Enforcing non competition obligations against natural persons in China? Plan ahead.

 

 

Randall Lewis

 

4 October, 2012

 

 

In recent postings, I openly advocated that all foreign investors should (where possible) choose a non China dispute resolution mechanism. 
 
A significant area of risk is ensuring that the key people do not breach their contractual non competition (this loosely includes confidentiality / fiduciary obligations etc…) obligations. 
 
Due to uncertainty, risk and an element of pernicious games in onshore dispute resolution you will certainly not want to attempt to enforce a non competition obligation in China against a natural person. However, any labor contract stipulating arbitration of disputes outside of China, cannot be arbitrated outside of China. 
 
Clearly, disputes over the terms and conditions of the labor contracts must be resolved in China (either through mandated labor arbitration [not discussed here] or in a PRC forum). In my experience, if you are concerned about non competition matters, the greater risk is not with regular employees, but with very senior management such as your executive director (or Chairman/CEO) whom are sometimes financially positioned to cause a large impact to your business if they decide to start their own competing operation. 
 
Broadly, in a pure labor relationship, an employing unit ("employer") and a laborer (the meaning of which is which is equivalent to “employee”) maintain the organization and leadership relationship as well as the relationship of the managing party and the managed party. As a party to the labor relationship, laborers are characterized as subordinate by nature. This means that: (1) working hours and compensation are controlled/managed; (2) the employing units direct and instruct the laborers via enterprise management rules and by means of stipulating the working hours, working methods and working places etc.; (3) the employing units have the right to impose punishment on laborers as to disciplinary matters (I am summarizing for brevity here). 
 
To design an agreement for a key person in your PRC entity (executive director/CEO), you will want to create a services agreement rather than an employment agreement. The contracting party to the services agreement should not be the specific PRC joint venture or PRC entity, the contracting party should be the investors into that entity (ex, direct agreement with X Canadian company to act as its agent in relation to PRC company XYZ) and compensation should ideally be in the form of a lump annual sum and/or include some incentive mechanism based upon the financial performance of the PRC entities. While your new executive director will be ultimately responsible for communicating to your company on his/her activities, there is a strong argument that an employment relationship has not been created such that you may choose a dispute resolution mechanism outside of the PRC (ie, arbitration in Singapore or Hong Kong for example). 
 
I am sure there will be people criticizing this posting. I would respond in advance that neither the PRC Labor Law nor judicial interpretation have expressly defined the meaning of the labor relationship, the laborers and the employing units. Scholars are of the opinion that the term “laborers” may be defined in broad and narrow senses. Although a party offers labor services to a party, there is no subordination between the two parties. That is to say, although the party offering labor services is to a certain extent required to accept the instructions or requests given by the party receiving the services, the former party is essentially independent from the latter party when offering its labor services on its own. These relationships do not fall within the scope of the Labor Law. They should fall within the scope of the PRC Civil Law. Is this a bullet proof? No. But in a dispute you will at least be on more solid ground to enforce your rights and encourage someone to sit at a bargaining table. Specifically explore this issue with specialized legal counsel.
 
Randall Lewis is Associate General Counsel, Asia Pacific at Danone. He is based in China. 

 

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