GC Agenda China: January 2017 | Practical Law

GC Agenda China: January 2017 | Practical Law

A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.

GC Agenda China: January 2017

Practical Law UK Articles w-005-5479 (Approx. 9 pages)

GC Agenda China: January 2017

by Brad Herrold, Consultant and Practical Law China
Law stated as at 25 Jan 2017China, International
A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.

SPC issues 15th batch of guiding cases

On 3 January 2017, the Supreme People’s Court (SPC) issued its 15th batch of guiding cases.
Guiding cases are not binding as legal precedents, but they are considered to have very strong persuasive value and judges in China are required to consider and refer to relevant guiding cases in their rulings on similar issues (see Practice note, Understanding Chinese legislation: Guiding cases).
This new batch of guiding cases addresses, among others, the following issues:
  • Food safety. Even if an additive is not in the non-food substance blacklist or the health food additive blacklist, the additive can be recognised as a "toxic or harmful non-food raw material" under Article 144 of the Criminal Law of the People's Republic of China 1997 (No. 70).
  • Failure to enforce a court ruling. The criminal liability of refusing to carry out a people's court ruling commences from the effective date of the court ruling (No. 71).
  • Conversion of loan contracts. The principal and interest under a previous loan agreement may be converted into the paid purchase price in a real estate sale and purchase contract subsequently signed by the parties (No. 72).
  • Priority rights in bankruptcy. The priority rights of a contractor run from the termination date of a construction contract if the contract is deemed to be terminated pursuant to Article 18 of the Bankruptcy Law of the People's Republic of China 2006 (No. 73).
  • Insurer's subrogation right. An insurer has a subrogation right against a third party who damaged the property insured due to breach of contract (No. 74).
  • Standing of whistleblowers. A whistleblower has standing as a plaintiff where the whistleblower reports an actionable infringement of its rights or interests to an administrative agency and has a legal stake in the outcome of the matter reported (No. 77).
For more coverage of this development, see Legal update, SPC issues 15th batch of guiding cases.

Market reaction

Dr. Mei Gechlik, Founder and Director of Stanford Law School's China Guiding Cases Project (CGCP)

"The release of the 15th batch of guiding cases brought the total number to 77, of which four were released in 2011 (only in the fourth quarter), eight in 2012, 10 in 2013, 22 in 2014, 12 in 2015 and 21 in 2016. The revival of the upward trend in guiding cases confirms what the CGCP has learned from our recent meeting with the SPC: guiding cases will be released in greater number and frequency going forward. Of the newest batch, No. 70 is of special significance for helping to clarify the crime of producing and selling toxic and harmful foods. This is obviously a topic of 'widespread concern to society', a criterion for selecting guiding cases."

Action items

Given the increasing number of guiding cases and impact on China's judicial practice, counsel for companies and individuals involved in litigation in China should become familiar with the guiding cases generally, and ensure that trial counsel reviews the full list of guiding cases and studies the content to determine if any may apply.

NPC Standing Committee circulates third draft of Civil Code

On 27 December 2016, the National People's Congress (NPC) Standing Committee circulated for public comment the Civil Code of the People's Republic of China (Draft) (Draft for Third Review) (中华人民共和国民法总则(草案)(三次审议稿)).
The first draft proposed new civil rights and obligations intended to address China's rapidly developing society (see Legal update, NPC Standing Committee circulates first draft of Civil Code). The second draft expanded on these changes and brought the law into conformity with a number of other laws enacted or revised since the code was originally enacted in 1986 (see Legal update, NPC Standing Committee circulates second draft of Civil Code).
Specifically, the third draft:
  • Includes additional clauses on:
    • fair and reasonable compensation for expropriated properties;
    • the right of inheritance of legitimate private assets; and
    • the legal effect of ultra vires.
  • Refines the extent of legal protection for:
    • intellectual property rights (scientific discoveries are no longer protected);
    • agency relationships (agents now may only be entrusted in writing); and
    • providers of emergency relief (liability is limited to acts of gross negligence).

Market reaction

Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai

"With this third draft, the NPC Standing Committee appears to be making significant progress in relation to the project of completing a formal codification of Chinese civil law. According to media reports, the draft is due to be presented at the general session of the NPC later this year."

Action items

No specific action is required as a result of the draft. However, it is important for businesses with operations or assets in China to understand and follow the general development of Chinese civil law, particularly insofar as this development impacts the rights of customers, employees and other interested parties.

NPC Standing Committee circulates draft e-commerce law for public comment

On 27 December 2016, the NPC Standing Committee circulated for public comment the E-commerce Law of the People's Republic of China (Draft) (中华人民共和国电子商务法(草案)).
The draft law applies to e-commerce activities that occur in China or involve e-commerce business operators (that is, third party e-commerce platforms and e-commerce operators) or consumers in China.
E-commerce activities are defined as transactions involving goods and services conducted over internet or another information network, except for e-commerce activities involving financial products and services or regulated online content, such as audio-visual programmes and internet publishing.
The draft law contains provisions regulating:
  • Third party e-commerce platforms. These are legal persons (such as Taobao.com) who provide services to parties engaged in e-commerce activities.
  • E-commerce operators. These are natural persons, legal persons or other organisations other than third-party e-commerce platforms that sell goods or provide services through information networks (such as vendors on Taobao.com).
  • Personal information. Users are entitled to certain protections, and e-commerce operators are bound by certain obligations, in relation to the personal information of users.
  • Intellectual property rights. Third party e-commerce platforms are subject to certain affirmative obligations upon discovering or receiving notice of infringement.
  • Electronic payment services. Third party payment service providers are subject to certain obligations in relation to payment confirmation information and liabilities in relation to financial security and unauthorised payments.
  • Ecommerce delivery and logistics. Express logistics service providers are liable for delays, losses and incomplete deliveries during their provision of services.

Market reaction

Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai

"Likely there is still significant work to be done before the draft law is promulgated in final form. Nonetheless, this current draft is an important development as Chinese legislators seek to address a wide range of legal issues affecting the orderly development of China’s already immense e-commerce market."

Action items

Counsel for relevant e-commerce businesses (including third party e-commerce platforms and e-commerce operators, as well as electronic payment service providers and e-commerce delivery and logistics service providers) should carefully study the obligations imposed on them in the draft and discuss with business teams on how to improve the operation and management to meet the relevant requirements.

MLR replies on automatic renewal of residential construction land use rights

On 8 December 2016, the Ministry of Land and Resources (MLR) issued the Reply on the Proper Handling of Issues concerning the Expiry of Land Use Rights of certain Residential Land (国土资源部办公厅关于妥善处理少数住宅建设用地使用权到期问题的复函). The MLR issued the reply in response to a request for guidance from the local bureau of land and resources in Zhejiang.
According to the reply, where the land use rights for residential purposes have expired, the authorities in a local bureau of land and resources:
  • May not require an application to renew the land use rights.
  • May not require the payment of any fee, including fees at the municipal and county levels.
  • Must handle the real property transaction and registration formalities in the normal course and keep the original start date and expiration date for the term of the land use rights, with a remark noting that the registration is handled pursuant to the reply.
The reply is based on:

Market reaction

Nancy Zhang, Partner, Junhe Law Offices, Beijing

"The reply was issued in the context that the residential land use rights of some Wenzhou residents expired in the absence of clear and definite national guidelines providing that renewal of the land use rights for residential purpose is free of charge. The reply provides transitional solutions to the dilemma encountered by these residents, who were unable to transfer their real estate because their land use rights expired, as well as to the operational challenges faced by local housing administration authorities in administrating real estate transactions and registrations. Even though only applicable to a small group of residents, the reply is a positive signal because it cites the auto-renewal clause from the 2007 Property Law, it provides that no fee will be charged for the renewal, and it emphasizes the necessity and importance of public expectations in relation to their property rights."

Action items

Counsel for companies engaging in real estate development or investment in China should be aware not only of the specific circumstances in the reply, but also the legal and policy bases for it, as it may be persuasive in protecting their property rights when the bulk of commercial and industrial renewal dates approach.

State Council issues rules on fixed asset investment project verification and record-filing

The term "investment project" means the investment and construction of fixed asset investment projects in China by enterprises.
Verification is required for investment projects related to:
  • National security.
  • The distribution of major national production forces.
  • The development of strategic resources.
  • A significant public interest.
The specific scope of and authority for the verification process will be determined by reference to an investment catalogue (that is, the Catalogue of Investment Projects Subject to Government Verification and Approval (2016 Version)).
Other investment projects are subject to record-filing.
Except for projects involving state secrets, the verification and record-filing processes will be carried out on a national online project supervision platform under a unified project code.

Market reaction

Sherry Gong, Consultant, Hogan Lovells, Beijing

"Following a recent trend toward extending national treatment to foreign investment, the rules, together with the 2016 version of the investment catalogue, define the scope and stipulate the administrative procedures for both domestic and foreign-invested fixed asset investment projects that require NDRC verification. The rules require the government to carry out the verification or record-filing procedures through an online platform, which signals the government's efforts to further improve government administration efficiency."

Action items

Counsel for companies that engage in the development of fixed assets, such as infrastructure, real estate and construction firms, should carefully study the procedural requirements contained in the rules, as well as the content of the updated catalogue. Counsel for companies in other fields should consider whether any component of a China asset involves the development of fixed assets and investigate whether the authorities deem these activities to constitute a fixed asset investment project.

MOJ and others call for strengthening foreign-related legal services industry

On 9 January 2017, the Ministry of Justice, Ministry of Foreign Affairs, Ministry of Commerce and the Legislative Affairs Office of the State Council jointly issued the Opinions on the Development of Foreign-related Legal Services (司法部、外交部、商务部、国务院法制办公室关于发展涉外法律服务业的意见).
The opinions aim to:
  • Establish a system for developing an internationally competitive legal services industry by 2020, expand the number of foreign-related legal practitioners, and increase the quality of services they provide.
  • Complement China's national economic development strategies (such as "One belt, One road") by developing legal services expertise in major infrastructure projects, international trade in goods and services, and innovative technologies and emerging industries.
  • Meet the needs of China's going global strategy regarding Chinese enterprises' and citizens' outbound investments by improving legal skills in foreign investment risk mitigation, foreign intellectual property rights protection and foreign dispute resolution.
  • Promote China's foreign affairs efforts through treaty negotiation, international trade dispute resolution, and the development of foreign economic and cultural cooperation.
  • Combat transnational crime, drugs and money laundering and strengthen multilateral anti-corruption efforts.
The opinions lay out the following steps for achieving these goals:
  • Establish an information exchange platform for foreign-related legal service institutions and foreign-related enterprises and promote foreign-related legal services.
  • Cultivate a number of foreign-related legal service agencies with strong international competitiveness and encourage domestic law firms to expand into foreign markets.
  • Train foreign-related legal services talent to provide high quality commercial and public affairs legal services.
  • Encourage legal services industry associations to self-discipline members and improve service standards and professional ethics in the foreign-related legal services field.
  • Encourage and standardise business alliances between Chinese law firms and foreign law firms.
  • Establish an inter-departmental coordination mechanism to study and solve problems in the foreign-related legal services field.

Market reaction

Thomas Man, Professor from Practice, Peking University School of Transnational Law, Shenzhen

"As Chinese businesses and individuals expand their global portfolios they are increasingly in need of quality international legal assistance, including regulatory and transactional advice and defense in some criminal cases. In addition, China's global trade and investment initiatives, as well as its desire to combat transnational crime and corruption, have increased the government's risk profile and its interest in improving the competitiveness of its legal counsel in the global arena."

Action items

No specific action is required as a result of the opinions. Counsel for foreign legal service institutions and foreign law firms may want to follow this development and see if there is any favourable policy available to them for providing foreign-related legal services to Chinese enterprises and individuals or any opportunity in forming business alliances with Chinese law firms.