Be vigilant about irrelevant costs in contracts and documentation
September 04, 2010 | BY
clpstaff &clp articles &State Council set to regulate prices on monopolised goods and services
Investors should pay close attention to contracts and documents when doing business in China to avoid spending on irrelevant costs, say counsel.
In a draft regulation released on August 2, the government made clear its intent to regulate and cap prices in monopolised industries. The Legislative Affairs Office of the State Council of China issued the circular because vagaries remained during the cost examination process.
“The Act would affect the pricing of the enterprises, mostly the State-owned monopolistic enterprises, in respect of public utilities and natural resources,” said Shanghai-based MWE Law Offices partner, Henry Chen.
He recommended that “investors need to be more careful during the contracting process, and keep documents and evidence that can justify the reasonability and relevance of pricing costs.”
The government's aim is to remove “unreasonable costs” by preventing business operations from “puffing the government-set price by inserting different kinds of irrelevant costs”, said Chen. For example, expenditures relating to donations, sponsorships, fines or damages arising from a breach of a contract will be “kicked out from pricing costs”.
He said the move would benefit downstream industries such as manufacturing, real estate, steel, and services. He called the legislation “neutral”, saying “it is beneficial to consumers, Chinese and foreign investors as a whole, because they are forced to better uphold the sense of credibility and integrity throughout the business. “
The key points of the draft regulation include details on pricing agencies, pricing principles, pricing costs, legal liabilities of operators and supervisors, and the pricing cost examination, which is how the governmental pricing agencies would verify pricing costs of the relevant goods and services based on the manufacturing and operating costs of business operators. “The Act emphasises that the pricing costs should be the average reasonable expenditures of the business operator,” said Chen.
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now