Foreign Law Firms Set to Expand in China

Separate Regulations for Hong Kong and Macao

It is significant that for the purposes of these Regulations, Hong Kong and Macao are apparently not considered foreign. Article 34 states that the State Council will formulate procedures for the administration of the legal service activities set up in China by law firms from the "Independent Tariff Zones". While "Independent Tariff Zone" is not a typical term used for Hong Kong and Macao, each has its own customs and tariff systems separate from those of mainland China. Moreover, they are referred to as such in some regulations of the General Customs Administration. The PRC Foreign Trade Law (中华人民共和国对外贸易法) refers to them as "separate customs territories", and for WTO purposes they are also referred to as "separate customs territories".

It is understood that authorities have been consulting various interested parties on the drafting of separate Hong Kong and Macao regulations, though the extent to which additional concessions are granted (perhaps even the right to practice mainland law) will be interesting to see. While such additional concessions may be permissible under WTO rules, they will likely prove contentious and difficult to apply. On the one hand, China is committed under its WTO Protocol of Accession to "eliminate or bring into conformity with the WTO Agreement all special trade arrangements... with third countries and separate customs territories" (emphasis added). On the other hand, Article 2 of the General Agreement on Trade in Services (GATS) arguably permits further concessions on the basis of Hong Kong and Macao being part of China as one country. The same arguments would also be applicable to Taiwan. One further option may be to rely on Article 5 of GATS, which permits countries to enter economic integration agreements with other countries and allows greater flexibility to developing countries for such agreements. Whether it is Article 2 or Article 5 of GATS that is used for a separate Hong Kong and Macao regulation, Article 34 of the Regulations nevertheless makes it clear that any future "Independent Tariff Zone" regulation will be formulated on principles set forth in the Regulations.

Of course, the other issue brought to the surface by special Hong Kong and Macao regulations is the obvious question: How is a "Hong Kong" or "Macao" law firm defined? The simple answer that the nationality of the applicant determines the origin of the law firm belies the complexity of the issues. Many law firms that began life in foreign countries have deep roots in Hong Kong. They practise Hong Kong law, employ Hong Kong lawyers, may even have a majority of Hong Kong partners and for Hong Kong regulatory purposes they are Hong Kong law firms. Conversely, it does not follow that law firms primarily based in Hong Kong are constituted by a majority of lawyers and partners who hold Hong Kong passports. Moreover, there have recently been mergers and cooperative arrangements between foreign law firms and smaller Hong Kong law firms. Whether the effect of these arrangements is to preclude the Hong Kong law firm from taking advantage of the forthcoming regulations, or whether the foreign law firms will gain a de facto advantage is presently unclear. What is clear, however, is that China's Protocol of Accession to the WTO requires it to be transparent, and defining "Hong Kong" and "Macao" law firms will be problematic.

Establishing a Representative Office

Existing foreign law firms in China have recently been requested by local bureaux of justice to re-register their Representative Offices. Under Article 35, Representative Offices have 90 days from the date on which the Regulations came into effect (January 1 2002) to reapply for examination and approval. This will require familiarity with the new provisions under which Representative Offices are registered.

Article 7 outlines the conditions that must be satisfied to establish a representative office in China. It is interesting to note that while foreign law firms must practise law in their home jurisdictions and can't have been penalized for violating practice rules and professional ethics, there are no particular requirements about the length of time that they have been established. Under the previous regulatory regime, foreign law firms were expected to have practised for a reasonable length of time. Moreover, while representatives are required to have practised law outside China for not less than two years, and chief representatives for not less than three years, there is no specific requirement that such practice must have been in the foreign law firm's home jurisdiction. Chief representatives, however, must have the status of partners, a stipulation that may cause difficulties for some small to medium sized firms, especially when combined with the minimum requirement of six-month residence for the chief representative (see below).

Article 8 specifies the documents that must be submitted to the local department of judicial affairs for approval to open a representative office. Article 8(1) specifies the nature of the foreign law firm in China, which is a business structure not generally familiar to foreigners who have no previous China experience. One requirement that may cause particular concern and inconvenience is that Article 8(3) requires the partnership deed (or the equivalent thereof) to be attested and certified by specified authorities and submitted as part of the application. Partnership deeds, however, are sensitive and confidential documents that foreign law firms would not generally disclose outside the partnership. Moreover, Article 8 provides that documents must be submitted in triplicate, with English documents being accompanied by a Chinese translation. The requirement to translate the partnership deed is likely to compound the inconvenience to foreign law firms, whose partnership agreements may be hundreds of pages long. Article 8(5) is more liberal than the previous regulatory regime in simply requesting proof of the practising qualification and length of practice outside China for the proposed chief representative and other representatives. It does not, for instance, specify the nationality of these representatives.

A positive aspect of the Regulations is that time limits are now imposed on the review of an application to open a representative office. Article 9 states that a local level review must be completed within three months of receipt of the application, and that the application, together with an opinion, must then be referred to the MOJ. The MOJ is required to make its decision within six months. These time limits have obvious benefits for applicants. Demonstrating an even more liberal approach to the assessment of applications is the further requirement that reasons must be given where an application is not approved. Article 23 is also a new provision, though one that merely prevents local registering bodies from overcharging. The fees collected from representative offices and representatives for registration are to be the same as for domestic Chinese law firms and practising lawyers. Article 23 further requires that all fees collected, illegal income seized and fines levied are to be paid into the State treasury.

Representative Office Business Scope

The WTO Commitments state that there are only five permitted activities within the business scope of foreign law firms, and these are contained in Article 15 of the Regulations. The permitted activities are:

(a) to provide clients with consultancy on the legislation of the country/region where the lawyers of the law firm are permitted to engage in lawyer's professional work, and on international conventions and practices;

(b) to handle, when entrusted by clients or Chinese law firms, legal affairs of the country/region where the lawyers of the law firm are permitted to engage in lawyer's professional work;

(c) to entrust, on behalf of foreign clients, Chinese law firms to deal with the Chinese legal affairs;

(d) to enter into contracts to maintain long-term entrustment relations with Chinese law firms for legal affairs; and

(e) to provide information on the impact of the Chinese legal environment.

Activities (a), (b) and (c) introduce nothing new when compared to pre-WTO limitations as found in the 1992 Ministry of Justice, State Administration for Industry and Commerce, Foreign Law Firms Establishing Offices in China Tentative Provisions (the Tentative Provisions). Activities (d) and (e) warrant more comment. However, it is first worth observing that while the restrictions appear stringent, they are not unreasonable when compared to restrictions existing in neighbouring jurisdictions, such as Japan and Korea.

Activity (d) allows long-term entrustment relations with Chinese law firms. While both the WTO Commitments and Article 15 provide that entrustment "allows the foreign representative office to directly instruct lawyers on the entrusted Chinese law firm, as agreed between both parties", there is little further guidance. Activity (d), however, appears broad enough to allow joint ventures with Chinese law firms, though whether this will actually be permitted is unclear. The official line is that joint ventures and cooperative law firms will not be permitted, although there have been rumours that joint ventures will be allowed in western China and other areas where the government is keen to promote foreign investment. There is also a rumour that a feasibility study has been undertaken to study joint ventures with Hong Kong firms. As noted above, however, regulations covering Hong Kong firms are yet to be issued by the State Council. Entrustment agreements, especially of the exclusive kind, whereby foreign law firms simply refer all work related to Chinese law to Chinese law firms are unlikely to take hold.

Activity (e) is an apparent concession, though once again, what it actually permits is not immediately apparent. The Tentative Provisions did not permit foreign law firms to act as agents for handling Chinese legal business, nor to interpret Chinese law to clients. Activity (e) appears to allow something more, though the extent to which "information on the impact of the Chinese legal environment" can be provided is unclear. On the one hand, providing such information could encompass the interpretation of Chinese law and the provision of legal advice. On the other hand, it is expressly stated that Chinese legal affairs are to be entrusted to Chinese law firms and, further, that foreign law firms are not permitted to engage in "Chinese legal business". The tension between these two has very real practical implications. For example, can a representative office tell their clients what Chinese law says about a particular industry and how those laws will impact on the client's business? If providing such advice does not come within the phrase "provide information on the impact of the Chinese legal system", then what does? Perhaps a balance between the prohibition on Chinese legal business and activity (e) can be found by saying that foreign law firms can now provide legal advice, but that they cannot conduct searches, litigation or other matters requiring the law firm to be an agent of the client.

Unfortunately, the Regulations miss the opportunity to clarify activities (d) and (e), choosing instead to merely reproduce the wording of China's WTO Commitments. The interpretation to be taken by the MOJ may, however, be clarified with supplementary regulations soon to be drafted by the MOJ Administration for China Offices of Foreign Law Firms. In the meantime, activities (d) and (e) are likely to be contentious. Despite this lack of present clarity, the final paragraph of Article 15 confirms that representative offices may not engage in any business not included in the above five activities, nor any other profit making activities. Article 26 imposes significant sanctions on violations of Article 15.

Legal Staff and Their Conduct

The requirements for representatives and chief representatives are outlined above in relation to establishing representative offices. Chief representatives must hold practising certificates, and must have at least three years' experience outside of China. Representatives must also hold practising certificates, though they only need two years of legal experience outside of China. The Regulations, however, have nothing specific to say about the role of the chief representative, though the Regulations do attach greater personal liability to the position. The Regulations are further silent on the employment of non-representative foreign lawyers and foreign support staff.²

Article 16 of the Regulations continues the ban on employing Chinese practising lawyers, and further provides that providing legal services to clients by auxiliary staff is not permitted. That is, employment of legally trained personnel is permitted, provided that they are not registered as Chinese lawyers and that they do not provide legal services to clients. The operation of the second prohibition in Article 16, however, may be difficult to apply in practice. For example, do translators provide legal services to a client by translating a Chinese contract into English? To what extent can translation services and the role of legal consultants be considered as providing legal services? To some extent everyone working within a law office provides, either directly or indirectly, legal services to clients. Article 16, however, offers no guidance on how the relevant distinctions are to be made.

Article 17 provides something new in that it expresses a very brief code of conduct for representative offices and representatives. The prohibited conduct itself, however, represents the bare minimum of an ethical standard with prohibitions against producing false evidence or otherwise interfering with evidence, taking advantage of client's property, taking improper benefits and breaching client confidentiality. However, while the expression of prohibited conduct is valuable, it arguably adds little to Articles 3 and 5. Article 3 requires both the representative office and the representatives to observe the professional ethics and discipline of PRC lawyers. Article 5 stipulates that foreign law firms will bear the civil obligation for legal services provided by the representative office and representatives.

The requirement in Article 18 that representatives shall not hold positions in two or more representative offices at the same time is difficult to understand, and likely to cause problems. Where a foreign law firm is working on a large project in China, it is quite possible that a particular lawyer will need to work at two or more offices. Would working in another representative office for one or two days in a month constitute an offence? Or does the article only prohibit one lawyer being listed as holding official positions in two or more representative offices? Moreover, it is unclear whether the article is intended to apply to chief representatives as well. For the purpose of some articles (such as Article 7) a distinction is made between the two, while other sections (such as Articles 15 and 17) presumably use the one term to apply to both representatives and chief representatives. Whether Article 18 applies to both or merely to representatives will have significant implications, though it also brings to the surface the failure of the Regulations to clearly spell out the exact role of a chief representative. It may be that each representative office is to have its own chief representative, though this is even less clearly stated than that a foreign law firm may have more than one representative office. Nevertheless, Article 18 is to be taken seriously as practising in two or more representative offices may result in sanctions against the representative office and the representative, ranging from the confiscation of illegal income to the cessation of legal practice and a fine between Rmb20,000 and
100,000 (Article 27).

Article 19 stipulates that representatives must stay in China for no less than six months in every year. Representatives will thus need to be careful that they fulfil the required time in China. Failure to remain in China for the required number of days will result in the representative being unable to register in the following year.

Settling Client Bills

A major impact on representative offices is the new requirement in Article 20, which specifies that accounts and fees must be settled in China. Being restricted to working for international clients, it will generally be the case that legal services performed by representative offices will form an integral part of larger dealings and arrangements. Work may be carried out for the same client in London, the United States and Hong Kong, and the principles for determining exactly what must be charged for and collected within China are not stated. Apportionment is the obvious answer, though again, the method of apportionment is simply not addressed. With the need to demonstrate compliance with the Regulations for the yearly renewal of the business licence, the requirement remains serious despite its practical difficulties.

Enforcement Provisions

The main enforcement mechanism for the limitations on the permitted work and the collection of fees will be the yearly renewal of the business licence, as compliance must be demonstrated in the renewal application. Article 22 specifies the materials that must be presented yearly for inspection before the business licence is renewed, though these remain very similar to those required under the previous regulations. The specified materials do, however, demonstrate the critical importance of properly interpreting the Regulation's many grey areas.

Aside from the operation of Article 22, there are ten provisions (Articles 24 to 33) defining specific offences and stating the corresponding penalties, though two of these are focused on the regulatory authorities and not directly on lawyers. Offences by representative offices and representatives include endangering national security, acting in violation of Article 15, hiring Chinese practising lawyers and revealing commercial secrets. Penalties for these may include revocation of the business licence and cancellation of the representative's practice certificate, confiscation of illegal revenue, fines between Rmb20,000 and Rmb300,000, or life-long bans on offending representatives. In some situations financial penalties and criminal responsibility attach to the chief representative personally. The range and depth of these penalties demonstrates that the government is serious about ensuring the strict regulation of foreign law firms in China.

Conclusion

WTO accession does give greater market access to foreign law firms in China, though it has also brought greater accountability. The door has opened to the possibility of joint ventures and closer cooperation with Chinese law firms, as it has also opened to allow the possibility of giving direct legal advice on Chinese law. However, the opening is ambiguous, and much remains to be clarified. With serious sanctions applying to non-complying representatives and representative offices, these grey areas may prove very contentious pending clarification by the MOJ. It is hoped that the soon to be drafted MOJ supplementing regulations will be a further step in opening China's legal service market.

Endnotes

1 These are: Beijing, Shanghai, Guangzhou, Shenzhen, Haikou, Dalian, Qingdao, Ningbo, Yantai, Tianjin, Suzhou, Xiamen, Zhuhai, Hanghou (sic), Fuzhou, Wuhan, Chengdu, Shenyang and Kunming. Though China's Schedule of Services Commitments states 'Hanghou' as one of the cities, it appears this is an error, and the correct name is Hangzhou.

2 Foreign lawyers will thus continue to be regulated under the 1999 The All China Law Association, Registration of Resident Lawyers of Offices of Foreign Law Firms in China Procedures (the Procedures). These Procedures recognize three classifications of lawyers, chief representatives, representatives and foreign lawyers who are engaged for 90 or more consecutive days in China. All three types of lawyers are required to register with the All China Law Association.