28 June 2022

Signing International Consulting Contracts: pay attention to the details!

As countries around the world become more and more connected, the work and content that international lawyers need to handle continues to grow in richness. International lawyers often put more time and effort into drafting consulting contracts than other contracts, as they often involve ongoing and more complex relationships without easily defined deliverables. In drafting these points a few key items should not be left unattended, apart from a solid description of the work to be performed and the price. But that goes without saying.

First of all, we need to pay attention to the need to sign a written contract with the client. Even if the communication between the two parties is smooth, the discussion on key points must be written down in a written contract for easy access and can be used as “a time-table”. Communication via email or other social networking software is not conducive evidence if needed at a later stage.

Secondly, clauses that limit the amount of damages are very important. While the principle of damage limitation is written into most international consulting contracts, there are still unreasonable clauses. We often see provisions stating that the maximum recoverable damages cannot be higher than the fees paid by our client firms under the contract. Since the potential for damage from underperforming services can easily exceed the amount paid for such services, it is often unacceptable to limit recoverable damages to the fees paid. At the other hand, sometimes consultants offer little recovery so the need demand the consultant takes out insurance to cover the damages is often advisable. While considering limitation of liability clauses, indemnification is also important. Many contracts contain a ‘one-way’ indemnity clause – providing for the client to indemnify the advisor for damages that the client company may have suffered as a result of the advisor’s negligence – but these consulting agreements often ignore the damages that the client firm may have suffered as a result of the advisor’s negligence. Therefore, a two-way ‘indemnity’ clause is necessary.

In addition, international consulting contracts and the work performed on the basis of these contracts are subject to intellectual property rights as it often involved  “personal work”. If you pay for this personal work or any documents, designs, etc., then you should have the right to use them and own them. So your contract should provide for that. From the consultants point of view, it is advisable to include a ‘disclaimer’ – stating that the risk of reusing the documents without their consent is at the client’s own risk.

Finally, pay attention to the choice of law and the venue for litigation. More than once we encounter that due to a wrong choice of law and venue, the international consulting contract can not be enforced and therefor is actually useless.

In general, you should include all of the above provisions in any consulting agreement, whether you are a company that hires foreign consultants or a company that provides consulting services to overseas companies. Consider limitation of liability clauses, individual intellectual property rights, use a written contract and think what happens if things do not turn out as expected.

Do you need advice on this topic? Please contact Joost Vrancken Peeters on +31 620210657 or [email protected] or Xinyi Yan at on [email protected].

P.J.B. (Pieter) van Deurzen

Attorney at Law & Managing Partner

Two reasons why you must include a diplomatic clause in your rental agreement
A Diplomatic clause has become very common in rental agreements. There are two different forms of diplomatic clauses. The first form applies to persons (for example, diplomats) who want to rent out their homes when they go abroad. This form of the diplomatic clause has its basis in article 7:274 of the Dutch Civil Code (hereinafter: “Diplomatic clause 1”). The second form applies to employers who want to provide accommodation to their employees who are temporally working far away from their homes. As an employer, you do not wish to be bound to a rental agreement if your employee has to leave. Therefore, you should include a diplomatic clause in the rental agreement (hereinafter: “the Diplomatic Clause 2”). Improve your legal position if you rent out your house We advise you to include a Diplomatic clause 1 when you move abroad and decide to rent out your house. This clause improves your legal position if you rent out your house because it provides a legal basis to terminate the rental agreement. When you are returning home, and the tenant is unwilling to leave the house at the set date, you must go to court to terminate the contract. However, the Dutch Civil Code is strict. A judge can only assign a claim to terminate the agreement in a few specific situations. A Diplomatic clause 1 is one of those specific situations. Therefore, with a Diplomatic clause 1 you can assure that the tenant will leave your house eventually. Housing for your employees: avoid unnecessary costs Suppose you want to provide your foreign employees who are temporally working in the Netherlands a place to live. Or suppose you want to provide your Dutch employees who are temporally working far away from home within the Netherlands a place to live. In these cases, it is relevant to include a Diplomatic clause 2 in the rental agreement. People often enter rental agreements for a definite period or an indefinite period with a minimum rental period of one year. In principle, both parties cannot terminate the definite contract or the contract within the first year. However, if you included a Diplomatic clause 2 it is possible to end the definite contract or the contract within the first year. Therefore, you avoid unnecessary rental costs. Because of COVID-19, including a Diplomatic clause 2 is now more relevant than ever. Many expats have left the country before the end of the rental period. Their temporary apartments were left empty. Furthermore, many Dutch employees were obliged to work from home. It became unnecessary to live nearby their work. Therefore, many Dutch employees left their temporary apartment and returned to their own homes before the rental period ended. In both situations, the temporary residences became needless. Nevertheless, the employer’s obligation to pay the rent remained even as many apartments were left empty. Be aware of the possibility to include a Diplomatic clause 2 in the rental agreement. It avoids unnecessary rental costs. Think ahead To improve your legal position when you are renting out your house and avoid unnecessary costs for renting an apartment for your employees, we would strongly recommend including a diplomatic clause in the rental agreement. More information Do you have any questions about a diplomatic clause? Do not hesitate to contact us. We are more than happy to answer your questions.
Mathijs Arts
Mathijs Arts
Attorney at Law
The shareholders' agreement: 5 points of importance
A shareholders’ agreement (‘SHA’) may prevent discussions or conflicts between shareholders internally and also between the shareholders and the company. It is not mandatory to draw up a SHA, but this is highly recommended in case the shares are held by more than one shareholder. Freedom of contract is therefore largely paramount. In this blog we cover 5 specific points of attention regarding the shareholders’ agreement. #1 Benefits of the Shareholders’ Agreement In the case a company has more than one shareholder, it is advisable to draw up a shareholders’ agreement . Especially in respect of a joint venture with a 50/50 ratio. In the event of a dispute, there may soon be a deadlock situation that could harm or damage the company. The commitment to a SHA can prevent discussions and conflicts, as shareholders are forced to think about and agree on a number of matters in advance regarding their cooperation. In addition, you can address your fellow shareholders if they do not comply with the agreement. Moreover, the agreement is (largely) flexible and can be changed by agreement of all shareholders. It is also possible to keep the agreement secret, unlike the articles of association. #2 Parts of the Shareholders’ Agreement The SHA provides clarity on the rights and obligations of the shareholders and the possible consequences for their non-compliance. Important topics that are usually included in a SHA are: a list of decisions/topics requiring a larger majority than usual; a list of board decisions requiring shareholders’ approval; an exit scheme; tag/drag along provisions; valuation bases for the shares; agreements on profit distribution; a non-compete and/or relationship clause; a confidentiality clause; and any chain clauses for subsequent and acceding shareholders. #3 Beware of model agreements Every company has its own specific points of attention and not every collaboration is the same. Take a critical look at what you do and do not include in the agreement. Look at your own company and situation and not just the standard agreements and parts thereof and boilerplate clauses. Be careful when using standard shareholder agreements, model agreements and templates. If in doubt, always have your agreement checked by a lawyer. #4 Drafting the shareholders’ agreement In many cases, a tailor-made agreement is therefore wise and desireable. Moreover, the agreement is usually an important document with a lot of arrangements in it. Therefore, take the time to draw up the agreement and have the document checked by a lawyer. Especially if standard arrangements, such as the approval scheme when transferring shares, are not the best solution for your company or situation. #5 Consequences of non-compliance with agreements A SHA is legally an agreement like (almost) any other. This means that the agreement must be respected. Failure to comply with the arrangements under the agreement may have far-reaching consequences, including the obligation to offer the shares to the co-shareholder(s). However, the parties are free to regulate the consequences of a breach of contract under the agreement itself. Contact The lawyers of La Gro are an important source of information for entrepreneurs, shareholders and directors. The corporate law team focuses on your future and can be your discussion and sparring partner when making (daily) decisions with legal implications. Do you need advice on this topic? Please contact Joost Vrancken Peeters on +31 620210657 or [email protected] and Mathijs Arts on +31 614338775 or [email protected].
Protecting your confidential information in China: a different ballgame
Known as the “world factory”, China still has a strong attraction to foreign investors. In daily life, you can easily find goods attached with tags, labels, and stickers on a variety of goods showing they are “Made in China”. With the benefits including low taxes and duties and low labor costs, China manufacturers still offer a very competitive value in the global manufacturing landscape. There’s a big chance that you are currently in cooperation with a Chinese manufacturer or seeking for a new one, in this case it’s important for you to conduct your business with an “NNN agreement” that protects your ideas and products in China. You may already be familiar with a European style Non Disclosure Agreement which focuses on protecting trade secrets. However, unfortunately, this is not working if you want to protect your IP in China. An NDA agreement focuses narrowly on preventing confidential information from being revealed to the public, but it doesn’t diminish the risk that the information might be  used to compete with you. What’s worse, only an NNN agreement is enforceable under Chinese law. So, in order to have a comprehensive protection for your relationship with Chinese counterparts, an NNN Agreement plays a key role. An NNN agreement is designed for individual property and confidentiality protection when cooperating with manufacturers in China. It consists of three “N”s and each of them represents a different type of contractual obligation: 1. Non-Use This section in the agreement gives a Chinese factory that you’re working with the obligation to not use your ideas, concepts or products in ways that will lead to competition with you. It is of great significance because the obligations are ensured by a written contract rather than Intellectual Property law, and your ideas or products would be considered as the subjects to contractual provisions, rather than IP concepts such as copyrights or trade secrets. Therefore, any violation of them would be directly seen as a breach of the contract and there’s no need to claim infringements of your Intellectual Property rights. This will bring much convenience for you because the contract would be the basis for your control over the Chinese factory and disputes resolution, so it saves your strengths from looking for safeguards of your confidential information from other legislations or waiting for the courts to decide. 2. Non-Disclosure As introduced above, the Non-use provisions prohibit a Chinese factory from using your confidential information, but that’s not enough for complete protection. There’s still a risk that the Chinese factories will disclose your information to the public, or in some cases, to someone of their group. The latter situation is more likely to take place in reality because the Chinese factory is able to claim that they did not violate the non-use provisions for not using the protected information directly. But eventually they will use the information somehow for their own benefits and cause harm to your profits. Those behaviors smartly avoid the non-use section and pose a substantive threat to your interest. Therefore, a non-disclosure section is also necessary to keep your information secret, and it is especially important to clearly state in the agreement that not only disclosure within the group is prohibited, but also any infringement caused by group members and third parties would lead to liabilities of the factory. 2. Non-Circumvention The non-circumvention section of the agreement obliges the Chinese manufacturer to not make products of your ideas and sell them to your potential customers at a lower price. It is always the case that you buy the products from China at a relatively low price and sell them to consumers of other countries after adding a margin to the prices to make profits. Aware of the price gap between the Chinese market and foreign markets, the Chinese manufacturer may be tempted to sell your products in other markets by themselves with a price lower than yours. Such behaviors can have a profound impact on you because, except for some certain service-oriented industries, consumers tend to choose the same products with less costs. In this case, you may have difficulty selling your own products and suffer a big loss caused. Therefore, non-circumventions provisions are of extreme value in prohibiting chinses factories from conducting circumvention behaviors. In conclusion, a Chinese NNN agreement is crucial for your cooperation with Chinese manufacturers. It includes non-use, non-disclosure and non-circumvention parts to provide an overall protection to your confidential information and products. An effective agreement is an essential part for your business to succeed. In our next article on this subject, we’ll elaborate on how to draft an effective NNN agreement. Do you need advice on this topic? Please contact Joost Vrancken Peeters on +31 620210657 or [email protected] or Shangjing Zhao on [email protected]
Ye Yu 1
Ye Yu
Director Asia Desk
Protect your trade secrets in China: an improvement!
On September 4, 2020, China’s State Administration for Market Regulation released the Draft Provisions on the Protection of Trade Secrets in order to strengthen the protection of trade secrets, stop the infringement of trade secrets, encourage research and development and innovation, and maintain the market order of fair competition. And, as of September 12, 2020, the Provisions on Several Issues Concerning the Application of Law in Trial of Civil Cases of Infringement (Theft) of Trade Secrets (“Provisions”) published by the Supreme People’s Court of China has taken effect, which has strong practicality and provides clear guidance for the companies concerning trade secret protection. What are trade secrets? There is no uniform law for protecting trade secrets in China, so the definition of “trade secrets” slightly varies in laws, regulations and judicial interpretations. Under the laws mentioned above, a trade secret is technical, operational, or other commercial information unknown to the public, which is of commercial value for the ‘right’ holder of that information and who has taken corresponding confidentiality measures. How to protect trade secrets? 1. Design a compliance management framework for the protection of the trade secrets of your company. If appropriate measures are not taken, the confidentiality of relevant information will be easily lost and its value will be damaged. Therefore, we would suggest if you have a company in China, you should incorporate the protection of trade secrets into your daily compliance work. By studying the definition of “trade secrets” in laws, regulations and judicial interpretations, and combining with the characteristics of your products, formulas, processes, sales channels, customer networks, and other business characteristics of your company. Based on those considerations, designing a compliance management framework is the first step. 2.Article 6 of the Provisions provides a practical guidance on confidentiality measures for a company, including: sign a confidentiality agreement or stipulate confidentiality obligations in the agreement; put forward confidentiality requirements for employees, former employees, suppliers, customers and visitors who can contact and obtain trade secrets by means of articles of association, training, rules, and regulations, and written notification; restrict visitors or conduct differentiated management on confidential factories, and other production and operation places; distinguish and manage trade secrets and their carriers by means of marking, classifying, isolating, encrypting, sealing up and limiting the range of personnel who can be contacted or obtained; prohibit or restrict the use, access, storage, and copying of computer equipment, electronic equipment, network equipment, storage equipment and software that can contact and obtain trade secrets; require employees who have left your service to register, return, clear, and destroy the business secrets and their carriers contacted or obtained, and continue to undertake the confidentiality obligations. The more reason to protect In the case of trade secret infringement, the Chinese courts would also consider whether the owner of the trade secrets has taken reasonable protection measures corresponding to the commercial value of its specific trade secret. Therefore, it is advisable that companies should take appropriate confidentiality measures according to different security levels to ensure that those measures are in line with the commercial value of trade secrets.
Deciding your China Structure
There are several ways to structure your investment in China. While the different options might seem straightforward at first glance, setting up a China presence is not a step that should be taken lightly. Apart from the fact that procedures to set up a company are more complicated and take generally more time than in the Europe, a lot of factors need to be considered in order to structure your investment in the best way possible. Several issues from both business, legal, financial and tax perspectives need to be addressed. And, if the wrong decisions are made in the beginning it might be difficult or costly to correct them afterwards. Changes in business scope or structure will often be subject to lengthy approval procedures once the company is set up. In this article our specialised Asia desk would like to briefly introduce the possible entities that can be set up by foreign companies in China, as well as explain the most common mistakes made by foreign companies in the process of investing in China. 1. Legal Entities in China. There are several legal entities in China which can be used by foreign companies in China, each with their pros and cons. We list these legal entities to give you a general introduction about the possibilities when setting up a business Representative Office (RO) Representative Offices can be established by foreign companies for engaging in business liaison activities, quality control, promotion, market research, technology exchange and some other permitted activities in China. RO’s are considered the easiest and cheapest solution to get a presence in China, taking approximately 20 days to register from the date of application. There are no minimum capital contribution requirements for the establishment of the RO. However permitted activities are limited. RO’s are prohibited from direct revenue earning business activities, such as signing sales contracts, receiving payments or issuing invoices. The RO is not allowed to hire personnel directly but must do so through a third-party HR service provider. Since January 2010, legislative changes affecting ROs have caused an increase in applicable taxes and introduced annual reporting duties. There are now stringent penalties imposed on RO’s whose activities are deemed to fall out of the allowed scope. While the fundamental characteristics of ROs remain unchanged, they may no longer be the ideal option for many companies. Wholly Foreign Owned Enterprise (WFOE) A wholly foreign owned enterprise (WFOE) is a limited liability company. All the directors of the WFOE can have foreign nationality and reside outside China. It normally takes 90 days for the relevant authorities to approve the establishment of a WFOE. The minimum registered capital requirement is at least RMB 30,000 but in reality this amount depends on local policies and scope and industry and can be considerably higher. A WFOE can directly trade, manufacture, distribute or deliver goods and services in China. There are different kind of WFOE’s such as Manufacturing and Consulting WFOE. Another special kind of WFOE is de Foreign Invested Commercial Enterprise, a specialized structure for trading, distribution and retail. Joint Venture (JV) A Joint Venture is a business arrangement between two or more companies, by which the participants create a new business entity or an official contractual relationship, sharing investment and operation expenses, management responsibilities, and profits and losses. Foreign investment companies could establish a Joint Venture with a Chinese partner, under two different Joint Venture structures: A Joint Venture could be either an Equity Joint Venture (EJV) or a Cooperative/Contractual Joint Venture (CJV). In an Equity Joint Venture (EJV), profits and losses are shared in proportion to the partners’ equity contribution. Normally it takes Chinese authorities 90 days to approve the establishment of an EJV. The equity contributed by the partner(s) is allowed to be in a form of cash, buildings, equipment, materials, intellectual property rights, and land-use rights. Equity in the form of labour is not allowed. A minimum of 25% capital contribution of the foreign partner(s) is required while there is no minimum capital contribution requirement for the Chinese partner(s). During the life of the joint venture contract, partner(s) are restricted from withdrawing registered capital. They must first receive the approval of relevant Chinese authorities before they can transfer any share holdings. There’s no minimum foreign contribution requirement in a Cooperative Joint Venture/Contractual Joint Venture (CJV). Profits and losses in a CJV are shared according to the negotiated terms of the contract, which allows a more flexible schedule for investment return in cases where one investor provides cash while the other party’s investment is primarily in kind. Normally it takes the relevant Chinese authorities 45 days to approve a CJV. The duration of a CJV is subject to the contractual agreement covering the venture and entered into by both partners. Foreign-invested Partnerships (FIP) Companies and individuals are now permitted, either amongst themselves or in partnership with domestic individuals or entities, to directly establish foreign invested partnerships (FIP) in China. A FIP is not an independent legal entity. It normally takes 20 days for a FIP to finish registration. The contribution into a FIP is flexible and can be in the form of cash and in-kind contributions (even labour services). The legal vehicle of a FIP is new to foreign investors and the relevant regulations are not yet completely worked out. However, the FIP does have its own advantages and a flexibility which could be another good option for some foreign businessmen to start business in China. 2. Investing in China through Hong Kong Sometimes it might be wise to structure your China investments through a Hong Kong company. There are several reasons why this might be beneficial: Agreements etc. will be governed by Hong Kong law, which might be preferable over Chinese law and provide additional protection for the foreign investor. It might ease the process of setting up the company as local officials in China will usually be accustomed to Hong Kong documents, while not necessarily (especially in more rural areas) with documents from other countries. A Hong Kong structure might provide tax benefits due to lower taxes and favorable tax-treaties between China and Hong Kong. Corporate restructuring in Hong Kong is a much easier process then in China where complicated and time-consuming procedures are necessary to do for example share transfers or otherwise change the scope or structure of an investment. In case of a Joint Venture, it might be best to set up a Joint Venture with a Chinese company in Hong Kong as this will make any changes to the JV easier. On the other side, setting up and maintaining a Hong Kong Ltd costs money, and for the tax benefits it is usually necessary to have actual substance and activities in Hong Kong to utilize them. Therefore, pros and cons of such a set-up should be considered in every individual case. 3. Common mistakes and pitfalls Many factors must be taken in to consideration when investing in China, and often mistakes made in the beginning when setting up your China structure might be difficult or costly to correct later. Many companies make the mistake of jumping in too fast. Long term planning has to be taken into account when setting up your structure. For example, depending on what you would like to do with your profits, -re-invest in China or repatriate profits to the head office- a different kind of structure might be chosen. An often-made mistake is starting the company with a registered capital that is too low to cover operating expenses. When additional capital is needed from the mother company, this will be deemed as income and will be taxed accordingly, making this a potentially costly mistake. Also, there is more to doing business in China than just setting up a legal entity. Before starting in China make sure your planned business activities are not prohibited or restricted, and make sure that there are no restrictions on certain materials you would need for your production in China. Depending on your business there might be a variety of required permits, some which might take a long time to get. While Joint Ventures might be a very good way to enter the Chinese market, here especially caution is necessary. Not all Joint Ventures last forever, and while they might start with the best of intentions, they might end in dispute. An exit strategy is therefore of the utmost importance. Make sure you know everything about your partner by doing a proper due diligence research. Make sure that the land and equipment that is brought in the Joint Venture by the Chinese partner is actually owned by them and ensuring your investment and intellectual property in properly protected in the agreements. 4. The Key to Success In short, a proper preparation is the key to success. There are many consultants and law firms both in China and in Europe who could help you set up a company in China, but you will risk ending up not with the solutions that you really need. Joost Vrancken Peeters has years of experience helping Dutch companies and individuals doing business and investing in China. We will not only help you set up a China presence, but by asking the right questions we will work together with you too come to the best strategy as well as structure. We will help you to protect your interests and ensure you enter the Chinese market minimizing both risks and costs. More information In need for more information? Do not hesitate to contact our specialised Asia desk.