Drafting for disputes
September 04, 2010 | BY
clpstaff &clp articles &With the re-emergence of Sino-foreign joint ventures, lawyers must draft contracts that better position investors in anticipation of disputes with partners
As noted in the article “Everything old is new again” in the April 2010 issue, the Sino-foreign joint venture has re-emerged. With the collapse of the European and North American markets during the continuing global financial crisis and the apparent enduring strength of China's economy (now the second largest in the world), many investors now consider China not simply as the place to make things for sale elsewhere. Rather, China is now their target market. Given the challenges of establishing a national or regional footprint in China, many foreign investors are forming joint ventures with established local partners. And just like many first wave ventures earlier this decade that fell victim to disputes between partners, some joint ventures are facing problems today as similar disputes surface.
Good drafting can protect investors when venture disputes develop. Disputes in China today typically arise from disagreements over business strategy, transactions with related parties, and internal compliance policies. A contract that specifies how such issues will be addressed is challenging to negotiate, but much easier while the parties still feel the incentive to commence business quickly.
A well-drafted contract should provide an efficient dispute resolution mechanism. Contracts in China commonly require “amicable discussion” during a cooling-off period before legal proceedings may be initiated. Because executives often opt to settle a dispute rather than incur legal costs and relinquish the resolution of the issue to a court or arbitral body, a contract should establish procedures to escalate any dispute through levels of management, specifying for each stage the titles of the officers who must attempt to resolve the dispute directly with their counterparts. Periods for each stage should be included, with the total time fixed unless the parties agree to extend it before commencing legal proceedings. Regardless, contracts should specify an exclusive dispute resolution mechanism in case escalation fails.
Under PRC Civil Procedure Law (中华人民共和国民事诉讼法), any lawsuit regarding a dispute arising out of a Sino-foreign Joint Venture Contract must be conducted by a PRC court. Despite the improved competency of PRC judges, particularly in urban centers, concern about local favouritism continues to motivate investors toward arbitration. Any arbitration agreement must demonstrate a clear intent to arbitrate and identify a specific arbitration forum. Though foreign parties continue to prefer arbitration in Hong Kong or Singapore, Chinese companies (particularly state-owned) increasingly insist on domestic arbitration.
When the foreign party to a joint venture is a PRC holding company, the validity of an international arbitration clause can become an issue. Although the Ministry of Commerce defines foreign-invested holding companies as foreign investors for investment purposes, the right to use offshore arbitration is not governed by those regulations but by the PRC Contract Law (中华人民共和国合同法) in Article 128. The Contract Law permits offshore arbitration only for contracts with “foreign elements”. Because such a contract is between two PRC companies (one foreign-invested) and governed by PRC law, and because the business will typically be located in China, it could be asserted that offshore arbitration is not permitted, at least in the absence of any People's Court interpretation that the contract has foreign elements.
With increasing negotiating skills and leverage, Chinese investors commonly insist dispute resolution be conducted in Chinese, or both English and Chinese. While dual languages appear fair to both parties, it can mean each party must submit all pleadings and evidence in both languages, and provide for translation of all oral arguments. These costs mount.
If arbitration becomes unavoidable, it is imperative to compile evidence necessary to support the investor's claims. For that reason, as well as good business practice, an investor should seek to provide in the joint venture contract for access to, and the right to obtain copies of, key documents and information including contracts, invoices, production records, delivery receipts, financial statements and meeting minutes. If the investor will appoint or nominate one or more officers of the joint venture company, care should be taken that any confidentiality provision in the employment contract is not so broadly written as to preclude an officer from providing the investor with information that may be required in a dispute.
Continuing use of the joint venture may offer the best option for expansion in China, but experience past and present suggests that some conflict between partners is inevitable. Lawyers who craft such joint venture contracts should therefore draft them with disputes in mind.
Daniel Roules and Changshun Chen, Squires Sanders & Dempsey, Shanghai
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