Jenny Zhang, Attorney at Law, Lawyer, Law firm in Dalian, China

In China, the word “arbitration” can be labor dispute arbitration, which is unique to China. That is a compulsory prepositional procedure for lawsuit in Chinese court for any dispute between the employer and employee. But in business transactions, arbitration generally refers to the resolution of dispute, opposite to litigation at court.

Arbitration has a lot of advantages over litigation, speedy, confidential, convenient and so on. Of course, it is more expensive than litigation. But considering the cost of time and energy, I think in any event the arbitration is a better option for foreign parties.

In fact, a lot of clients have noticed this point and include an arbitration clause in their agreement with Chinese party. But most of time, these arbitration clause turns to be invalid as our foreign clients don’t understand the specific requirements for a valid arbitration, especially when they choose Chinese arbitral tribunal. Here the following is the typical one which can not be enforceable.

1. “Any dispute difference or question which may arise at any time hereafter between the Seller and the Buyer touching the true construction of this Agreement or the rights and liabilities of the parities hereto or any matter arising in connection with this Agreement shall be referred to the decision of a single arbitrator to be agreed upon between the parties hereto, or in default of agreement for fourteen days after one party has requested the other to agree to an appointment, to be appointed at the request of either party hereto by ____.”

The flaws in this article:

Ad hoc arbitration. Since China has been a member of New York Convention, the ad hoc arbitration award in the other contracting states can be enforced by Chinese court. But as the provision is so simple and concise in this clause, once the parties can’t make an agreement with regard to the procedures, it is quite hard for the arbitration to proceed.

Institutional arbitration. As ad hoc arbitration can’t move on, the parties may intend to resort to institutional arbitration. In this case, our client guessed it would be convenient to arbitrate in China because the seller is a Chinese business. However, Chinese Arbitration Law and CIETAC arbitration rules don’t support ad hoc arbitration. China’s arbitration law is substantially different from the UNCITRAL Model Law, and generally provides for a lower level of party autonomy. Under China’s arbitration law, only a standing arbitral organ can suffice, and that means such a clause can’t meet the requirement of a binding arbitration clause in China. Thus, neither CIETAC nor any other Chinese tribunal can accept this case.

Another example:

1. Any dispute or controversy arising from or in connection with this Contract shall be settled through friendly consultations between both parties. In case no settlement can be reached through consultations, the disputes shall be submitted for arbitration or to the court with competent jurisdiction. (“凡因执行本合同所发生的或与本合同有关的一切争议，双方应通过友好协商解决，如果协商不能解决，应提交仲裁机构进行仲裁或提交有管辖权法院进行审判。”)
2. JURISDICTION：All disputes arising under or in connection with this Bill of Lading shall be determined by Chinese Law in the courts of，or by arbitration in，the People’s Republic of China．[i](中译文为：“管辖权：所有因此提单产生的争议应按照中华人民共和国法律在中华人民共和国法院审理或在中华人民共和国仲裁。”)

As the first sample, the second one and the third one also lack the specific arbitration institution. Moreover, the above clauses contain both arbitration and litigation. If the parties would hold conflicting opinion with regard of the settlement, they would make supplementary agreements further. But if they could not reach any agreement, Chinese law would just render it noneffective as the principle in China is “the obscure arbitration agreement is invalid unless the parties could make it clear through construction and amendment.” However, in international practice, the arbitral organs or the courts with competent jurisdiction would construe the arbitration agreement as far as possible to make it applicable.

We shall notice the differences in the standards between international arbitration and China’s arbitration and try to prevent the problems of arbitrability arising from the ambiguities when we review the agreement for clients.

Here is my book published in Law Press, a leading press in legal area. After half -a -year’s hard work, I finally completed the translation of Interntional Business Transaction, one of the Netshell series. When translating, I spent a lot of time on reviewing American laws, international principles,  customs and cases.  But all work deserves because I gained a lot.

All these days, I’ve been visited a lot by foreign educators seeking to open schools in Dalian, and most of times, none of them have any idea as to what would be involved and as to what the costs would be.

I made a research and here is my report of this question.

Rules & Regulations

The rules and regulations that govern the setting-up schools include Education Law of PRC, Vocational Education Law of PRC, Higher Education Law of PRC, and Private Education Promotion Law of the PRC. All these laws provide that foreign organizations and persons can set up schools with Chinese organizations, but there are no more specific rules about how to cooperate between the parties. All the details are reserved to be explained by the State Council.

After China’s entry into the WTO, Regulations of the People’s Republic of China on Chinese-Foreign Cooperation in Running Schools was enacted, also with its Concrete Measures. However, this Regulation mainly governs the cooperation between foreign educational institutions and Chinese educational institutions (see Article 2). That is to say, for individual foreigners, they even have no qualification to be governed by this Regulation.

Therefore, the answer is individual foreigner can not set up schools in China to provide education service to Chinese citizens. Foreign investors can only establish schools for children of foreign personnel under Interim Regulations for the Administrion of Establishement of Schools for Children of Foreign Personnel by the Ministry of Educaion of  PRC.

Alternative Solution:

After reading the above, maybe you would feel depressed a lot. Don’t be disappointed, if you determine to create a business and make some kind of achievement in China as a teacher or a headmaster, there is a compromise way for you—that is to be affiliated to a school or training center with an education license. We call it “Gua Kao”(挂靠) in Chinese.

Gua Kao is to use the other’s license and run one’s own business. All the operation has to be under the other’s name, including issuing invoices. Legally, Gua Kao is a kind of cooperation between the foreign educator and the Chinese school. A complete agreement seems to be necessary and essential for both parties. Actually, the approval of an education license is very hard even for most of Chinese. The requirement of scale and capital for schools is much stricter than the requirement for common businesses. Quite a lot of business starters choose to be adjunct of other schools. Like licensing, the starters pay fees to the schools with license.

During the process of finding your partner, the school with license, do make a due diligence research and make sure they really possess the license.

Good News:

Maybe you still feel worried for using the other’s license. Even the Agreement is “perfect drafted”, there are still some concerns, e.g. if you intends to do a long term business, or if you want to promote your own brand.

Up to now, there is still no good resolution. In Catalogue for the Guidance of Foreign Investment Industries (2007), higher education is encouraged but skill traing is not mentioned. 2007 version has been implemented for almost 4 years. Recently, National Development and Reform Commission and Ministry of Commerce has recitified the Gatalogue and the draft is issued for comments. In the Draft for Comment, skill training is listed in the Catagory of Encouraged Foreign Investment Industries. We can believe that in the near future, when this new version is issued, the relevant governmental organs would issue detailed implementing procedures. At that time, for those who dreams to open language schools in China, all come to true.

Foreign trading company is also called Foreign Invested Commercial Enterpriese, FICE in China. For any foreign investor who intends to establish a trading company in Dalian or other cities in China, rules in Measures for the Administration on Foreign Investment in Commercial Fields (《外商投资商业领域管理办法》）will govern.

Under this Measures, the foreign invested commercial enterprise can be devided into four categories of businesses, including commission agency, wholesale, retail and franchising.

Generally speaking, common trading company belongs to the second categories, wholesaling. Under Article 9, foreign invested commercial enterprise may operate the following business upon approval for wholesaling business:

1.  Wholesaling of commodities;
2.  Commission agency (excluding auction);
3.  Importing and exporting of goods; and
4.  Other relevant matching businesses.

Only those that establish outlets or open stores in China belongs to the first category, the retail businesses, for example, Carrefore.

Minimum Registered Capital Required

There is a popular mistaken belief, the registed capital has to amount to 1,000,000 RMB for setting up trading company. That is the out of date. Under Company Law of P.R.C., the minimum registered capital is 30,000RMB. Now China treats foreign business nationally, so the same amount for setting up a foreign trading company. BUT, if there is just one investor, the minimum amount is 100,000 RMB. Therefore, only the newly established company has 2 or more than 2 investors, the rule of 30,000 RMB applies. Here Please note that  for special goods with large value such as car or heavy equipment, there would be special capital requirement for enterprise.

In practice, we usually recommand our clients to register with 1,000,000 RMB, which approximately is $150,000. On one hand, the business could satisfy the special requirement in registered capital mentioned above in most of  times. On the other hand, we have a lot of supporting reasons when we help drafting the feasibility report. And also the last but not the least, when the procedure of examination of capital injection is over, the investor could be free to use the capital in any way.

Registration Time

It normally takes 90 days to go through the procedures. But if the products trading need special approval from the  concerning Authority, the period will be prolonged.

Chinese law devides foreigners who work in China into two categories,  foreign expers and foreign workers.

As stated in the Measures on the Administration of Foreign Experts in Foreign Investment Enterprises, foreign experts are foreign professionals, technical staff, and managerial personnel who are hired by FIEs to engage in production, operations, and administration. To qualify as a foreign expert, the foreigner must engage in the kind of job that is commesurate with his or her specialty and skills and meet the following requirements:

1. to posess at least a bachelor degree or the professional title of engineer, or have an equivalent degree or title;

2. the have five or more years of work experience in his or her specialty, being able to give technical gaidance and being qualified for the job;

3. to possess the expertise or special skills urgently needed by China or any other vocational specialites and

4. to have five or more years of managerial experience overseas and hold the position of a departmental manager or its equiealent in a large or medium sized FIE or in a high-technology or new technology enterprise.

The foreigner who meets the above requirement could apply for Foreign Expert Certificate, which entitles the foreigner to preferential treatment by China’s Customs.

Are you a foreigner working in China?

If so, do you know the relationship between you and your employer? Many readers would give me an answer quickly and almost spontaneously, “yes, of couse, the employment relationship.” Bingo. but do you know if the classification of employment relationship in China? They are respectively the “pinyong”(聘用）, “lao dong”（劳动）and “hetong”（合同）.

Usually, a foreigner would not be in “pinyong” relationship with the employer. It is becuase only those work in public institution can sign “pinyong” contracts with the employer, such as hospital, university and some governmental agencies. Some foreigners in colleges or university just argued here，”I am working in a school, and am I not in pinyong relationship with the school?” Definitely not. Just remember that only those with Chinese nationality can form “pinyong” relationship with their employers. And “pinyong” is a very special labor relationship. The treatment to people who in “pinyong” is pretty similiar to that to governmental official. It is kind of lifelong tenure.

For most foreigners working in China, only two labor relationship will be involved, “laodong” and “hetong”. “Lao dong”(劳动) can be literally translated into “labor”. However, “Laodong” is a smaller conception than the “labor”.  Ususally,  according to Rules on the Administration of the Employment of Foreigners in China,  those holding Foreigner Employment Card  are in “laodong” relationship with employers. In event of any dispute between  a foreigner with such a card and the employer, the dispute shall be governed by  Labour Law of the People’s Republic of China and and Labor Contract Law. Therefore, the arbitration is a must step and if one party want to challenge the award, he coulf sue in the court with jurisdiction.

The last one is “hetong” relationship. “He tong” is Contract（合同）. But here it specificly refers to the standard contract issued by the State Administration of Foreign Experts Affairs, which is especially made for the expert foreingers holding Foreign Expert Card and working in universities and research institute or other cultural and educational organizations. In case the foreign experts are in the disputes with such schools or organizations, they also have to go through arbitration process firstly under Measures for the Administration of Foreign Cultural and Educational Experts Employment Contract. But when the tribunal or the court hear the case, the governing substantial law is not Labor Law or Labor Contract Law. All the compensatiion will be based on the contract itself, that is to say, Contract Law governs.

All in all, before you challenge,  it is essential to know which kind of labor relationship you are with your boss! It just affects the amount of money you would get.