There is huge queries faced by the China lawyers from the American and European companies seeking remedies in identifying the strength behind their pleas for getting paid on indemnification or settlement agreements or for breaches of investment or merger contracts. Because of the tightened capital control rule of China, it has become really tough to get money out of the above mentioned claims.
Currency regulations are relatively strict in China and are designed to prevent large sums of money from leaving the country. The country has taken firm actions to curb capital outflows from the nation.
In many occasion it has been noted that using the capital control rule of China as an excuse, many Chinese companies deliberately escape paying money to the foreign companies. And the matter gets even worse for the overseas companies when they can’t assess whether the payment is not occurring due to the unwillingness of the Chinese company or because of the intervention of the Chinese government in blocking the payment.
Most of the Chinese companies do not carry insurance for indemnification. Not having this insurance will prevent them converting RMB into dollars from the Bank of China. It is quite dubious for us to determine whether they do it willingly or not. As far as China lawyers can determine, Chinese companies intentionally had the contracts written to make payment complex. It is quite acceptable who would like to give away millions of dollars while they can carry on a cheaper court case.
The non-payment problem is influencing the investment deals as well. To make it simple for you to understand, we have given a step-wise simplified version-
STAGE 1- At first, a Chinese company settles for an agreement with an overseas company with the assurance of buying the company or investing in it.
STAGE 2- The contract will have the provision that the Chinese company will have to make a certain amount of payment at the early stage.
STAGE 3- The contract will also have liquidated damages provision in case of the failure of the deal.
STAGE 4- The Chinese company stays away from making the first payment furnishing the excuse that the Chinese government is preventing them from doing so.
STAGE 5- The American or European company then wants to sue for breach of contract damages or for the liquidated damages.
The major two problems in this contracts are one of substance and one of procedure. China lawyers advise American or European companies to think about all the non-payment possibilities before drafting the contract. Foreign companies should not enter into an agreement with the Chinese companies that seems purely domestic. You could be on a safe side and prevent losing money by doing this.