During the 1990s, China opened its legal services market to overseas law firms and today, there are more than 200 which have taken the opportunity to expand operations into China and enter a ‘new frontier’ full of uncertain prospects, but great opportunity.
Some of these overseas law firms have managed to achieve what they set out to do and deepened their ties through mergers with local law firms, while others have failed to understand the politics, the culture and the people. They did not heed the warning signs, did not follow protocol or simply underestimated the market complexity, and as a result gave up in frustration, closed their doors and walked away.
But now, with the continuing rapid growth of its economy, China is the focus for more international businesses looking to expand their operations and take advantage of the opportunities available. This renewed and increased focus has brought with it an even greater increase in demand for legal services from these entities resulting in an increasing number of overseas law firms opening in China recently including several Australian law firms which have established representative office in mainland China and Hong Kong.
But despite the attraction of overseas expansion, practicing law means something totally different to a law firm in China than it does to a firm here in Australia.
China is a unique legal environment with diverse political, cultural and regulatory requirements, set out by its State Council which need to be followed by overseas law firms just to be able to practice law . Opening a representative office is not a decision to be taken lightly and involves a lengthy application process and the rules relating to the services which foreign law firms can legitimately provide are complex . Yet, despite these challenges, the attraction remains, and the question needs to be asked- should this law firm follow suit and open a representative law office in China?
This memo will attempt to answer that question by examining the evolution of Chinese law and the legal system of China. It will consider how it has influenced and shaped modern China, discuss the growth of the Communist Party, and the influence the government has on business, including how the day to day operation of the business is conducted.
It will outline the regulatory requirements to be followed and the conditions of practice before some final comments and recommendations are offered to enable an informed decision to be made on whether ‘to open or not to open’ a law office in China and if so, where.
BRIEF HISTORY & BACKGROUND
China is the third largest country geographically, but with over 1.5 billion people, has the world’s biggest population. Following the fall of communism in the former Soviet Union in the late 1980s and early 1990s, China is now the largest and most powerful communist government in existence.
Administratively, the country is divided into twenty-three provinces, five autonomous regions and four municipalities. Its legal system has been based on the Confucian philosophy of social control through moral education, as well as the Legalist emphasis on codified law and criminal sanction.
With such a rich and extensive history covering thousands of years of civilization, Chinese legal history falls into two categories which will be examined – Traditional China and Modern China.
China had its own legal system with unique features. Legal codes existed as far back as the 7th century AD during the Tang dynasty and constituted the foundation of other codes including the Song, Yuan, Ming and Qing. It is these codes and statutes of law which regulated matters and would form the basis of the modern legal approach.
Confucianism and Legalism, strongly influenced the idea of law in China. Confucianism promoted the idea that human beings are fundamentally good, and the state should lead the people and create a sense of shame to prevent bad conduct. By contrast Legalism professed the use of codified laws and harsh punishments to achieve order. This was due to the opposite belief that all human beings are born evil, self-interested and if left unrestrained would become selfish which would lead to social unrest. To force people to behave morally, the legalist belief was to publicly promulgate clearly written laws and impose harsh punishments. The conflict between the two systems was that Confucianism relied on tradition to make the leader the head, while Legalism makes standard laws which even the emperor was to be bound. The common factor is that both agree that benevolence and the idea that the state knows better than its citizens and makes laws to protect them. That is, the ruler had the ultimate authority to decide what the law should be. So much so that during the Qing dynasty the emperor implemented strict laws and harsh punishments even for insignificant crimes. For example, books were burned and people who held different views were buried alive.
With the arrival of the 19th century China began to be dragged into the globalization process, and with the rise of capitalism and industrialization, the ancient empire realised it had to adjust its laws to survive in the modern world.
Efforts to modernise the legal system soon began to be instituted by the Qing Empire when it became clear there were aspects of the legal system, like the harshness of the criminal procedures, in the traditional legal system as backward and barbaric rendering China’s law primitive by comparison to the legal systems of other countries. So, with the assistance of Japanese legal scholars, an initiative was undertaken to reform the law codes by importing other countries codes with modifications. In 1904 the Ministry of Law Reform was created and given the task of translating foreign codes and drafting new laws and codes.
Another move in the modernisation of the legal system was the establishment in 1908 of what became known as the Imperial Constitutional Outline. However, before any of the drafted laws were implemented, the Qing Empire was overthrown but successive governments adopted some of the laws that were based on the draft laws. Following the Revolution of 1911, a comprehensive modern legal system was established when China adopted a largely Western-style legal code in the civil law tradition resulting in the Provisional Constitution of 1912 which included the idea of equality under the law, rights for women, and broader rights for citizens.
In February 1949, under Chairman Mao the Communist Party abolished the legal system totally as it represented a different ideology. This was considered a necessary step to reinforce the Communist ideology and eradicate the legitimacy of Nationalist rule. Then on October 1st, 1949 the Communist Party formally founded the People’s Republic of China.
Under Chinese communism, the party controlled the state and from the outset created and used the law to regulate the masses and suppress counter-revolutionaries.
Since it is the Party’s view that the law and legal institutions exist merely to support party and state power, law often takes the form of general principles rather than detailed and constant rules. The Communist Party at the time wrote the laws in simple enough language so every individual could understand and abide by them whilst technical language and strict legal procedures for the police and courts were dispensed with to encourage greater popular appreciation of the legal system. Law at this time was regarded inferior to state/party policies.
In considering the merits of whether to open an office in China or not, it is important to reiterate that according to Communist legal theory, the law is merely a mechanism for control. It sees the law as creating constraints upon its power and the administration of justice as a rival to party control. As Paul Gewirtz noted: ‘China’s leaders see improving the legal system not simply as a way to control society but as a way to rein in wayward bureaucrats, insist that local officials carry out national policies, establish rules for a more robust economy, provide peaceful ways for citizens to resolve disputes and reduce the corruption that’s seen as the greatest threat to the Party’s continued hold on power — in short, to constrain the government itself and not just to control society and contain social unrest’. It is not a way to achieve justice, but a way to impose the government’s will to implement party policy. A tool to facilitate the fledgling nation’s rejection of old evils and its transformation into a new socialist republic. Certainly, a different system to the democratic system we have here in Australia, and a factor to be considered in any decision.
THE LEGAL SYSTEM ; SOURCES OF LAW
China’s state legislature is the National People’s Congress which is largely a rubber-stamp body of over 300 members who meet in full session for only two weeks a year. Real power is retained by the Politburo, a small committee of ten members of the Communist party which includes the top leadership. The Chinese court system has a People’s Court who are the judicial organs of the state. There are four levels of courts – the Supreme People’s Court, the High People’s Court at the Provincial level, the Intermediate People’s Court at the prefecture level and the Basic People’s Court at the county level.
The current Constitution of the PRC, adopted in 1982, is viewed as the highest source of law in the country. The Constitution establishes the framework of the government in addition to codifying the general principles of government and society whilst listing the fundamental rights and duties of all citizens.
At present, there is no civil code in China. However, on March 15th, 2017 General Rules of the Civil Law of the PRC were promulgated and took effect on October 1st, 2017. These General Rules cover new laws in China and take the form of a civil code and is the first attempt to codify the law making the present Chinese legal system effectively a very young system.
In codifying the system China looked at Germany, France and Japan codes to gain an understanding of how they countries made it work. From there, they were able to build a good civil law system from 1930 until 1949 which then changed to the Soviet style inquisitorial system. This meant that from approximately 1958 until 1978, China had no legal system after it was destroyed by Chairman Mao.
To modernise the system, China then turned to the tiny nation of Singapore as an example of how to do international trade and public administration and policy. Since 1979 and following the death of Chairman Mao, China has continued to embark on a widespread programme of social, economic and legal reform. A process which has accelerated at pace especially following its accession to the WTO in 2001.
LAWS AND RULES REGULATING FOREIGN LAWYERS – PROS & CONS
Closer analysis of the Chinese culture suggests there is no obvious reason for an overseas law firm to go to China and open an office. There are numerous challenges to overcome simply to ‘open the doors’ and these challenges start with the law itself. For example, there is an inconsistent application of law by the local bureaus, in that what may be true in Shanghai may not be true in Beijing or vice versa. As a result, lawyers must spend more time looking at how the law has been applied throughout the country resulting in what clients would think is a simple question always ending up requiring more time and investigation.
Even if the laws were consistently applied, the different emphasis on legal precedents poses another problem. Legal precedents do not have the same influence in China as they do in Australia. While here in Australia, a lawyer might be able to reference previous decisions as they advise clients, they cannot have the same assurance past decisions will influence future ones in China. Whatever the benefits or otherwise of Chinese law, it can also be a political tool, enforced (or not) as befits political ends. This environment limits the authority precedents have held here in Australia and pose a unique challenge for China’s lawyers.
Because of the law’s inconsistent application across regions and the challenge posed by a lack of proper precedents, foreign lawyers in China need to pay special attention to government relations. That is, you need to get answers for clients without spending an inordinate amount of time doing it. To do this it’s important to figure out “how to get the government guy to say yes” and it is common for government officials to deny requests from foreign companies without reason.
The government relations work lawyers do is so important because it helps companies who are making legal claims progress them more smoothly. Since the government won’t make any effort to proactively gather evidence, it’s then up to the lawyer to find the evidence on a client’s behalf.
Prohibited from practicing Chinese law
As a foreign firm operating in China, our firm’s lawyers will technically, be prohibited from practicing Chinese law. They can interpret and guide clients on how to operate in China, but technically speaking, they cannot practice Chinese law. The two clear indications of practicing Chinese law would include appearing in front of a Chinese court and giving legal opinions on Chinese law.
As foreign lawyers, we are restricted from giving opinions on Chinese law, and if we advise our clients on legal matters, it can only be in coordination with Chinese local counsel or it must be based on publicly available information and our own experience as foreign lawyers registered in China.
Partnerships and mergers
Furthermore, successfully navigating China’s legal services industry and providing our overseas clients with the service they expect, whether here in Australia or elsewhere will require us to partner with a Chinese counterpart. That partnership may come through an M&A and is certainly an area to the firm should explore. Recent mergers have received a lot of attention in China’s legal industry and is looked upon favorably by local Chinese organisations.
Finally, whilst Chinese law firms are now offering a higher quality of service than they used to, there is still a need to ensure quality assurance is maintained. Whilst here in Australia, we can be pretty sure that whichever one of our offices a client calls, they will for the most part get a quality lawyer and quality service, in China that’s still developing. A firm that’s got a great office in Shanghai might still not have developed any sophisticated systems in Guangzhou. The reputational risk for our firm that could come from choosing a partner of inconsistent quality means my recommendation is for our firm to work with a variety of Chinese firms on a case-by-case basis on different matters around the country, instead of just working with one.
What will make it all worthwhile?
The challenges are sizeable, and the regulatory framework considerable, but the opportunities for future returns are encouraging and worthwhile. As Chinese companies continue to grow and spread their influence across the globe through outbound investment, our efforts must be to focus on winning M;A mandates from these transactions.
While our competitors focus on supporting the China operations of their local clients, our aim success will come from building relationships and trust with Chinese companies looking to invest in Australia thereby enabling us to be involved in future outbound investment transactions.
Focusing on outbound investment might also prove a strategic way for our firm, once an office is open in China, to differentiate ourselves from increasingly sophisticated Chinese firms. There are more than 19,000 Chinese law firms today, and as these firms develop, they are beginning to gain the capability and reputation to represent foreign clients on their own.
Upon my thorough analysis of the Chinese legal system outlined above and the opportunities created by the expanding economic growth opportunities, my recommendation is for the Board to open a representative office in China as soon as possible. In my opinion, the only way to build a profitable stream of Chinese clients is by having a representative office via an ‘on the ground’ presence. This will enable our firm to support our clients’ needs and react more quickly to changing global circumstances.
In addition, having lawyers located in China will build confidence amongst our clients, and whilst the office may not initially be a very big revenue generator early on, being present will enable our firm to play an important intermediary role for international clients who tend to mistrust the Chinese government.
At present, the major legal centres in China are Beijing and Shanghai, although Guangzhou is becoming increasingly popular, and Hong Kong is certainly an option given it’s English speaking roots, and the fact there is no visa requirement for employees or visitors to be able to enter the country.
However, having considered all the above factors, my recommendation is for our firm to open a representative office in the city of Shanghai because it is:
• a large metropolitan city;
• home to many large Chinese corporations;
• much more western in its thinking;
• the financial centre of China;
• the home of the Chinese stock exchange;
• more foreigner friendly, and
• less polluted than the city of Beijing.