(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.

Introduction to the Case:

Appellant (defendant at first instance): Jia Ruiyu

Respondent (plaintiff at first instance): Lau Paul Cun

Court of first instance: Shanghai No.2 Intermediate People’s Court  No.: (2006)沪二中民五（商）初字第105号

Court of second instance: Shanghai Higher People’s Court  No.: (2007)沪高民四(商)终字第17号

On September 9, 2005, respondent Lau Paul Cun and appellant Jia Ruiyu signed a Contract for Sino-Foreign Equity Joint Venture, promising that the parties agreed on the establishment of a Sino-American equity joint venture and that they would each invest RMB 1.5 million, with a total investment of RMB 3 million in the establishment of a Sino-American company in either Shanghai or Jiangsu Province. Afterwards, Lau Paul Cun paid 103,000 US dollars through the telegraphic transfer and RMB 80,000 successively in October 2005 and July 2006 to the appellant Jia Ruiyu.

In October 2006, the Shanghai Administration for Industry and Commerce issued a Prior Approval of the Name of Enterprise, indicating that the enterprise name was Shanghai Shenmai Automobile Service Co., Ltd (transliterated from “上海申脉汽车修理有限公司”) which was invested in by Jia Ruiyu, Lau Paul Cun, Shanghai Sailong Automotive Equipment Co., Ltd and Shanghai Shenmai Economic and Trading Co., Ltd. The total amount of registered capital of the Shanghai Shenmai Automobile Service Co., Ltd was RMB 500,000, with the shareholder Jia Ruiyu investing RMB 195,000 in cash.

Lau Paul Cun found out that Jia Ruiyu was failed to establish the Sino-American joint venture, and then brought the case to court, claiming that the court should affirm the invalidity of the Contract for Sino-American Joint Venture, and request Jia Ruiyu return the payment of $103,000 USD and RMB 80,000 and to undertake liability for  the expenses of his air tickets, interest reversal and charges suffered from the telegraphic transfer.

The Shanghai No.2 Intermediate People’s Court accepted the case and held that:

1. The relevant contract for the Sino-American Joint Venture was signed for the purpose of the establishment of a Sino-American Joint Venture and was performed in China, thus Chinese laws and regulations apply in this case.
2. As a party of the contract for Sino-American Joint Venture, Jia Ruiyu, a Chinese individual, did not meet the stipulation of the law regarding Sino-Foreign Equity Joint Ventures and thus making the contract invalid. Therefore, the payment of 103,000 US dollars and RMB 80,000 successively paid by Lau Paul Cun on the basis of performing the contract should be returned by Jia Ruiyu.
3. Regarding the signing and the performance of the contract, either Jia Ruiyu or Lau Paul Cun was at fault with regards to the ultimate invalidity of the contract. As such, the losses suffered from the invalidity of the contract should be borne by both parties. Consequently, expenses such as his air tickets, interest reversal and charges suffered from the telegraphic transfer, should be borne by Lau Paul Cun himself.

For these reasons, Shanghai No.2 Intermediate People’s Court determined the invalidity of the Contract for Sino-American Equity Joint Venture and requested Jia Ruiyu to return the 103,000 US dollar and RMB 80,000 to Lau Paul Cun. Jia Ruiyu was dissatisfied with the judgment of the first instance and subsequently appealed. However, the Shanghai Higher People’s Court accepted the case, affirmed the original judgment and confirmed the contract to be invalid.

Lawyer’s Comment:

There are two fundamental legal problems in this case. One is the question of whether Chinese citizens can form joint ventures with foreign investors, and the other is which country’s laws should have jurisdiction over the Sino-Foreign equity joint venture.

1. Can Chinese citizens establish sino-foreign equity joint ventures with foreign investors?

Article 1 of the Law on Sino-Foreign Equity Joint Ventures stipulates that, foreign companies, enterprises, other commercial organizations and individuals (the “foreign investors”), subject to the approval of the Chinese government, may be permitted to form joint ventures with Chinese companies, enterprises and other commercial organizations within the territory of China.

Pursuant to these Chinese laws and regulations, Chinese citizens must be natural persons, rather than other commercial organizations as regulated in Article 1 of the Law on Sino-Foreign Equity Joint Ventures, and thus would not be able to form joint ventures with foreign investors. Chinese laws and regulations have many restrictions on the commercial operations of Chinese citizens. For instance, in this case, foreign citizens are permitted to form joint ventures with Chinese companies, but not Chinese citizens. Another example of this double standard can be seen in that foreign citizens can apply for trademarks in China whilst Chinese citizens are not allowed to apply for trademarks.

These preferential policies towards foreign citizens constitute discrimination against Chinese citizens and reflect the inequality of the political system, which is deeply entrenched from the failure to establish a liberal democratic political system in China. However, I believe that it will be changed in the foreseeable future.

1. Which country’s laws should cover the Sino-foreign equity joint ventures?

Article 126 of the Contract Law stipulates that,

Parties to a contract involving foreign interests may choose the law which would govern the settlement of their contractual disputes, except as otherwise stipulated by law.

If the parties to a contract involving foreign interests have not made such a choice, the law of the country to which the contract is most closely connected shall be applied.

Regarding contracts for Sino-foreign equity joint ventures, sino-foreign contractual joint ventures and sino-foreign cooperative explorations and developments of natural resources to be performed within the territory of the People’s Republic of China, the laws of the People’s Republic of China shall apply.

Applying these legal principles to the case at hand, this dispute resulted from a sino-foreign equity joint ventures and consequently was judged by a  Chinese court. As such, Chinese laws will apply in this case.

Lawyer Contacts

You Yunting：86-21-52134918  youyunting@debund.com/yytbest@gmail.com

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