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Arbitration

Overview
Including: international arbitration versus domestic arbitration; institutional and ad hoc arbitration; legal representation; commencement of proceedings; appointment of arbitrators; expansion of application and defence - further pleadings; hearing; rules of evidence; post-hearing pleadings; preservative measures; awards; enforcement of foreign arbitration award.

It is generally accepted that when a claim or a debt is assigned, the arbitration agreement attached thereto is also assigned. However, the Supreme People's Court has opined that an arbitration clause contained in a contract for carriage of goods by sea was not binding on an insurer that stepped into the shoes of the insured consignee by way of subrogation.

The Supreme People's Court recently issued a direction that an arbitral award should be refused recognition and enforcement as the arbitration concerned an inheritance dispute and was therefore not arbitrable. However, a request for a declaration of title to a 50% equity share in a company by way of succession could be characterized as a commercial matter.

The Supreme People's Court has upheld the Chinese courts' first decision on an arbitral award issued by a truncated tribunal. Recognition and enforcement were refused in accordance with Article V(1)(d) of the New York Convention. However, Chinese arbitration law and practice do not absolutely reject an arbitral award issued by a truncated tribunal.

For the first time since China acceded to the New York Convention in 1987, a foreign arbitration award has been refused recognition and enforcement in China on public policy grounds. Although the court apparently intended to set a precedent on these grounds, the case leaves open a number of significant questions.

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Aviation

A recent decision by a Chinese low-cost carrier to blacklist passengers who demanded and obtained compensation for an extended flight delay has been the subject of much public debate. The airline has confirmed that it has blacklisted the passengers for their unruly behaviour. But questions have arisen as to whether airlines have the right to create blacklists or otherwise refuse to admit passengers.

A controversial civil aviation development charge is being imposed on every air passenger in China and every Chinese airline. Many commentators have questioned the need for, and the legitimacy of, such a charge, arguing that with tax revenues of Rmb1 trillion in 2011, the government does not lack capital for large-scale aviation infrastructure.

China signed the Cape Town Convention and protocols in 2001, but it was not until 2009 that the Civil Aviation Administration of China issued rules for the recordation of irrevocable deregistration and export request authorisations (IDERAs) and the deregistration of aircraft by IDERA holders. Chinese airlines and their foreign creditors should be aware of the application process and the documents required.

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Banking

The China Banking Regulatory Commission's guidelines on reputational risk management in commercial banks apply to all Chinese commercial banks, banks established through equity joint ventures and foreign-invested banks. They require banks not only to integrate reputational risk management into their corporate governance and overall risk management, but also to minimize adverse effects on the public and society.

In an attempt to strengthen China's economic exchange with foreign countries, the government announced the launch of a renminbi cross-border trade settlement pilot programme, for which the People's Bank of China and ministerial authorities have issued implementing regulations. The scheme will affect background clearing between Chinese and foreign banks.

With Chinese banks' loan business growing rapidly - along with fears of inflation - the China Banking Regulatory Commission has released a consultative note on a draft circular on capital replenishment mechanisms. The draft circular indicates the government's intention to tighten capital adequacy ratio requirements for Chinese banks and to curtail bank lending.

The People's Bank of China and the Hong Kong Monetary Authority have signed a currency swap agreement which enables short-term liquidity support to be provided to the mainland operations of Hong Kong banks and the Hong Kong operations of mainland banks, as necessary.

The People's Bank of China and the Hong Kong Monetary Authority have announced a multi-currency cross-border payment arrangement between the mainland and Hong Kong. The arrangement covers cross-border payments and settlement in four currencies.

Rules newly in force are likely to complicate the acquisition or disposal of interests in financial enterprises. Among other things, they confirm that transfers of state-owned interests in unlisted financial institutions are subject to a mandatory public auction or tender process, unless a special approval for transfer by private agreement is obtained from the State Council or the financial authorities.

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Capital Markets

After a two-year moratorium on the establishment of, and investment in, Chinese securities companies, the new Rules on the Establishment of Securities Companies with Foreign Equity Participation and their subsidiary provisions demonstrate the government's encouraging, if cautious, approach to creating a clearer regulatory framework and enabling a gradual opening of the industry to foreign investors.

Company & Commercial

Overview
Including: Foreign Investment and Registered Capital; Dividends, Voting Rights and Equity; Share Transfer and Directors' Accountability; Shareholders.

The Ministry of Commerce has recently decentralized its approval powers with respect to foreign-invested commercial enterprises, delegating the power to approve the establishment of and changes to such enterprises to its provincial counterparts. The provincial governments are eager to attract foreign investment and the change should make it much simpler to establish a foreign-invested commercial enterprise.

Various government departments have jointly issued Implementing Opinions on Certain Questions Concerning the Laws Applicable to the Administration of the Approval and Registration of Foreign Investment Companies. The opinions restate much current law but also aim to clarify certain principles in China's foreign investment regime that overlap or conflict with the revised Company Law and the Company Registration Regulations.

The amendments to the Regulations on the Administration of Company Registration bring the rules into line with the newly amended Company Law and clarify various points related to registration. They also increase the financial penalties for non-compliance which may be imposed on companies and their directors.

A number of local administrations for industry and commerce in China have stopped accepting applications to register liaison offices and will not renew existing registrations. Foreign-invested enterprises that have used liaison offices to minimize tax liability may wish to evaluate the options offered by a branch structure.

As individual members of a corporation's decision-making body, directors do not usually bear personal liability for the actions of the corporation. Nevertheless, in certain circumstances directors can be personally liable for damages to others as well as to the company itself. A director may even bear criminal liability in some situations.

The Ministry of Commerce has issued a notice regarding foreign investment in distribution activities in China. Before the issuance of the notice, there was limited guidance on the procedures for existing foreign-invested enterprises to include distribution in their business scopes.

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Competition

The Ministry of Commerce (MOFCOM) recently published two sets of draft merger control rules – one governing the imposition of restrictive conditions and the other outlining a procedure for dealing with simple cases. These positive steps demonstrate MOFCOM's continued efforts to accelerate the rule-making process and improve the efficiency and transparency of the merger control review procedure.

The Ministry of Commerce (MOFCOM) recently announced its conditional approval of Marubeni Corporation's acquisition of Gavilon Holdings. Given Marubeni's advantage in China's soybean import market and Gavilon's influence in the North American soybean market, MOFCOM initially held that the proposed deal could lead to Marubeni's enhanced control over China's soybean import market and thus restrict competition.

The Ministry of Commerce (MOFCOM) recently gave the green light to the Glencore/Xstrata deal, which will be the largest merger in mining history. The approval has been awaited for more than a year. MOFCOM issued the approval with certain restrictive conditions on the deal, following the practice of merger review agencies in other relevant jurisdictions.

The simmering war between two large Chinese internet companies has culminated in Qihoo 360 losing the first-ever antitrust litigation involving instant messaging services. The court held that Tencent did not commit an abuse of dominance as defined in the Anti-monopoly Law. The case shows that henceforth, Chinese courts will challenge monopoly behaviours with more muscle.

Less than two months after a breakthrough cartel case resulting in record fines, the Chinese price monopoly watchdog has levied another harsh punishment against two luxury Chinese liquor producers. This case reaffirms that companies operating in China should prudently review their distribution policies in particular and antitrust compliance in general in order to avoid antitrust risks.

At the end of 2011 the Hunan Province Administration for Industry and Commerce (AIC) received multiple reports concerning monopoly agreements and the elimination of competition on a new auto insurance market operated by the New Auto Centre. Following an investigation, the AIC has imposed a penalty of Rmb1.7 million on some of the involved parties.

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Construction

The Ministry of Construction and Ministry of Commerce have issued the Implementation Rules to the Administrative Regulations on Foreign-Invested Construction Engineering Design Enterprises. The rules relax the requirements on foreign service providers' qualifications under the Administrative Regulations on Foreign Invested Construction Engineering Design Enterprises.

The problem of non-payment of contractors has long plagued China's construction industry. Owners often start construction work on a project before they have sufficient funds to ensure its completion; contractors in a fiercely competitive market often have no choice but to agree to fund the construction of the project, even though they may have no guarantee of payment once the project is completed.

Corporate Finance/M&A

The State Council has established several fundamental policies that seek to promote the development of diverse forms of ownership and turn state-controlled enterprises into ordinary joint stock companies. It also wishes to encourage private investment in the fields of finance, rail transport, energy, telecommunications, education and medical services.

Over the past two years, domestic private equity investment has greatly increased but, as a result of coordination problems between departments and their supervisory authorities, the Administrative Rules on Private Equity Investment Management have not yet been released. The government is concurrently implementing pilot projects and draft administrative regulations on the subject.

Many foreign investors in China face difficulties in assembling a successful business project team to implement their project. As well as considering the best composition of an internal team, this update looks at the selection of external consultants: what roles do they play, how should they be selected - and are they really necessary?

If venture capital investment enterprises make an equity investment in private small and medium-sized high-tech and new technology enterprises for more than two years, they are entitled to a 70% deduction of the total investment in the enterprises from the venture capital enterprise's taxable income once the two-year period for the equity holding is reached.

A new State Council policy proposes to open more sectors to private investors. Before the promulgation of the policy, some of the industries were monopolized by state-owned enterprises and were virtual no-go areas for private capital. However, the successful implementation of these policies and incentives depends on clear implementing rules. Otherwise, private investors will be back to square one.

For many companies approaching a transaction, due diligence is a tool to confirm compliance or to seek confirmation that the project is not excessively risky. For an acquisition in China, this is the wrong approach. This update considers legal due dilgence processes and tools, highlighting common problems for a foreign investor.

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Corporate Immigration

New regulations on permanent residency for foreigners have been issued by the Ministries of Public Security and Foreign Affairs. The move has brought China into closer compliance with its World Trade Organization accession commitments and has been welcomed by long-term expatriates, many of whom consider the country to be their adopted home.

The large number of multinationals establishing and operating companies in China has created a growing need to send foreign nationals to work in the country on long-term or short-term contracts. Applicants must complete an eight-step process in order to obtain a valid work and residence permit, which will allow for multiple entry, exit and continuous residence for between one and three years.

China's legal system does not yet allow foreigners to immigrate to China. Although recent legislation has introduced a green card system, which allows for a form of permanent residency, all foreigners must obtain a visa for entry into China and undertake several procedures in order to obtain a valid residence permit based on the purpose of their residence.

Corporate Tax

The State Administration of Taxation interpretation of the China-Singapore tax treaty is the first comprehensive, systematic interpretation of a tax treaty between China and a foreign jurisdiction since the 2008 Enterprise Income Tax Law entered into force. Among other issues, it considers the question of what constitutes a 'permanent establishment' within the meaning of the treaty.

The State Council and the State Administration of Taxation have sought to clarify the tax treatment of restructuring operations. However, the existing tax management system is far from perfect in this respect. Listed companies contemplating a merger or acquisition should prepare an appropriate tax plan and take a proactive approach with the tax authorities.

In accordance with Article 8 of the Business Tax Law, the Administrative Measures of Enterprise Income Tax Derived from Enterprise Restructuring have been issued. They provide useful clarification of the ordinary or special tax treatment available in the event of a debt restructuring, acquisition, merger or demerger.

National and local tax bureaux will be focusing afresh on companies' transfer pricing documentation under a recently issued circular. The State Administration of Taxation has decided to undertake a nationwide programme of random inspections to examine the contemporaneous documentation for such operations.

Over the past few months the State Administration of Taxation has issued a number of regulations and policies regarding the treatment of so-called 'general' taxpayers in accordance with China's value added tax (VAT) regime. Tax experts have been considering these clarifications and their impact on the application of VAT.

An official newspaper of the State Administration of Taxation has reported that the automotive and pharmaceutical industries are the tax authorities' current focus in respect of anti-avoidance administration. Foreign-invested companies in these sectors typically have a high volume of cross-border licensing and servicing transactions, which may be one of the reasons for the authorities' focus on them.

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E-commerce

Operating online can have its challenges. As online trading is quite a new phenomenon in China, as yet there is no perfect solution to the problems connected with it. The State Administration for Industry and Commerce issued the Provisional Measures for the Administration of Trade and Services on the Internet, a first-of-its-kind prescriptive document designed specifically to regulate trading conduct on the Internet.

On April 1 2005 China's first national level e-commerce legislation, the Electronic Signatures Law, came into effect. By giving legal weight to electronic signatures and to the creation and storage of business documents in electronic form, the law will not only facilitate online transactions, but also spur on the security and encryption business.

Employment & Labour

The secondment of expatriate employees to China has been a headache for multinational companies since 2009, when the tax authorities started to treat secondment as creating a permanent establishment of the overseas employer. However, new rules recently issued under domestic tax law with respect to cross-border secondment will hopefully ease the pain associated with expatriate secondments.

The Supreme People's Court has issued the long-awaited Interpretation on Various Issues Concerning Application of Law in the Trial of Employment Disputes (commonly referred to as 'SPC IV'), which provides clarity on some hot-button issues. Among other things, it sets out certain severance pay protections and specific rules on the enforcement of non-compete restrictions.

The Standing Committee of the National People's Congress has finally passed an amendment to the Employment Contract Law, under which companies will no longer be allowed to hire staff through staffing agencies, except under very narrow circumstances. Companies should be mindful of how these changes may affect their human resources structures.

The Shanghai Pudong District People's Court has dismissed an employee's claim against his former employer for termination payments after finding that the credibility of the employee's evidence was outweighed by the evidence produced by the employer and the employee's refusal to take a polygraph test. The case highlights that submission of fraudulent evidence is still a problem in employment disputes in China.

The Dongguan Number 3 District People's Court has upheld an employer's termination of 17 striking employees for misconduct. Although Chinese law does not explicitly allow employees to strike, it is silent on whether strikes are considered illegal. This case indicates that in some strike situations, the courts may uphold an employer's disciplinary actions against striking employees on the ground of serious violation of company rules.

The Shenzhen Municipal People's Congress Standing Committee has passed the Regulations on the Promotion of Sex Equality, which will become effective in January next year. While various national laws and local regulations already contain provisions related to sex discrimination and sexual harassment, this is the first piece of legislation exclusively addressing the issue of sex equality.

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Franchising

The new Regulation on Commercial Franchises represents a significant step towards an effective and efficient regulatory regime, and will greatly benefit both franchisors and franchisees in China. However, it is by no means a perfect document and much remains to be clarified by Chinese officials, through Ministry of Commerce implementation guidelines and otherwise.

Insurance & Reinsurance

The environment is an important issue for the Chinese government, while surveys and social media show increasing public concern over environmental pollution. Against this backdrop, the Ministry of Environmental Protection and the China Insurance Regulatory Commission have issued new guidelines establishing the pilot enterprises that are subject to compulsory environmental pollution insurance.

At the end of 2011 the Hunan Province Administration for Industry and Commerce (AIC) received multiple reports concerning monopoly agreements and the elimination of competition on a new auto insurance market operated by the New Auto Centre. Following an investigation, the AIC has imposed a penalty of Rmb1.7 million on some of the involved parties.

The China Insurance Regulatory Commission and the Supreme Court have jointly issued a notice to establish a collaboration system linking insurance litigation to mediation in some areas. Considering the limited judicial resources in many insurance disputes, the court has chosen insurance litigation as the first sector in which to begin actively encouraging alternative dispute resolution over court proceedings.

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Intellectual Property

A recent decision of the Trademark Review and Adjudication Board confirms that a pseudonym, as an expression of the name of a natural person, may in certain circumstances be considered as a prior right under the Chinese Trademark Law and enforced as such. This case involved Francisco Rabanne Cuervo, a famous Spanish fashion designer who has been using the pseudonym Paco Rabanne for many years.

When examining opposition proceedings, the China Trademark Office (CTMO) generally considers only the opposed trademark and the cited trademark. However, two recent cases show that the CTMO may take other trademark applications filed by the applicant into consideration when assessing the situation and deciding on the opposition.

Original equipment manufacturer production has become a hot topic in Chinese trademark practice. It involves the intersection of three trademark issues: registration maintenance, squatting and infringement. It is hoped that the Supreme Court's expected publication of the IP Rights Report, along with an extensive review of last year's cases, will shed light on these issues.

The State Intellectual Property Office has issued a draft of the Regulations on Service Inventions. The regulations will play an important role in encouraging innovations and talent in China by entitling inventors to safeguard the IP rights for their inventions made in the course of their employment. However, several issues in the draft need to be addressed and clarified.

General Mills recently obtained a victory against a trademark squatter before the Trademark Review and Adjudication Board, which affirmed the well-known status of the Chinese translation of 'Häagen-Dazs' and rejected the bad-faith application of the mark HÖOGEN-DAZS. It seems that the board is strengthening the protection of well-known trademarks and intensifying efforts to prevent trademark squatting.

After six years of proceedings, the Beijing Higher Court has issued its decision to vacate the lower court's decision in a high-profile civil suit between Neoplan Bus GmbH and the alleged design patent infringer Zhongda Group, a domestic bus producer. The court found that no infringement had occurred, due to the invalidation of Neoplan's design patent.

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Offshore Services

The new Trust Law which recently took effect was enacted to protect the legitimate rights and interests of parties to a trust. The law provides a long-awaited legal framework for trusts in China, allowing for greater flexibility with regards to the holding and managing of property.

Product Liability

The introduction of the Food Safety Law was driven by the rise of consumerism in China and the government's efforts to improve China's international reputation on product safety. It aims to establish a monitoring and supervision system, a set of national standards, a recall system and strict penalties for offenders. However, does the new law remedy the failings of the old regime and will it protect consumers?

The government has issued a plan to assist people whose health has been affected by contaminated milk, but the one-off payments offered fall short of the remedies provided for by law. After many attempts, a court has finally accepted a civil claim against a milk company, but the claimants' lawyers fear that the low levels of compensation in the plan may effectively cap any compensation award.

China's bad year for food safety and quality control got worse when it became known that milk products produced by reputable producers had been tainted with melamine. The government has issued new regulations for the dairy industry and is pursuing its plans for a draft Food Safety Law, which aims to resolve jurisdictional uncertainties and establish a comprehensive supervision system.

Since the Supreme People’s Court issued an interpretation on determining liability for mental distress in March 2001, the courts have been increasingly prepared to award damages for pain and suffering. They are also more willing to award damages that are substantial enough to provide realistic relief to the claimant.

High-profile product recalls, such as those of Mattel toys, made 2007 a controversial year for Chinese-made goods, but claims within China have been less widely reported. This update considers the damages available in the Chinese courts when consumers claim for general damages, mental distress or emotional injury and punitive damages.

Including: Liability and Defence; Remedies; Burden of Proof; Evidence; Statute of Limitations.

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Projects & Procurement

The Beijing government has opened the city's public utilities and facilities market to private and foreign companies. A new regulation fills the gap left by the expiry of local legislation in July 2005, opening construction and management opportunities in the fields of water, gas and heating networks, urban transport and waste disposal.

The Ministry of Construction has published the long-awaited draft model concession agreement for urban wastewater treatment. The new agreement covers many of the usual and essential aspects of a project-financed wastewater treatment concession, including sections on minimum capital investment requirement, termination compensation and wastewater treatment fees.

Shipping & Transport

A recent case before the Shanghai Maritime Court highlights the importance of pinpointing exactly where cargo damage occurs when determining the responsible party in container damage claims. The case also shows that a consignee's failure to make a full inspection of the goods upon receipt and within the statutory period could bring about the unravelling of its claim.

A recent case before the Guangzhou Maritime Court highlights the extent of relief from carriers' liability for damaged cargo under the Maritime Law. Although the dispute was ultimately settled out of court, provisions of the law allowed the defendant to pay a much lower settlement amount than the plaintiff's original claims.

In a case concerning compensation liability for the release of goods without a bill of lading, the defendant was a qualified non-vessel operating common carrier, but also had a certificate for handling international forwarding. The plaintiff failed to distinguish between the freight forwarder and non-vessel operating common carrier and thus did not make its action against the right defendant, causing the court to rule against it.

Two ships, the M/V SF and the M/V CS, collided in the port of Tianjin, causing much damage to the CS. The CS's owner filed an action for damages against the owner of the SF and its protection and indemnity club insurer. The club argued, among other things, that it was merely a trade brand jointly used by 12 insurers and thus not a legal entity that could be sued. The court ruled in favour of the club, dismissing the claim.

An item of machinery that was to be shipped from Brazil to China was damaged when it struck lifting equipment in the port area. Among other things, the court had to decide whether the defendant was entitled to enjoy the unit limitation of liability that applies when cargo damage occurs during sea transportation, with the plaintiff arguing that the cargo damage had occurred some distance from the ship's rail.

A dispute between a clothing company in China, a logistics company and a shipping company raises significant questions about the scope of liability where goods are released at their destination without an original bill of lading, particularly where the carrier is required to deliver the goods to Customs and the port authority.

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Telecommunications

As backers of rival third-generation (3G) mobile telephony standards compete for a share of China's rapidly expanding telecommunications market, China Telecom's announcement that it will be able to offer 3G services within seven or eight months of receiving official approval makes the government's forthcoming decision on licensing even more crucial.

Trade & Customs

Under the value added tax (VAT) pilot programme, international transportation services and the export of research and development services and design services are zero-rated. To clarify the rules for the implementation of this zero-rating, the State Administration of Taxation and the Ministry of Finance have issued administrative measures.

Mainland China and Hong Kong have reached an agreement on the enhancement of economic and trade cooperation and exchanges between the two jurisdictions under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) and signed Supplement 9 to CEPA. Supplement 9 provides for a total of 43 measures for services liberalisation and trade and investment facilitation.

In order to encourage imports and economic and social development, the Ministry of Finance has announced that China will apply lower import provisional taxes on more than 730 kinds of goods, with an average rate of 4.4% - over 50% lower than the most-favoured nation rates.

The General Administration of Customs has issued an announcement which sets out the principles to be applied in classifying imported articles and in determining their dutiable value, indicating the correct approach for articles listed (or not listed) in the relevant classification and dutiable value tables.

The General Administration of Customs has issued a formal announcement of new anti-corruption measures with respect to the giving and receipt of so-called 'red packets' - cash, securities, payment vouchers, commercial pre-paid cards or other instruments. The announcement sets out the obligations and restrictions on customs units and individual officers.

The General Administration of Customs has issued Announcement 63/2011 on the implementation of changes to the China-Singapore Free Trade Agreement Rules of Origin and Customs Procedures arising from the China-Singapore Amendment Protocol. Among other things, it deals with the retrospective issuance of preferential certificates of origin.

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