With regard to the Chinese legal system, the quote “Not a nation of law, but a nation of the rule of life” is often attributed. This expression describes China as a country with laws which are often subjectively enforced. Therefore, it can be difficult to settle any legal disputes. Not surprising in this context is that China’s reputation as a country to follow international trade laws and to settle disputes is not very good, too.
When engaged in international trade, the prospect of a dispute can be worrying. The last thing you want is to get into a complex legal battle. By having an informed level of knowledge about the Chinese legal system before entering into any agreements or carrying out any trade in China you should do prior research to mitigate the risk. Generally, there are two main types of international legal disputes in the Chinese legal system, which are criminal fraud and civil fraud.
Criminal contract fraud is common when there has been an intentional false statement that has significant effects on the formation of the contract. An example could be that one party believes the other to be an authorized reseller, but they are in fact not. Rectifying this situation in China requires you to contact local police in the district or city where the infringing company is registered.
The other main type of international dispute is a civil dispute. This situation comes about when an argument relating to the details of a contract like the quality, quantity, delayed payments, delayed delivery or any other similar reasons. To settle this dispute, a company should seek legal advice from Chinese lawyers to prepare a lawsuit, with the end process taking up to a year.
The law in China is in general divided into three distinct separate categories: civil law, criminal law and administrative law. In relation to carrying out business the main area to be concerned about is civil law. Civil law generally covers business related aspects such as contracts, trademarks and copyright law. The most common disputes are directly related to contract law, trademark law and copyright law and all these fall under civil law. When a dispute arises it is heard under an open trial, however, even if you get a favorable verdict, it can be hard to enforce the judgement.
The criminal law in the Chinese legal system can also cover aspects of business, mainly related to white collar crimes. For example, stealing business secrets, bankruptcy fraud, bribery and other similar offenses would be tried under criminal law. However, it generally does not include business disputes as criminal law is brought upon by acts against the state. Contract fraud can fall under both civil and criminal law under the Chinese legal system, and if it is deemed to be a criminal offence the consequences can be much more severe.
Administrative law is also important if you are carrying out business in China. Environmental protection laws, regulations on taxes and duties and product quality laws all fall under this area. With the government regulating this area, violating them may lead to fines.
Firstly, China does restrict foreign investment into the country in certain industries. There has been a proposed change with the draft of “The Foreign Investment Law” being reviewed. Currently, many industries restrict the level of investment by foreign companies, including manufacturing, high polluting and resource intensive activities. However they are welcoming to investments that China is in demand for like renewable energy and clean production. It is advised to be thorough when researching if there are limits on your type of business.
You should also beware if there are any trade barriers. These could be imposed tariffs on exports which decrease the competiveness of moving sections of the company to China. Alternatively, they can exist in the form of quotas, licensing, selectively applied legal framework, anti-competitive practices, anti-dumping regulations, as well as other controls.
It is up to you to find out whether any further legal restrictions apply specifically against your company in your industry, or if you even need to take an alternative method of partnering with a local agent or firm to address your needs.
When there is a dispute between companies, rather than going through the court process and Chinese legal system many firms find it easier and more effective to go through a process of arbitration. You should include an arbitration clause within the contract and before entering into an agreement receive legal advice to ensure it can be enforced. Since foreign companies usually feel that the Chinese court systems will favour domestic companies more than foreign ones, arbitration strikes an ideal balance. If you are in a situation where you wanting to proceed with arbitration, the China International Economic and Trade Arbitration Commission (CIETAC) is one of the most commonly used.