Legal Documents in China: Contracts

[Tianjin42]

A fellow foreign student asked a question that I couldn’t answer so I will open it to the forum. He has had an offer to work for a small privately owned Chinese company involved in teaching (based in Beijing). The job itself doesn't involve teaching but more of an organisational position. The owner has offered a small percentage of the company if my friend works there for two years.

This is all in a provisional contract (written in English for the benefit of my friend). He wants to check the legality (and ensure all is watertight) but doesn’t know the best way to do this here in China. Any ideas?

I suggested a legal agency but the first I looked at offering a suitable service do so for a cool $500. Any alternatives?

Cheers

[roddy]

$500 to set up a watertight partnership where one party is a foreigner, in China, sounds fairly reasonable to me. How much is he going to lose if it goes wrong?

[zhouhaochen]

A standard rate for a lawyer in Beijing for contractual work we have found to be 150 - 300RMB/hour (there might be more expensive/cheaper alternatives, but these were lawyer's offices we found trustworthy and competent), which is much cheaper than abroad and I would say worth it.

None of the people we work with speak English though and I could imagine the price goes up very quickly if you require that.

In general I agree that 500 USD for a proper partnership agreement is pretty cheap, in China or anywhere else.

If your friend wants to own part of the company, this will need some additional legal work with either setting up a JV, going through HK etc. which will cost more than 500 USD.

So if this is all very low key at the moment, my suggestion would be to sign a contract in English that seems reasonable and then be so involved in the company in two years that it makes no sense for the owner to not give what he promised. To actually fight something in court costs a lot of money in China.

[gato]

To make the 2% more secure, I would suggest that your friend ask for the 2% upfront and sign an agreement to return the 2% if he leaves before 2 years. Put the onus of litigation in case of a dispute on the other party. Or at least ask for a portion of the 2% up front. Focus on enforceability. The language is important, but not as important as the structure.

[lordnikon]

In China contracts can only be legally binding if written in chinese and stamped with the official company seal. A lot of shady people will cheat foreigners with contracts in english and if the foreigner tries to challenge it the police and courts will tell them that the contract is meaningless because it is not in chinese. Also if there is no red company seal/stamp/chop on the contract then the contract is effectively not signed, it does not matter if every employee in the company signed the document the official company seal is the only thing that counts as a binding signature

[roddy]

then be so involved in the company in two years that it makes no sense for the owner to not give what he promised.

Trouble with that is that he doesn't sound like he's going to be particularly indispensable (organisation in a teaching agency? There are any number of TEFL teachers or foreign students who'd love a shot at that) and you're relying on the owner doing what makes sense - Beijing is littered with foreign-started businesses which landlords or business partners took over that subsequently went downhill.

And even a trusted business partner can turn around - might get married to someone who insists they start taking more money out of the business, might be under pressure to come up with money for another venture, etc. Your best bet is to make sure it's legally watertight AND make sure you know exactly what's going on - in particular, what money is coming in, and where's it going.

[imron]

Also relevant are these posts from China Law Blog:

China Contracts. Why Even Bother?

The Legal Faults With Faulty China Translations

China OEM Agreements. Why Ours Are In Chinese. Flat Out.

[Tianjin42]

Thanks for the replies – much sound advice.

Okay, I agree that $500 for peace of mind on such a matter may actually be a fair deal. After speaking to the guy, starting up won’t involve a large sum of money for him personally though he (understandably) wants to ensure that his time and effort won’t be wasted over the next two years.

As it happens he is on very good terms with the Chinese citizen in question. In fact, he was debating whether further checks would be required but I told him that I felt it would be a good idea regardless. The reason he spoke to me is because I previously mentioned to him that I had an interesting internship and may be in a similar situation in the future.

Zhouhaochen: the prospect of further additional legal work to confirm status is worthy of further investigation – I will pass that on. As it is, I think that rather than try to become indispensible to the company, he (correctly in my opinion) would like actual legal confirmation of status.

Gato: I’m not sure it would be possible or advisable in this case for him to ask for the money up front.

Lordnikon: This is an interesting point (contracts must be in Chinese have correct stamp etc) and one that I suspected might be an issue though I myself am not sure either way.

Roddy: agreed here – It seems there are any number of partnerships that went sour despite rosy initial conditions. It seems that some sort of official legal advice will be a good start though I would suspect that finding exactly where the money is coming and going will be difficult indeed (though I agree it is something he should pursue as far as he can).

Regarding the courts here I would simply avoid that at all costs. God knows that would be an expensive mess back home (U.K. for me) but here he’d have to contend with a few extras like the (legal) language, the precedent of Chinese courts backing Chinese and a myriad of other unwelcoming factors.

Imron: thanks kindly for the links. I will pass them on (and take a look myself).

I will try and keep in touch with him and pass on any useful information here. And I will certainly update you if I decide to go down this road myself in the near future.

Thanks for the help.

[gato]

Gato: I’m not sure it would be possible or advisable in this case for him to ask for the money up front.

Didn't you say that the 2% is ownership interest and not cash? Have you heard of restricted stocks that companies grant to their executives? The stocks are given to the executives, on condition that some of it be cancelled if the executives leave early for not good cause.

There are lots of different possibilities. For example, he can ask for the ownership interest to be transferred over a staggered schedule. 1% up front, and then another 1% at the end of the year or even two years. It's like a deposit or a collateral to help ensure the performance of the contract. If you wait until the end of the two years to ask the other party its side of the contract, you won't have any leverage and there is a greater chance that you'll have to sue to enforce the contract.

He may feel embarrassed about asking for it up front, but if the 2% ownership is a significant value, then it's worth thinking about ways to make it enforceable other than suing in court. You can think of it as self-help enforcement of contract, as opposed to entirely relying on the court system.

[roddy]

I don't think anyone's mentioned 2% specifically, could be plenty more.

How would this be structured legally, does anyone know? It's not a WFOE or JV. A partnership?

[gato]

I thought I saw in the OP's post. I guess I misread it. The same principle applies. You need some self-help enforcement mechanism. If the employment doesn't pay your salary, you can walk away and cut your losses. If at the end of the two years, he refuses to give you the ownership interest, what are you going to do?