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Companies / International trading "IN CHINA, ONE’S WORD IS THE ONLY THING THAT COUNTS, AND IS MORE IMPORTANT THAN ANY CONTRACT" Philippe SNEL, Dewolf & Partners Today China is the European Union’s second largest trade partner. Conversely, the European Union is China’s biggest trade partner. The stakes: a bilateral trade volume in excess of $400 billion. It is fair to say that its growth is more than sustained. As commercial relations with China intensify, contracts are multiplying. by Yves-Etienne MASSART AWEX-UWE SEMINAR Tribulations of a contract in China At a recent seminar held by AWEX in the UWE offices, Maître Philippe Snel, a lawyer who heads the Dewolf & Partners Shanghai office, had the opportunity to illustrate a series of commercial relations challenges between our companies and China. It is a fact that more and more economic interests are being located in China without, however, sufficient attention being paid to a whole range of legal and other kinds of concerns. Philippe Snel spells out the situation as being "between needless depravations and dangerous pitfalls". And when we ask why one would tolerate, in China, what a chief executive would not dare elsewhere, on pain of putting his company at risk, he replies, "It’s partly due to the blindness of a number of businessmen who regard China as an El Dorado and consequently confuse speed and haste. Every day, entire planeloads of businessmen land on Chinese soil. They have one idea in their heads: to make a fortune in two years, for some of them even six months". Keeping a sense of reason The mistake would not be not guarding against potential problems, but not taking the time to understand the context in which one will operate. This leads to surprises with regard to the reactions of partners or the authorities. "It’s as though a machine had been installed at the airport that makes most people lose their simple common sense!" This is why he specifies certain indispensable prerequirements: "taking an interest in the general framework in which the contract is entered into (legal, political, economic, etc), being able to demonstrate a certain sensitivity to cultural and linguistic peculiarities, and finally being located in China and being able to depend on reliable, competent and loyal resources". These would be local partners and agents, employees, friends and acquaintances, different consultants, legal advisers, and so forth. It should also not be ignored that China and its business environment are in constant evolution. It is worth noting that pure trade between China and Europe is declining and is being replaced by partnerships, in addition to the fact that Chinese businesses are professionalizing their management and that the legal framework is becoming concretized and formalized. This is all in a complex State environment, in which justice is dependent on different levels of power and is organized at different geographical levels. That said, the legal environment has recorded a very clear strengthening of the judicial system since 2006, with a clear acceleration in the movement of reforms. The trigger: joining the WTO, negotiated inch by inch. For the past 2 years, the Chinese legal system has been adopting new laws with regard to bankruptcy, property, employment contracts, monopolies and fights against monopoly situations, as well as in the area of patents. This is all accompanied by another, very clear movement of harmonization of the legal system, whereby locals and foreigners are now subject to the same duties and obligations. The global crisis, accompanied by a reduction in foreign investments, has accelerated this movement, even though access to certain markets will probably still remain highly regulated for some years to come. The sum of the balances Another development is the high degree of professionalism of Chinese judges, at the highest level. "It would be jumping to conclusions to say that they are adopting a systematic preconception in favor of the Chinese. But, at a local level, there still remains work to be done". And the quality of justice handed down is considered to be very good. 14. Dynamisme Special Issue
Philippe Snel also advises putting aside received ideas such as "in China, one’s word is the only thing that counts, and is more important than any contract". In fact, on this erroneous basis, you would be forgiven for wondering if it is even worth drafting a contract. In China, however, as in most other countries around the world, it is absolutely vital to contractualize the relations undertaken with a commercial partner. In fact, giving one’s word is not always respected and moreover, many misunderstandings can arise between parties, if only because of linguistic differences or the quasi-systematic intermediation of a translator. In these cases, it is vital to have a unique reference framework, written and signed by the parties, drawn up clearly so as not only to prove the intention of the parties but also to specify it in the event of a misunderstanding. That said, a contract is not an end in itself, contrary to the view we have here in Belgium, particularly because of the influence of Roman law. In China, seeking a balance is absolutely essential. "A case with a winner and a loser means failure. So a contract must be viewed as the expression of the balances negotiated between the parties". The key to any contract is its signature, together with precise formalism. The ancestral seal is the only tool that denotes authenticity. Any original contract must be signed and sealed. Exchange by fax or e-mail poses problems of authentication and certification. Which law should be applied In most cases a contract will fall under Chinese legislation, especially if it was signed in China. Recourse to Belgian courts is possible in theory, but the clauses still have to be translated into Chinese and then signed. "As for providing for enforcement of a judgment under Belgian law in China, this is pure science fiction!" There remains the possibility of international contracts, in which the applicable law is chosen by the parties: "In summary, parties are free to choose the applicable law in an international contract, with the exception of contracts compulsorily governed by Chinese law". This takes place provided that the contract is considered international, which is possible under three alternative conditions: if one or both parties to the contract are foreign nationals, stateless or foreign corporations; if the subject matter of the contract is located abroad; or finally, if the act giving rise to the contractual rights and obligations, or amending or terminating them, takes place abroad. There is a historical exception for three kinds of contracts which, although containing foreign elements, were compulsorily subject to Chinese law: capital joint-venture contracts, contractual or cooperative joint-venture contracts, and contracts for the exploration and exploitation of natural resources. New provisions have added contracts for transfer of securities of a foreign investment company, contracts for management by a foreign jointventure party, contracts for acquisition by a foreign party of shares in a Chinese company, contracts for participation by a foreign party in a Chinese company, and contracts for purchase by a foreign party of assets of a Chinese company. This has only served to formalize a practice of the Chinese approval authorities, who, in the framework of merger/acquisition transactions involving a foreign purchaser and a Chinese target, systematically refused to approve contracts if they were subject to a foreign law. As regards other international contracts, the parties can choose the applicable law or change their choice until the end of an action in the event of a dispute. In the absence of a choice expressed by the parties, the Chinese Supreme Court specifies that in order to decide on the applicable law, the court must examine the details of the contract and consider to what extent a party’s obligations are sufficient to characterize the contract. The factors to be taken into account are, for example, the nationality of the parties, their places of residence or main business, where the contract was signed, and the place of execution. The Supreme Court, in its provisions, gives the list of criteria for determining the applicable law to 17 categories of contracts; application of these criteria most often leads, in practice, to retaining Chinese law as the applicable law. Arbitration When a law other than Chinese law is chosen as the applicable law, and a dispute is brought before a Chinese court, the Supreme Court requires the contracting parties to provide to the court the content of the chosen law in the Chinese language. When the parties have not expressed a choice, and a foreign law is applicable, the court can itself seek this law and request the parties to do so. The Supreme Court expressly indicates that if the foreign law, although applicable, cannot be found in the Chinese language by the court and by the parties, then Chinese law will apply. This will also be the case if it transpires that the parties have sought to circumvent Chinese law by choosing a foreign law while the conditions for doing so were not met: the clause relating to the applicable law will be deemed null and void and Chinese law will automatically apply. Should recourse to Chinese courts and tribunals necessarily be avoided "Yes and no: the Chinese judiciary system is in fact sometimes unpredictable. When there is a foreign party to a contract, it is possible to stipulate the competence of a foreign court, tribunal or arbitration chamber". So is a Belgian tribunal possible Not necessarily. It also depends on the nature of the dispute, since Belgian legislation is sometimes more favorable, sometimes less. Recourse to an international arbitration chamber is possible, with English as the working language. They exist in Hong Kong and Singapore. But in the event of the Chinese party rejecting any foreign arbitration, it is still possible to accept recourse to the Chinese international arbitration chamber, CIETAC. This chamber offers an operation and services that respond globally to the quality requirements involved. It is however advised, in order to guarantee neutrality of the arbitration tribunal, to stipulate that the language of the proceedings will be English (especially if it is also the language of the contract) and adopt a mechanism for appointing arbitrators that ensures that they do in fact have a mastery of the language. A final word of caution from Maître Snel: amicable and negotiated settlements are the only solution – the only acceptable solution. A legal solution or even arbitration will only ever be the confirmation of a divergence and disruption of the balance between the parties – in other words, a confirmation of failure. Dynamisme Special Issue .15
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