Haworth & Lexon Law Newsletter
No.6 2012 (Total:No.124) Aug. 8, 2012
Edited by Haworth & Lexon
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:
Notice on Printing and Distributing the Implementation Opinions on Encouraging and Guiding Private Enterprises to Actively Invest Abroad
Notice on Issues Concerning the Investment of Insurance Funds in Equity and Real Estate
Interim Administrative Measures for Entrusted Investment of Insurance Funds
Notice of the Ministry of Commerce on Pilot Launch of Commercial Factoring
Implementation Opinions of the Ministry of Culture on Encouraging and Guiding Private Capital into the Field of Culture
Notice on Further Strenthening the Administration of Internet Dramas, Micro Films and Other Audio-Visual Programs
Law of the People’s Republic of China on Control of Entry and Exit
Administrative Measures for the Registration of Hazardous Chemicals
Announcement of the State Administration of Taxation on Issues concerning the Levy of Enterprise Income Tax by Verification
Announcement of the State Administration of Taxation on the Identification of “Beneficial Owners” in Tax Treaties
Legal Practices:
Legal Practices of the Application for Invalidation of the Arbitration Agreement (I)
Serial Articles: Comparisons among Judicial Practices of Labor Disputes (I)
Chongqing Office Column:
Legal Practices: A New Method for Guarantee of Creditor’s Right—Pledge over Accounts Receivable
Latest Laws and Regulations
Notice on Printing and Distributing the Implementation Opinions on Encouraging and Guiding Private Enterprises to Actively Invest Abroa
On June 29, 2012, thirteen ministries and commissions including the National Development and Reform Commission, the Ministry of Foreign Affairs, the Ministry of Industry and Information Technology, the Ministry of Finance and the Ministry of Commerce jointly promulgated the Notice on Printing and Distributing the Implementation Opinions on Encouraging and Guiding Private Enterprises in Actively Investing Abroad (Fa Gai Wai Zi [2012] No.1905, hereinafter referred to as the Notice). The Notice entered into force with relevant suggestions and guidelines on encouraging and guiding private enterprises in actively investing abroad.
As per the Notice, private enterprises are encouraged to go overseas to conduct investment in energies and resources, infrastructure, agriculture and service industry, etc. Meanwhile, to support the overseas investment by private enterprises, the Notice also indicates that the relevant supporting policies will be formed, including the policy on tax credit on income tax paid abroad by enterprises, multiple types of credit support, the optimized customs clearance system, etc.
The Notice also specifies that the examination and approval of overseas investment shall be simplified and the policies concerning foreign exchange administration will be reformed and improved, including that the approval requirements for the purchase and payment of foreign exchange used for overseas loans shall be abolished, a domestic individual who has direct interested relationship with the party providing guarantee shall be permitted to provide joint guarantee for the debt under that guarantee provided by a domestic institution.
Notice on Issues Concerning the Investment of Insurance Funds in Equity and Real Estate
On July 16, 2012, the China Insurance Regulatory Commission (the “CIRC”) promulgated the Notice on Issues Concerning the Investment of Insurance Funds in Equity and Real Estate (Bao Jian Fa [2012] No.59, hereianfter referred to as the Notice), which made ten major adjustments to the investment of insurance funds in equity and real estate.
1. For an insurance company that invests in equity or immovables, the basic requirement of the net assets at the previous accounting year shall be uniformly adjusted to RMB 100 million. The basic requirement of the solvency adequacy ratio shall be adjusted to that, the solvency adequacy ratio at the end of the previous quarter shall not be less than 120%, and where the solvency adequacy ratio is less than 120% after the investment has been made, the investment strategy shall be timely adjusted and valid measures shall be taken so as control relevant risks.
2. The scope of equity that insurance funds may be directly invested in is extended to include equity in energy enterprises, resource enterprises, and modern agricultural enterprises and new-type trading circulation enterprises relating to insurance business, provided that the target enterprises of such equity investment shall comply with relevant macro-policies and industrial policies of the State and have a stable cash flow and good economic performance.
3. Equity investment funds that insurance funds may be invested in include growth funds, merger & acquisition funds, emerging strategic industry funds and parent funds with the aforementioned equity investment funds as investment objects; and where insurance funds are invested in an equity investment fund, a non-insurance financial institution or any subsidiary thereof may not have actual control over the management and operation of the fund or hold any general partnership interest in the fund.
Besides, the Notice further confirms, where insurance funds are indirectly invested in public rental housing or low-rent housing projects, such projects shall have been examined and approved by the government, have all necessary, lawful and valid certificates and are located in big cities with solid economic strength, sound financial situations and a stable population growth rate.
The Notice also requires that an insurance company may not create any mortgage or security on real estate it invests in, but where an insurance company invests in real estate by using the equity it holds in a project company, the project company may, based on the mortgage or guarantee of its own assets, borrow money from the shareholders of the insurance company or otherwise raise funds, provided that the total amount of funds raised therefrom shall not exceed 40% of total investment in the project.
Interim Administrative Measures for Entrusted Investment of Insurance Funds
On July 16, 2012, China Insurance Regulatory Commission (“CIRC”) issued the Interim Administrative Measures for Entrusted Investment of Insurance Funds (Bao Jian Fa [2012] No.60, hereinafter referred to as the Measures) to regulate the entrusted investment of insurance funds.
The Measures stipulate that, the Measures apply to the entrustment of insurance funds by insurance group (holding) companies and insurance companies legally incorporated within the territory of China to qualified investment managers to be used in targeted asset management, specialized asset management or customer-specific asset management and other investment businesses.
The Measures provide for the conditions for insurance companies with regard to the business of entrusted investment of insurance funds and the qualification of investment managers. Besides, the Measures require that the scope of the entrusted investment of insurance funds shall be limited to deposits in domestic markets, bonds and stocks issued in public, listed and traded in accordance with the law, securities investment funds and other financial instruments.
Notice of the Ministry of Commerce on Pilot Launch of Commercial Factoring
On June 27, 2012, the Ministry of Coommerce issued the Notice on Pilot Launch of Commercial Factoring (Shang Zi Han [2012] No.419, hereinafter referred to as the Notice). The Notice explicitly provides for the pilot launch of commercial factoring in Tianjin Binhai New Area and Shanghai Pudong New Area.
The Notice stipulates that commercial factoring companies shall be established to provide enterprises with trade financing, management of sales ledgers, investigation and assessment of client credit standings, management and collection of accounts receivable, credit risk guarantee and other services.
The Notice fundamentally provides for the work mechanism, market access management, business operations and regulatory system of a commercial factoring company; in the meantime, commercial factoring companies of all types are encouraged to serve medium, small and micro-sized enterprises and actively carry out international and domestic factoring business. Besides, competent commerce departments in the pilot regions shall report information on the pilot work to the Ministry of Commerce on a regular basis.
Implementation Opinions of the Ministry of Culture on Encouraging and Guiding Private Capital into the Field of Culture
On June 28, 2012, the Ministry of Culture promulgated the Implementation Opinions of the Ministry of Culture on Encouraging and Guiding Private Capital into the Field of Culture (Wen Chan Fa [2012] No.17, hereinafter referred to as the Implementation Opinions). The Implementation Opinions have affirmed the important role played by the private capital in the field of culture, and for the first time, fully open the field of culture administered by the Ministry of Culture to the private capital.
The Implementation Opinions encourage and support private capital to actively participate in the corporate restructuring of state-owned literary and artistic theater troupes , participate in public culture service system construction, invest in culture industry development, participate in intangible cultural heritage inheritance and protection and take active part in foreign cultural exchanges and cultural trade by various means through granting preferential treatment to private capital, treating private capital and state-owned enterprises equally, etc.
The Implementation Opinions also provide sound conditions for private capital to enter into the field of culture by eliminating the systematic obstacles for private capital entering into the field of culture, deepening and reforming the administrative examination and approval system, improving the public service level, etc.; the Implementation Opinions also provide for strengthening the administration of guidance and regulation for private capital entering into the field of culture.
Notice on Further Strenthening the Administration of Internet Dramas, Micro Films and Other Audio-Visual Programs
On July 9, 2012, the State Administration of Radio Film and Television and the State Internet Information Office jointly promulgated the Notice on Further Strenghthening the Administration of Internet Dramas, Micro Films and Other Audio-Visual Programs (hereinafter referred to as the Notice) to regulate the broadcasting and examination of internet dramas, micro films and other audio-visual programs.
The Notice requires the entities in charge of internet audio-visual programs to perform their duties as sponsors and bear the social responsibilities of mass media and to be responsible for the internet dramas, micro films and other audio-visual programs. Before broadcasting any program, the entities shall organize examination personnel to examine the content of the program and only broadcast those that have been approved. Besides, the industy association in charge of interne audio-visual programs are also required to perform the duty and role as an association, train and examine the examination personnel of the member entities in charge of internet audio-visual programs and the Notice also guides the member entities to dissemninate healthy and beneficiary audio-visual programs. The Notice also requires the government functional departments to urge the entities in charge of internet audio-visual programs to meet up with the requirements of the Notice and administer the entry and exit of business sponsors.
Law of the People’s Republic of China on Control of Entry and Exit
On June 30, 2012, the Standing Committee of the National People’s Congress passed and promulgated the Law of the People’s Republic of China on Control of Entry and Exit (hereinafter referred to as the Law on Control of the Exit and Entry). The Law on Control of the Exit and Entry explicitly provides for and regulate the exit and entry of Chinese citizens and entry and exit of aliens.
The Law on Control of the Exit and Entry specifies that the exit and entry of Chinese citizens, entry and exit of aliens, stay and residence of aliens in China and inspection by the frontier inspection offices on exit and entry of transportation means shall be subject to the Law on Control of the Exit and Entry.
I. Exit and entry of Chinese citizens
Pursuant to the Law on Control of Exit and Entry, Chinese citizens who exit or enter China shall, in accordance with law, apply for passports or other travel documents. Chinese citizens bound for other countries or regions shall also obtain visas or other entry permits from destination countries, unless the Chinese government has signed visa exemption agreements with governments of other countries or unless otherwise stipulated by the Ministry of Public Security and the Ministry of Foreign Affairs. Besides, the Law on Control on Control of Exit and Entry specifies the circumstances where the exit of a Chinese citizen shall be restricted.
II. Entry and exit of foreigners
The Law on Control of the Exit and Entry stipulates that foreigners who enter China shall apply to the visa-issuing authorities abroad for a visa, unless otherwise provided for in this Law. Visa includes diplomatic visa, courtesy visa, official visa and ordinary visa. Besides, the Law on Control of the Exit and Entry generally lists out the circumstances where a visa shall not be issued.
In addition to the said entry formalities, the Law on Control of the Exit and Entry also provides for the system of temporary entry which allows those foreigners who meet up with the relevant conditions to enter China temporarily. Besides, the circumstances where the entry and exit of a foreigner shall be restricted have been regulated and numerated.
III. Stay and residence of foreigners in China
Pursuant to the Law on Control of the Exit and Entry, where the duration of stay specified in visas held by foreigners does not exceed 180 days, holders may stay in China within the duration of stay specified in visas. Where visas held by foreigners specify that foreigners need to apply for residence permits upon entry, foreigners shall, within 30 days upon entry, apply to the exit-entry administrations of public security organs under local people’s governments above the county level in proposed places of residence for foreigner residence permits. The minimum and maximum validity periods of a foreigner residence permit for work shall be 90 days and five years respectively; and the minimum and maximum validity periods of a non-working foreigner residence permit shall be 180 days and five years respectively.
The Law on Control of the Exit and Entry also specifies that foreigners who work in China shall obtain work permits and residence permits for work in accordance with relevant regulations. No entities or individuals may employ foreigners without work permits or residence permits for work.
The Law on Control of the Exit and Entry also provides for the qualification for permanent residence: foreigners who have made remarkable contributions to China’s economic and social development or meet other conditions for permanent residence in China may obtain the qualification for permanent residence upon application by them and approval by the Ministry of Public Security.
Administrative Measures for the Registration of Hazardous Chemicals
On July 1, 2012, the State Administration of Work Safety promulgated the Administrative Measures for the Registration of Hazardous Chemicals (hereinafter referred to as the Administrative Measures) in order to strengthen the safety management of hazardous chemicals and standardize the registration of hazardous chemicals.
As specified by the Administrative Measures, the Administrative Measures shall apply to the registration and administration of hazardous chemicals listed in the Catalogue of Hazardous Chemicals that are produced or imported by hazardous chemicals production enterprises or import enterprises (hereinafter referred to as “registrants” collectively).
The Administrative Measures require that a newly-established production enterprise shall go through formalities for registration of hazardous chemicals prior to the final acceptance thereof. An import enterprise shall go through formalities for registration of hazardous chemicals prior to the first import of hazardous chemicals. The Adminsitrative Measures also specify and detail the process for the registration of hazardous chemicals by hazardous chemicals production enterprises or import enterprises and the materials required to be submitted for the registration, and the registration authority shall be the relevant registration center set up by the state and provincial administration of work safety.
Announcement of the State Administration of Taxation on Issues concerning the Levy of Enterprise Income Tax by Verification
On June 19, 2012, the State Administration of Taxation promulgated the Announcement on Issues concerning the Levy of Enterprise Income Tax by Verification (No.27 [2012], hereinafter referred to as the Announcement).
Pursuant to the Announcement, enterprise income tax on enterprises specializing in equity (stock) investment business shall not be levied by verification. As regards an enterprise subject to enterprise income tax levied by way of verification at the verified taxable income rate in accordance with the law, its incomes obtained from transfer of equity (stocks) and other property shall be fully credited into the amount of its taxable income for the purpose of taxation at the taxable income rate applicable to its core project (business).
Announcement of the State Administration of Taxation on the Identification of “Beneficial Owners” in Tax Treaties
On June 20, 2012, the State Administration of Taxation made an annoucement on issues concerning the identification of “beneficial owners” involved in the Notice of the State Administration of Taxation Concerning the Meaning and Determination of the Identity of “Beneficial Owner” in Tax Treaties (Guo Shui Han [2009] No.601).
The Annoucement specifies that, when judging whether a resident of the other contracting party has the beneficial owner status, an comprehensive analysis and judgment shall be made according to the various factors specified in Article 2 of the document numbered Guo Shui Han [2009] No. 601 and the identification of such status shall not be denied or approved due merely to the existence of a certain adverse factor or the non-existence of the “purpose of the evasion, reduction or transfer of tax or the accumulation of profit” as specified in Article 1.
The Annoucement further confirms that, if the income obtained in China by a resident of the other contracting party which is applying for the enjoyment of the treatment under the treaty (hereinafter referred to as the “applicant”) is dividends, and the resident is a company listed in the other contracting party or is wholly owned directly or indirectly by a company which is also the resident of the other contracting party and listed in the other contracting party (excluding the situation in which shares are held indirectly through a resident enterprise in a third country or region that does not belong to the resident of China or the resident of the other contracting party) and such dividends come from the shares held by the listed company, the beneficial owner status of the applicant can be directly identified.
The Announcement also specifies that if a taxation authority with examination and approval power is involved in a case that denies the beneficial owner status of the applicant when handling the relevant matters for examination and approval, such denial shall be implemented after being reported to and approved by the taxation authority at the provincial level. The taxation authority at the provincial level shall simultaneously report the result of the handling of the relevant case to the State Administration of Taxation (International Tax Department) for record-filing.
Legal Practices
Legal Practices of Application for Invalidation of Arbitration Agreement (I)
Where an agreement stipulates that arbitration shall be applicable for settlement of any dispute between the parties to such agreement, in the event of a dispute, legal practitioners are usually busy judging whether such stipulation is effective. This article is intended to briefly parse several circumstances where arbitration clauses are deemed invalid as well as the relevant issues of procedure laws.
I. Laws applicable for identification of the validity of an arbitration clause
Pursuant to Article 16 of the Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of the Arbitration Law of the People’s Republic of China (hereinafter referred to as the Judicial Interpretation), as for identifying the validity of an arbitration agreement involving foreign elements, the law agreed upon by the parties shall apply. If the parties have not agreed upon an applicable law but have agreed upon the place of arbitration, the law of that place shall apply. If the parties have agreed upon neither an applicable law nor the place of arbitration, or they fail to clearly agree upon the place of arbitration, the law of the court shall apply. In this article, the relevant issues are analyzed in accodance with the laws of PRC.
In China, to determine whether an arbitration clause is valid, the Arbitration Law and the Judicial Interpretation of the Arbitration Law are applicable in most cases, surely as well as the reply of the Supreme People’s Court to relevant legal issues and the reply to specific cases, etc.
II. The cause for invalidating an arbitration agreement prescribed the law of the PRC
1. Pursuant to Article 17 of the Arbitration Law of the People’s Republic of China, an arbitration agreement shall be null and void under one of the following circumstances:
(1) The agreed matters for arbitration exceed the range of arbitrable matters as specified by law;
(2) One party that concluded the arbitration agreement has no capacity for civil conducts or has limited capacity for civil conducts; or
(3) One party coerced the other party into concluding the arbitration agreement.
It is comparatively simple to understand from the perspective of commercial law the above three circumstances resulting in the invalidation of an arbitration agreement.
2. An arbitration agreement which contains none or unclear provisions concerning the matters for arbitration and for which a supplementary agreement cannot be attained shall be deemed invalid:
Pursuant to Article 18 of the Arbitration Law, if an arbitration agreement contains none or unclear provisions concerning the matters for arbitration or the arbitration commission, the parties may reach a supplementary agreement. If no such supplementary agreement can be reached, the arbitration agreement shall be null and void. However, purusant to the Judicial Interpretation of the Arbitration Law, if parties concerned generally agree that the arbitrable matters shall be disputes arising from a contract, then all disputes arising from the formation, validity, modification, assignment, performance, liability for breach, interpretation, or rescission of the contract may be deemed arbitrable matters.
3. The arbitration agreement for which a supplementary agreement cannot be reached due to the absence of a stipulation or of an explicit stipulation by the arbitratin committee
Pursuant to Article 18 of the Arbitration Law, if an arbitration agreement contains no or unclear provisions concerning the matters for arbitration or the arbitration commission, the parties may reach a supplementary agreement. If no such supplementary agreement can be reached, the arbitration agreement shall be null and void. This shall be analyzed under different situations.
3.1 Pursuant to Article 3 of the Judicial Interpretation, if the name of the arbitration institution agreed upon in an arbitration agreement is not described in an accurate way, but the specific arbitration institution is determinable, it shall be deemed that the arbitration institution has been selected.
As for the effectiveness of the arbitration clause prescribing the arbitration institution as “China International Economic and Trade Arbitration Commission”, the Supreme People’s Court replied in the Letter (Fa Jing [1998] No.159) that “China International Economic and Trade Arbitration Commission” has the jurisdiction.
3.2 Pursuant to Article 4 of the Judicial Interpretation, where an arbitration agreement only includes the arbitration rules applicable for the dispute at issue, the parties concerned shall be deemed not to have agreed upon the arbitration institution, unless the parties have reached a supplementary agreement or the arbitration institution can be identified through their agreed-upon arbitration rules. On the contrary, once the arbitration rules are determined, does that mean the arbitration institution has been agreed upon? The Judicial Interpretation denied this. However, there are exceptions that the parties concerned have reached a supplementary agreement or the arbitration institution can be determined in accordance with the agreed-upon arbitration rules.
It is comparatively complicated to determine the arbitration institution in accordance with the agreed arbitration rules and generally the arbitration institution is determined in accordance with the law applicable to the arbitration agreement. For example, if the parties concerned agree on “arbitration in accordance with the commerical arbitration rules of Japan Commercial Arbitration Association”, according to “Article 1, Article 3.3 and Article 4 of the arbitration rules of Japan Commercial Arbitration Association, it can be determined that Japan Commerical Arbitration Association will becoem the exclusive and irreplaceable arbitration management institution” (see Page 44 of the Interpretation and Application of the Judicial Interpretation of the Supreme People’s Court of the Arbitration Law compiled by the Research Office of the Supreme People’s Court)
3.3 Pursuant to Article 5 of the Judicial Interpretation, if two or more arbitration institutions are agreed upon in an arbitration agreement, the parties concerned may select, by agreement, one of these arbitration institutions to which they will apply for arbitration. If the parties fail to reach an agreement on the arbitration institution, the arbitration agreement shall be deemed invalid.
With regard to an arbitration agreement which provides for more than two arbitration institutions, before the promulgation of the Judicial Interpretation, the attitude of courts in China was always explicit: any party concerned may apply for arbitration to any arbitration committee at its own free will and the arbitration agreement shall be valid. However, the Judicial Interpretation has changed the judicial stance of China and turned to request the parties concerned to an arbitration agreement to choose one of those arbitration institutions through agreement. Where agreement fails, the arbitration agreement shall be ascertained invalid.
It is worth particularly noticing that, although some arbitration agreement provides for two arbitration institutions, judging from specific representations therein, the designated arbitration committee shall be explicit and unique, under which circumstance, the arbitration clause shall be valid. For example, in the lawsuit filed by Shenzhen Cereals Group Co., Ltd. against Noble Group (Singapore) with regard to a dispute arising out of their sales and purchase contract, the arbitration clause provides: “either party to the contract out of which a dispute arises may submit the dispute for arbitration. If the defendant is the purchaser, the dispute shall be submitted to Hong Kong International Arbitration Center; if the defendant is the seller, the dispute shall be submitted to GAFTA for arbitration”. Pursuant to the reply of the Supreme People’s Court to such case (Min Si Ta Zi [2010] No.22), the above-mentioned arbitration clause shall be ascertained valid.
3.4 Arbitration clause which only provides for the location of arbitration institution
Pursuant to Article 6 of the Judicial Interpretation, if an arbitration agreement states that arbitration shall be conducted by an arbitration institution at a certain place, and there is only one arbitration institution in that place, such arbitration institution shall be deemed the agreed-upon arbitration institution. If two or more arbitration institutions exist in that place, the parties concerned may select, by agreement, one of these arbitration institutions to which they will apply for arbitration. For example, the arbitration agreement stipulates that “the dispute arising out of contractual performance shall be arbitrated in the place where Party A is located”; if Party A is in Shanghai, the parties shall reach consensus on the single arbitration insititution to be selected since there are more than one arbitration institutions in Shanghai, or otherwise the arbitration agreement shall be invalid. However, if Party A’s domicile is in ShiJiaZhuang where there is only one arbitration committee, then such arbitration clause shall be valid.
4. Issues concerning the validity of an arbitration agreement which provides for both the arbitration and the litigation
In accordance with Article 7 of the Judicial Interpretation of the Arbitration Law, an arbitration agreement shall be invalid if the parties thereto agree that disputes may be resolved either through submission to an arbitration institution for arbitration or by filing an action with a people’s court, unless one of the parties applies to an arbitration institution for arbitration and the other party fails to raise an objection within the time limit specified in Paragraph 2 of Article 20 of the Arbitration Law. Under such circumstance, the arbitration agreement does not exclude the court jurisdiction and it is impossible to determine whether the parties concerned have any explicit and definite intent to seek arbitration, hence the arbitration agreement shall be deemed invalid; but if one party applies for arbitration while the other party raises no objection prior to the first court session, the arbitration clause then shall be deemed valid.
5. Other arbitration clauses which have defects in forms
For instance, pursuant to the Arbitration Law, the arbitration clauses shall be provided for in written forms. The “written forms” have been defined by the Judicial Interpretation as “including written contract, letter, or electronic data text (including telegram, telex, facsimile, electronic data interchange, and e-mail), etc.” Therefore, if any arbitration clause is agreed upon by both parities merely in words, such arbitration clause shall be null and void.
In the Reply of the Supreme People’s Court to the Application of the Claimant Zhejiang Zhuji Foreign Economic and Trade Company and the Respondent Hong Kong Kaiwei Trading Company for Confirming the Validity of the Arbitration Agreement, the arbitration clauses in a letter of sales confirmation which have defect in the seal affixed thereupon was invalidated. (To be continued)
(The author’s contact information: baileyxu@hllawyers.com)
Serial Articles: Comparisons among Judicial Practices of Labor Disputes (II)
Following the previous newsletter which discussed the judicial interpretations of several provinces and cities relating to “issues concerning whether an open-ended labor contract is a must for the second renewal of the labor contract”, this article is intended to further analyze the provisions relating to the “issues concerning whether an open-ended labor contract is a must for the second renewal of the labor contract” and “issues concerning the essential conditions for entry-into-force of the competition restriction clause”.
1. Comparisons among “issues concerning whether an open-ended labor contract is a must for the second renewal of the labor contract”:
Title
Contents
Shanghai Opinions
Article 4: (I) when an open-ended labor contract shall be concluded.
Article 4: (3) whether the fact that the employee is caused to work for over ten years for the same employer for statutory extension reasons serve as the reason for execution of an open-ended labor contract. A labor contract automatically terminates upon expiry of its term. By giving consideration to the employee’s speacial status, the extension of the labor contract term only postpones the termination date of the labor contract but not prohibit the termination. Article 45 of the Labor Contract Law also stipulates: at the expiration of a labor contract, under one of the circumstances prescribed in Article 42 of this Law, the term of the labor contract shall be extended until the necessary conditions cease to exist. Under the circumstance where the law does not have any special provision on the termination conditions, the relevant provisions for labor contract termination shall not be breached or overstated at will nor shall the consequence of executing an opened-ended labor contract be incorporated thereinto. Therefore, where the statutory postponement cause does not exist, the contract shall automatically terminate.
Article 9 Upon expiry of the labor contract term, where the employee is caused to have worked for ten years or more in the same entity due to delay caused by the following circumstances, hence the employee proproses to conclude an open-ended labor contract, support shall be rendered thereto: (1) being engaged in operations exposed to occupational disease hazards, the worker is not given pre-departure occupational health examinations, or being suspected of an occupational disease, is in the process of being diagnosed or is under medical observation; (2) the worker is in the prescribed period of medical treatment for illness, or for injury incurred when not at work, and; (3) the worker is during the pregnant, puerperal or breast-feeding stage.
Jiangsu Opinions I
Article 7: where the labor contract between the employer and the employer is automatically renewed upon expiry of the original contract term as agreed by the employer and employee, it shall be deemed that the two parties have signed the labor contract anew, except for the legal renewal of the labor contract in accordance with the particulars set forth in Article 42 and Article 45 of the Labor Contract Law.
Article 11: where the employer fails to conclude an open-ended labor contract with the employee in accordance with Article 14 of the Labor Contract Law, and the employee requests to confirm the formation of the open-ended labor contract relationship between him/her and the employer, such request by the employee shall be supported by the court.
Legal Interpretations:
In real practices of labor and personnel management, different operating modes shall be adopted pursuant to the different local policies in order to respond to the situations depicted here: when the statutory cause does not exist, a company in Shanghai may terminate the labor contract with its employee; but the company in Jiangsu or Shenzhen shall sign an open-ended labor contract with its employee.
2. Comparisons among provisions relating to “issues concerning essential conditions for entry-into-force of the competition restriction clause”:
Title
Contents
Beijing Minutes
39. Where the employer and the employee have agreed upon the competition restriction clause in the labor contract or confidentiality agreement but not yet upon the payment of economic compensation or the specific standard thereof, the competition restriction clause shall not be deemed ineffective as a result thereof, and both parties may take remedial measures through negotiations, failing which the employer may pay to the employee on the basis of 20% to 60% of the employee’s salary in the last year prior to the termination of labor relations. Where the employee explicitly explains that there shall be no compensation, the competition restriction clause then shall not be binding upon the employee. Where the employee and the employer do not agree upon the competition restriction period, both parties shall determine this through negotiations, failing which it shall be determined that the competition restirction shall not exceed two years.
Shanghai Opinions
Article 13 How to deal with the absence of an explicit agreement between the parties concerned on the competition restriction clause? Where the parties to a labor contract only agree on the competition restriction obligation that shall be performed by the employee but do not clarify if there is any compensation payable to the employee, in consideration of some consensus between the two parties on the competition restriction, it shall be deemed that the competition restriction clause shall be binding upon both parties. Where the specific amount of the compensation is not clear yet, both parties may continue to negotiate on the economic compensation standard amicably, failing which the employer shall pay the employee on the basis of 20% to 50% of the employee’s previous salary. Where the two parties cannot reach a consensus through negotiations, the competition restriction period shall not exceed two years.
Jiangsu Opinions I
Article 13 Where the employer and the employee provides for the competition restriction clause but do not agree on the relevant economic compensation, or the two sides agree on the economic compensation but the employer fails to pay the same to the employee, such competition restriction clause shall not be binding upon the employee.
Jiangsu Opinions II
Article 11 Where the employer agrees upon the competition restriction clause with the employee who shall perform the confidentiality obligation and has prepaid some economic compensation which conforms to the contractual provisions and the amount of which is not below the statutory standard to the employee during the term of labor contract, upon rescission or termination of the labor contract, if the employee requests to deem such competition restriction clause invalid, the request shall not be upheld. If the amount of economic compensation prepaid by the employer during the term of labor contract is below the statutory standard, the employer shall make up for the balance. Where the employer fails to make up for the balance within one month upon rescission or termination of the labor contract, the competition restriction clause shall not be binding upon the employee, unless the employee volunteers to perform such.
Zhejiang Opinions
Article 40 The employer and the employee provided for the competition restriction but did not provide for the compensation amount, or the amount agreed upon is too low to sustain the minimum living standard for the employee in the locality, Clause 2 of Article 26 of the Labor Contract Law: “the employing unit disclaims its statutory responsibility or denies the worker his rights” shall apply, and such competition restriction clause hence shall be null and void.
Guangdong Opinions
Article 26 Where the employer and the employee agree upon the competition restriction, economic compensations shall be given to the employee during the competition restriction period. Where the employer fails to pay economic compensations to the employee as agreed, the employee may request the employer to perform the competition restriction agreement. As at the date when the handover is completed, if the employer has not paid any economic compensation to the employee, the competition restriction is no longer binding upon the employee.
Legal Interpretations:
The judicial practices in different localities have somewhat fierce arguments over the question whether the absence of agreement on the competition restriction compensation in the competition restriction clause will cause the competition restriction clause null and void:
Shanghai follows the principle of “Valid Theory”: even the competition restriction agreement between the company and the employee does not provide for or does not explicitly provide for the competition restriction compensation, the competion restriction agreement remains binding upon both parties; Jiangsu Province and Zhejiang Province follow the “Invalid Theory”: where the employer and the employee agree on the competition but do not provide for the economic compensation or the compesation amount is very low, the competition and restriction clause is not binding upon the employee. Beijing and Guangdong Province follows the theory of “Efficacy To Be Determined”: i.e. although the employer and the employee do not provide for the payment of compensation or the specific payment standard, the competition restriction clause shall not be held invalid accordingly, and the two sides may take remedial measures through negotiations.
Legal Advice:
A company in Beijing or Shanghai may provide for the competition restirction directly in the labor contract or confidentiality agreement with its employee, and the competition restriction compensation may not be agreed upon in the meantime. The company may determine pursuant to actual conditions whether or not to request such employee to perform the competition restriction obligation before the employee terminates his or her labor relations with the company; if so, the company shall negotiate the specific amount of the competition restriction compensation with the employee, failing which the company may unilaterally pay the competition restriction compensation to the employee in accordance with the relevant standarads. The author suggests, a company in Jiangsu, Zhejiang or Guangdong, should agree with its employee upon the amount of the competition restriction compensation in the competition restirction caluse. Of course, when the employee terminates his or her labor relations with the company, the company shall also have the right to unilaterally inform the employee that an end shall be put to the performance of the competition restriction obligation.
(To be continued)
(The author’s contact information:kevincheng@hllawyers.com)
Chongqing Office Column
Legal Practices: A New Method for Guarantee of Creditor’s Right—Pledge over Accounts Receivable
The Property Law of the People’s Republic of China effective as of October 1, 2007 provides for in Article 223 and Article 228 the scope of rights of the receivables that can be pledged from the perspective of law, stipulating that “the interest to the pledge is created at the time when the pledge is registered with the credit information service”. To define the procedures and rules for carrying out the pledge right registration and guarantee the smooth operation of receivables financing, the People’s Bank of China designed and established a system for publicizing the registration of pledge over receivables, along with the Measures for the Registration of Pledge over Accounts Receivable (hereinafter referred to as the Measures), Operating Rules of the Credit Reference Center of the PBC for Registration of Accounts Receivable Pledge (hereinafter referred to as the Rules), effective on the date same as the Property Law in order to coordinate with the coming online of the system. Thus far, a new method emerges for the guarantee of creditor’s right.
Whereas the accounts receivable account for a significant proportion in the assets of medium and small enterprises, under the circumstance that there are not so many other properties for guarantee available, the establishment of the system for accounts receivable can help medium and small enterprises circumvent credit risks in market-oriented economy and break the financing plight. Therefore, it is of particular significance to accurately understand and grasp the contents of this new system.
I. Definition and Scope of the Accounts Receivable
Article 4 of the Measures define the accounts receivable as “the right to request the obligator to make payments which is obtained by the obligee by means of providing goods, services or facilities, including existing and future creditor’s right in monetary form and the proceeds thereof, but not including the right to request payment generated from instruments or other negotiable securities”. In addition to the above generalized provisions, Article 4 also lists the following five rights: (1) creditor’s rights generated from sales, including the sale of goods, supply of water, electricity, gas and heat as well as licensed use of intellectual property rights, etc.; (2) creditor’s rights generated from lease, including lease of movable and immovable properties; (3) creditor’s rights generated from providing services; (4) right to collect fees on immovable properties such as highways, bridges, tunnels and ferries; (5) creditor’s rights generated from providing loans or other credits.
II. Procedures for Registration of Pledge over Accounts Receivable
The Credit Reference Center of the People’s Bank of China (hereinafter referred to as the “Credit Reference Center”) is the authority in charge of registration of pledge over accounts receivable. The pledge over accounts receivable shall be handled with the system for announcing the information on registration of pledge over accounts receivable that became online through the Credit Reference Center by the pledgee or the authoroized person.
The pledgee shall sign an agreement with the pledgor before going through the formalities for pledge registration, and the agreement shall specify the following contents: the pledgee has signed a pledge contract with the pledgor; the pledgee shall be responsible for going through the formalities for pledge registration; the pledgor has already informed the pledgee of all the effective pledgor names for the past four months as of the pledge registration; or the pledgor has already informed the pledgee of all the effecive or once effective ID card numbers; the signatures or seals of both parites to the pledge contract.
When the pledgee or its agent handles the registration of pledge over accounts receivable, he or she shall be registrated as user of the system for announcing the information on registration of pledge over accounts receivable (hereinafter referred to as the “Registration Announcement System”), on which the users are divided into common users and frequent users. After the registration, the user shall conduct preliminary registration following the tips given by the registration system. The contents of registration shall include the basic information about the pledgee and the pledgor, description of the accounts receivable, registration period, etc.
Any entity and individual may, after registering itself as user of the system for announcing the information on registration of pledge over accounts receivable, search for information about the pledge registration. Where the pledgor is an entity, it shall search with the pledgor’s complete and accurate statutory registered name. Where the pledgor is an individual, it shall search with his or her ID card number.
III. Effectiveness of registration and issues worth noticing
Once the pledge over accounts receivable is established, it shall become legally effective, as reflected by:
(1) Priority of claim against the pledge over accounts receivable.
(2) Restraining the pledgor and the debtor who sets up the pledge over accounts receivable from impairing the realization of the pledgee’s right of pledge.
(3) Right of recovery against the substitutes of the pledged accounts receivable.
(4) Right of recovery against the security interest of the pledged accounts receivable.
(5) Before the pledgor goes bankrupt, it has already claimed the exemption right of the pledged accounts receivable.
In addition, the pledge over accounts receivable is a form of guarantee of creditor’s right, so the following points shall also be taken into account:
(1) As a kind of statutory security interest, once the pledge over accounts receivable is established in accordance with the law, the pledgee will obtain the priority of claim against the sums gained from discounts and auctions upon strength of the accounts receivable agreement and sell-off of pledged properties. Inter alia, the sell-off shall refer to the market price, i.e. the fair and reasonable price.
(2) Without the pledgee’s consent, the accounts receivable which have already been pledged shall not be transferred.
(3) The pledged accounts receivable shall expire and get paid off prior to maturity of the master obligatory right, and the amounts paid off shall be used to settle the claim secured by the pledgee or be deposited with a third party in advance.
(4) Where the pledgor intends to take back the pledged properties or terminate the pledge over accounts receivable, it may perform obligations on behalf of the debtor.
