Hong Kong: Toto, We’re Not in Mainland China anymore

China and Hong Kong legal systems
For professional regulation purposes, think of Hong Kong as a various jurisdiction from the Mainland

In an hard work to cut down the problem of manufacturing in Mainland China, several international businesses come to a decision not to go immediate. They instead make use of middleman businesses that act as the sellers in the transaction. These intermediaries offer with the buyer, but the messy business of manufacturing is performed in the PRC. These middleman businesses are normally located in Hong Kong. We have seen that most international consumers do not understand the challenges involved in working with Hong Kong businesses and this also normally triggers them to unknowingly consider on important challenges. One particular of those important challenges occurs in the area of intellectual home defense.

From the standpoint of authorized jurisdiction, Hong Kong and the PRC are two completely various countries. The most essential consequence of this authorized distinction is that international financial investment in the PRC by Hong Kong businesses and persons is limited in the exact way it is limited for American and European and Australian businesses. This indicates Hong Kong businesses cannot function immediately in the PRC. To function lawfully in the PRC, a Hong Kong firm have to type a WFOE or an Equity Joint Enterprise, in the exact way as for any other international entity. See How to Type a WFOE in China, Part 3: What is Hong Kong Received to Do With It?

What does this mean in the manufacturing location? The international buyer enters that enters into a deal with a Hong Kong firm is (999 situations out of 1000) not getting into into a deal with the genuine manufacturer simply because the genuine manufacturer is a firm located in the PRC. The genuine manufacturer is a authorized entity completely independent from the Hong Kong firm. To make this apparent, in the manufacturing contracts drafted by the China lawyers at my agency, we get in touch with the Hong Kong firm the “Seller” and the PRC manufacturer the “Factory.”

Now look at what all of this indicates from the standpoint of intellectual home defense. The international buyer provides its proprietary style and design to the Hong Kong vendor. Intricate molds embodying the proprietary style and design are fabricated. Considerable engineering and production style and design get the job done is performed to acquire a working item prototype. But, none of this get the job done is performed by the Hong Kong-dependent Vendor simply because all of this get the job done is remaining performed by the factory in the PRC. This get the job done is practically normally remaining performed by entities mysterious to the buyer and with which the buyer has no contractual marriage. The molds and tooling and item prototypes are physically located in the PRC.

The consequence is that the buyer has supplied away its most useful intellectual home to individuals and entities it equally does not know and cannot handle. So what occurs if anything goes completely wrong? What occurs if the buyer wishes access to the molds to transfer production to a further factory. What occurs if the buyer learns the molds are remaining used to make “knock off” solutions? What occurs if the buyer learns the item prototype is remaining used in the PRC to manufacture a competing item? These are not trivial issues as these points take place each single day in the PRC. The response is that the buyer has no recourse at all in the PRC. The only authorized motion the buyer can consider is versus the Vendor in Hong Kong. In the intellectual home area, this indicates the only issue the buyer can do is to sue for damages. The buyer can consider no immediate motion versus the infringer nor does it usually have any great authorized foundation to prevent the infringement happening in the PRC.

Now incorporate to this that in most scenarios (at minimum most occasions — by far — the place businesses have retained my regulation agency to investigate the above kind of situations), the Hong Kong Vendor has no actual belongings. The Vendor is no extra than a tiny office environment with a phone and pc and at times a tiny gross sales workers. All the effective belongings are located in the PRC, in the palms of businesses and persons with no immediate authorized marriage to the Hong Kong entity. Funds received by the Hong Kong entity is consistently swept into independent accounts with no immediate marriage to the Hong Kong entity. In litigation phrases, the Hong Kong entity is judgement proof.

What this all indicates is that the international buyer has effectively supplied away its intellectual home. The intellectual home is in the palms of a firm in China and nothing at all can be performed in China if the intellectual home is misused in some way. For bodily merchandise like molds, tooling, and prototypes, the merchandise are absent eternally. The PRC entity may refuse to return the merchandise. The PRC entity may pass the merchandise on to its subcontractors, who then more pass the merchandise on to a subcontractor or family close friend. In the end, it is not unusual to locate that no one is familiar with the top fate of the merchandise. But what is identified is that the merchandise are located in the PRC and the buyer has no authorized recourse in the PRC. The buyer has nothing at all extra than a assert for monetary damages versus a Hong Kong entity most likely to be judgment proof.

A international buyer that entirely understands the challenges may make the business determination to incur the risk. However, in our possess get the job done in Asia, we fairly much by no means encounter U.S. or European consumers that understand the scenario. Most merely believe that when they deal with a Hong Kong entity, their authorized scenario is no various than if they were being contracting with a PRC entity. They have already resolved to incur the risk of manufacturing in the PRC and they see working with a Hong Kong entity as a way to cut down that risk, not boost it. They believe the Hong Kong entity will be much easier to converse with and that simply because Hong Kong’s authorized technique is greater, they and their IP will be greater shielded this way.

But in truth, the international buyer has not lessened its risk. It has instead significantly increased it. If the boost in risk is meant, that is section of the professional calculation. But when the boost in risk is dependent on a basically incorrect knowing of the regulation and the details, it is nothing at all extra than a miscalculation.

For extra on why it is essential to distinguish Mainland China from Hong Kong, check out the adhering to:

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