order to have the Joint-Venture contract protected from future changes in the Chinese civil law system a stabilisation clause is highly recommended (Coale, M. T. B, 2001-2002). Types of Joint-Ventures in China: What makes the selection of a joint-venture so important is that even though China’s Choice of Law provisions follow international practices; this doesn’t apply for Joint-Ventures.
The only time a foreign party within a Joint-Venture may have a choice of law is when settling disputes (Gao, 1989, p. 560; Wei, 2000, p. 40; Sino Foreign Joint-Venture Law Article 2). Types of Sino-Foreign Joint-Ventures in China: Refer to Appendix 1. Equity Joint-Venture (EJV): An equity Joint-Venture in China takes the form of a limited liability company (JVL Article 4 and Article 2 RICJVL; Kluwer Law International, 2005; Nee, O. D, 1992, 83-101). In this type of Joint-Venture both parties contribute to the registered capital and risks; profits and losses are all taken in regards to the proportion of that contribution.
Four Basic attributes (Kluwer Law International, 2005; Wei, 2000, p. 74-75): 1. Established in accordance to the law of the People’s Republic of China. 2. Necessary Property or Capital 3. Possesses its own name, structure and premises 4. Assumes civil liability independently. Cooperative (Contractual) Joint-Venture Creating Chinese Juristic Person (CJVCJP): Also a limited liability company which assumes responsibilities for the ventures total assets however can have a separate internal arrangement on debt liability of each party (Articles 11,12, 14 of RICJVL; Wei, 2000, p. 5-76). The structure and status of this type of venture is a lot more flexible than for EJV’s, with precise aspects being able to be defined by contract (Kluwer Law International, 2005; Nee, O. D, 1992, 83-101). It also has liberty of negotiation of product or profit distribution method while still being a separate legal person with the parties’ liability limited to their capital contributions (Article 14 of RICJVL; China Business Law Guide, 2005; Cooperative Joint-Venture Law and Cooperative Joint-Venture implementing Law).
Cooperative (Contractual) Joint-Venture Not Creating Chinese Juristic Person: (CJVWCJP): Does not create a Chinese juristic person (Article 52 of RICJVL) and parties take unlimited liabilities for the debts of the Joint-Venture jointly and severally. All investments are administered in a unified manner and consent is needed for the disposing of a party’s investment (Nee, O. D, 1992, 83-101). ————————————————- It has loose structure, high risk and low degree of control and cooperation (Nee, O. D, 1992; Wei, 2000, p. 176). ————————————————-
As all Chinese JV’s are controlled under the P. R. C law (Article 5 of the Foreign Economic Contract Law (FECL); Lewis, 1996, p. 31; Wei, 2000, p. 73), the ability to create their own contractual clauses and have more freedom in the contractual relationship is necessary, especially in regards to topics such as intellectual property; that is why a Contractual Joint-Venture Creating Chinese Juristic Person is the best choice. Also, in relation to management and liability and the production of manufactured goods this type of Joint-Venture is ideal (China Business Law Guide, 2005; Gomes-Casseres, 1990; Wei, 2000, p. 68). The Issue of Intellectual Property: From the 6th China International New Wall-Building Materials, Equipment and Technology exhibition held in Beijing in May 2012, it can be seen that green building is becoming increasingly popular in China (GCiS, 2012). In fact the 12th Five-Year Plan states that by 2015, at least one billion of these should be built with eco-friendly building materials, and by 2020, green buildings will account for more than 30% of new construction (ACBW, 2012; Appendix 6; GCiS, 2012).
However, with this novelty in green building rising and a lot more foreign producers developing products and technology in China so comes the problem of protecting intellectual property. Intellectual property protection is relatively new in the People’s Republic of China but its importance continues to rise (Wheare, 1998, p. 1) and it is often cited as an issue of concern for foreign parties in China (Ding, 1997; Liesch & McGaughey, 2000, p. 1; Massey, J. , 2006-2007; Vanhonacker & Pan, 1997). Traditionally the concept of protecting intellectual property did not have a strong hold in Chinese culture (Wei, 2000, p. 9), but China’s reformation of its national IP system to comply with the international standards set out through the WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement has been a leap for the development of China’s view in regards to intellectual property (Wheare, 1998, p. 1). However, despite China’s accomplishments in IP protection and indications it will not become a “haven of piracy” it still considered one of the most risky places to do business (Folsom & Minan, 1989, p. 792; Liesch & McGaughey, 2000 p. 2).
This is due to its relative novelty in the People’s Republic making certain segments of the population have only a rather vague understanding of the concept (Cohen et al. , 1996, p. 7). In the P. R. C the problem isn’t that they don’t have laws regulating IP protection. In fact they have laws for the protection of Patents, Copyright Infringement and Trademarks. However, the problem comes when trying to implement these laws (Yuan, 2004, p. 1) as Chinese civil enforcement procedures make it very difficult to protect high technology patents (Appendix 5; Kennedy and Clark, 2006; Zhang: 2010: 7).
In addition an interesting fact to note is that People’s court may accept oral evidence but in practice they rarely accept or put weight on this type of evidence (Kennedy and Clark, 2006). Therefore, when dealing with foreign parties it is important to develop and implement a comprehensive strategy for protecting their technology interests (Greguras, 2007, p. 3; Norris, 2011, p. 58; Wheare, 1998, p. 159). If it is assumed this wall paneling company has already patented their product in Australia, under Australia’s Patent law the patent will last for 20 years (ALRC, 2012).
As the product is already being produced in Australia it can’t be patented in China. However, as China is part of WTO and is a signee on the TRIPS agreement, therefore they are politically and morally bound to recognise the Australian patent (ALRC, 2012; Article 27. 1 of TRIPS Agreement; WTO; 2012). As the producers in China will need to have the production know-how for the wall paneling, therefore there is risk of intellectual property theft. To try and protect the IP a license agreement for technology transfer could be considered.
When setting up a technology transfer agreement, the Technology Transfer Regulations as stipulated in the China Laws for Foreign Business outlines in Article 2 six ways of technology acquisition (Appendix 2; Kluwer Law International, 2005). ————————————————- If licensing is chosen for the transfer of the patent and its technology in the Joint-Venture the usual licensing agreement is 10 years. However this is usually permitted to extend to the life of the Joint-Venture (Lewis, 1996, p. 67). The agreement involved will allow the Chinese producers to use the technological know-how with it returning to the licensor (the Australian side) once the Joint-Venture is terminated. However it must be noted that the general consensus in China is that technology and know-how belong to the licensee at the end of the term and the licensor should not be able to restrict the licensee in its use of this information (Jianhua & Williams, 1998, p. 167; Lewis, 1996, p. 167).
Therefore despite many ways one can try and protect IP in China, the most important factor is to carry out due diligence and make sure that the knowhow has been protected as good as possible. The Issue of Dispute Resolution: Due to a difference in legal system, cultural values and business practices, China can be seen as a high risk business environment. In the case of any disputes a clear and understandable dispute resolution method and clause should be formed and included in the Joint-Venture contract (Wei, 2000, p. 154).
It is crucial for JV parties to specify dispute resolution methods, applicable law and venue for resolving disputes (Chan & Suen, 2005). Under the law of the P. R. C, Sino foreign Joint-Ventures are allowed to select applicable law and the venue for the dispute resolution in their contractual clause and Chinese law is only an option in this case (Dobkin, 1988, 79-80; FECL 1985; Lewis J. 1996, p. 256; Wei, 2000. p. 156). However Article 25 of the Law on Sino-foreign Cooperative Joint-Ventures (2005) provides that if a dispute arises, the dispute should be in first instance settled through friendly consultations to the extent possible.
If such consultations fail then the dispute may be settled by arbitration or be referred to the People’s Court (Lewis J. 1996, p. 255) Therefore it is recommended that in light of any breaches of contract or party disputes the first step should be negotiation. Negotiation is not legally binding and can preserve the guanxi between both parties, whilst being the cheapest ADR method (Cheung and Suen, 2002; Dimatteo, 2003 p. 109). Also given the law states that friendly consultation should be the first step it should be the first method tried.
However if not successful a relevant arbitration can be included in the contract. The P. R. C has a flexible approach regarding dispute resolution and it can take place in China or abroad according to Chinese rules or an international arbitration body (Lewis, 1996, p. 256). However, for this wall paneling company it is still recommended to have the arbitration carried out in China as cost is lower and it is more convenient and is enforceable (Dimatteo, 2003, 109). Many parties scared of using mainland Chinese arbitration rules have decided on arbitrating in Hong Kong.
This is a great option for the wall paneling company as Hong Kong has adopted the UNCITRAL model law on arbitration and is considered an international arbitration centre with highly developed infrastructure (Brandt & Tomson, 2012, p. 18; Dobkin, 1988, 79-80; HKIAC, 2004). In addition, Hong Kong will able to give better advice on foreign related matters in English making the process a lot smoother (Lewis, 1996, p. 257; Srivastava, 2002, 197). A possible dispute resolution clause that could be included in the contract can be viewed in Appendix 3. ————————————————-
If Arbitration still has not produced any results litigation can be considered (Wei, 2000, p. 154) but in China it is usually viewed a s a last resort due to possible bias present in the courts and due to court proceeding being very lengthy and expensive and it’s also difficult to find lawyers competent to advise on foreign matters in English. Usually foreign parties will endeavour to ensure their disputes are resolved without Chinese courts as they are still unconfident because of the reported local protectionism (Bersani, 1994; Chan, 1997) The Issue of Language: ————————————————-
Which language should be used in the Joint-Venture contract? When dealing with foreign parties there can sometimes be large language barriers. This problem can often be solved by having a clear language agreement stipulated in the contract. It is common practice to have the contract in both acting languages. Although this can be rather expensive, it may avoid some major problems that could arise in the future (Lewis, 1996, p. 31). The Issue of Termination: Chinese parties may be averted to agreeing with the public and formal ending of a Joint-Venture, not wanting to discuss the end before even beginning (Xu, 2008).
However, sometimes, as the Chinese saying goes, the foreign party might find themselves in the ‘same bed’ as the Chinese but ‘with different dreams’. This is why a termination clause is very important. Despite the conventionality of this clause, it is still a grey area; the general practice is that foreign investors buy their way in and then buy their way out if the situation turns bad. Chinese parties have been known to play corporate blackmail with foreign investors as to block potential exit of the foreign party or to hold them liable for all losses (Xu, 2008).
A Joint-Venture contract should have a detailed termination clause which outlines the events allowing parties to terminate their involvement. It should also state the duration of the Joint-Venture. (Dimatteo 2003) Some grounds for termination are as follows (Lewis, 1996, p. 257): 1. Expiration of the Joint-Venture term; 2. Inability to continue operations due to heavy losses; 3. Inability to continue operations due to the failure of one of the contracting parties to fulfill its contractual obligations; 4. Inability to continue operations to heavy losses caused by force majeure or; 5.
Inability to attain the desired objectives of operations and the lack of future for development. Some other terms that may be included are set out in Appendix 4. *It is proposed that the tenure for this Joint-Venture should be set at an appropriate time so as to avoid the transfer of intellectual property. This time should be before the patent protection runs out and before the licensing agreement runs out. —————————————————————————————————————————————– Appendices
Appendix 1: Business Structures in China (Yuwa Wei, 2000, Investing in China. p. 169) Appendix 2: China Business Law Guide 2005 a) The assignment of patent rights; b) The assignment of the rights to apply for patents c) The licensing of patent exploitation; d) The assignment of technical secrets; e) The provision of technical services; and f) Other forms of transfer of technology. Appendix 3: Dispute Resolution Clause In the event of any dispute arising under this contract, the parties shall first make all necessary efforts to settle the dispute through friendly consultation.
If it is impossible to settle the dispute in this way then the matter shall be submitted to arbitration before the Hong Kong International Arbitration Centre (Lewis, 1996, P. 255). Appendix 4: Grounds for Termination (Frenkel, 1998) 1. Failure of a participant to make require capital contribution; 2. Failure of a participant to obtain necessary government approvals; 3. Failure of the venture to reach a pre-agreed level of profitability; 4. Management deadlock; 5. Failure of one partner to purchase the shares of another. (Buy-Sell agreement); 6. An adverse and debilitating change in the law; 7.
Bankruptcy or insolvency of the Joint-Venture. In relation to IP even if there is a clear termination clause and licensing agreement relating to the breach for the use of IP and know how as mentioned before the general consensus in China is that licensed IP will be able to be used once the license agreement has ended by the licensee. This means that despite efforts to protect IP, there is still a possibility of a breach and this should be understood as China’s cultural view is different and they still have a developing legal system in relation to this problem. Appendix 5: Key Issues in Enforcing IP Law (Kennedy, G. amp; Clark. D, 2006) The key issues are: 1. Civil procedure law puts a strong burden on plaintiffs to prove their case. There are no rules specifically shifting the burden of proof if a plaintiff makes out a prima facie case. This can make it very difficult to prove that a high technology patent has been infringed, or a trade secret has been misappropriated. (Article 125, Contracting Law) 2. There is no discovery in civil proceedings. Parties are only required to submit evidence that assists their case. Without discovery, it can be extremely difficult to prove a case. Article 125, Contracting Law) 3. Oral evidence is very rarely accepted in civil proceedings (63 and 72 of Civil Procedure Law) – oral evidence of misbehaviour by an employee will thus be very hard to use. Appendix 6: Expected Growth of China Green Buildings (MOHURD, GCiS). Reference List 1. Austrade, 2012, Building Materials to China, Available at <http://www. austrade. gov. au/Building-materials-to-China/default. aspx>. Accessed on 22/10/2012. 2. Australian Business Forum (ACBW), 2012, China to Boost construction of Green Building. May 7th. Available at <http://australianbusinessforum. om. au/_blog/ACBW_Feature_Articles/post/China_to_boost_construction_of_green_buildings/>. Accessed on 23/10/2012. 3. Australian Law Reform Commission (ALRC), 2012, Duration of Patent Protection, Australian Government. Available at <http://www. alrc. gov. au/publications/5-domestic-legal-framework/duration-patent-protection>. Accessed on 25/09/2012. 4. Brandt, M. & Tomson, K. , 2012, Hong Kong’s state and crown immunity: immunity for state-owned enterprises? Published by SNR Consulting and Legal Services, Hong Kong. 5. Chan, E. H. W ; Suen, H. C.
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