BizChina

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?

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?

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