Managing the risk in China

Saturday 20th December 2008

Rosemary Wallis, Partner, Baldwins Intellectual Property and Director of Baldwins Law Ltd presented at an Auckland District Law Society seminar.  New Zealand businesses needed to register their intellectual property rights in China ahead of time to avoid problems and demonstrate faith in their products, said Baldwins’ partner Rosemary Wallis.

Ms Wallis told the ADLS seminar, “Trading with China - Getting it Right”, that China had around 1400 million people and was the world’s manufacturing powerhouse. New Zealanders couldn’t afford not to go there but they did need to protect themselves, get local help and “put in the hard yards”.

She said it was important for New Zealand businesses to register intellectual property rights as soon as they could.

China was a “first to file” jurisdiction, meaning that the entity which applied for trademark or patent registration first would be entitled to it. Ms Wallis said that trade mark applications were filed with the Chinese Trademark Office, with words, designs, alphabet letters, numerals, three-dimensional marks and colour combinations all being registrable.

Ms Wallis said that planning ahead was particularly important in relation to brands as registration took time. By getting an application in the queue, New Zealand firms could, in the short-term, minimise the risk of an opportunistic distributor or business or unrelated third party making a similar application.

Ms Wallis said that retaining control of the intellectual property in New Zealand was important. “It is a bad idea for a New Zealand business to leave the registration of its rights to its Chinese partner or agree to let the Chinese partner attend to registration. That may be fine while the relationship with the Chinese partner is in good heart. It will not be when there is a falling out.”

She said that, with respect to trademarks, it was important not only to register the English language trade mark, but also to register the Chinese equivalent of a brand.

“If a New Zealand business only registers the English version, a local company may well register the Chinese version. Consequently, if the Chinese brand it not protected, it will be difficult for the overseas owner of the English language brand to stop the Chinese brand owner from using the Chinese equivalent.”

Ms Wallis said that it could take two years or more from application to registration in China. Firms should also be aware that the Chinese trademark office focused quite strongly on the formalities.

Ms Wallis said that all applicants for trademarks must use Chinese agents.New Zealand companies should also register the company name. There were three types of patents in China:
1. invention patents,
2. utility patents, and
3. design patents.

Patents in China had a life of 20 years and it usually took between three and five years to achieve registration of an invention patent.

Bell Gully senior associate, Stephen Layburn, said that one of the big factors in the development of China was the continuing migration from country to city, meaning that a burgeoning urban population needed to be fed.

This arguably placed New Zealand in a very favourable position, not only because of the strengths inherent in its rural economy, but also because of food production technologies which might be able to be licensed or developed in China.

“A further point to bear in mind is that, while the melamine scandal is still being played out, the significance of the involvement of regional and central government agencies should not be underestimated. Anecdotal evidence indicates that doing business can often be very bureaucratic, with a seemingly never-ending list of licences, consents and permits to be obtained.”

Mr Layburn said that New Zealand firms needed to manage risk to ensure that they were paid for the goods and services they supplied, while importers had to make sure they received what they had bargained for when parting with payment.

“The bottom line in both instances is that enforcement through China’s legal system is likely to be difficult and costly. Underpinning this is feedback that, because the Chinese business community often takes a different approach towards contracts and negotiations over the contract price, there are a number of hazards to be avoided, including the risk of a counterparty seeking to renegotiate what was to be a firm price after goods have been ordered or sent.”

Mr Layburn said that the two most commonly used payment methods for export businesses were letters of credit and documents against payment.

Other payment protection methods included trade insurance and the export guarantee scheme operated by the New Zealand Export Credit Office. He said that, as with any overseas market, risk management was often about gauging who was likely to be a bad payer and whether that firm was worth the risk.

“Due diligence is vital. In the case of new customers, seek references from third parties and check those references. Sound credit management policies are equally vital. These include all the usual recommendations about managing your exposure to a customer, whether new or existing.”

Mr Layburn said that up to 90 per cent of profits from a China-based operation would generally be repatriated to New Zealand, subject to payment of taxes. In relation to dispute resolution, he said that a number of standard provisions appeared to be emerging.

One was to require arbitration through the China International Economic and Trade Arbitration Commission. Foreign entities could also choose off-shore arbitration, with some multinationals opting for arbitration in centres such as Singapore.

Mr Layburn said that the Chinese legal system did not appear to have kept pace with the rate of economic development. Although a great deal of effort was being put into improving matters, problems of cost, delays and inconsistent outcomes in dealings involving commercial disputes suggested that there was a good deal of room for improvement.

Concern had been expressed about a lack of separation between the judiciary and various arms of state. It was also significant that there was an absence of reciprocal enforcement of judgments of foreign courts.

“Perhaps these are issues that will see rapid improvement under the various measures included with the New Zealand-China Free Trade Agreement. However, until there are concrete signs of progress, the best advice points to doing your homework before entering into a commercial relationship, managing that relationship throughout its lifetime, and, if the worst does happen, exploring the possibilities for arriving at a commercial solution.”
by Catriona MacLennan

This article appeared in issue no. 43 (Novermber 2008) of Law News published by the Auckland Disctrict Law Society.

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