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

Recently I read an article written by an attorney of the same trade with me, Selling Your Products into China: 3 Choices. His idea is brilliant and knowledgeable.

Mainly there are 3 ways whereby one can export his/her goods in China:

(1) Distribute your goods directly;

(2) Establish a joint venture;

(3) Find a qualified agent or distributor with a vast sales network

Before exporting your goods into China or choosing a Chinese partner, it is advised for you to conduct thorough market research and due diligence. Companies should be mindful of possible problems in export rights, regulations and intellectual property rights protection. If the company decides to distribute the goods directly, then it will have to be aware of the distribution rights and understand the licensing process in China.

Distributing your goods directly may be a complicated and time-consuming process as one may not be familiar with China’s business practices and government regulations. Application for distribution rights and establishment of own distribution channels will be difficult. Chances of failure will be higher as a result. Establishing a joint venture will thus be a better option. Establishing cooperation with a local partner can allow you to have faster access into China’s market and with the local partner’s knowledge and experiences of China’s market, your success rate will be higher and goods can be better distributed. Acquiring help from a local partner does give you many advantages in penetrating the China’s market. A side issue to note will be that joint venture usually requires large amount of capital and China’s government may have capital control towards outflow of funds should one transfer his/her funds back to his/her home country. The government will also need to assess the potential economic benefits that it can bring to China, e.g. does it create job opportunities for the local population before approving it.

For small and medium sized companies, the best way to enter the China market is through a reputable or well-known agent or distributor. These companies are located regionally and typically have large sales network. Thus they will be able to have a better understanding of the China’s market and can provide assistance in developing distribution strategies in China and the region. In this way, new products can be launched easier into the market and distribution network can be set up rapidly without any problems dealing with distribution rights and licensing.

Besides all these, the most important step that one must take before exporting his/her products into China will be have a thorough understanding China’s customs, regulations and controls towards imported goods. A sound market entry strategy is also necessary in order to penetrate the China’s market. An assessment of your goods’ strengths, weakness, opportunities and threats can allow you to promote and distribute your products better. Understanding the profitability and marketability of your products in the China’s market is thus vital before exporting your products into China.

This article analyzed the benefits and shortcomings of each way of selling goods into a new overseas market. The sequence may be selling directly, finding an agent and JV. Besides those options, a WFOE as an importer is another one. Of course, a WFOE means a better understanding of local market and also ethical and legal environments. Risks involves a WFOE is much higher than the above three. But as a long-term business strategy, a WFOE is the best choice. I think maybe in the following days, I should write more about the legal issues arising from each business mode.

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.

Usually, I don’t like to write articles beyongd the topics of laws here in my legal blog. But this time, I am really angry, I intend to take advantage of my limited influence to tell a real Dalian.

I have no idea until I got the call from my best friend in Shanghai. She was too worried about me and the conditions in Dalian. When I got home at night on July 16, I got the whole picture on TV. Fire,exhausted  fireman, oil, polluted sea—all these days, my eyes and ears are flooded with these key words. Ten days passed, I decided to have a look by myself. 

Dalian New Port is an industrial port in Yellow Sea and it is about 35 kilometers from downtown. We drove to Dalian Development Zone, where is obviously affected by the oil. The rocks in the seashore are wearing black. No seagull at all.  Boshi Shore(which means white rocks), which is a famous seashore in Developent Zone and where sea-view buildings and fancy resteraunant located,  seems very ugly and the beautiful constrution form a distinct contrast with the dirty seashore.

We drove to one of my relatives. There we were told not to go to the New Port in that it is not accessible to visitors. We had to quit our plan but anyway, we would drive along to Gloden Pebble Beach. Misery! The shining fine white sand in the beach was gone forever, black , nothing but desolation. In this tourism season, it should have been full of visitors. BUT—

I felt very sorry for the scene. Even though I got the new from local govenment that the clean-up in the sea has made great development, I could not expect how long the beautiful beach would turn back to its oringinal picture.

Whose fault for this disaster? NO NEWS. How to compensate? NO NEWS. But I got that  the distance of  oil tanks is only 5 meters, which is the minimum distance speculated in the  Code for design of petroleum depots. When the fire broke up, the fire fighter truck could not go through the oil tanks to  the site of the explosion and thus delayed the putting out.

for more information, pls check China Dalian oil spill cleaned nine days after accident.

Thanks for all the friends who visit my blog. Your encouragement gives me a driving force to update it and write more. If you have any questions or interest to understand about Chinese laws, please just leave me a message,thus I may choose my topics better.Thank you!

 TRIAL in China.

There is just an oral contract between the parties. How does the local court have the jurisdiction over such an oral contract without choice of forum? In this situation,  we must adpot the rules of choice of law.

In accordance with basic principlies of choice of law with respect of contract dispute, the closest relationship is the standard to decide the forum. In contract dispute, the place of performance has  the closest relationship with choice of forum. The parties have not expressly agreed upon the place of  performance, therefore, under Chinese Contract Law Article 61, paragraph (c), the place of performance shall be at  where the obligator is located. The parties agreed to deliver the goods with the term of CIF,  according to “International Incoterms 2000″, the Seller shall complete delivery obligations in the port of shipment, DAlIAN.  THUS, Dalian is the actual place of performance.

Without express agreement of place of performance, where CIF is adpoted, the Seller can lodge a suit in Dalian. BUT where both parties choose D-terms, it is hard for local Chinese court to accept the case. 

 Because international enforcement is very difficult and time comsuming, for such a small order, the Seller wouldnot choose to enforce it overseas. Then WHY DO WE LODGE A SUIT? The answer is , under Law of the People’s Republic of China on Control of the Entry and Exit of Aliens, we could apply the Chinese court to issue an injunction restricting the default party to leave China since it involves in unsolved civil cases. I guess that is most of the  foreign businessmen are reluctant to accept.