Haworth & Lexon Law Newsletter
No.5 2009 (Total:No.90) June.15th, 2009
Edited by Haworth & Lexon 

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¡°Haworth & Lexon Law Newsletter ¡± is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, E-commerce, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.

Guidelines:

Latest Laws and Regulations:

Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Application of the Contract Law of the People¡¯s Republic of China (II).

Several Opinions of the Supreme People¡¯s Court concerning the Acceptance and Examination of Civil Cases Applied for Retrial.

Reply of the Supreme People¡¯s Court concerning Such Issues as the Calculation of Interests on Debt during the Delayed Performance Period in Enforcement.

Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Specific Application of Laws in the Trial of Cases about the Disputes of Property Management Services.

Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Specific Application of Laws in the Trial of Cases about the Disputes of Divisional Ownerships of Building.

Supplementary Provisions of the Supreme People¡¯s Court concerning People¡¯s Court¡¯s Recognition of the Civil Verdicts made by the Courts of Taiwan Region.

Notice on Matters in Relation to the Investment or Establishment of Non-enterprise Legal Person by Mainland¡¯s Enterprises in Taiwan Region.

Notice of the Ministry of Commerce on Matters in Relation to the Examination, Approval and Management of Part of the Foreign-invested Service Enterprises by Provincial Administration of Commerce and National Economic-Technological Development Area.

Notice on Relevant Issues concerning the Recognition of Enterprises Registered outside China but Controlled by Chinese Capital as Resident Enterprise according to the Standard of Actual Management Institution.

Notice on Several Issues concerning the Handling of Enterprise Income Tax on the Business of Enterprise Reorganization.

Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues concerning the Implementation of Preferential Policies on Enterprise Income Tax.

Measures for the Examination of Medical Instrument Advertisement

 

Legal Practices:

Flexible Policies concerning the Application of Labor Contract Law Is Issued in Shanghai.

Be Aware of the Potential Risks in the Assignment of Real Estate.

Trademark ¡°Ë÷°®¡± was Rush Registered due to the Failure of Sony Ericson in Proving the Use and Effect of the Trademark.

Scope of the Compensation by Carrier for Breach of Contract.

Latest Laws and Regulations

Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Application of the Contract Law of the People¡¯s Republic of China (II)

The Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Application of the Contract Law of the People¡¯s Republic of China (II) (hereinafter ¡°the Interpretation¡±) is promulgated by the Supreme People¡¯s Court on April 24, 2009 and shall come into force as of May 13, 2009. The Interpretation shall apply to the cases concerning the contractual disputes arising after the implementation of Contract Law but the final judgment has been made after the implementation of the Interpretation. As to cases that have been finally tried before the implementation of Interpretation while the party/parties applies/apply for re-trial or such case is decided to be re-tried according to the procedure of judicial supervision, the Interpretation shall not apply.

The Interpretation includes 30 articles, which is focused on the details of the conclusion, validity, performance, termination of rights and obligations of contract. The major content of the Interpretation is:

I. Conclusion of Contract

Where the parties did not enter into a contract in written or oral form, it may be deemed that the parties had entered into a contract ¡°in other forms¡±, provided that it is able to presume that the parties should have had the intention to enter into such a contract from their civil acts. A thumbprint on the contract shall be of same legal effects with the signature or seal.

Where a party providing standard terms that excludes or restricts its liabilities in the standard terms has, when entering into such a contract, used special marks such as word, symbol and typeface that may attract the other party¡¯s attention and explained the standard terms upon request by the other party, it shall be deemed as conformity to the ¡°adoption of reasonable method¡± as provided in Article 39 of the Contract Law, and the party providing the standard terms shall, however, prove that it has made reasonable remind and undertaken the obligation of introduction.

As to the trade usage, the party asserting such claim shall bear the burden of proof. The cases that may be deemed as the ¡°trade usage¡± as provided by the Contract Law include: the practices that are normally adopted at the place where the transaction act occurs or in certain field or certain industry and have been known or should have been known by the parties to the transaction; and the customary practices usually adopted by the parties.

II. Validity of the Contract

A contract concluded by a person with limited civil capacity of conduct or by a person having no power of agency shall be effective after being ratified afterwards by the person¡¯s statutory agent or by the principal. The ratification shall be effective since the manifestation of intention has been delivered to the counterparty, and the contract shall be effective since the date of execution. Where a person has no power of agency entered into a contract in the name of the principal and the principal has begun to perform the obligation of the contract, it shall be deemed as the ratification of the contract. Where a principal has assumed the liabilities resulting from the effective agency in accordance with the provision of agency by estoppel as provided by Article 49 of the Contract Law, it may recover the losses arising from the agency against the person having no power of agency.

Where the seller entered into several sales contract in respect of one subject matter, and all the contracts do not fall into the circumstances of invalidity as provided by Article 52 of the Contract Law, if the buyer cannot obtain the ownership of the subject matter pursuant to the contract and therefore claimed for liabilities for breach of contract against the seller, the people¡¯s court shall support such claims.

III. Performance of the Contract

Where the obligor waives its creditor¡¯s right against a third party that is due or waives the security on the creditor¡¯s rights, or maliciously extends the performance term of the creditor¡¯s right that is due, and thereby harming the obligee¡¯s interests, the obligee may petition the people¡¯s court for cancellation of the obligor¡¯s act.

As to the ¡°price which is unreasonable low¡± as stated in Article 74 of the Contract Law, the Interpretation provides that the assigning price shall be deemed as obviously unreasonable low price if it, at the time of transaction, is lower than 70% of the guiding price or market trade price at the place of transaction; and the assigning price shall be deemed as obviously unreasonable high price if it is higher than 130% of local guiding price or market trade price. Where the obligor buys other¡¯s property at a price that is obviously unreasonable high, the people¡¯s court may, at the request of the obligee, cancel such transactions.

Where the obligor is unable to pay up all of the several debts of the same types it owes to the obligee, the turn for payment as provided by the Interpretation shall be: (1) where the obligor and obligee have specified the payment of debt or the turn for payment of debt, such specification shall apply; (2) the debt that is due shall be returned in priority; (3) where some of the debts are due, the debt that is lack of security or with the smallest amount of security shall be returned in priority; (4) where the amounts of security are the same, the debt that is of higher burden shall be returned in priority; (5) where the burdens are the same, the debt shall be returned in the priority of the time when they become due; or (6) where the debt become due at the same time, the debts shall be returned proportionately.

Where the obligor shall, apart from the principal debt, still pay the interests and expenses, if the payment is not sufficient to cover all the debts and the parties have no specification, the people¡¯s court shall decide the turn for payment as follows: (1) the expenses to achieve relevant expenses; (2) interests; (3) principal debts.

IV. Termination of Contractual Rights and Obligations

After the termination of contractual rights and obligations, if the party fails to perform such obligations as notification, assistance, confidentiality and the like in good faith according to trade usage and thereby causes losses and damage to the other party, the people¡¯s court shall, when the other party claims for compensation of actual losses, support such claims. As to such debts that are due that can be offset as provided by Article 99 of the Contract Law, if the parties specified that no offset is available, the people¡¯s court shall hold that such specification be effective.

Where great changes, other than the business risks caused by force majeure, occurs to objective circumstances after the formation of the contract that is beyond the predication of the parties at the time of conclusion of this contract, and the continue performance will either be obvious unfair to the other party or frustrate the purpose of the contract, if a party requests the people¡¯s court to revise or dissolve such contract, the people¡¯s court shall, on the ground of the actual circumstances of the case and the principle of fairness, decide to revise or dissolve such contract.

V. Liabilities for Breach of Contract

As to Paragraph 2 of Article 114 of the Contract Law, the Interpretation provides that: a party may, by counterclaim or counterplea, request the people¡¯s court to adjust liquidated damage pursuant to such paragraph; where a party requests the people¡¯s court to increase the liquidated damage, the amount of the liquidated damage after increase shall not exceed the amount of actual losses; where the amount of the liquidated damage is higher than 130% of the actual losses, it shall be deemed as ¡°significantly higher than the damages incurred¡± as provided by such paragraph.

Several Opinions of the Supreme People¡¯s Court concerning the Acceptance and Examination of Civil Cases Applied for Retrial
The Several Opinions concerning the Acceptance and Examination of Civil Cases Applied for Retrial (hereinafter ¡°the Opinions¡±) is printed and issued by the Supreme People¡¯s Court on April 27, 2009.

I. Acceptance of Civil Cases Applied for Retrial

It is provided by the Opinions that, the party or outsider applied for retrial shall submit retrial application letter and other materials that conform to the provisions and provide such number of copies of the application letter that equal to the number of the applying parties and other parties in original instance.

The retrial application proposed by the retrial applicant shall conform to the following parties: (1) the retrial applicant shall be a party listed in the effective judging decision, or an outsider as provided by law and judicial interpretations; (2) the court that accepting the retrial application shall be at a higher level of the court that made the effective judging decision; (3) the decision that is applied for retrial belong to the effective decision that is allowed for retrial as provided by law and judicial interpretations; and (4) the reason for retrial application falls under the circumstances provided by Article 179 of Civil Procedure Law.

As to retrial application that does not conform to the term requirement as provided by Article 184 of the Civil Procedure Law, if the retrial applicant holds that the statutory term has not been exceeded, the people¡¯s court may request the applicant to submit the copy of the certificate of delivery of the effective judging decisions or other evidences that may prove the actual date of effectiveness of the judging decisions. If the retrial application exceeds the statutory term after examination, the people¡¯s court shall render a verdict to object such an application.

II. Examination of Civil Cases Applied for Retrial

It is provided by the Opinions that, the people¡¯s court shall, after accepting the application for retrial, organize collegiate bench to examine the case. The examination shall be focused on the issue whether the reason for retrial application can stand, and shall not examine the reasons not claimed by the retrial applicant; if the reason for retrial application cannot stand after examination, the people¡¯s court may directly render a verdict to object the retrial application.

If the reasons for retrial application can stand on the ground of the application materials, the people¡¯s court may directly render a verdict to decide the retry such cases as: (1) that are in violation of law and regulation and have mistakes in jurisdiction; (2) that the constitution of the judging organization is illegal or the judge that shall avoid has not avoided; (3) that the litigation involving a person with no legal capacity to engage in litigation is undertaken without the engagement of his/her statutory representative, or the party that should join the litigation fails to join the litigation for reasons not attributable to him/herself or his/her litigant representative; (4) the legal instrument on which the original judgment or verdict was made has been cancelled or amended; (5) the judge has such acts as making embezzlement and accepting bribery, or engaging in malpractices for personal gains, or misusing the law in rendering judgment during the trial, and has been investigated with relevant criminal instrument or disciplinary punishment.

The application to withdraw the retrial application in the course of examination shall be subject to the approval of the people¡¯s court. If the retrial applicant, the applying parties and other parties in original instance have voluntarily reached a settlement agreement during the course of examination, if the party applies to people¡¯s court to issue mediation letter and it is able to confirm that the reasons for retrial application can stand, the people¡¯s court shall render a verdict to retry the case and make the mediation letter.

Reply of the Supreme People¡¯s Court concerning Such Issues as the Calculation of Interests on Debt during the Delayed Performance Period in Enforcement
Interests on Debt during the Delayed Performance Period in Enforcement (hereinafter ¡°the Reply¡±) is promulgated on May 11, 2009 by the Supreme People¡¯s Court and shall come into force as of May 18, 2009.

According to the Reply, when calculating the ¡°interests on debt during the delayed performance period¡± according to Article 229 of the Civil Procedure Law of China, the people¡¯s court shall undertake the calculation on the ground of the bench mark lending rate of the same period as provided by the People¡¯s Bank of China. Where the funds got in the enforcement is not enough to pay up all the debts, it shall pay the monetary debts confirmed in the legal instruments and the interests of the debts during the delayed performance period proportionately on the principle of joint return, unless otherwise specified by the parties in respect of the payment turn in enforcement accommodation.

The concrete calculation formula shall be: 1. funds got in the enforcement = monetary debts confirmed in the legal instruments + interests of the debts during the delayed performance period. 2. interests of the debts during the delayed performance period = monetary debts confirmed in the legal instruments * bench mark lending rate of the same period * 2 * delayed performance period.

Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Specific Application of Laws in the Trial of Cases about the Disputes of Property Management Services

The Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Specific Application of Laws in the Trial of Cases about the Disputes of Property Management Services (hereinafter ¡°the Interpretation¡±) is promulgated on May 15, 2009 by the Supreme People¡¯s Court, and shall come into force as of October 1, 2009. As to cases that have been finally tried before the implementation of Interpretation while the party/parties applies/apply for re-trial or such case is decided to be re-tried according to the procedure of judicial supervision, the Interpretation shall not apply.

The Interpretation has made detailed rules from the following aspects:

1. Validity of Contract on Property Management Service

The preliminary property management service contract between the construction entity, and the property management service contract between the property owners commission and the property management service enterprise appointed by the general meeting of property owners shall not be objected by the property owners merely because that ¡°they are not parties to such contracts¡±. However, if the property management service contract (including preliminary management service contract) is an entrustment contract in which the property management service enterprises entrusts all the property management service businesses within the property management service area to the others, or there are clauses that discharges the liability of property management service enterprise, or increases the liability of property owners or precludes the major rights of property owners commission or property owners, the property owners commission or property owners may request to determine that the such contracts or such clauses therein are invalid.

2. Performance of Contract on Property Management Service

The service undertakings and detailed service rules made by property management service enterprise in public shall be deemed as part of the property management service contract. Where the property management service enterprise does not perform or fails to entirely perform the obligations under the property management service contract or that provided by the law, the property owner may request the property management service enterprise to assume the liabilities for breach of contract such as continual performance of obligations, taking remedying measures or making compensations to the loss and damage and the like. Where the property owner breaches the property management service contract or violates the law, regulation, management rule, and has such activities that obstruct the property management and service, the property management service enterprise may request the property owner to assume relevant civil liabilities such as restoration to original state, stoppage of infringement, and elimination of nuisance.

3. Charge of Contract on Property Management Service

Where the property management service enterprise breaches the property management service contract or violates the law, regulation, department rules, and extends the charging scope or increases the charging standard or re-charges the fees without authority, the property owner may defend on the ground of illegal charge of fees; where the property owner rejects to pay the property management fees or fails to pay the property management fees within reasonable period without just reasons, the property management service enterprise may request the property owner to pay the property management fees, and the property owner shall not defend merely on the ground that he/she has not enjoyed or does not need the relevant property management service.

4. Dismissal of Property Management Service Enterprise

After the general meeting of property owners has made the decision to dismiss the property management service enterprise pursuant to the procedure provided in Article 76 of the Law on Real Right, the property owners commission may request to dissolve the property management service contract. Upon termination of the rights and obligations in the property management service contract, the property owners may request the property management service enterprise to return the pre-paid property management fees for the defaulting property management service period, and ask the property management service enterprise to move from the property management service area and transfer the property management service houses and etc; the property management service enterprise may request property owners to pay the delayed property management fees, but shall not refuse to move from such area or transfer such house, nor shall request on the ground of actual property management service relationship the property owners to pay the property management fees after the termination of the rights and obligations in the property management service contract.

Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Specific Application of Laws in the Trial of Cases about the Disputes of Divisional Ownerships of Building
The ¡°Interpretation of the Supreme People¡¯s Court on Several Issues concerning the Specific Application of Laws in the Trial of Cases about the Disputes of Divisional Ownerships of Building¡± (hereinafter ¡°the Interpretation¡±) is promulgated on May 14, 2009 by the Supreme People¡¯s Court, and shall come into force as of October 1, 2009.

The Interpretation has 19 articles, which involves: the division of exclusive part and common part, disposition of disputes concerning parking lot and garage, the scope of material issues under the autonomy of owners, disposition of disputes concerning the transformation of residential building to commercial building, recognition of owners having common interests, exercise of cancellation right of the owner and protection of owner¡¯s right to information.

I. Definition of exclusive parts and common parts

The Interpretation has given express definition concerning the exclusive parts and common parts of buildings, those that are independent in construction and use within the building area, and are subject to the registration of title under the name of owners such as house, parking lot, stall and other specific spaces, shall be recognized as exclusive parts; and those basic structural parts such as roads, green field, infrastructure of the building, loading structure, outer wall, roof and the like, and public entrances such as passage, stair, hall and the like, and affiliated utilities and devices such as fire protection, public lighting and the like, and the structural parts such as refuge floor, device floor or device room and other parts that shall neither be owned by the owners, nor belong to municipal parts or places and devices owned by other right owners shall be recognized as common parts.

II. Disposition of such cases that use common parts in business activities without authorization

Article 7 of the Interpretation provides that: the change of use of common parts, or using the common parts for business activities, or the disposition of common parts shall be subject to the decision of all the owners; meanwhile, Article 14 of the Interpretation still provides that where the construction unit or owner or other person occupy, dispose of the common parts or change its function or use it for business activities without authorization, the right owner shall have the right to claim for elimination of nuisance, restitution, or confirmation of invalidity of such acts or for compensation.

III. Further acknowledge the disposition of disputes concerning the transformation of residential building to commercial building
The Interpretation provides that, if the owner changes the residential house into business house, such two conditions shall be satisfied: compliance with laws, regulation and administrative rules; consent of owners having common interests. Any such act that has been agreed by owners having common interests shall not be legal. Moreover, the Interpretation has confirmed the scope of owners having common interests, who refers to the owners within the said building. Still, any owner outside that building that is able to prove that the value of its house, the quality of its life has or may have suffered adverse affects may be deemed as owners having common interests.

IV. The owners may bring lawsuits to people¡¯s court to consult the property management contract and the use of repair and maintenance funds

Article 13 of the Interpretation provides that, where the owner request the people¡¯s court to open and consult such information and materials as the collection and use of repair and maintenance funds, the management agreement, resolution of owners¡¯ commission, property management contract, the use and profit of common parts, disposition of parking lot and garage and the like, the people¡¯s court shall give relevant supports.

Supplementary Provisions of the Supreme People¡¯s Court concerning People¡¯s Court¡¯s Recognition of the Civil Verdicts made by the Courts of Taiwan Region
The ¡°Supplementary Provisions of the Supreme People¡¯s Court concerning People¡¯s Court¡¯s Recognition of the Civil Verdicts made by the Courts of Taiwan Region¡± (hereinafter ¡°the Supplementary Provisions¡±) is promulgated on April 24, 2009 by the Supreme People¡¯s Court, which is the supplementary provision to the Provisions concerning People Court¡¯s Recognition of the Civil Verdicts Made by the Courts of Taiwan Region (hereinafter ¡°the Provisions¡±) and shall come into force as of May 14, 2009.

The application filed by any applicant for recognition of civil verdicts made by courts of Taiwan region shall be submitted within 2 years after such verdicts come into force, with proof evidencing that such verdict is real and effective. Civil verdicts of Taiwan region that are available for recognition include civil cases in respect of commerce, intellectual property and maritime. Where the applicant applies for recognition of civil decision, mediation letter, payment order of courts of Taiwan region and the arbitral awards of arbitration institution of Taiwan region, the Provisions and the Supplementary Provisions shall apply. Where the people¡¯s court confirms that, after examination, the verdict is real and valid without any circumstance under Article 9 of the Provisions such as that the case is under exclusive jurisdiction of people¡¯s court, or the parties have entered into arbitration agreement, it shall recognize the validity within 6 months. The civil verdicts made by courts of Taiwan region that have been recognized shall be of same validity of the effective verdicts made by people¡¯s court.

The applicant that applied for recognition of civil verdicts made by courts of Taiwan region may, while applying for the application or after the acceptance of the application but before the decision of the people¡¯s court, apply for custody of property, however, he/she must provide effective collateral at the same time. The people¡¯s court may decide to cancel the custody of property if certain legal conditions are satisfied.

Notice on Matters in Relation to the Investment or Establishment of Non-enterprise Legal Person by Mainland¡¯s Enterprises in Taiwan Region
The Ministry of Commerce and the Taiwan Affairs Office of the State Council promulgated the ¡°Notice on Matters in Relation to the Investment or Establishment of Non-enterprise Legal Person by Mainland¡¯s Enterprises in Taiwan Region¡± on May 8, 2009 (hereinafter, ¡°Notice¡±).

According to the Notice, the Ministry of Commerce shall be responsible for the examination of investment or establishment of non-enterprise legal person in Taiwan. Concerning the detailed procedure, for a local enterprise, the application shall be submitted to the Ministry of Commerce by the provincial administration of commerce, and for a central enterprise, the application shall be submitted to the Ministry of Commerce directly. The Ministry of Commerce shall, after seeking for comments from the Taiwan Affairs Office, examine according to the Measures on Administration of Overseas Investment. If the Mainland enterprise is approved to make investment or establish a non-enterprise legal person in Taiwan, the Ministry of Commerce shall issue the ¡°Enterprise Overseas Investment Certificate¡± or ¡°Enterprise Overseas Institution Certificate¡±, and the Mainland enterprise shall go through the formalities such as approval of travel to Taiwan, foreign exchange and others.

The Notice provides that the Mainland enterprise shall carry out its business in strict compliance with the business scope approved by the Ministry of Commerce. After the registration of the enterprise or non-enterprise legal person in Taiwan, the Mainland enterprise shall, within fifteen (15) working days, file the registration documents at the Ministry of Commerce and the Taiwan Affairs Office of the State Council. If the enterprise or non-enterprise legal person established by the Mainland enterprise is changed or terminated, the relevant formalities shall be handled according to the Measures on Administration of Overseas Investment.

Notice of the Ministry of Commerce on Matters in Relation to the Examination, Approval and Management of Part of the Foreign-invested Service Enterprises by Provincial Administration of Commerce and National Economic-Technological Development Area
The Ministry of Commerce promulgated the Notice on Matters in Relation to the Examination, Approval and Management of Part of the Foreign-invested Service Enterprises by Provincial Administration of Commerce and National Economic-Technological Development Area (hereinafter, ¡°Notice¡±) on May 4, 2009, which shall be implemented from the date of promulgation.

According to the Notice, the scope of examination and management on the establishment and change of foreign invested enterprises by the competent departments of commerce of all provinces, autonomous regions, municipalities directly under the Central Government, municipalities under the separate state planning, city at deputy provincial level and Xinjiang Production and Construction Corps and the state-level economic and technological development zones shall include the encouraged categories and allowed categories in the Catalog of Industries for Guiding Investment whose total investment is below USD 100,000,000 and the restricted categories whose total investment is below USD 50,000,000, which shall be in the industries such as Sino-foreign equity or cooperative medical institute, auction enterprises, book, newsletter and magazine distribution enterprises, Sino-foreign cooperative audio video product wholesale enterprises and foreign-invested non-oil-or-gas mineral exploration enterprises and various non-oil-or-gas mineral exploitation enterprises.

In addition, according to the Notice, for a merger and acquisition transaction, if the transaction belong to the encouraged and allowed categories with the transaction amount below USD 100,000,000, or the restricted categories with the transaction amount below USD 50,000,000, then it shall be examined and approved by the provincial administration of commerce and the state-level economic and technological development zones.

Notice on Relevant Issues concerning the Recognition of Enterprises Registered outside China but Controlled by Chinese Capital as Resident Enterprise according to the Standard of Actual Management Institution

The State Administration of Taxation promulgated the Notice on Relevant Issues concerning the Recognition of Enterprises Registered outside China but Controlled by Chinese Capital as Resident Enterprise according to the Standard of Actual Management Institution (hereinafter, ¡°Notice¡±) on April 22, 2009, which shall be effective from January 1, 2008.

The overseas Chinese enterprise in the Notice shall refer to those enterprise whose main controlling investors is a Chinese enterprise or group and which is registered abroad according to the foreign laws. If the overseas Chinese enterprise is recognized as a resident enterprise whose actual management institution is located in China (hereinafter, ¡°resident enterprise not registered domestically¡±), then the income of the resident enterprise not registered domestically, whether it comes from China or not, shall be imposed on enterprise income tax.

All of the following four conditions shall be complied with if an overseas Chinese enterprise is recognized as a resident enterprise not registered domestically:

the management personnel who are responsible for daily production and business operation and the location where the management department fulfills its duties enterprise are located in China (the principle of essence is more important than the form shall be respected);
the decisions on finance (such as loan, credit, finance, financial risk management) and personnel (such as nomination, dismiss and remuneration) shall be made, or approved by the institutions or persons located in China;
the main assets, accounting books, company chops, meeting minutes of the board of directors and general meeting shall be located or reserved in China;
1/2 or more of the board of directors having voting rights or the management personnel are often resided in China. For these resident enterprise not registered domestically, its income, from China or not, shall be levied on enterprise income tax.
According to the Notice, the dividends, bonuses and other equity investment proceeds obtained from China by the resident enterprise not registered domestically shall be exempted of tax. The enterprise invested in China by the resident enterprise not registered domestically shall enjoy the tax treatment as a foreign invested enterprise. An overseas enterprise, if recognized as the resident enterprise not registered domestically, shall not be deemed as a controlled foreign enterprise, but the tax of other controlled foreign enterprises which are controlled by it shall still be dealt with according to the relevant regulations.

The overseas Chinese enterprise may file its application for resident enterprise to the administration of taxation where the actual management institution is located or the Chinese main investors are located, and shall be confirmed by the State Administration of Taxation after trial examination of the administration of taxation in charge. If it has a dual-resident status when it is recognized as a Chinese resident enterprise, the relevant taxation agreement/arrangement between China and other relevant countries/regions shall be applicable.

 

Notice on Several Issues concerning the Handling of Enterprise Income Tax on the Business of Enterprise Reorganization

The Ministry of Finance and the State Administration of Taxation promulgated the ¡°Notice on Several Issues concerning the Handling of Enterprise Income Tax on the Business of Enterprise Reorganization¡± (hereinafter, ¡°Notice¡±) on April 30, 2009, which shall be effective from January 1, 2008.

The enterprise reorganization referred to in the Notice shall mean the transaction of the enterprise which involves the significant change of legal structure or economic structure beyond the daily business operation, including the change of legal form (referring to the simple change of registered name, address and organization), restructuring of liabilities, acquisition of shares, acquisition of assets, merger and division.

The Notice divides the taxation treatment into common taxation treatment and special taxation treatment according to different conditions, and thus to lower the restructuring taxation costs of the enterprise.

The enterprise enjoying the special taxation treatment shall comply with the following conditions: (1) it has reasonable business purpose, and the main purpose shall not be to lower, exempt from or delay the tax; (2) the proportion of the assets or shares which are acquired, merged or divided shall conform to the proportion provided in this Notice; (3) the enterprise shall not change the essential business operation of the restructured assets within the continuous twelve (12) months after restructuring; (4) the shares, which are used as the consideration in the restructuring transaction, shall conform to the proportion provided in this Notice; (5) the previous main shareholders who are paid by shares shall, within n the continuous twelve (12) months after restructuring, not transfer the shares acquired by them.

Special taxation treatment shall be applicable to a domestic and foreign (including Hong Kong, Macau and Taiwan) shares and assets acquisition transaction if the following conditions are met, in addition to the above conditions: (1) a non-resident enterprise transfers the shares of a resident enterprise to another non-resident enterprise, 100% of whose shares are directly controlled by it, which does not cause any change to the withholding tax of the transfer of these shares and the transferor delivers a written letter to the administration of taxation to warrant that it will not transfer the shares of the transferee within three years; (2) a non-resident enterprise transfers the shares of a resident enterprise to another resident enterprise, 100% of whose shares are directly controlled by it; (3) a resident enterprise makes investment with the assets or shares in the non-resident enterprise, 100% of whose shares are directly controlled by it; (4) other circumstances approved by the Ministry of Finance and the State Administration of Taxation.

If there are special restructuring conditions provided in this Notice and the enterprise chooses the special taxation treatment, the parties concerned shall, when declaring the annual income tax of the year when the restructuring finishes, file the written documents to the administration of taxation to prove that it complies with the conditions for special restructuring. Special taxation treatment shall not apply if the written filing is not conducted.

 

Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues concerning the Implementation of Preferential Policies on Enterprise Income Tax

The Ministry of Finance and the State Administration of Taxation promulgated the Notice on Several Issues concerning the Implementation of Preferential Policies on Enterprise Income Tax (hereinafter, ¡°Notice¡±) on April 24, 2009, which shall come into effect from January 1, 2008.

The main contents of the Notice shall be as follows:

1. an enterprise enjoying the transitional preferential policies provided in ¡°the Notice of the State Council about Implementing Preferential Policies on Transition of Enterprise Income Tax¡± (hereinafter, ¡°Notice of the State Council¡±) and the preferential policies regarding the western development may pay half of the payable tax amount computed at the applicable tax rate within the half-reduction period of the specified period for tax reductions and exemptions. With regard to other types of tax reductions and exemptions under specified periods, they shall pay half of the payable tax amount computed at the statutory tax rate for enterprise income tax, namely, 25%.

2. The circumstance as prescribed in Article 3 of the Notice of the State Council, under which no overlapping preferential policies may be enjoyed repeatedly and under which no change may be made once a preferential policies is chosen, is limited to the transitional preferential policies on enterprise income tax and such preferential policies as tax reductions and exemptions and reduced tax rates provided in the tax law and the Regulation on the Implementation of Enterprise Income Tax Law.

3. After January 1, 2008, the dividends, bonuses and other equity investment proceeds, which are formed as a result of distribution of the accumulative undistributed profits of 2007 and of the years preceding 2007 among the resident enterprises, shall be exempted of tax.

4. Where a branch, which was established by an enterprise prior to March 16, 2007, has separately enjoyed the relevant preferential policies as provided in the former enterprise income tax law for Chinese-funded enterprises or for foreign-invested enterprises and satisfies the policy requirements as listed in the Notice of the State Council, it may separately enjoy the transitional preferential policies on enterprise income tax as prescribed in the said Notice.

The treatments to the small meager-profit enterprises as prescribed in Article 28 of the Enterprise Income Law shall apply to the enterprises that satisfy the requirements for the separate accounting of their payable income tax amounts.

6. The software production enterprises and the integrated circuit production enterprises established prior to the end of 2007 may, upon certification, enjoy the preferential policies on the enterprise income tax reductions and exemptions within specified periods as provided in the Notice of the Ministry of Finance and the State Administration of Taxation on Several Preferential Policies on Enterprise Income Tax (No. 1 [2008] of the Ministry of Finance). An enterprise which had made profits in 2007 or in the years preceding 2007 and had started enjoying the enterprise income tax reductions and exemptions within specified periods may continue to enjoy the relevant preferential policies from 2008 till the expiry of the specified periods.

Measures for the Examination of Medical Instrument Advertisement

The Ministry of Health, the State Administration of Industry and Commerce and the State Food and Drug Administration promulgated the ¡°Measures for the Examination of Medical Instrument Advertisement¡± (hereinafter, ¡°Measures¡±) on April 7, 2009, which went into effect from May, 20, 2009. The Measures for the Examination of Medical Instrument Advertisement promulgated on March 8, 1995 shall be annulled simultaneously.

The new Measures have 28 clauses, which provide on the examination body, examination and approval procedure, time of limit, obligations of the applicant, the supervision and management of medical instrument advertisement and legal liabilities.

The Measures defined the medical instrument advertisement as follows: ¡°the advertisement released through the media and in a certain form, including the contents such as the name of the medical instrument, applicable scope, functions and components, and the mechanism¡±. The advertisement only publicizing the name of the product may not be examined, but it shall mark the medical instrument registration number. The applicant for the approval of medical instrument advertisement shall be the legally qualified medical instrument producing enterprise or medical instrument operation enterprise, which shall get the permit from the medical instrument producing enterprise. The approval for medical instrument advertisement shall be filed at the Food and Drug Administration of the province, autonomous regions, and municipalities directly under the Central Government where the medical instrument producing enterprise is located. The approval document shall be valid for one year.

The Measures also clarify the processing measures on false medical instrument advertisement and application for medical instrument advertisement with false documents.

 

Legal Practices

Flexible Policies concerning the Application of Labor Contract Law Is Issued in Shanghai

Shanghai High People¡¯s Court promulgated, in March 2009, the Opinions on Relevant Issues concerning the Application of Labor Contract Law (hereinafter, ¡°Opinions¡±).

These Opinions are promulgated in the context of the financial crisis, which have been fully discussed by the courts of Shanghai, Labor Dispute Arbitration Commission, Department of Human Resource and Social Security and Shanghai Labor Union, under the guiding principles of ¡°to fully and correctly understand, to encourage good faith and to balance the benefits of both parties¡±. So these opinions leave some space for the survival and development of the enterprise to some extent and thus are called ¡°flexible policies¡± by the experts.

We hereby give a simple analysis on the core issues of the Opinions as follows:

Defence for double pay because of non-written labor contract
The Opinions are clear that the execution and performance of the labor contract shall comply with the principles of good faith. Therefore, if the employer has fulfilled the duty of good faith, whether the labor contract is newly concluded or renewed, the employer may not pay double wages to the employee, if the non-conclusion of labor contract is caused because of force majeure, accident or refusal by the employee to sign. Meanwhile, if the employee refuses to conclude the written labor contract and continuous performance, it shall be deemed that the employee unilaterally terminated the labor contract.

Exceptions for non-fixed-term labor contract
Concerning the disputed issue of ¡°conclusion of fixed term labor contract for two successive times¡± according to the Opinions, the employer has the right to terminate the labor contract when it expires after conclusion of the fixed term labor contract twice successively. Only if the employer and the employee have the intention to renew the labor contract for a third time and the employee requests to conclude a non-fixed term labor contract, then the employer has to sign the non-fixed term labor contract.
When the conditions for conclusion of non-fixed-term labor contract are met, but the employee sign a fixed term labor contract with the employer, then the labor contract shall be terminated when it expires. According to the Opinions, the employee only has one chance to sign the non-fixed-term labor contract, and he will never have the right once he waives it.
If the employee works for the same employer for more than ten (10) years due to the legal causes provided in Clause 42 of the Labor Contract Law, it shall not be the reason to request the conclusion of non-fixed-term labor contract, which means the contract shall be terminated when the legal causes disappear.
Right of the employer to waive the requirement on service term
Firstly, based on Clause 17 of the Regulation on the Implementation of the Employment Contract Law, the employer may discuss with the employee that the labor contract shall not last until the expiration of the service term. Furthermore, according to the Opinions, it is the right of the employer whether to request the employee to provide service. That is to say, when the contract expires, the employer may waive the requirement on the remaining service term and terminate the labor contract. Meanwhile, if the employer requests the employee to perform for the service term, then during the service term, the employer may not provide the working position and waive the requirement on the remaining service term, and thus terminate the labor contract. But attention shall be paid if the employer waives the requirement on service term, it shall not claim for compensation against the employee for the service term.

Distribution of liabilities arising from defects in the procedure of termination of contract and invalid regulations and rules
Based on the principle to encourage good faith and balance the interests, the Opinions clarify that:

If the conditions for termination of the labor contract have been legally met, but there is defect in the procedure when the employer handles the termination (such as failure of 30 days notice), the employer needs not pay such kind of compensation from ¡°termination in violation of laws¡±.
Even if the regulations and rules are invalid, the employee shall still fulfill the obligations according to the laws and the principle of good faith, including the obligations referred to from Clause 2 of Article 3 of the Labor Law, ¡°the employee shall comply with the labor disciplines and professional ethics¡± which are managed by the employer in its sole discretion, otherwise, the employee shall be legally liable.
Handling of special treatment
In line with the ¡°Regulations of Shanghai on Labor Contract¡±, the Opinions provide if the employee does not perform the labor contract for the agreed term and terminates the labor contract, according to the principle of relativity of contract, the employer may refuse to pay the special treatment such as subsidies for car, house or residence; if they have already been paid, the employer may request to refund in proportion. But the employer and the employee shall have the definite agreement on the service term for the special treatment, and no liquidated damages shall be paid in this circumstance.

Validity of the clause of non-competition
The Opinions provide if the parties concerned have the intention on non-competition, it shall be deemed that the non-competition clause is binding on both parties. That is to say, even if no compensation is agreed to be paid to the employee, or there is an agreement on payment of compensation but no specific standard is provided, the validity of the clause of non-competition shall not be affected. The Opinions allow the parties to discuss the compensation later. If no agreement is reached, then the compensation shall be decided within the scope from 20% to 50% of the previous wages of the employee.

In addition to the above simple analysis, the Opinions also have practical explanations and handling of payment cases and standards for ¡°payment for substitute for notice¡±, guarantee set during the performance of labor contract, standards of equal pay for equal work, working years and economic compensations.

Finally, we have to point out though the Opinions loosen the application of Labor Contract Law to some extent, the employer shall still pay attention to its burden of proof under this circumstance. In addition, the Opinions only have guiding meaning in Shanghai, Beijing, Jiangsu, Zhejiang and Shenzhen have their own various opinions. For an enterprise or group operating across many regions, the local policies shall be respected and followed.

(Contact of author: terryxie@hllawyers.com)

 

Be Aware of the Potential Risks in the Assignment of Real Estate

With the rapid development of economy, the transfer price of industrial land and plants in the suburban districts of Shanghai has kept increasing. A lot of enterprises prefer to purchase well-developed industrial land and plants in the suburban districts of Shanghai, however, due to some historical reasons, a few years ago, these lands are still collectively owned, and the actual users of such lands and plants are usually some companies partially owned by the local governments. Therefore, when purchasing real estate from these companies with governmental background, the investors should pay attention to the relevant potential legal risks.

Mr. Huixiao Han and Mr. Bruce Luan, attorneys of Haworth & Lexon have dealt with a typical case regarding an invalid real estate transfer agreement. This contract was entered into by Company A, a private enterprise, as the transferee, and Company B, a local collectively owned enterprise in Songjiang District, Shanghai, as the transferor, regarding the transfer of an industrial land and the plants and office buildings thereon.

[Case Summary]

Company A and Company B reached an agreement in January 2004, according to which, Company B should transfer an industrial land (about 10 mu) located in Sijing Town, Songjiang District together with the plants and office buildings (about 6300©O) thereon to Company A; upon its receipt of the initial payment at 40% of the total contract price, Company B should forthwith assist Company A in obtaining the Land Use Right Certificate and House Ownership Certificate.

Through investigation, it was found that, before the transfer agreement was concluded, Company B has obtained the Planning Permit on Land for Construction Use issued by the planning authority, and in 2003, the government of Songjiang District has approved the grant of about 10-hectare constructive lands (including the land involved in this case) to Company B through the method of requisition, and Company B transferred the 10-hectare constructive lands to 8 companies, including Company A.

After the execution of the transfer agreement, in order to avoid the deed tax, Company A and Company B agreed to change the filed project construction unit from Company B to Company A, and let Company A obtain the Land Use Right Certificate and House Ownership Certificate directly from the government. In 2004, the government of Songjiang District approved the change of the grantee of the 10-hectare constructive lands from Company B to 8 companies including Company A. From 2005 to 2006, the change of the project construction unit from Company B to Company A was approved by the relevant authorities.

It was also confirmed that, after the execution of the transfer agreement, Company A has made the initial payment to Company B amounting to 40% of the total contract price, and Company A has started to use the plants and office buildings. From 2004 to 2007, neither Company A nor Company B has dealt with the procedures to obtain the Land Use Right Certificate and House Ownership Certificate, and later on, due to the adjustment of relevant policies, it was impossible for Company A to apply for such certificates. In 2008, Company held that when the transfer agreement was concluded, Company B has not been granted the relevant certificates such as the Land Use Right Certificate and Construction Permit, and the transfer was not approved by the land administration authority, which has violated the compulsory regulations on real estate transaction, therefore, Company B brought a suit against Company A to claim for the invalidity of the transfer agreement and claim for return of the land and buildings.

[Brief Comments]

In accordance with the applicable laws of PRC, transfer of real estate with the right of land use shall comply with the following conditions: (1) All the fees in concern with the grant of the right of land use have been paid in accordance with the contract for the grant and the certificate of the right to use the land has been obtained; and (2) Investment and development have been done in accordance with the provisions prescribed by the contract for the grant; for housing construction projects, 25 percent of the total investment has gone through; for development of large tracts of land, land has been available for the construction of industrial or other projects. When a real estate is transferred with a finished building, title certificate for the building is also needed. Transfer of real estate without land use right certificate or house ownership certificate is invalid.

In this case, Company B has only obtained the approval of government for granting this land to Company B, and the administrative permit for its specific project construct, but no grant fee has been paid, and the Land Use Right Certificate was not obtained. We hold that, the transfer of land use right is totally different from the grant of land use right. The issuance of the relevant governmental approval for granting this land should not be deemed as a symbol of Company A¡¯s enjoyment of the land use right. The ¡°granting¡± of this land under the governmental approval shall not be assigned independently without the obtaining and transfer of land use right. Therefore, the contract signed by Company A and Company B in January 2004 is invalid due to its violation with the compulsory regulations on real estate transfer.

Although Company B, relying on its governmental background, has made the ¡°grantee¡± of the land and the ¡°construction unit¡± of the project be changed to Company A after the execution of the transfer agreement, this sort of ¡°change¡± shall not be deemed as the government¡¯s approval on the transfer of the land use right without Company B¡¯s obtaining of such right, and on the other hand, Company A and Company B has only made some preliminary preparation for obtaining the house ownership certificate in accordance with the transfer agreement, and neither the land use right certificate nor the house ownership certificate was issued during the period from 2004 to 2007, and as a result, Company A was unable to get the these certificate due to the adjustment of governmental policies.

Therefore, the No.1 Intermediate People¡¯s Court of Shanghai finally judged that the contract was invalid and the real estate should be returned to Company B.

(Contact of author: bruceluan@hllawyers.com)

Trademark ¡°Ë÷°®¡± was Rush Registered due to the Failure of Sony Ericson in Proving the Use and Effect of the Trademark
[Case Summary]

The appeal was filed by Liu Jianjia, as the Appellant (the third party of the first trial) against Sony Ericsson Mobile Communications (China) Co. Ltd. (hereinafter referred to as ¡°Sony Ericson China¡±), as the Appellee (the plaintiff of the first trial), and Trademark Examination Committee of the State Administration of Industry and Commerce (hereinafter referred to as the ¡°Trademark Examination Committee¡±) as another Appellee (the defendant of the first trial) regarding objection against the Verdict [ (2008)YIZHONGXINGCHUZI No:196] made by the No.1 Intermediate People¡¯s Court of Beijing. The final verdict was issued by the High People¡¯s Court of Beijing on Mar.12, 2009, and according to this final verdict, the verdict of the fist trial was revoked, and the court finally supported the Decision [SHANGPINGZI (2007) No. 11295] on the dispute of the trademark ¡°Ë÷°®¡± (Registered No. 3492439) issued by the Trademark Examination Committee (hereinafter referred to as the Decision No. 11295).

In March 2003, Liu Jianjia submitted his application to the Trademark Bureau of the State Administration of Industry and Commerce (hereinafter referred to as the ¡°Trademark Bureau¡±) for the registration of the trademark ¡°Ë÷°®¡± (hereinafter referred to as the ¡°Disputed Trademark¡±). On Aug.7, 2004, the Trademark Bureau approved the registration of the Disputed Trademark (Registered No. 3492439) in Category 9 for videodisc players, amplifiers and other products. In June 2005, Sony Ericson China applied for revocation of the Disputed Trademark, and held that the trademark ¡°Ë÷°®¡± is a famous trademark in China owned by Sony Ericson China, and Liu Jianjia¡¯s rush registration of the trademark will infringe the legal rights and interests of Sony Ericson China. In November 2007, the application of Sony Ericson China was rejected by the Trademark Examination Committee with the Decision No. 11295.

Therefore, Sony Ericson China brought a lawsuit to the No.1 Intermediate People¡¯s Court of Beijing and claimed that before the application date for registration of the Dispute Trademark, ¡°Ë÷°®¡±, according to the customs of the public, has been deemed as the abbreviation for the well-known trademarks ¡°Ë÷Äá°®Á¢ÐÅ¡± and ¡°Sony Ericsson¡±, and the Disputed Trademark was solely and definitely symbolizing the Sony Ericson Group (including Sony Ericson China) and its products; Liu Jianjia¡¯s behavior is obviously a willful rush registration for the purpose of unfair competition; and the registration and use of the Disputed Trademark will cause confusion or misunderstanding of the public regarding the source of the products, will interfere the fair market competition, and will also be harmful to the interest and goodwill of Sony Ericson China.

The No.1 Intermediate People¡¯s Court of Beijing held that, Sony Ericson China failed to produce proper evidence to prove that the Disputed Trademark had become a famous trademark before the application date for registration, and therefore its claim that ¡°Ë÷°®¡± is an ¡°unregistered famous trademark¡± is without factual ground. Through the evidence submitted by Sony Ericson China, the court affirmed that since December 2002 to the application date for registration, news reports and comments of different types of ¡°Ë÷°®¡± mobile phone and other ¡°Ë÷°®¡± electronic products had appeared on various websites, and the manufacturer of these products is Sony Ericson or Sony Ericson China, which means in daily life, ¡°Ë÷°®¡±, as the abbreviation for ¡°Ë÷Äá°®Á¢ÐÅ¡±, has been widely used by the relevant public and media, and has been recognized by the consumers since the establishment of the Sony Ericson China and the appearance of its electronic products. ¡°Ë÷°®¡± has become a symbol of product source and quality, which will naturally affected Sony Ericson China, and it can be deemed as Sony Ericson China¡¯s use of this trademark. Thus, ¡°Ë÷°®¡± has actually become a trademark used by Sony Ericson China, which should be known to Liu Jianjia, who has been engaged in the industry of electronic products for many years. Therefore, the court held that Liu Jianjia¡¯s application for the registration of the Disputed Trademark for the products including telephone is obviously improper, and the court revoked the Decision No. 11295, and judged that the Trademark Examination Committee shall redecide the application submitted by Sony Ericson China.

Liu Jianjia filed the appeal with the High People¡¯s Court of Beijing and claimed that the affirmation made by the court of the first trial that the Disputed Trademark was an unregistered trademark used by Sony Ericson China with certain effect is not true; Sony Ericson China had never used the Disputed Trademark according to the laws of China; and the application of Article 31 of the Trademark Law by the verdict of the first trial is incorrect.

[Final Judgment]

The High People¡¯s Court of Beijing held that, the claim of Sony Ericson China was based on the news reports and comments of the ¡°Ë÷°®¡± mobile phones and other products on some websites, and according to these news reports and comments, the manufacturer of these ¡°Ë÷°®¡± products is Sony Ericson or Sony Ericson China. But these news reports or comments were not from Sony Ericson China. By the application date for registration, Sony Ericson China had not conduct any manufacture, sale or advertisement activities for ¡°Ë÷°®¡± products, and up to about October 2007, Sony Ericson China had not recognized ¡°Ë÷°®¡± as the abbreviation for its company name or for its mobile phones or other electronic products. Since Sony Ericson China had never used ¡°Ë÷°®¡± as its trademark for commercial purpose, the affirmation made by the court of the first trail is without legal ground. And therefore the court of the final trial supported the claim of Liu Jianjia, and finally revoked the verdict of the first trial, and maintained the Decision No. 11295.

[Brief Comments]

As stipulated in Article 31 of the Trademark Law of China, an application for registration of a trademark shall not prejudice the prior right of another person, and it is not allowed to rush register with unfair means any trademark with certain reputation which has been used by another person. In accordance with this Article, ¡°rush registration¡± is referred to the trademark which has been used with certain effect. And as regulated in Article 3 of the Implementing Regulations of the Trademark Law of China, the ¡°use of trademarks¡± includes, among other things, the use of trademarks on goods, Packages or containers thereof and commodity trading instruments, or use of trademarks in advertisements, exhibitions and other commercial activities. Therefore, the rush-registered trademark should have been used in the commercial activities of the person who claims for his prior right to this trademark. In this case, although the media and the relevant public have widely connect ¡°Ë÷°®¡± with the products of Sony Ericson China, such a connection was not based on the use of this trademark by Sony Ericson China according to the trademark laws, and thus the court did not support the claim of Sony Ericson China that ¡°Ë÷°®¡± is a trademark used by it with certain effect, and finally this trademark was registered by others.

(Contact of author: juliazhu@hllawyers.com)

Scope of the Compensation by Carrier for Breach of Contract

Transportation is a derivative need of trading activities. As the most importation means of transportation, shipping possesses a slowly increasing portion of the whole transportation industry. Shipping is a high-risk industry with special risks. Even with highly-developed sailing technologies, collision in crowded water area and cargo damage or cargo shortage or overloaded is still common due to the trend of largeness and speediness of vessels.

In case of cargo damage, the consignee possibly will reject the cargos at the port of destination because the cargos cannot comply with the requirements of the trading contract, and the consignor, in most cases, will be liable for the breach of the trading contract. We think, in the event of cargo damage, the consignor and the carrier should reasonably share the economic loss arising from the cargo damage through consultation. Here is a case for your reference:

[Case Summary]

The Plaintiff: a trading company of Zhejiang Province
The Defendant: a shipping company of Fujian Province

In the end of July 2006, an oral agreement was concluded between the Plaintiff and the Defendant, and according to this agreement, the vessel ¡°Quanxing169¡± owned by the Defendant was hired by the Plaintiff to transport starch from Fangcheng Port to Qinhuangdao Port. The cargos were shipped at Fangcheng Port, and the Defendant issued two waterway bills sealed with the vessel stamp, according to which, the Plaintiff was the consignor, and CGOG (Tianjin) Vegetable Oil Industry Trading Co., Ltd. (hereinafter referred to as ¡°CGOG¡±) was the consignee. Upon the arrival of the vessel ¡°Quanxing169¡± at Qinhuangdao Port on Aug.21, the consignee found that due to the improper management of the Defendant during the transportation, a part of the cargos had sustained wet damage. The Plaintiff reported the damage to PICC Property and Casualty Co., Ltd. Fangcheng Branch (hereinafter referred to as ¡°PICC¡±), and after its survey on the spot, PICC paid RMB 38000 to the Plaintiff as the insurance indemnity. The Plaintiff had entered into a trading contract with CGOG, and according to this contract, ¡°if the Supplier fails to deliver all the goods complying with the requirements of time, quality and quantity, it shall be deemed as the supplier¡¯s breach of the contract, and a liquidated damage amounting to 15% of the price of the undelivered goods shall be paid to the Buyer¡±.

[Judgment]

The maritime court held that this case is a cargo damage dispute arising from waterway transportation contract, and the key point to this case is whether the Defendant shall bear the liability for breach, and how to decide the scope of compensation.

The court affirmed that:

1. The waterway transportation contract between the Plaintiff and the Defendant was based on the declaration of will of both parties without violating the laws and regulations of the state, and therefore this contract is effective and should be binding upon each party. The Defendant, as the carrier under the contract, shall be responsible for safely transporting the cargos to the port of destination, and shall be entitled to the freight paid by the consignor. Because the wet damage of the cargos is arising from the Defendant¡¯s improper management, the compensation should be deducted from the freight to be paid by the Defendant.

2. The Defendant shall not be responsible for the liquidated damage paid by the Plaintiff to the third party, no matter whether such liquidated damage has been paid or not, because 1) the Defendant shall only bear the compensation liabilities under the waterway transportation contract. The contract between the plaintiff and the third party, CGOG, shall not be binding upon the Defendant, and therefore the Plaintiff shall not claim for compensation from Defendant based on the trading contract; 2) As stipulated in Article 113 of the Contract Law, ¡°where a party fails to perform its obligations under the contract or its performance fails to conform to the agreement and cause losses to the other party, the amount of compensation for losses shall be equal to the losses caused by the breach of contract, including the interests receivable after the performance of the contract, provided not exceeding the probable losses caused by the breach of contract which has been foreseen or ought to be foreseen when the party in breach concludes the contract.¡± In this case, the Defendant, as the carrier under the waterway transportation contract, can only foresee the possible losses and risks, such as cargo damage, under the transportation contract, and was unable to foresee the risk of liquidated damage under the trading contract, and therefore it shall not be responsible for this liquidated damage pursuant to the limitation of compensation under this Article 113 of the Contract Law.

The Court judged that:

The freight for that part of cargos which have sustained wet damage shall be deducted from the total amount of the freight to be paid by the Plaintiff;
The Defendant shall not be liable for the liquidated damages paid by the Plaintiff to the third party.
[Brief Comments]

Notwithstanding the rapid development of technologies, shipping is still a high-risk industry, and in order to protect the health development of this industry, the carriers are still entitled to some relief or limitation of their liabilities. In the seaway shipping industry, in theory, the bill of lading is not a shipping contract, but only an evidence of shipping contract, however in practice, usually the consignor will not execute a shipping contract with the carrier, but will only book cargo space with a shipping order, and generally speaking, a shipping order will not regulate in details the responsibilities of each party. Therefore, we suggest that, in order to protect each party¡¯s legal rights and interest, a detailed written shipping contract should be entered into by both parties to specify the rights and obligations of each party.