Monthly Archives: July 2015

Liquidation Damage Clause in PRC

Under PRC Contract Law, the parties may agree for liquidated damages, either in the form of a stipulated amount or a method for the calculation of the amount of compensation for the damages incurred as a result of any breach of contract. (“Liquidated Damages”)

The significance of Liquidated Damages clauses in the context of PRC legal practice are underestimated or even overlooked. This is especially the case for foreign practitioners during a tough negotiation of a cross border transactions.

Are You Having a “Labor Contract” When You Only Have A “Service Contract” In Mind?

When you procured service from someone for your business in China, it is critical to draw a clean-cut line between whether it is a “labor contract”, or whether it is merely a “service contract”. The distinction may result in completely different cost and burden.

Legal Implication of the Distinctions

The major legal implications of such distinction can be summarized as below:

Governing Law: A labor contract is governed by the PRC Labor Contract Law which provides for various mandatory provisions, such as working hours, content of work, labour protection and labour conditions, labour remunerations, labour disciplines, conditions for the termination of the labour contract, etc. However, a service contract is governed by PRC Contract Law and is considered a simple commercial contract. The parties will be endowed with more autonomy and flexibility to make their deal by mutual consent.

A Dramatic Reverse of the VIE in China?

In our article published in May entitled “Another Brainstorm-like Forecast of Future Development of VIE in China”, we estimate that the “variable interest entity” structure (“VIE”) will guadually and naturally be obsoleted due to the opening of the PRC TMT market.

Therefore, the substantial legal risks about whether the VIE structure will be challenged by the legal basis of “circumventing illegal purpose by legal form” under Article 52 of PRC Contract Law may be mitigated.