(By Bai Lituan) Registered capital is important part of a company’s assets and a guarantee on civil liabilities owed to people outside the company. Inappropriate registered capital reduction will directly affect a company’s ability to pay its debts and pose a threat to creditors’ interests. Therefore, the creditor notification process is a legal arrangement for maintaining a balance between legal person’s and personal interests and one of the prerequisites for exempting a shareholder reducing their capital contribution from liabilities to the extent of the registered capital decrease.
(By Bai Lituan)
What is “clean hands rule”?
The “clean hands rule” that came from the UK equity law deprives a person acting in an improper way of the right to seek remedies for their acts. A person acting in a way that violates the principles of “justice, conscientiousness, fairness, etc.” in equity law cannot seek remedies in a court under an equity law jurisdiction. The clean hands rule is generally accepted in international business arbitration and reflected by provisions of the Chinese Civil Code. For example, Article 591 provides that if a party violates the contract, the other party should take appropriate action to prevent loss increase or otherwise could not claim for the loss increase. Based on this provision, if a party does nothing to prevent the increase in damages caused by the other party breaching the contract, the non-breaching party will have no right to win the action for the loss increase with its hands not clean. In addition, articles 680 and 1125 of Civil Code implicitly follow the clean hands rule which for example is applied in Chinese cases of buying false products deliberately where the buyer will not be awarded a refund for and damages of three times the price of false products they bought because their hands are not clean and their acts are not protectable by law.
(By Wang Haichuan)Facing the coronavirus epidemic, some people are going on the extra 10-days’ holiday, while others are worrying about their contracts. For example, the Government of Shanghai requires local enterprises not resume their work before 24:00 of February 9th. Such requirement may result in a delay or failure of contract performance. This brings about a few questions. Who should be responsible for the contract breach? Can the contract be extended or terminated? What about allocation of damages arising from the contract termination.
I.The epidemic is a force majeure event
People usually think of such events as force majeure. Is the coronavirus epidemic a force majeure event? Chinese courts used to consider similar events as force majeure. The SARS epidemic in 2003 is very similar to the coronavirus epidemic this time. The Supreme Court issued the notice regarding contract disputes arising from SARS (“SARS cases”) in 2003. Accordingly, contract disputes arising from the SARS epidemic or government acts to prevent and control the SARS epidemic should be resolved according to force majeure related provisions. Actually, there are contract disputes decided by Chinese courts as caused by force majeure events.
According to the Contract Law of the People’s Republic of China, if a contract cannot be fulfilled due to a force majeure event, the liabilities may be exempted in whole or in part depending on the impact of the force majeure event. The “exemption of liabilities” means no longer needing to pay damages and be responsible for the breach of the contract, but does not mean exempting the obligation to perform the contract. For example, in case of delayed performance of a contract, the defaulting party shall pay the non-defaulting party 0.5% of the contract price as penalty for each day of delay. When the performance is delayed due to force majeure, the delaying party is entitled to refuse to pay the penalty pursuant to force majeure related provisions. After the disappearance of a force majeure event, the other party is entitled to require the delaying party to continue to perform the contract.
You may feel less worried after reading the above paragraph because anyhow you are not liable for the contract breach. However, force majeure related provisions do not apply in all cases where a force majeure event occurs. For example, the effect of the epidemic on a sales contract may be different from that on a tourism contract. For instance, a tourism contract for a trip to Wuhan is completely unable to be performed, while a computer sales contract between two Shanghai-based companies are not be affected at all. Therefore, the impact of force majeure events on the performance of contracts should be determined on a case-by-case basis by taking actual circumstances into consideration. In some SARS related cases, courts found that the SARS epidemic and restrictions imposed by the government due to the SARS epidemic only affected part of the business of the defaulting party in a way that was not serious enough to “directly” or “basically” cause the contract to be unable to be performed and therefore the force majeure event could not be a legal reason for the contract termination[L.S.2.M.K.Z.No.14 Tenancy Contract Case of Second Trial between Dalian Pengcheng Holiday Damu Co., Ltd. and Dalian Zhengdian Watches Co., Ltd.]. In summary, after the occurrence of force majeure events, factors such as the duration of the epidemic, the contents of the contract, the term of the contract and government orders should be taken into consideration to determine whether relevant force majeure provisions can be applied.
II. What should we do after a force majeure event occurs?
The exemption of liabilities in the event of force majeure doesn’t mean that the contractual parties can wait and do nothing until the disappearance of the force majeure event. The parties should do the following things about their contract after the occurrence of a force majeure event.
1. To take active and appropriate measures to reduce the extent of the damage and the adverse effect on the performance of the contract. The party failing to take prompt action is liable for additional losses arising from such failure.
2. To obtain proof of the occurrence of the force majeure event. In some contracts the affected party may be required to provide the other party with proof of the force majeure event within a certain period of time. Therefore, the affected party should be active collecting proof of the force majeure event from government agencies or other third parties.
3. To deal with other contract related issues as soon as possible, especially modification or termination of the contract. In case of modification of the contract, the parties will continue to perform the contract some time later or at a reduced contract price. In the SARS epidemic some tenants had to stop doing business and asked for cuts in rent. Courts supported their claims in equitable fashion[(2004) H.2.Z.M.2.(M) Z.Z.No.354 House Lease Contract Case between Shanghai Pipe Entertainment Co., Ltd. and Shanghai New Huangpu (Group) Co., Ltd.]. In case of termination of the contract, neither party is liable for the termination if the purpose of the contract cannot be met because of the force majeure event.
4. Any party that wants to terminate the contract needs to collect evidence of losses arising from the contract performance. After the termination, the fulfilled part of the contract should be paid for, with the rest part of the contract price not needing to be paid. The cost of preparations made for the performance of the contract made are part of losses of the parties to the contract. Courts usually award damages in an equitable fashion. In some cases, each party pay 50% damages[cf. Government’s Abstract Administrative Act Resulting in Non-Performance of a Contract Can Be Considered as a Force Majeure Event, by Li Hu, People’s Judicature, 20th issue 2009, pp.83-86; and the written judgement for the (2016) SPC.M.Z.No.220 contract case of second trial between Bai Junying and the Government of Tumd Zuoqi].
5. To send a written notice to the other party to the contract. Issuing such written notice will give you the following advantages. First, giving a clarification of measures taken to mitigate the adverse effect of the force majeure event could reduce the risk of being held liable (for further losses). Second, there are different approaches to addressing issues arising from an force majeure event (such as change or termination of the contract). Sending a written notice can give you an advantage of making a good choice for yourself. A notice usually contains:
(1) details of the force majeure event and its effect;
(2) measures taken or to be taken by you to reduce losses after its occurrence;
(3) your proposed plan to deal with other contract related issues arising therefrom (such as change or termination);
(4) your losses arising from performance of the contract and loss distribution plan (if the contract is terminated)
6. To actively negotiate with the other party and prepare for possible action. The two parties must reach a mutual agreement for the change of contract. If the parties fail to reach an agreement, an action may be brought to change the contract. When a force majeure event occurs, the possibility of contract disputes is higher. Therefore, on one hand, the parties involved should discuss and negotiate with each other actively to resolve the problems; on the other hand, they must prepare for possible litigation.
We suggest the parties affected by the epidemic of the coronavirus:
1.evaluate the impact of the epidemic on the contract performance to see whether force majeure related provisions are applicable;
2. take reasonable measures to reduce losses after the occurrence of the force majeure event;
3. obtain proof of the occurrence of force majeure event;
4. decide how to deal with issues related to the contract (change or termination);
5. collecting evidence of losses arising from the performance of the contract;
6. sending a written notice to the other party as soon as possible to fix related facts and express your opinions;
7. discuss with each other actively and prepare for possible litigation.
（By Bai Lituan）The Regulations of Several Issues Concerning Application of the Company Law of the People’s Republic of China (IV) (Legal Interpretation IV of the Company Law) taken into action by the Supreme People’s Court on 1 September 2017 provides that if shareholders claim that the company should distribute its profits without providing a related distribution plan or shareholder resolution, the court should reject the claim unless shareholder rights are abused, causing the company unable to distribute its profits and causing damage to other shareholders. In other words, in principle, courts should reject profit distribution claims brought by shareholders without a related shareholder resolution, unless in exceptional circumstances.
(By Bai Lituan)Securities repurchase is a financial activity of raising funds by selling securities and meanwhile signing an agreement with the buyer to repurchase the same securities at the agreed price and time. There are not many securities repurchase cases because it is not long ago that people in our country began to raise funds in this way. The first case decided by the Shanghai Finance Court is Oriental Securities v Honggao Zhongtai Securities Repurchase case.
Securities repurchase contract related laws mainly include the Securities Law, the Company Law, the minutes of meetings of the Supreme People’s Court on securities repurchase cases and the Notice on Restating Several Issues Connected with Further Standardizing Securities Repurchase Activities published by the Central Bank, the Ministry of Finance and the China Securities Regulatory Commission. All securities repurchase cases courts are dealing with come from the main, small and medium sized business and startup boards. My search result shows no securities repurchase cases relating to the new OTC board (the national share transfer system for small and medium sized businesses).
（By Li Xiang）Article Six of the Regulations of the Supreme People’s Court on Hearing Civil Compensation Cases Arising from False Statements in Securities Markets (“Regulations”) states that “courts should accept and hear litigation cases brought by investors claiming damages for themselves arising from a false statement on the basis of decision made by an administrative authority or a criminal court”. According to this, administrative or criminal punishment is the preliminary process for filing a civil compensation case arising from a false statement.
(By Lisa Li) In accordance with relevant laws of People’s Republic of China (“PRC), judicial interpretation by PRC Supreme People’s Court, judicial interpretation by local Superior People’s Courts and local regulations and based on the author’s research into and analysis of over two dozens of litigation cases from Shanghai and Beijing etc, the author elaborates on the application of laws on non-competition clauses from the perspective of Chinese employment law practice. The following is Part I of this topic on application of laws on non-competition clauses.
(By Yue Mengyan) An employee violates non-competition clause in his previous labor contract with his former employer, and works for a new employer, which has a competitive relationship with his former one. Could the former employer claim the new employer to be liable for such infringement, in addition to the employee’s liability for breach of contract? Pursuant to relevant laws and regulations in China, we will introduce a case and make our analysis in the following.
Appellant (defendant of first instance): Liu Guoqing
(By Dr. Wenbao Qiao) For foreign companies doing business in China, dispute and litigation may sometimes be inevitable. Once a dispute cannot be resolved out of court, there is a long and rocky road to the final success, with several important points to be considered for planning and handling of litigation in China:
Documents and Evidence
The first step of each procedure is to collect and prepare all necessary documents and evidence. According to Chinese law, documents and evidence from another country (such as excerpts from the commercial register or powers of attorney) have to be first notarized in their country of origin and then certified by the Chinese Embassy or Consulate in the respective country. Only notarized and certified documents and evidence will be accepted by Chinese courts. While preparing the documents and evidence, attention should be paid to the timeline required for the notarization and certification. There are several important statutory deadlines shown below. Failure to meet these deadlines can lead to the loss of a case. Notarization and certification in Germany usually takes two to three weeks, which in turn may play a critical role for the time schedule of trial preparation.
(By Wang Ting and You Yunting) In enterprise name registration, if an enterprise changed its enterprise name at once, generally the new enterprise name is under protection. This means, the enterprise is no longer entitled to the rights and interests of its prior enterprise name. Such being the case, does another’s registration on the prior enterprise name cause its prior rights, or violate the Article 32 of the Trademark Law on the stipulation that the trademark application shall not infringe upon another party’s prior existing rights? Is the enterprise with a new enterprise name entitled to the prior right for its prior rights? In today’s post, with regard to those questions, the Trademark Office, the Trademark Review and Adjudication Board, Beijing No.1 Intermediate People’s Court and Beijing Higher Peoples Court were divided in their attitude.
(By You Yunting) Today we would like to introduce a typical case concerning the situation where a Chinese citizen tries to form a joint venture with a foreign individual. Pursuant to Chinese laws and regulations, foreign companies, enterprises, other commercial organizations and individuals (the “foreign investors”) can only form joint ventures with Chinese companies, enterprises and other commercial organizations, rather than with Chinese citizens. For these reasons, the court determined that the contract agreed upon by the Chinese citizens and foreign investors was invalid and each party should undertake the expenses and costs of establishment individually.
(By You Yunting) We have already introduced litigation injunctions regarding patent, trademark and trade-secret proceedings in our previous posts. Today we would like to introduce a copyright injunction that Haidian District Lower People’s Court issued a copyright litigation injunction to prevent Funshion.com from copyright infringement of I Am a Singer (a popular Talent Show in China).
Introduction to the Case:
Court:Haidian District Lower People’s Court
(By Luo Yanjie) Abstract: Company’s independent status as a legal person is a prerequisite for bearing liabilities independently incurred to the company. If a company loses its independent status as a legal person, shareholders shall bear several and joint liability for the debts of the company or the affiliated company, similarly for debts incurred in affiliated companies.
In recent years, there are many disputes regarding abuse of company’s independent status as a legal person that many intelligent merchants attempted to evade the payments of debts by abusing the company’s independent status as a legal person or the limited liability of shareholders. In today’s post, we would like to introduce a typical case regarding the confusion of company’s independent status as a legal person on the Cases Guidance of the Supreme People’s Court in China as follows.
(By Luo Yanjie) Abstract: “where a laborer is unqualified for his work and remains unqualified even after receiving a training or an adjustment to another work post”, the employer may terminate a labor contract. The employer shall, if terminates a labor contract with an unqualified laborer, prove the employer to be incompetent from many aspects not just based on a bad performance.
Pursuant to the Labor Contract Law, there are many conditions for termination of a labor contract with laborers. Among these conditions, the most used one is that a labor is unqualified for his work. This means, the employer may not consider rescinding a labor contract unless a laborer is unqualified for his work. During the process of termination, among many disputes between laborers and employers, we would like to introduce a typical cases regarding termination of an unqualified laborer from Case Guidance of the Supreme People’s Court.
Danone established a joint venture company with the Wahaha Group in 1996, with a 51 percent ownership stake of stock in the company. In addition to this joint venture company, the Wahaha Group also operated several separate non-Wahaha joint ventures. In 2007, Danone attempted to offer four billion Yuan to purchase 51 percent of the shares of all non-Wahaha joint ventures, but this offer was rejected. Subsequently, Danone was involved in a series of complex litigation against the Wahaha group in a number of jurisdictions.