This CS Alert is relevant to the growing number of foreign investors, companies, and business people (“Non-domestic Entities”) engaging in commercial activity in China, especially Non-domestic Entities entering into a written contract (“Contract”) with a domestic counterpart (“Domestic Entity”).
This CS Alert explores how to select a People’s Court in Shanghai as the dispute resolution venue in order to prevent a defendant from benefiting from the home court advantage it would enjoy with a People’s Court in its own locality, assuming the defendant is not Shanghai-based.
Allowing a defendant to have the home court advantage may place the plaintiff at a distinct disadvantage because the defendant can better anticipate, understand or even impact the court through shared social and political contacts or a superior grasp of local norms and values. Furthermore, the fact that the defendant’s taxes fund the local taxman who, in turn, pays for the rent, salaries and lights at the local People’s Court can also play a role in fostering sympathy for the defendant.
Benefits of a People’s Court in Shanghai
Having a Contract dispute heard by a People’s Court in Shanghai is likely to benefit a Non-domestic entity for several reasons. Firstly, courts in China’s more progressive and dynamic socio-economic centers (such as Shanghai) are typically more transparent and efficient. Furthermore, many Non-domestic Entities have staff, partners, friendly contacts or offices located in Shanghai, such that administrative costs can be significantly reduced when compared to a far-flung province or city. Finally, English language proficiency, the pool of professional service providers and the logistics infrastructure is generally more advanced in Shanghai, such that filing and executing a law suit may be smoother.
Qualifying for a People’s Court in Shanghai
You can ensure that a law suit is heard by a People’s Court in a particular Shanghai district when a) both parties agree to have Contract disputes heard by the People’s Court in that Shanghai district; and b) any of the following occurs or is situated in that Shanghai district: the performance of the Contract, the plaintiff’s principal place of business or main office location (“Domicile”), or the signing of the Contract.
When engaging with a Domestic Entity whose Domicile is in Shanghai, any Contract dispute will automatically qualify for hearing in the People’s Court in the district where the defendant’s Domicile is located. Therefore, you may want to consider countermeasures to either have the law suit heard in a different district or even a different city.
Regardless of the above measures, law suits concerning real estate, harbor operations and inheritance must be heard in the court venue corresponding to the location of the real estate, the incident or the core of the estate.
Qualifying for an Intermediate People’s Court in Shanghai
People’s Courts in China are divided into four levels: Basic People’s Courts; Intermediate People’s Courts; High People’s Court; and the Supreme Court. Having an Intermediate People’s Court as the court of first instance may be more desirable for a number of reasons, ranging from the quality of the resources available in the court to the appeal process in China.
For a Contract dispute involving a Non-domestic Entity (that is not concerned with IP violations ((As of 1 February 2010, new policies have been implemented such that the Shanghai districts of Huangpu, Luwan, Pudong and Yangpu Basic People’s Courts are empowered to hear disputes involving certain IP violations. Such IP violation disputes will only be heard by these Basic People’s Courts if (i) the damages amount is equal to or below RMB2 million; and (ii) the dispute qualifies for hearing in one of the four relevant districts (i.e., the subject of the Contract is performed in that district, the defendant has its Domicile in that district, the parties agree to such district, the Contract is signed in such district or the plaintiff has its Domicile in that district). If these two criteria are not met, then an IP-related dispute will qualify for a Shanghai Intermediate People’s Court.)) to qualify for a Shanghai Intermediate People’s Court, the damages amount must exceed RMB20 million ((Note from Shanghai Higher Court on the Coordination of Court Jurisdiction in Shanghai issued 20 March 2008.)). In contrast, for a Contract dispute involving two Domestic Entities to qualify for an Intermediate People’s Court, the damages amount must exceed RMB50 million.
Domestic Entity Plaintiff vs Non-domestic Entity Plaintiff
Under certain circumstances, many of our clients may be able to choose whether to enter a contract as a foreign invested Domestic Entity (commonly referred to as a foreign invested enterprise), or as a Non-domestic Entity.
Benefits of entering a Contract as a Domestic Entity may include:
(i) Qualifying to have Contract disputes heard in a People’s Court in the district where the Domestic Entity is registered; and
(ii) Conserving significant resources associated with the notarization, translation, and authentication of a variety of documents and evidence needed for the law suit.
However, benefits of entering a Contract as a Non-domestic Entity may include:
(i) Requiring a minimum damages amount that exceeds RMB20 million to qualify for a Shanghai Intermediate People’s Court as court of first instance (compared to RMB50 million if both defendant and plaintiff are Domestic Entities); and
(ii) The transaction costs for a Domestic Entity plaintiff to initiate a law suit against your Non-domestic Entity are significantly high, if not prohibitively high.
Conclusion
As you pursue commercial opportunities in China, you need to consider if the People’s Courts are the most realistic or ideal venue for dispute resolution. If the answer is yes, then the next step is to secure a People’s Court in a neutral location. When Shanghai is the preferred location, the simplest approach is to select a favored district, specify that both parties agree to have any dispute arising from the Contract heard in that district, and sign the Contract in that district.
CS Notes: Stricter Regulations for Representative Offices
In January 2010, the State Administration for Industry and Commerce indicated that representative offices (“ROs”) would face significantly increased scrutiny for establishment and ongoing licensing ((Notice on Further Administration of Registration of Foreign Companies’ Resident Representative Offices issued 4 January 2010.)).
A foreign parent company must now be at least two years old before it can qualify to establish an RO; previously, there was no such requirement. In addition, the incorporation documents for the parent company must now be notarized and attested for the ongoing renewal of the RO licensing (which now occurs every year); previously, this was required only upon establishment.
The notice also indicates that ROs will be subject to inspection shortly after establishment to ensure that the RO is actually located and operating at its registered address, although it remains to be seen if the relevant authorities will apply the resources to realize such inspection. Finally, the notice states that ROs cannot have more than four representatives, a new limitation on the number of foreign employees that can be sponsored by the RO to work and reside in China.
©2012 All content of this article is the property and copyright of China Solutions Inc and may not be reproduced in any format without prior express written permission. The content of this article is intended to provide a general guide to the subject matter and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.
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