Joint Venture in China

One of the biggest issues may be found through the difference in law between China and Australia; China having civil law and Australia having common law. Therefore in order to have the Joint-Venture contract protected from future changes in the Chinese civil law system a stabilization clause is highly recommended. Types of Joint-Ventures in China: What makes the selection of a joint-venture so important is that even though China’s Choice of Law provisions follow international practices; this doesn’t apply for Joint-Ventures.

Four Basic attributes:

1. Established in accordance with the law of the People’s Republic of China.
2. Necessary Property or Capital
3. Possesses its own name, structure, and premises
4. Assumes civil liability independently.

Cooperative (Contractual) Joint-Venture Creating Chinese Juristic Person (CJVCJP): Also a limited liability company which assumes responsibilities for the ventures total assets however can have a separate internal arrangement on debt liability of each party. The structure and status of this type of venture are a lot more flexible than for EJV’s, with precise aspects being able to be defined by contract. It also has the liberty of negotiation of product or profit distribution method while still being a separate legal person with the parties’ liability limited to their capital contributions.

However, with this novelty in green building rising and a lot more foreign producers developing products and technology in China so comes the problem of protecting intellectual property. Intellectual property protection is relatively new in the People’s Republic of China but its importance continues to rise and it is often cited as an issue of concern for foreign parties in China. Traditionally the concept of protecting intellectual property did not have a stronghold in Chinese culture, but China’s reformation of its national IP system to comply with the international standards set out through the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement has been a leap for the development of China’s view in regards to intellectual property. However, despite China’s accomplishments in IP protection and indications it will not become a “haven of piracy” is still considered one of the most risky places to do business. This is due to its relative novelty in the People’s Republic making certain segments of the population have only a rather vague understanding of the concept. In the P. R. C, the problem isn’t that they don’t have laws regulating IP protection. In fact, they have laws for the protection of Patents, Copyright Infringement, and Trademarks. However, the problem comes when trying to implement these laws as Chinese civil enforcement procedures make it very difficult to protect high technology patents.

In addition, an interesting fact to note is that People’s court may accept oral evidence but in practice, they rarely accept or put weight on this type of evidence. Therefore, when dealing with foreign parties it is important to develop and implement a comprehensive strategy for protecting their technology interests. If it is assumed this wall paneling company has already patented its product in Australia, under Australia’s Patent law the patent will last for 20 years. As the product is already being produced in Australia it can’t be patented in China. However, as China is part of WTO and is a signee on the TRIPS agreement, therefore they are politically and morally bound to recognize the Australian patent. As the producers in China will need to have the production know-how for the wall paneling, therefore there is a risk of intellectual property theft. To try and protect the IP a license agreement for technology transfer could be considered.

When setting up a technology transfer agreement, the Technology Transfer Regulations as stipulated in the China Laws for Foreign Business outlines in Article 2 six ways of technology acquisition. If licensing is chosen for the transfer of the patent and its technology in the Joint-Venture the usual licensing agreement is 10 years. However, this is usually permitted to extend to the life of the Joint-Venture. The agreement involved will allow the Chinese producers to use the technological know-how with it returning to the licensor (the Australian side) once the Joint-Venture is terminated. However it must be noted that the general consensus in China is that technology and know-how belong to the licensee at the end of the term and the licensor should not be able to restrict the licensee in its use of this information. Therefore despite many ways one can try and protect IP in China, the most important factor is to carry out due diligence and make sure that the know-how has been protected as good as possible. The Issue of Dispute Resolution: Due to a difference in the legal system, cultural values, and business practices, China can be seen as a high-risk business environment. In the case of any disputes, a clear and understandable dispute resolution method and the clause should be formed and included in the Joint-Venture contract.

It is crucial for JV parties to specify dispute resolution methods, applicable law, and venue for resolving disputes. Under the law of the P. R. C, Sino foreign Joint-Ventures are allowed to select applicable law and the venue for the dispute resolution in their contractual clause and Chinese law is only an option in this case. However, Article 25 of the Law on Sino-foreign Cooperative Joint-Ventures (2005) provides that if a dispute arises, the dispute should be in the first instance settled through friendly consultations to the extent possible. If such consultations fail then the dispute may be settled by arbitration or be referred to the People’s Court. Therefore it is recommended that in light of any breaches of contract or party disputes the first step should be a negotiation. Negotiation is not legally binding and can preserve the guanxi between both parties, whilst being the cheapest ADR method. Also given the law states that friendly consultation should be the first step it should be the first method tried. However if not successful a relevant arbitration can be included in the contract. P. R. C has a flexible approach regarding dispute resolution and it can take place in China or abroad according to Chinese rules or an international arbitration body. However, for this wall paneling company, it is still recommended to have the arbitration carried out in China as the cost is lower and it is more convenient and is enforceable. Many parties scared of using mainland Chinese arbitration rules have decided on arbitrating in Hong Kong.

This is a great option for the wall paneling company as Hong Kong has adopted the UNCITRAL model law on arbitration and is considered an international arbitration center with highly developed infrastructure. In addition, Hong Kong will able to give better advice on foreign-related matters in English making the process a lot smoother. If Arbitration still has not produced any results litigation can be considered but in China, it is usually viewed as a last resort due to possible bias present in the courts and due to court proceeding being very lengthy and expensive and it’s also difficult to find lawyers competent to advise on foreign matters in English. Usually, foreign parties will endeavor to ensure their disputes are resolved without Chinese courts as they are still unconfident because of the reported local protectionism. Which language should be used in the Joint-Venture contract? When dealing with foreign parties there can sometimes be large language barriers. This problem can often be solved by having a clear language agreement stipulated in the contract. It is common practice to have a contract in both acting languages. Although this can be rather expensive, it may avoid some major problems that could arise in the future.

The Issue of Termination: Chinese parties may be averted to agreeing with the public and formal ending of a Joint-Venture, not wanting to discuss the end before even beginning. However, sometimes, as the Chinese saying goes, the foreign party might find themselves in the ‘same bed’ as the Chinese but ‘with different dreams’. This is why a termination clause is very important. Despite the conventionality of this clause, it is still a grey area; the general practice is that foreign investors buy their way in and then buy their way out if the situation turns bad. Chinese parties have been known to play corporate blackmail with foreign investors as to block the potential exit of the foreign party or to hold them liable for all losses. A Joint-Venture contract should have a detailed termination clause that outlines the events allowing parties to terminate their involvement. It should also state the duration of the Joint-Venture.

Some grounds for termination are as follows:

1. Expiration of the Joint-Venture term
2. Inability to continue operations due to heavy losses
3. Inability to continue operations due to the failure of one of the contracting parties to fulfill its contractual obligations
4. Inability to continue operations to heavy losses caused by force majeure
5. nability to attain the desired objectives of operations and the lack of future for development.

Appendix 1: Business Structures in China

Appendix 2: China Business Law Guide 2005

• a) The assignment of patent rights;
• b) The assignment of the rights to apply for patents
• c) The licensing of patent exploitation;
• d) The assignment of technical secrets;
• e) The provision of technical services;
• f) Other forms of transfer of technology.

Appendix 3: Dispute Resolution Clause In the event of any dispute arising under this contract, the parties shall first make all necessary efforts to settle the dispute through friendly consultation. If it is impossible to settle the dispute in this way then the matter shall be submitted to arbitration before the Hong Kong.

International Arbitration Centre. Appendix 4: Grounds for Termination

1. Failure of a participant to make require capital contribution;
2. Failure of a participant to obtain necessary government approvals;
3. Failure of the venture to reach a pre-agreed level of profitability;
4. Management deadlock;
5. Failure of one partner to purchase the shares of another. (Buy-Sell agreement);
6. An adverse and debilitating change in the law;
7. Bankruptcy or insolvency of the Joint-Venture.

In relation to IP even if there is a clear termination clause and licensing agreement relating to the breach for the use of IP and know-how as mentioned before the general consensus in China is that licensed IP will be able to be used once the license agreement has ended by the licensee. This means that despite efforts to protect IP, there is still a possibility of a breach and this should be understood as China’s cultural view is different and they still have a developing legal system in relation to this problem.

Appendix 5: Key Issues in Enforcing IP Law

The key issues are:

1. Civil procedure law puts a strong burden on plaintiffs to prove their case. There are no rules specifically shifting the burden of proof if a plaintiff makes out a prima facie case. This can make it very difficult to prove that a high technology patent has been infringed, or a trade secret has been misappropriated.
2. There is no discovery in civil proceedings. Parties are only required to submit evidence that assists their case. Without discovery, it can be extremely difficult to prove a case.
3. Oral evidence is very rarely accepted in civil proceedings (63 and 72 of Civil Procedure Law) – oral evidence of misbehavior by an employee will thus be very hard to use.

Appendix 6: Expected Growth of China Green Buildings.

Reference

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