Minimising the risks
The risk of doing business in any market can be managed, provided you prepare for the possibility of commercial disputes. Australian companies thinking of doing business with China should:
Seek professional legal advice
The reality is that China’s legal system is complex and is composed of a myriad of national laws and local regulations, supplemented by court interpretations, departmental notices and, importantly, local practice. For contracts of any significant size or complexity you should obtain specific legal advice on the terms, nature and content of the contract. The legal advice should take into account and be consistent with the legal structures of China, be structured for a fair result that protects your interests, and avoid any issues regarding language (both English and Chinese).
In most major cities in China, there are networks of law firms offering a range of legal services. Some of the larger firms now offer a full service package and are capable of assisting clients with complex and large-scale commercial activities in and outside China.
There are a considerable number of international law firms operating in China, particularly in the larger commercial centres of Shanghai, Beijing and Guangzhou. Note that international firms are not allowed to provide formal legal advice on matters concerning Chinese law or to represent clients in the Chinese courts. However, foreign firms are able to advise on the Chinese legal environment in the context of international practices. In practice, they can assist clients with managing projects, drafting contracts and other legal documents, and other similar matters. International firms can also provide a good liaison with local Chinese law firms.
If engaging professional legal advice either in Australia or abroad is beyond your company’s financial means, you may need to reconsider doing business in China.
Austrade can provide referral lists of China-based law firms that have a track record of working with Australian companies. Please contact your local Austrade office or call 13 28 78.
Undertake due diligence checks
The most effective way of avoiding commercial disputes is choosing the right business partner. This includes fully understanding the company, its history, structure and background, as well as the key individuals involved; both with your business and, if they are different, the owners / key decision-makers in the firm. The most common regret expressed by Australian businesspeople who have encountered disputes and worse, is that they didn’t put enough effort into this selection.
By taking the necessary steps to ensure that you are part of a business network that has experience in China and recognising that good business relationships are built upon firm foundations, including a good commercial contract, you will minimise your risks further down the track.
A lawyer can help you to answer many of these questions. If you are not based in China, you may wish to seek the services of a local agent or representative. Both China-based lawyers and local agents can help you to make the best decisions based on information obtained on the ground in China.
Seek trial shipments and arrange pre-export inspections
If you are thinking about purchasing goods from China, seek small trial shipments to ensure that the goods you order meet your quality requirements and that the business you are dealing with is a legitimate one. Employing a good local agent to consolidate, sample and verify goods prior to export can also help to ensure that what you have ordered is what you get.
Be aware of local business practices and be sensitive towards them
If you are doing business in China you should be aware of the local business culture and practices – particularly in regards to dispute resolution. For example, negotiation is central to dispute resolution in China – indeed many commercial contracts in China will contain a standard clause stipulating that negotiation should be pursued before other dispute settlement mechanisms. A failure to adequately acknowledge this cultural expectation may be interpreted as a lack of courtesy, goodwill or cultural sensitivity. This has the potential to exacerbate, rather than help to resolve, a commercial dispute.
Reach out – at various levels if necessary – to a Chinese partner to raise the problem. Try to gain their agreement that this is an issue that needs to be addressed. Keep the focus on finding solutions and demonstrate your commitment to finding middle ground. Maintain communication and volunteer the difficulties this is causing your company.
Be aware of local laws relating to business activity
If you are doing business in China, you need to be aware of local laws. Criminal charges have been laid against Australian businesspeople for activities that do not constitute crimes in Australia – for example, misstating registered capital or having undocumented loans. These charges can result in lengthy prison sentences. If you are unsure about the legality of certain business activities under Chinese law, you should first seek professional legal advice.
If you are a Chinese Australian doing business in China, travel on your Australian passport
If you do not enter China on your Australian passport, the Australian Government will be unable to provide you with consular assistance should you be detained or face criminal charges relating to your business activity.
China-bound Australians should read the Australian Government’s China travel advice and register their travel plans with the Department of Foreign Affairs and Trade at www.smartraveller.gov.au.
For information on the types of consular services provided by the Australian Government, consult the Australian Government’s Consular Services Charter at www.smartraveller.gov.au/services/consular-services-charter.html.
Protect your intellectual property rights (IPR)
Although China is now a signatory to most major international IP agreements and has a legislative framework broadly in line with international norms, foreign companies need to be cautious of the potential risks around IP infringement.
China operates a first-to-file system meaning just that, the first person to register a trademark in China becomes the legal owner. Consequently, one of the most common IP risks is ‘Trademark squatting ‘. If an Australian company finds this has happened, there are options available to recover your brand, but these are often lengthy and expensive, with no guarantee of success.
It is strongly recommended that Australian companies considering manufacturing in or exporting to China register their trademarks in both English and Chinese as early as possible. Registering transliterations of trademarks should also be considered.
Australian companies planning to do business in China should also consider the merits of seeking patent protection for their inventions in China.
What should Australian companies do to protect themselves?
Precaution is always the best remedy. As part of market entry strategy, Australian companies should do an IP audit and be acquainted with how best to protect their IP rights in China. Companies should always bear in mind that compared to Australia; China has a very different business and social culture, which has a significant impact on its IP system.
Sometimes you will need to look at different options for protecting your IP compared to what you have undertaken in Australia. Legal experts experienced in the Chinese IP environment are best placed to assist you develop a comprehensive IP strategy to suit your business requirements.
For more details on IP protection, please see the information available on the IP Australia website www.ipaustralia.gov.au.