Many foreign investors might find the legal system in China confusing for the reason that it absorbs success cases of various countries as well as adds elements with Chinese characteristics to polish its own system, making itself unique, mighty but also complex.
These features have made China one of the most favored investment destinations around the world. However, without getting a basic understanding of the Chinese legal system, it is quite risky for any foreign investors to operate their business here.
To help foreign investors have a better understanding of the China’s legal system, the article focuses on four parts, showing how things go in China:
- Common Law vs Civil Law
- Legislation System in China
- People’s Court—How Legal Disputes are Settled in China
- Foreign Related Legal Dispute
Common Law vs Civil Law
To be specific, China has been devoting itself to forming a socialist system of laws with Chinese characteristics. However, its unique features are developed on the basis of civil law. As a result, generally speaking, China can be regarded as a civil law country.
The China’s legal system has been deeply affected by the Soviet Union, Germany, Japan, America and some international treaties in various aspects.
After the establishment of the People’s Republic of China, the legislation carried on loads of features of the Soviet Union. As for matters of intellectual property, securities, and finance, China borrowed from America and international treaties to enrich its own system.
In case you are a foreign investor coming from a common law country, we would like to make a contrast between the two different systems to help you have a clear understanding.
Chinese law is developed through legislative statutes or executive branch action rather than by judge through decisions of courts and similar tribunals.
Chinese courts base their decisions on legislative enactments rather than prior judicial pronouncements. What’s more, judges rely on codes or texts rather than on their predecessors’ decisions of actual controversies to guide them in applying the law in China.
However, it is still true that the rule or the opinion of the Supreme Court still has a strong influence on courts on many levels.
The socialist system of laws with Chinese characteristics is an organic integration of the related laws of the Constitution, civil and commercial laws, administrative laws, economic laws, social laws, criminal laws, litigation and non-litigation procedural laws, and other legal branches, with the Constitution in the supreme place, the laws as the main body, and administrative and local regulations as the major components.
Below you can read more about some of the characteristics of the specific laws.
The laws deal with fundamental and overall matters which are important to national development and those which affect the country’s stability and long-term development. For example, one of the most important laws related to foreign investment, which is the Foreign Investment Law, is one of the laws we discuss in this paragraph.
For instance, Regulation for Implementing the Foreign Investment Law of the People’s Republic of China belongs to administrative regulations. It is published by the State Council and is considered as the detailed rule for implementing the Foreign Investment Law.
The administrative rules can be divided into departmental rules and local rules:
- Departmental rules refer to the general terms of normative documents formulated by various departments under the state council and its directly affiliated institutions with administrative functions in accordance with laws, administrative regulations, decisions and orders of the state council. Take Special Administrative Measures (Negative List) for the Access of Foreign Investment as an example, it is a typical departmental rules in China.
- Local rules refer to the general term of normative documents that are universally applicable to the administration of a region formulated by the people’s governments of provinces, autonomous regions, municipalities directly under the central government and other large cities in accordance with laws, administrative regulations and local regulations.
In general cases, the legal dispute of foreign investors is settled by the court in China (People’s Court). The Chinese Court system consists of four levels of courts, and the legal dispute can be ruled by the court at most three times. That is what we call “instances at four levels”.
The four levels of courts mentioned above are:
- The Supreme People’s Court (hereinafter referred as the SPC)
- Higher People’s Courts
- Intermediate People’s Courts
- Basic People’s Courts
- Cases that have a major impact nationwide;
- Cases that the Supreme People’s Court deems shall be tried by itself.
What’s more, the SPC establishes International Commercial Courts, which are standing organs of the SPC, dealing with international commercial cases of first instance which have a major impact nationwide.
- Major foreign-related cases;
- Cases that have a major impact within their respective jurisdictions;
- Cases that are under the jurisdiction of the intermediate people’s courts as determined by the Supreme People’s Court.
In general, it is considered as the court of the city level.
Given the fact that one of the major concerns for foreign investors is related to IP rights, we will explain more about intellectual property courts.
Intellectual property courts have been established for a short time, and up till now, only three provinces (Beijing, Shanghai, and Guangzhou) have had intellectual property courts.
Intellectual property courts as the courts of first instance shall have jurisdiction over a civil or administrative intellectual property case involving following matters:
- A patent, a new variety of plant;
- An integrated circuit layout design;
- Technical know-how;
- Others that are highly technical.
For a major foreign related case of first instance regarding intellectual property rights or for a case of first instance regarding intellectual property rights with significant impacts under the jurisdiction of the basic level people’s court in the city where the intellectual property court is located, the intellectual property court may exercise higher level jurisdiction.
Considering that foreign investors are different from local people, who may have language problems, distance problems or identity-related problems and so on, special rules are set for foreign-related legal disputes to provide foreign investors with more proper approaches.
Below we will briefly introduce some rules regarding it:
- General Principle
- Service of process and periods
- Arbitration and mediation institutions
- The people’s court at the place where the contract is signed or performed;
- The people’s court at the place where the subject matter of the action is located;
- The people’s court at the place where the impoundable property is located;
- The people’s court at the place where the tort occurs;
- The people’s court at the place where the domicile of the representative office is located.
The cases include:
- If the contract is signed or performed in China;
- If the subject matter of the action is located in China;
- If the defendant has any impoundable property in China;
- If the defendant has any representative office in China.
It can be concluded from the table that, compared with Chinese citizens, foreign investors have more time to react with the changeable situation, but it is still important to pay attention to the deadline of each step when foreign investors meet with actions.
|Stages||Standard Procedures||Foreign-related Procedures|
|First instance||A people’s court shall, within five days after docketing a case, serve a copy of the written complaint on the defendant, and the defendant shall submit a written statement of defense within 15 days after receiving the complaint.||The people’s court shall serve a copy of the written complaint on the defendant and notify the defendant to a written statement of defense within 30 days after receiving a copy of the written complaint.|
|Appeal||Against a first instance judgment or ruling of a local people’s court, a party shall have the right to file an appeal with the people’s court at the next higher level within 10 days from the date of service of the written ruling.||Foreign investors without domicile in China shall have the right to appeal against a judgment or ruling of a people’s court of first instance within 30 days from the date of service of the written judgment or ruling.|
|Appeal||The appellee shall, within 15 days after receiving the copies, submit their written statements of defense.||The appellee shall submit a written statement of defense within 30 days after receiving a copy of the written appeal.|
When it comes to the foreign-related lawsuit, a thicket of procedures would slow progress to a crawl, thus arbitration or mediation may be a better choice for the reason that they are much convenient and time-saving.
Following are some major arbitration and mediation institutions for international commercial disputes in China:
- The China International Economic and Trade Arbitration Commission
- The Shanghai International Economic and Trade Arbitration Commission
- The China Maritime Arbitration Commission
- The Mediation Center of the China Council for the Promotion of International Trade
- The Shanghai Commercial Mediation Center
Although arbitration and mediation have the advantage over legal action to some point, their shortcoming can not be ignored.
Firstly, it is less legally binding than the decision of courts. What’s more, the cost of arbitration can be higher because of its standardized processes. Foreign investors can make their choices after considering the merits and demerits of both methods.
To conclude, the article aims at providing foreign investors with basic knowledge of the China’s legal system so that they can make wiser choices and adapt themselves to the Chinese market as soon as possible.
We sincerely hope that the article was helpful to you. If you have any problem understanding it, please feel free to contact us. It’s our pleasure to offer you with professional and good services. It would be an honor to be your guide for investing in China.
How can we help your business in China?
We are a non-state consulting firm based in Shanghai that helps foreign businesses enter the Chinese market and develop their operations. Our clients are assisted from initial stages with company formation and employment solutions, to further support-requiring stages with our business solutions such as tax & accounting and payroll & tax.