CONTRACTS, PRACTICE AND LAW IN TRADE WITH CHINA: SOME OBSERVATIONS II. Chinese Contract Clauses and Practice under them B. Payment 1. Standard Terms 768 771 771 772 772 782 785 2. Trademarks_ III. Recent Developments in Chinese Policies Toward Law "Erh li gou doesn't mean 'early go' American businessman during trade negotiations in Peking, 1978. Erh li gou ("two mile gully") is the street in Peking on which stands the "large import building", the headquarters of the Chinese state trade corporations which purchase machinery, equipment, chemicals and technology from abroad. The punning reference to the protracted length of negotiations there is relevant to this piece, because the writer spent seven weeks between mid-January and mid-April, 1978 participating in negotiations in Peking; the long stay provided an opportunity to test generalizations and to write with some immediacy. This essay describes the process of negotiating sales of capital goods to the Chinese corporations and the contracts which embody such transactions, as seen by this writer in mid-1978.1 *Stanley Lubman, Special Counsel to the San Francisco and Hong Kong law firm of Heller, Ehrman, White & McAuliffe, was trained as a China specialist in the midsixties and then was a professor at the University of California School of Law (Berkeley) from 1967 to 1972, before returning to private practice, specializing in Chinese affairs. He has visited China many times since 1972. 1 See also Law and Politics in China's Foreign Trade (Victor H. Li ed. 1977), which is particularly helpful in describing the experience of China's European and Japanese trading partners and in setting forth contract forms; Gene Hsiao. The Foreign Trade of China: Policy Law, and Practice (1977), a general overview; Dicks, The People's Republic of China in East-West Business Transactions 397 (R. Starr ed. 1974); Reghizzi, Legal Aspects of Trade with China, 9 Harv. Int'l L. J. 85 (1968); Smith, Standard Form Contracts in the international Commercial Transactions of the People's Republic of China: 21 Int'l and Comp. L. Quart. 133 (1972); J. Dingle, Technical Selling in China (1974); and Holtzmann, Resolving Disputes in U.S.-China Trade in Legal Aspects of U.S.-China Trade (H. Holtzmann, ed. 1975). The Far Eastern Economic Review and The Asian Edition of the Wall Street Journal are indispensable for following current developments. Change in foreign trade policy was very much in the air in Peking while this was being written, and negotiations and contracts alike reflect new policies. This essay also notes some recent developments in a related area that may affect China's foreign trade practice. Some indications appeared in early 1978 that China's domestic legal institutions were being strengthened and developed. China's formal legal system has in recent years been conspicuously unimportant in influencing the making and application of rules, within China as well as in China's foreign trade. At its very least, the new policy toward law is an interesting expression of an aspect of the Chinese leadership's development strategy, and noteworthy for that alone; beyond that, it may have other implications. Lack of space prevents detailed discussion here, but some likely subjects of future speculation can be suggested. China now seems to be traveling developmental roads which other societies have discovered. although they began at different starting points. It is worth noting, for instance, that as the idea of "self-reliance" becomes modified not only are China's imports of goods and technology increasing, but China's Minister of Foreign Trade has recently expressed willingness to consider transactions which the Chinese have previously resisted, such as manufacturing exports to buyers' specifications, incorporating components supplied by foreign buyers, and reviving barter. The next stage, already the subject of speculation in the West, may see assembly operations and more complicated transactions such as coproduction and product buyback arrangements. Hong Kong at the moment promises to be the focus of interesting experiments in Sino-Western trade and industrial cooperation. At the very least, it is probably no coincidence that new interest in a variety of types of international transactions has been articulated contemporaneously with new emphasis on the domestic legal system. Without any specific connection between the two trends it is possible to note that they share an underlying receptiveness to the use of orderly and structured institutions for economic development operating according to increasingly regularized rules. Other policies announced in early 1978 reinforce this impression, particularly the intense emphasis on improving China's scientific and technological base and on improving the quality of education. Common to these policies and to the new emphasis on law is a willingness to entrust more responsibility to decision-makers because of their "expertness" rather than their "redness". Beyond this confluence of trends lie further possible implications for increased regularization of Chinese society. Perhaps the time has come for the accretion of bureaucratic practice to be expressed in regulations and codes less tentative than much Chinese legislation in the past. Although it remains highly unlikely that the Western legal tradition, which had never taken hold in China before 1949, will exert a discernibly strong influence, pragmatism and the need to develop solutions to the problems of managing an increasingly more complex economy may impel Chinese planners to choose selectively from analogies derived from the experience of other nations, developed as well as developing. It is too early to be confident that a lasting commitment has been made to fashioning and using institutions for implementing policies that reduce the use of mass mobilization and increase the making and application of rules by officials charged with those tasks. Even if policy could change again, though, the present mood and current experimentation reflect an openness and flexibility that are striking by contrast to the policies that dominated the previous decade. The pages that follow describe a mix of institutions and practices at a point in time that may be misleadingly fixed: Just as a river may be composed of currents moving at different speeds, the Chinese institutions discussed below, artificially captured in print, are changing unevenly, some hardly at all. The foreigner's point of view, like a watcher from the river bank, is limited. But because the institutions of foreign trade are those with which the foreigner can have the most sustained contact, insight into the operation of those institutions may furnish hints of less immediately visible developments. I. NEGOTIATIONS IN PEKING A. The Road to Peking Since the purge of the "Gang of Four" in October, 1976, Chinese leadership policy has much stressed the importance and necessity of foreign trade, including the importation of equipment, machinery, whole plants, and technology. The new prominence of trade has caused the state trading corporations to multiply, to grow in size, and to increase the speed of their activities, but at the moment the foreign businessman must still be patient both in his efforts to get to Peking and to negotiate while he is there. The decisions to purchase from abroad are made not by the trade corporations but by their "end-users" and the ministries to which they are responsible. Even if these units wish to purchase from abroad, they must compete with each other for the allocation of scarce foreign exchange with which to make the purchase. The planning of purchases and their financing is time-consuming, and for these reasons the foreign seller must expect that a Chinese response to his approaches may be long in coming. Also, the sheer weight of business on the trade corporations makes for long delay. The volume of correspondence which they must carry on, within China as well as with foreigners, is extensive. Negotiations occupy their time, as do frequent consultations with end-users. The size, many layers and caution of the trade bureaucracy make for slowness in decision-making. There is no single best route which a foreign seller may use to get to Peking. Alternatives which should be pursued are letters with appropriate enclosures of technical literature directed to the relevant trade corporations and to the China Council for the Promotion of Foreign Trade in Peking, direct approaches to members of the commercial section of the PRC's Liaison Office in Washington, attendance at the Canton Fair, approaches to Chinese delegations visiting the United States, representation on scientific or industrial delegations to China, and engaging an experienced advisor or agent to assist, support and coordinate the seller's approaches to China. These means of approach should not be regarded as mutually exclusive. Without discussing them here, it should be noted that in many cases attendance at the Canton Fair by exporters does not produce substantive technical or commercial discussions, because the trade corporations normally do not send top-ranking officials to Canton to discuss purchases of items such as whole plants or complex equipment. The Fair, however, may be a useful forum for presentations, which are summarized and reported on when the Chinese officials at the Fair return to Peking. Another route to the negotiating table is the technical seminar. The trade corporations have been increasingly interested recently in "technical exchanges" involving lectures and sometimes, demonstrations of equipment by technical specialists sent to Peking and occasionally to other Chinese cities by their companies. Such sessions offer an opportunity for sellers' representatives to talk directly to technically competent personnel representing the end-users themselves, which is not usually possible at the Canton Fair. Such technical seminars are expensive, involve considerable opportunity costs, and may not lead to commercial talks during the particular visit, but they are undoubtedly the most effective route which sellers can take in interesting end-users. Another method of shortening the time which must elapse before a Chinese response is received is to translate considerable amounts of technical literature-not glossy advertising or a corporation's annual report into modern Chinese and send it to the end-users directly, so that the recipients will not have to translate it themselves or pore over it in an unfamiliar language. Translation and printing services are provided by a number of organizations and companies in the United States and in Hong Kong. If a foreign seller receives a response from Peking, it is usually a positive one, since if they're not interested, the trade corporations probably won't respond at all. When they do answer, they may ask for further information or for offers, or they may indicate an interest in holding negotiations in Peking. Upon receiving such invitations, the seller must then decide who to send. B. Negotiations in Peking It is usually a great mistake to send a representative of top management unless he has unusual competence to discuss his company's products. With due respect to the dignity and experience of highranking executives, the company representatives who make the best impressions on the Chinese are those who are most knowledgeable about the design and performance of their company's products. Obviously the seller must send a representative with authority to discuss price and other commercial details, and to negotiate and sign a contract. But it is in the technical sphere that it is vitally important to send particularly competent persons. As will be described below, competence becomes unusually important in the absence of good communications with the sellers' home office, which is a distinct and continuous problem in Peking. The choice of personnel must be made, also, bearing in mind that the sellers' representatives may have to remain in Peking for weeks. The opportunity cost of sending very talented specialists to China may therefore be considerable. Men (or women) who are not cheerful about foreign travel, extended absences from home, long stays in hotels considerably more austere than those at home and the absence of night life may find themselves distinctly unhappy in Peking. The negotiating team can fly to Peking from western Europe, Tokyo, or from Canton after having entered China via Hong Kong, although plane tickets are becoming harder to obtain because of the unprecedented Chinese push to increase tourism. If the travellers fly from Tokyo they may find that most of the seats on their plane are filled by Japanese businessmen, reflecting the considerable advantage Japanese exporters have over Americans in the China market by reasons of geographic proximity, pure competitiveness, and generally keener interest in exporting than most American companies. Upon arrival in Peking, the sellers' team will be greeted by representatives of the trade corporation which has invited them. Americans are usually put up in the new wing of the Peking Hotel, which was erected four years ago and has spacious rooms. Most Japanese and some Europeans prefer the Hsin Chiao, which is smaller and older. Other hotels are also being used as the number of would-be sellers increases. The host corporations make these arrangements on behalf of visitors. Once installed the sellers' team then falls into a more or less regular pattern. They breakfast early, and then, laden with briefcases and boxes of technical material, samples and plans, order a taxi to Erh li gou. The drive from the Peking Hotel is about twenty minutes, along roads shared with thousands of bicyclists, many large public buses, and a relatively small number of cars and trucks. If the visitors are staying at the Peking Hotel, they will be borne through Tien An Men, Peking's great square, past the entrances to the old Forbidden City and to Chiang-Nan-Hai, where China's top leaders live. It is impossible not to be stirred by the magnificent yellow-tiled roofs and red walls of the Forbidden City. The ultimate destination, the "big important building," is considerably more mundane. As visitors arrive, many other taxis will be arriving at the same time, disgorging other businessmen-the majority of them Japanese-who have also come to negotiate. Until the spring of 1978, foreigners never even got above the ground floor, whose long, drab corridors are lined with doors opening into formal negotiating rooms of various sizes, always with long baize-covered tables separating one side of the room from the other. A brighter, newer, and larger multi-story building has been completed next door to the old one to serve as the center for negotiations. Each session begins the same way, with polite small talk about the weather and the offering of tea and cigarettes. The meetings usually begin at 8:30 a.m. at the earliest and end at 11:30, to resume at 2:30 and end at 5:30 p.m. One of the frustrations of this schedule is that, as willing as the seller might be to work longer hours in order to wind up the negotiations sooner, meetings outside normal hours are very rare. C. Patterns The Chinese participants will of course include representatives of the host organization, such as the China National Machinery Import and Export Corporation (often referred to for short by its cable address, "Machimpex"). In addition, representatives of the end-users may also be present. In some negotiations the end-users assume the predominant role until the very end, when price and commercial details are settled. Often, the end-user's team will include comparatively young and inexperienced personnel who are obviously |