Below are some practical constraints and best practices with respect to the PRC Contract Law. Although quite general, some of the issues below also apply to many other transactions under PRC law.
IIII. Practical Constraints
• China does not follow a system of judicial precedent, and without a case law system it can be difficult to resolve complex contract issues. **(However judicial interpretations by the PRC Supreme Court are binding.)
• There is no formal system of discovery in China, therefore gathering and compelling evidence can sometimes be mission impossible.
• Judgements in PRC courts are often political and protectionist.
• In many cases, the laws that apply to a particular contract case can be found in many different places, often with no translations, and these laws regularly are in conflict.
IIV. Best Practices
• At the drafting stage it is important to gather as much information from the local party as possible.
• Independent legal advice from local Mandarin speaking lawyers is advisable if you do not have relevant expertise in a particular area.
• In the event of a dispute, arguments should be based on the legal framework and the principles of the law, rather than its application through cases.
• When conflicts between PRC laws exist, it is prudent to follow the law or regulation issued by the higher decision making body.
Monday, November 30, 2009
Sunday, November 29, 2009
Help, what is my severance pay?
If you are entitled to severance pay, how exactly is it calculated in the PRC?
In the PRC, severance pay is calculated in a bifurcated manner. The old labor law (“Old Law”) applies to the term of employment before January 1, 2008 and the new PRC Labor Contract Law (“New Law”) applies to the period from January 1, 2008.
1. For term of service after January 1, 2008.
According to the New Law, severance pay is generally 1 month’s salary for each year of employment (or ½ month salary for employment of less than 6 months).
“Monthly Salary” = the employee's average monthly salary in the preceding 12 months prior to termination, which includes base salary and also any bonuses, allowances, subsidies, etc.
**If however, the Monthly Salary is more than three times the average monthly salary of all employees in the jurisdiction (“Average Local Salary”), then the Monthly Salary will be capped at 3x the Average Local Salary. For example in Shanghai the Average Local Salary in 2008 was RMB 3,292, and three times that equals RMB 9,876. Therefore, suppose your monthly salary is RMB 35,967 a month from January 1, 2008 – January 1, 2009, your severance will be capped at RMB 9,876.
2. For term of service before January 1, 2008.
According to the Old Law, the term of employment before this time period is not subject to the Average Local Salary cap. Therefore, employees fair much better with regards to severance pay for the term worked prior to January 1, 2008. So following the example above, you will be able to use your Monthly Salary (i.e., RMB 35,967) to calculate severance pay.
(***this is not legal advice! talk to a friendly lawyer friend -- you may also be able to get more or nothing at all, depending on your individual circumstances)
Deeper into the PRC Contract Law (Part 2)
II. Formation of contracts under PRC law
Structurally, the Contract Law, like many other laws on contracts, is divided into three sections:
(1) General Provisions;
(2) Specific Provisions; and
(3) Supplementary Provisions.
In the Contract Law, there are many black letter provisions that are common to contract laws in other jurisdictions. But there are also certain provisions that may come as a surprise to foreign practitioners which will be discussed in more detail below.
In Writing means a memorandum of contract, letter or electronic message (including telegram, telex, facsimile, electronic data exchange and e-mail), etc. which is capable of expressing its contents in a tangible form -- ***therefore an email may be considered a proof of writing and be used to conclude a contract.
Choice of Law - In contracts with a foreign element, the parties may choose the law for dispute settlement. In the absence of a stated law, the law of the jurisdiction with the closest connection to the contract will apply.
Structurally, the Contract Law, like many other laws on contracts, is divided into three sections:
(1) General Provisions;
(2) Specific Provisions; and
(3) Supplementary Provisions.
In the Contract Law, there are many black letter provisions that are common to contract laws in other jurisdictions. But there are also certain provisions that may come as a surprise to foreign practitioners which will be discussed in more detail below.
In Writing means a memorandum of contract, letter or electronic message (including telegram, telex, facsimile, electronic data exchange and e-mail), etc. which is capable of expressing its contents in a tangible form -- ***therefore an email may be considered a proof of writing and be used to conclude a contract.
Choice of Law - In contracts with a foreign element, the parties may choose the law for dispute settlement. In the absence of a stated law, the law of the jurisdiction with the closest connection to the contract will apply.
****Notable Exceptions: PRC law applies in specific cases such as: (1) Sino-foreign cooperative joint venture contracts; (2) Sino-foreign equity joint venture contracts.
III. Recent clarifications on the Contract Law
III. Recent clarifications on the Contract Law
(i) Second Judicial Interpretation and the Recent Judicial Direction on Contracts
24 April 2009 the Supreme People's Court (the "SPC") issued a second judicial interpretation re "Interpretation on Several Issues Concerning the Application of the PRC Contract Law" (the “New Interpretation”);and on 7 July 2009 the Supreme People’s court issued the Direction on Dealing with Several Issues in Civil and Commercial Contract Disputes (“Direction”), for more guidance on how lower PRC courts should apply the Contract Law.
Highlights include:
Introduction of a “Change of Circumstances” rule - According to Article 26, of the New Interpretation, where a change of circumstances has occurred due to various reasons enumerated in the Article such as, material objective changes, unforeseen circumstances, or unfairness, etc., the party affected may apply to the court for amendment or termination of the contract. **It should be noted that courts will proceed with this issue with caution in order to maintain fairness and not overly hinder freedom of the market economy.
Liability for failure to carry out formalities to effectuate a contract – such as failure to complete government registrations, etc., can subject the offending party to relevant expenses. For foreign parties who often depend on the Chinese party to the transaction to complete government registrations/filings/approvals, etc., this may be a valuable tool - however in practice I can't imagine negotiations would go very well if this rule was sprung up on the Chinese party. But at least we know its there.
Liquidated damages may be adjusted by the courts to the actual losses suffered by the party – but in no event shall be more than 30% of the actual losses suffered by the party. **The principals here are fairness and good faith.
Standard Form Contracts and Exemption of Liability Clauses– here the contract provider must use reasonable efforts to draw attention of the other party to clauses in which it attempts to limit its liability. **Reasonableness will be based on, among others, font size, typeface, and other sufficient markings. Failure to do so, may allow the court to rescind the contract.
Fingerprints may be recognized as fulfilling the requirement of “signing” or “sealing” the contract.
Place of Signing may be determined according to the place agreed by the parties, even if it is not actually signed there, or if it is signed in different places or no location is specified, the final signing place will be recognized.
In absence of a writing or oral agreement, actions by parties may be sufficient to conclude a contract unless laws or regulations otherwise provide.
If a contractually named principal begins performance of a contract but has no power of agency in the contract, the contract will nevertheless stand effective.
The New Interpretation, still remains quite general in parts, but should nevertheless provide more guidance to contracting parties and in some respects reinforces the Supreme People’s Court’s desire to allow the free will of contracting.
That's all for now visit again for an even deeeper look... (and remember this is for reference only and not legal advice)
Wednesday, November 25, 2009
Deep into the PRC Contract Law (Part 1)
This is an important area of law to understand for all parties doing business in the PRC.
I. Legislative Overview
(i) Background
• As a trading nation which functioned under a strictly planned economy, China had no need to have an established system of law for centuries. However, with the opening of the PRC and the altering of trade culture, the legislature quickly realized a need for laws on contracts to provide structure and guidance to the mounting complications arising in trade related transactions.
• Prompted by such circumstances, the National People’s Congress, passed the following three laws on contracts in the early 1980’s:
1 Economic Contracts Law of the PRC (1981);
2 Law of the PRC on Economic Contracts Involving Foreign Interests; and
3 Law of the PRC on Technology Contracts.
These three-piece laws on contract were largely inconsistent and overlapped in many areas while offering little guidance for complex contractual cases. The purpose of the second law on the list was to promote foreign trade and investment, and for the first time in PRC history incorporated Western notions of freedom to contract and party autonomy.
(ii) Promulgation of one uniform contract law in 1999
Initiated by further globalization in the 90's, the State Council undertook a major overhaul to further reform this area of law – which resulted in the promulgation of the ‘PRC Contract Law’ (1999) (the “Contract Law”) - which repealed the former three laws – and was an overt effort by the government toward "protecting the legitimate rights and interests of parties to contracts, maintaining socio-economic order and promoting socialist modernization”.
The Contract Law is a hybrid of key concepts from Common Law and Civil law jurisdictions.
The Contract Law is not comprehensive in itself, and other laws which must be referenced include:
I. Legislative Overview
(i) Background
• As a trading nation which functioned under a strictly planned economy, China had no need to have an established system of law for centuries. However, with the opening of the PRC and the altering of trade culture, the legislature quickly realized a need for laws on contracts to provide structure and guidance to the mounting complications arising in trade related transactions.
• Prompted by such circumstances, the National People’s Congress, passed the following three laws on contracts in the early 1980’s:
1 Economic Contracts Law of the PRC (1981);
2 Law of the PRC on Economic Contracts Involving Foreign Interests; and
3 Law of the PRC on Technology Contracts.
These three-piece laws on contract were largely inconsistent and overlapped in many areas while offering little guidance for complex contractual cases. The purpose of the second law on the list was to promote foreign trade and investment, and for the first time in PRC history incorporated Western notions of freedom to contract and party autonomy.
(ii) Promulgation of one uniform contract law in 1999
Initiated by further globalization in the 90's, the State Council undertook a major overhaul to further reform this area of law – which resulted in the promulgation of the ‘PRC Contract Law’ (1999) (the “Contract Law”) - which repealed the former three laws – and was an overt effort by the government toward "protecting the legitimate rights and interests of parties to contracts, maintaining socio-economic order and promoting socialist modernization”.
The Contract Law is a hybrid of key concepts from Common Law and Civil law jurisdictions.
The Contract Law is not comprehensive in itself, and other laws which must be referenced include:
a. PRC Civil Code;
b. PRC Supreme Court interpretations and administrative regulations;
c. District level, city level, provincial level and national level rules, ordinances, guidelines, etc.; and
d. Specific laws such as, PRC Law on Chinese-Foreign Equity Joint Ventures (2001).
(iii) Legislative developments of the PRC Contract Law
PRC Contract Law (effective October 1, 1999)
Interpretation of Issues relating to the PRC Contract Law (Supreme Court, effective December 29, 1999)
Interpretation of Issues relating to Construction Contracts (Supreme Court, 2005)
Interpretation on Several Issues Concerning the Application of the PRC Contract Law (Supreme Court, April 24, 2009)
Direction on Dealing with Several Issues in Civil and Commercial Contract Disputes (July 7th, 2009)
Come back next week for a closer look!
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