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Lara Farrar and Xie Yu have written an excellent article for the China Daily and AsiaOne on the recent controversy swirling around what is being called China's first foreign nail house case. The article is entitled, "1st foreigner 'nail household' in China," and it details the travails Tim Hilbert has been having in getting compensation from his landlord for the demolition of the Beijing building that housed Hilbert's restaurant, "Tim's Texas Roadhouse."
This is an excellent article because, near as I can tell, it is the only English language article out there that actually correctly analyzes the legal issues. And yes, it is from the China Daily!
The article starts out by setting the factual stage:
Tim Hilbert may have been the first foreigner holed up in one of China's famous "nail houses" -- buildings occupied by stubborn tenants who refuse to leave despite the demolition of structures around them.But he told China Daily that he does not want to be tagged a "troublemaker".
"I am not proud to be a 'nail household'. I just want to get justice and be normal," Hilbert said.
Last Thursday morning Hilbert went to collect some belongings, including a few pots and pans and an old Phillips 66 gasoline sign, on a final visit to his Beijing restaurant.
Less than 24 hours later, Tim's Texas Roadhouse, the last business left standing in what was once a dusty neighborhood in northeastern Beijing called Super Bar Street, was demolished, opening the way for a massive new development project.
The restaurant's destruction marks at least the symbolic end of what has been a four-month standoff between Hilbert, his landlord and a local court over compensation Hilbert says he is entitled to receive.
The article then talks about the intensive media coverage and it provides more history:
The ordeal started on May 12 when Hilbert and neighborhood tenants were informed of the impending relocation. The lights and water would be shut off in early June, they were told, and bulldozing would start shortly thereafter.Tenants were also advised to arrange compensation meetings with their landlords, said Hilbert, a Texan who moved to China in 2003.
For Hilbert, no meeting would take place. Instead, the Texan said he received a document from his landlord, a company called Seven Colors, notifying him he would receive one month free rent and his security deposit would be returned.
For someone who had invested nearly $650,000 in his business since opening it in 2007, this was something he just couldn't swallow. And so Hilbert decided to put up a fight.
Hilbert then hired "a Chinese lawyer and a team of security guards to protect his restaurant to fend off wrecking crews." At one point, Hilbert's landlord offered to pay him about 360 yuan ($52) a square meter. "That would have been less than 10 percent of what I invested," said Hilbert.
Hilbert then went through a lengthy legal process that involved him "endless trips to government offices, arbitration centers and courtrooms followed by more trips to meet with local officials and lawyers followed by letters sent to Beijing authorities. Hilbert also sought help from the US Embassy in China, which, completely predictably and justifiably, told him "his case is a commercial dispute with his landlord, and they will not intervene."
Hilbert has so far been unsuccessful in court but proceedings are still pending:
A district court ruled against Hilbert in a lawsuit filed by his landlord in mid-July seeking to break their contract and carry on with the demolition.Yi Li, from the Chaoyang District People's court, told China Daily they were carrying out "prior execution" to tear up Hilbert's restaurant while the case was actually not closed. She emphasized they acted in line with legal procedures, and the case has not been tried yet.
Hilbert said the Beijing High People's Court accepted his document last Thursday, and promised to give him a reply within 30 days.
Hilbert said he hopes to present this evidence in Beijing High People's Court where he has filed an appeal on the August verdict issued by the Chaoyang District Court. It remains unknown whether the court will agree to hear Hilbert's case. It also remains unclear whether Hilbert will ever receive any compensation from his landlord or the government - or whether he is entitled to it.
THE CONTRACT IS ALMOST EVERYTHING
The article then looks at the case from the correct legal angle, thanks in large measure to CLB co-blogger Steve Dickinson.
According to legal experts, unless a contract between a landlord and a tenant clearly stipulate remuneration for a structure that is going to be destroyed, tenants have no right to demand compensation."Most Chinese leases provide very explicitly that if the property is torn down, the landlord gets the compensation and the tenant gets nothing," said Steve Dickinson, a China-based lawyer at Harris & Moure.
"It depends 100 percent not on property law but on what the lease document says," said Dickinson.
SO WHAT DOES THE CONTRACT/LEASE ACTUALLY SAY?
The article then gets a little fuzzy as to what the lease actually mandates regarding the landlord's having to compensate Hilbert for a teardown:
Hilbert said he made an amendment to his lease stipulating compensation if in the future the building housing his restaurant were to be torn down. Hilbert's landlord could not be reached for comment to verify this.A woman surnamed Liang, Hilbert's assistant, told China Daily that they signed the contract with the landlord on March 30, 2007 and the contract should be valid until May 15, 2010.
But they did not make it clear in the contract how much the landlord should compensate Hilbert if the landlord ends the contract ahead of schedule, according to Liang.
THE FUTURE IS UNCERTAIN
It is not clear what Hilbert will do next:
Hilbert would not disclose the next steps he will take in order to secure the money he is owed for the death of Tim's Texas Roadhouse."It is an ongoing matter," he said. "Obviously nobody ever discusses strategies in ongoing matters with the media until after the actions take place."
For the record, my firm counsels our clients who lease property in China to think about putting a provision into their lease agreement setting forth exactly what the landlord's requirements will be if the building is demolished. Buildings get demolished in China all the time and one absolutely must at least consider this when entering into a lease agreement there.
YOU WANT TAKEAWAYS? I'VE GOT TAKEAWAYS.
There is much to be learned from this event.
1. First off, and most importantly, you must realize that your contract is king. Even in China. If you are going to do business in China, you absolutely must realize that the starting point on most legal issues is going to be your contract.
I cannot tell you how many times I have been contacted by someone who wants my law firm's assistance in suing some manufacturer in China for having provided bad product. One of their first questions nearly always is whether they can win such a lawsuit or not. Here's my standard reply:
That is going to depend on your contract. If you have a really well crafted contract, that clearly sets out the standards to which your Chinese manufacturer was to build your product, then your chances are going to be a lot better than if the contract is vague or, even worse, if you do not have a contract at all. And if your contract is written in Chinese and if it calls for disputes to be resolved in China, well that's going to help you a lot as well. But I have to tell you that the mere fact that you are calling me for the first time makes me think you did not use a qualified lawyer to draft your contract and in virtually all of those cases where this has been the case, the situation is pretty bad. So send me the contract and we will get back to you.
For more on China product (OEM) agreements, check out "China OEM Agreements. Why Ours Are In Chinese. Flat Out."
I also cannot tell you how many times I have had a similar conversation regarding a joint venture gone bad (most of these have been in the last year or so as economic shifts have caused these to blow up in even greater numbers than usual). These usually start out with the company going through a long litany of horrible things that are being done to them by their Chinese joint venture partner and then the question as to whether Chinese law prohibits these things. My response (and you have probably guessed it by now) is that virtually all depends on their joint venture agreement. For more on China joint ventures, check out this article "Chinese Joint Ventures -- The Information The Chinese Government Does Not Want You To Know ".
2. Secondly, when reading articles about foreigners getting "screwed" in China, you should always ask whether it is China's laws that are messing with the foreigner or is it the foreigner who tried to mess with China's laws. I do not even purport to know what the real situation is regarding Mr. Hilbert because I have not seen his lease contract, but the point is that the inquiry should start with that lease contract.
Three or four years ago, there a whole spate of articles came out on foreign companies whose trademarks had been "stolen" by Chinese companies. I realized that most of these articles were leaving out an essential fact in that they did not say whether the foreign company had actually registered its trademark in China or not. So I called some of the reporters who had written these articles and every single time they did not know whether the companies had registered their trademarks in China or not. Seeing as how one cannot have one's trademark stolen without first owning such a trademark and owning a trademark in China requires registering the trademark in China, these articles had it all wrong. Their thrust should not have been, "China is a country without laws." Their thrust should have been on how foreigners were going into China without first making any real effort to understand China's business laws. For more on China's trademark laws, check out "China Trademark Law: Simple And Effective."
So what do you think?
Read more: China's First Foreign Nail House. Dude, Where's Your Contract?
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Read more: Fast and furious: China’s carmakers catching up quick
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President Obama faces a September 17th deadline to determine whether to go along with the International Trade Commission’s recommendation to impose high tariffs on low end Chinese tires. The US has the authority to impose these tariffs under section 421 of China’s complicated WTO accession agreement. There were six similar cases during the Bush administration, although in no cases were tariffs implemented, including four separate cases where President Bush himself shot down the commission’s prescription.
This is the first China trade case for President Obama and it is therefore being watched very closely both in the United States and in China. Interestingly, the tire unions brought this case and the tire companies have been noticeably quiet, presumably in an effort to maintain their good standing in China as they try to capture a piece of the rapidly expanding Chinese tire market. It will be interesting to see how Obama plays this as he tries to avoid angering the Chinese before the September 20 G-20 meeting and before his November visit to China, while also trying to placate the unions, who supported him in the election.
There aren’t that many places to get really insightful analysis of such a technical issue, but AmCham-China just did an excellent podcast with Akin Gump’s Spencer Griffith. Griffith is a highly respected international trade lawyer who clearly knows his stuff and my friend Josh Gartner does a great job with the questions. I’ve been enjoying AmCham-China’s “China Brief Insight” podcasts for a while (hey, they had me on, so how bad could it be?) and I highly recommend you catch this podcast interview if you have any interest in US-China trade issues and on what may very soon be coming down the pike. Click here if you want to get it through iTunes.
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Yesterday, I wrote a post on how important contracts are in China. The post was about a China Daily article on what has been described as China's first foreign nail house. The China Daily article included an interview with CLB's own Steve Dickinson, who said the case really hinged on the lease agreement (i.e., the contract) between the landlord and the tenant. According to Steve, the lease itself would control whatever compensation the landlord would be required to pay the tenant for the tenant's eviction due to the building being demolished.
The thrust of my post, entitled, "China's First Foreign Nail House. Dude, Where's Your Contract?" was that contracts are usually determinative in China. In response to this post, "Sean" asked this great question in the form of a comment:
"So when is the contract everything, and when do you have to be worried about a judge ruling against you in the interest of "fairness" to the Chinese counterpart? ("Fairness" in terms of your previous post here
Sean was referring to a post we did, entitled, "China Sex, Mistresses, And Improper Payments, And What They Mean For Your China Business Litigation " where we talked about how Chinese courts tend to look much more at the equities of a situation than at the literal meaning of the contract or of the written laws.
Despite it being a great question, I am pretty much not going to answer it directly. I am not going to answer it directly both because I do not have enough empirical evidence (who really knows why a court or an arbitrator rules the way they do) and because it does not really need a firm answer. The answer is that Chinese courts and arbitrators generally do look at equities much more than courts in the West. It is also true that you are a foreigner involved in a lawsuit in China against a Chinese company, you are already behind on the equities count. A contract is not always going to be the only decisive factor in your case, but you are always going to be better off having a strong contract that favors you than having a strong contract that does not favor you, a weak contract that does not favor you, a weak contract that does favor you, or no contract at all.
So we can discuss how much having a strong and favorable contract, but I think that time would be better spent drafting the next strong and favorable contract because even though I cannot measure with specificity the value of such a contract, I know it is far more valuable than not having one.
What do you think?
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I have to admit one of my favorite things is forming a China WFOE for foreign companies. I love them because co-blogger Steve Dickinson and our Chinese affiliated lawyers do all the work. I also love them because it is the rare WFOE that does not also need real estate, labor law, and IP assistance to go with the new company. They often require additional work as well, such as contracts, environmental compliance, government approvals, etc. In other words, the forming of one WFOE is almost always the forming of a long term and fruitful legal relationship.
Which is why I have to admit to loving China's 60th Birthday celebrations and Shanghai's upcoming Expo.
Please allow me to explain.
Every time China has a big event, (see the Olympic games for past proof), it starts tightening up on visas. Over the last few weeks, we are hearing more and more about foreigners getting stopped on the street or in their apartment lobby!
So why is this a good thing for my law firm? Because one of the best things about having your very own China WFOE is the ability to secure a coveted work visa, a/k/a the Z Visa. In the last month, we started WFOE applications for two companies who almost certainly would not have gone forward with the process had they not been at such great risk of having some of their people kept out of China over the next 6-10 months. Both companies are service companies that were hired by large American multinationals to provide the multinationals with services in China that they are providing in the United States. Both companies are uncertain if these China projects will last more than a year.
I talked with both about how their US employees could work in China for around 90 days and then leave the country and return, but I also told them that every time they leave the risk of not getting back increases. I also told them that I have been hearing more and more of people getting shorter visas than they would have liked. In the end, the risk of not being able to service their good clients without interruption and their belief that gaining a toehold in China has benefits even beyond the surefire visa led both companies to go forward with their WFOES.
Thank you China.
What are you seeing out there?
Read more: How China's Birthday And Shanghai's Expo Are Good For The Legal Business.