One of the many problems that China faces in its transition from planned to market economy is the time needed to establish an appropriate regulatory framework. According to Judith Crosby of UK firm Lovell White Durrant, "The Chinese are having to unlearn their past experience of law, that it exists to oppress, and learn that it also protects."
Filling the gap means drafting and enacting laws, an inherently lengthy process. Authorities can't keep pace with the demands placed upon them; China's patent law enacted in 1991, for example, was first drafted in 1985, five years after a patent office was established.
Where laws do exist they are often difficult to understand and monitor. New laws are emerging all the time and they come from a variety of levels, from provincial authority to central government department.
"We have five people in Hong Kong who do nothing but compile the recent legislation that comes out of China," said Michael Moser of Baker & McKenzie. But with craftmanship improving and quicker English translations emerging, at least the laws are becoming more comprehensible. "Legislation is much easier than it is in Russia," said Christopher Smith, a partner with Lovell White Durrant which opened its Beijing office in February.
Without comprehensive laws, inward investors remain concerned about weak protection in several areas: confidentiality, trademark infringement, currency devaluation, joint venture contracts and general uncertainty regarding the interpretation of laws. The stakes are high given the bureaucracy and negotiating skills that prevail in China.
In this environment, expert legal advice becomes a necessity. Most investors turn to the many foreign legal firms based in Hong Kong or the mainland. Chinese firms will stay out of favour until they improve their knowledge of international law and foreign language skills.
This is where China faces a dilemma: how to let foreign firms operate in a way that helps maximise inward investment but does not stifle the growth of Chinese lawyers.
The chosen policy has been to give official status to a limited number of firms, letting their international legal expertise rub off on China's 50,000 domestic practising lawyers. Whether it provides for a more stable environment for overseas investors and businessmen is more open to question. Foreign investment is becoming even more of a priority now that austerity measures have been reintroduced.
Up until last year, Western legal firms were not allowed to operate openly. The only alternatives were to practice via Hong Kong, open a representative office or provide 'consultancy' services on the mainland. As 'consultants', foreign lawyers used to report to Mofert (now Moftec) rather than the Ministry of Justice, thereby placing no direct controls on them advising on Chinese law.
In 1992 the authorities sought to redress this situation by allowing a dozen foreign firms to open up office. Interim regulations govern the activities of the twelve, along with the second batch of firms that followed in April 1993.
The move was part of a wider reform of the profession. In 1992, for example, foreign accountancy firms were for the first time allowed to fully audit domestic and joint venture firms seeking a listing on a local stock exchange.
Whilst the chosen few were happy enough, the new regulations have received a mixed reception from Western firms. None were consulted in the drawing up of regulations and few expected to influence future legislation. The rules are still provisional and new approvals are subject to no set timetables, meaning that 'much of the previous uncertainty remains.
And whilst the number of applications was high, the process of selecting which firms could operate was criticised. Prominent European firms were chosen along with some lesser-known Hong Kong ones. The US, with Coudert Brothers their only representative to win favour last October, believes that it was penalised for hitherto offering a consultancy service. Such firms fear that continued isolation could sideline their future activities.
Laws governing foreign solicitors
Under the new rules, approved foreign firms can represent foreign clients in China and Chinese clients overseas, as well as give opinions on international law and the law of their home country. They can also advertise their services and approach officials for information.
Amongst the things that foreign lawyers can't do is 'interpret' Chinese law. Previously, they advised on such matters on an informal basis but this is now threatened, pending clarification of the word 'interpret' by the Ministry of Justice.
Clifford Chance has a Shanghai office equipped to do transactional work but whose China practice is still based in Hong Kong. Elizabeth Owen, who heads up its Shanghai office believes that it can give informal advice on its understanding of Chinese law, provided that clients are informed that it is not qualified formally in this area.
Will Dennis, an ex-diplomat and currently partner in charge of the commercial department and China practice in Denton Hall's Hong Kong office and chief representative in Beijing, commented, "Prudent foreign law firms have always recognised that to protect them from litigation, the involvement of Chinese law firms in deals and in giving legal opinions on Chinese law is essential. This has not changed and will not change."
Foreign firms are also barred from acting in China's courts and can only employ Chinese lawyers if they give up their practising licences. Of all the restrictions, only this last one is thought likely to be amended over coming years.
The variety of legal work under-taken by foreign firms has increased greatly. Pioneers in the early 1980s scrapped over the small amount of direct investment business, such as joint ventures, technology transfer and property development.
Work has since become much more sophisticated and is no longer confined to the south and coastal regions. Firms have diversified into many new areas: quasi-privatisation, power generation and public utilities, telecommunications, intellectual property and project finance.
Perhaps the most prestigious area is in the securities markets, creating work in B-shares and advice on the listing of Chinese companies. Listings work for Western legal firms is being facilitated through working relationships with local or Hong Kong firms. Courdert Brothers' tie up with Hong Kong firm Carey & Lui helped them to become joint legal advisers to Shanghai Petroleum Complex in its recent Hong Kong listing. But Slaughter and May has dominated the business by acting for seven of the leading advisers of the 19 B-share listings on the Shanghai and Shenihen stock exchanges.
In what is a highly competitive listings market, Slaughters adopted an aggressive pricing strategy. According to Victor Chu of -Victor Chu & Co, the work is 'just not profitable'. Christopher Smith believes that firms are mistaken in believing that they will be able to offer higher rates for repeat business. "If anything they will go down," he says.
Real estate activity has fluctuated greatly over recent years, but really took off with the proclamation of the law covering the Grant and Transfer of Land Use Right in 1990. In this area it's particularly important for a legal firm to demonstrate good contacts, whether they're Beijing officials or the Hong Kong business community. Well-connected Hong Kong firms have secured nearly all the real estate business; Deacons is one of the few exceptions.
Another key attribute, as in all areas, is having the right number of Mandarin-speaking lawyers with sound corporate finance expertise.
Piracy and lax intellectual property protection is a source of concern for Foreign manufacturers in many developing countries. In China the situation has improved greatly over the past three years, albeit from a low base. According to US customs statistics for the first half of 1992, China was the worst offender behind Taiwan in terms of seizures of imports violating US intellectual property rights.
The US-China bilateral agreement signed in January 1992 committed China to the Berne Convention on copyright and to improve protection in computer software, sound recordings, agrochemicals and pharmaceuticals. An Unfair Competition Law will also come into effect in 1994 which should help to protect unregistered trademarks and protect packaging, and recent amendments to the current trademark law were operational from 1st July (see below).
Whilst the trademark law is now more acceptable, especially compared to other Asian countries, enforcement remains a problem. With a country the size of China, it's difficult to trace where breaches are coming from. Bureaucracy and the complexity of government organisations involved at national and local level add to the difficulties. Other problems include the weight of evidence needed and the lack of compensation and mild punishment exerted once the evidence has been accepted. Elizabeth Owen knows of "at least one foreign investor which has had great difficulty in having quite flagrant breaches of its rights properly dealt with by the Chinese."
However, successful claims by the likes of Microsoft, M&Ms and Pepe Clothing show that recourse can be achieved and it is likely that tougher punishments will be meted out in the future. Most important of all, there now seems to be the political will.
By the year 2000 there will be an estimated 100,000 Chinese lawyers. Increasingly they will be able to advise clients on commercial transactions and international financial matters. Greater financial rewards will tempt many to leave traditional firms and to form cooperatives.
Will Dennis predicts a rapid ascendancy of domestic law firms in terms of size, standing and the number of tie-ups with foreign firms. "They will gradually take over from foreign firms the business of advising foreign investment clients," he said.
Partly for this reason, and partly due to the fact that his role has been almost as much investment advisor as pure lawyer, Dennis will shortly be leaving Denton Hall to join NM Rothschild & Sons (Hong Kong) as director in charge of China business and concurrently corporate counsel.
Dennis's commercial knowledge, quality contacts and fluent Mandarin are skills highly sought after by all professional firms operating in China. In the era of the multinational law firm, his move is a useful reminder of the importance of the individual.
Trademark law amendments
Approved by the Standing Committee of the National People's Congress in February, the amended Trademark Law of China took effect from July 1st, according to Clifford Chance's monthly newsletter. One of the most important aspects of the amended law, says the report, is the introduction of registration of service marks.
Applications will be examined on a "first to file" basis in keeping with the existing trademark registration rules. In order to ensure that enough time is provided for accepting the first incoming service mark applications the authorities have provided a period from 1st July to 30th September during which all service mark applications will be given the same filing date – namely 1st July.
The international classification system will be used for the service marks. Conflicting applications filed during the lead-in period will be examined on a prior use basis.
The revised law provides for more explicit grounds for cancellation if registration was achieved using "deceptive or other improper means". Supplementary provisions to the Criminal Law have also been introduced dealing with the increase in counterfeiting in China. *