It is commonly understood that attorneys’ fees are not recoverable losses under the laws of China (Hong Kong, Macao, and Taiwan excluded for the purpose of this article) in most types of legal disputes, with a handful of exceptions such as intellectual property and labor disputes. This rule is well-established in practice and applied in numerous cases heard by the Chinese courts, however, at the theoretical level, it is continuously debated among scholars and practitioners.

When it comes to the provision governing the calculation of damages in the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), Article 74 of CISG is silent about whether litigation expenses, including attorneys’ fees, are recoverable in a dispute where CISG is applied. This has led to various interpretations by courts in different jurisdictions. By studying the case reports compiled by Chinese courts that reveal courts’ perspectives on attorneys’ fees under CISG, this article aims to reveal the prevailing opinions held by Chinese courts regarding this matter and to identify potential differences between relevant rules under CISG and Chinese laws, thereby providing predictability for future cases.

To avoid any doubt, the attorneys’ fees discussed herein solely refer to the costs incurred by a claimant within a specific court case and exclude any expenses arising from legal proceedings between the claimant and any third parties, such as its downstream buyers, local authorities, etc.

Interpretations of Article 74 of CISG

On the one hand, it is not surprising that advocates for classifying attorneys’ fees as recoverable losses primarily base their argument on the text of Article 74 of CISG and the principle of protecting bona fide parties. The rationale behind this argument is that attorneys’ fees are actual losses incurred by the parties, as evidenced by case reports from courts in Germany, Japan, and other jurisdictions.[1]

On the other hand, based on the principle of equality, the CISG Advisory Council takes a different stance in Opinion No. 6, maintaining that “although Article 74’s principle of full compensation appears to support the view that litigation expenses should be recoverable in order to make the aggrieved party whole, such an interpretation would be contrary to the principle of equality between buyers and sellers as expressed in Articles 45 and 61.” The underlying rationale is that “if legal expenses were awarded as damages under Article 74, an anomaly would result where only a successful claimant would be able to recover litigation expenses,” and therefore, this will give the prevailing claimants or respondents an unfair advantage.[2] However, the CISG Advisory Council is a private initiative, and as such, its opinions are not legally binding on the CISG contracting states.

Similar viewpoints are found in the case reports of some courts outside China. In some cases, certain courts rule that attorneys’ fees are not recoverable losses under Article 74, but a district court may exercise its inherent authority to penalize a litigant or the litigant’s lawyers for engaging in bad faith litigation practices.[3] In this sense, awarding attorneys’ fees as damages is an issue governed by domestic laws rather than CISG.

Case Study on Chinese Court Practices

Based on a study of accessible case reports, Chinese courts’ practices on whether an aggrieved party is entitled to recover attorneys’ fees as litigation costs under CISG vary. However, a clear pattern emerges: most Chinese courts dismiss such claims, suggesting a prevailing opinion against awarding attorneys’ fees as damages. This tendency has become more pronounced in recent years.

Reasons for Denial of Attorneys’ Fees

The grounds on which the courts deny the recovery of attorneys’ fees may vary, but can be broadly categorized as follows:

However, it is noteworthy that in some cases, courts may deny attorneys’ fees on one of the grounds listed above while granting awards of notarization and translation fees as litigation costs, showing certain inconsistencies in the underlying logics behind such awards.

Reasons for Awards of Attorneys’ Fees

Although less common and less recent, there are some case reports that support the recovery of attorneys’ fees under CISG. The rationale behind the case reports emphasizes the goal of protecting the rights of non-breaching parties, without touching upon the potential controversies surrounding the interpretation and scope of Article 74 of CISG.

The reasonings of awarding attorneys’ fees as reasonable litigation costs include:

By assessing the number of accessible case reports supporting each side, we can see that the Chinese courts tend to deny the recovery of attorneys’ fees and are typically inclined to adhere to previous case reports employing the same reasoning. However, we are under the impression that the courts’ tendency to dismiss the claims for recovery of attorneys’ fees is largely dictated by courts’ practices under Chinese laws, since these case reports seldom touch upon the interpretation of Article 74 of CISG and a significant portion of them reach their conclusions without providing a detailed rationale.

Trends of Future Chinese Court Practices

As indicated above, given the current court practices in China, the likelihood of claiming attorneys’ fees as recoverable losses under CISG before Chinese courts is relatively low. This trend is expected to persist in the near future. 

A case report recently published in the Database of Cases of People’s Republic Courts (in Chinese: 人民法院案例库) states that the CISG Advisory Council Opinions could be taken as a reference when interpreting the articles of CISG,[4] further bolstering our stance on the trend. As the case reports in this Database are selected by the Supreme People’s Court of China, this development, to a certain extent, indicates the Supreme Court’s inclination towards considering such opinions. This recent case report provides Chinese courts a legal ground to interpret Article 74 of CISG along with the CISG Advisory Council Opinion No. 6, with the latter arguing against the recovery of attorneys’ fees. This case report, together with the CISG Advisory Council Opinion No. 6, may provide guidance for future practices of Chinese courts.

Despite the above-mentioned developments, it remains possible for claimants to argue for recovery of attorneys’ fees, given that the CISG Advisory Council Opinion No.6 is not binding and there have been no case reports directly addressing the issue. To recover attorneys’ fees, it is imperative to demonstrate the bad faith of the respondent, the significant losses incurred by the claimant due to the breach, the efforts made by the claimant for resolving the dispute, and the work performed by the attorneys.

Concluding Remarks

In contrast to the practices of some other jurisdictions, Chinese courts generally hold a negative attitude towards treating attorneys’ fees as recoverable losses. Although attorneys’ fees may not constitute a substantial portion of the claims in a dispute, they in some cases can be an important consideration for a claimant to decide whether to pursue legal action. Consequently, we find it of great importance to understand the stance of Chinese courts on this issue, which will greatly facilitate our efforts of protecting our clients’ interests.

[Note] 

[1] See a summary on the website of CISG Online: https://cisg-online.org/cisg-article-by-article/part-3/art.-74-cisg/loss-by-category-of-loss/attorneys-fees.

[2] CISG-AC Opinion No 6, Calculation of Damages under CISG Article 74. Rapporteur: Professor John Y. Gotanda, Villanova University School of Law, Villanova, Pennsylvania, USA. Available at: https://cisgac.com/opinions/cisgac-opinion-no-6/.

[3] Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Comp., U.S. Court of Appeals (7th Circuit), November 19, 2002, available at: https://cisg-online.org/search-for-cases?caseId=6625.

[4] A German Medical Technology Company v. a Ningbo Company over Contract of International Sales of Goods, Zhejiang High Court, Case No. (2022) Zhejiang Civil Final No. 1205, February 16, 2023. The reference number in the Database of Cases of People’s Republic Courts is 2024-10-2-084-001.

On April 12, 2024, China’s three major stock markets, the Shenzhen Stock Exchange (SZSE), the Shanghai Stock Exchange (SSE), and the Beijing Stock Exchange (BSE), issued their respective Guidelines on Self-Regulation of Listed Companies – Sustainability Report (Trial) (collectively, “Sustainability Report Guidelines”).  

The Sustainability Report Guidelines, effective on May 1, 2024, are a milestone as they mandate the first-ever disclosure requirements for listed companies about information related to environmental, social, and governance (“ESG”) issues, two years after the China Securities Regulatory Commission (“CSRC”) stated in 2022 its intention to establish corporate sustainability disclosure requirements to support the sustainable development of listed companies. 

This article aims to introduce the scope of disclosure in the Sustainability Report Guidelines, highlight certain reporting requirements, and set out their implications for foreign investors.

Scope of Disclosure

As mentioned in our previous article, ESG in China – Opportunities and Challenges for Foreign Investors, much of the emphasis on ESG in China has been placed on ESG disclosure in recent years, and stock exchanges in China have been particularly active in developing an ESG disclosure regime in this regard.

Prior to the promulgation of the Sustainability Report Guidelines, China only imposed compulsory ESG disclosure obligations on certain companies, typically “dirty” manufacturing companies and those that had previously violated environmental or labor regulations. For other companies, ESG disclosure is generally on a voluntary basis.

The Sustainability Report Guidelines, however, impose clear and mandatory disclosure requirements for specific listed companies.  The scope of mandatory disclosures of different stock exchanges is listed in detail in the table below:

It is noteworthy that, in contrast with the SZSE and the SSE, the BSE has decided to only require voluntary disclosure for its listed companies.  This may be due to the fact that the BSE primarily targets small and medium-sized enterprises, which are generally still at the stage of development and may have limited disclosure capabilities.

Overall, although only approximately 500 companies fall within the scope of mandatory disclosure under the Sustainability Report Guidelines, the new requirements help further standardize the ESG reporting practices among Chinese companies, which will better inform foreign investors of the actions taken by companies to address and manage the impacts, risks, and opportunities related to sustainable development.

Highlights of Reporting Requirements

An overarching principle of the Sustainability Report Guidelines is the double materiality approach (“Double Materiality Principle”) on sustainability disclosure topics. The Double Materiality Principle requires regulated companies to identify whether each topic is expected to have a major impact on their business model, operations, development strategy, financial position, operating results, cash flows, financing methods, and costs over the short, medium, and long term (financial materiality) and whether a company’s performance in related issues has a material impact on the economy, society, and environment (impact materiality).

Specifically, under the Sustainability Report Guidelines, regulated companies will be obliged to disclose information across a myriad of ESG-related issues, including climate change (Articles 21 – 28), environmental compliance management (Article 33), data security and customer privacy protection (Article 48), anti-commercial bribery and anti-corruption (Article 55), anti-unfair competition (Article 56), etc. This article will highlight some of these issues below.

Climate Change

In recent years, China has been actively addressing climate change issues and making significant progress in meeting its national strategy of the “Dual Carbon” goal in 2020, which aims to peak carbon emissions before 2030 and achieve carbon neutrality by 2060. In particular, there has been increasing regulatory attention to carbon trading in China.  The Interim Regulations on Administration of Carbon Emissions Trading (《碳排放权交易管理暂行条例》) promulgated by the State Council and coming into force this May set out the general regulatory legal framework over carbon emissions allowance in the carbon trading market in China.

Local governments have also been active in developing the carbon trading regime by releasing local policies and regulations. For example, in August 2023, the Department of Ecology and Environment of Guangdong Province released the Implementation Plan of Guangdong Emissions Trading to Support Peaking Carbon Emissions and Achieving Carbon Neutrality (2023-2030) (《广东省碳交易支持碳达峰碳中和实施方案（2023-2030年）》), which aims to effectively give full play to the role of the carbon trading market in Guangdong Province.

The Sustainability Report Guidelines further specify the required disclosure items for listed companies that participate in carbon trading. For example, Article 24 encourages entities to entrust third-party agencies to disclose and verify the company’s greenhouse gas (GHG) emissions data, as well as other related data. In addition, if the relevant entity participates in carbon trading, it shall disclose whether such trading has been settled within the reporting period and whether any rectification or investigation imposed by the relevant regulatory authorities is involved.

Data Security and Customer Privacy Protection

In recent years, China has introduced several landmark data protection laws and regulations to establish a comprehensive regulatory framework for data security and data protection.

The importance of sound data security and privacy policies for enterprises is further emphasized in recent ESG-specific legislation. Notably, Article 48 of the Sustainability Report Guidelines stipulates that the relevant entity shall disclose the basic information of data security and customer privacy protection during the reporting period, including but not limited to: 

1. establishment and operation of the data security management system, as well as specific measures and certification obtained (if any);
2. details of the data security incidents that occurred during the reporting period, including the impacts, the amounts involved, the corrective measures taken, and the corresponding effects (if any);
3. information on the construction and operation of the customer privacy protection system; and
4. details of events related to the leakage of the privacy of the customers that occurred during the reporting period, including the impacts, the amount involved, the corrective measures taken, and the corresponding effects (if any).

The Sustainability Report Guidelines further demonstrate that data security and privacy protection are essential aspects of corporate sustainability and an integral part of ESG disclosures. Given the nature of the data-driven business of many companies nowadays, companies need to be more aware than ever of the need to strictly follow and comply with privacy laws and standards in China to avoid any breach of data protection laws and corresponding penalties by Chinese regulatory authorities.

Anti-Unfair Competition

It is a worldwide issue that companies may exaggerate their ESG performance and contribution through incomplete or fabricated ESG disclosures by, for example, engaging in “greenwashing” to attract investors. Greenwashing is banned in many jurisdictions to better protect investors and consumers.

China has not enacted a specialized law to regulate greenwashing, but it regulates such misconduct through specific bodies of laws, including the Advertising Law (《广告法》), the Anti-Unfair Competition Law (《反不正当竞争法》), the Law on the Protection of Rights and Interests of Consumers (《消费者权益保护法》), etc.

Article 56 of the Sustainability Report Guidelines stipulates that the regulated entity shall disclose the specific information of its anti-unfair competition work during the reporting period, including but not limited to the specific measures for preventing unfair competition (such as false advertising, monopolies, trade secret infringements, etc.).

The requirements under the Sustainability Report Guidelines add another layer of protection for investors by requiring companies to disclose ESG-related information objectively and truthfully and by emphasizing that the companies shall not disclose information relating to sustainable development selectively, and shall not mislead investors and other interested parties, no matter whether such disclosures are mandated or voluntary.

Concluding Remarks

In sum, as an effort to join other major markets in moving towards greater transparency and mandatory sustainability reporting requirements for companies, the Chinese government is expected to take further strides towards strengthening environmental regulations, addressing social issues, and improving corporate governance by imposing compulsory ESG disclosure requirements on a larger scope of companies.

As stipulated in the revised Company Law (《公司法》), which is to take effect from this July, companies shall take into full consideration the interests of their employees, consumers, and other stakeholders, as well as social and public interests, including the protection of the environment, and shall assume social responsibilities when engaging in business operations. The revised Company Law clearly marks a pioneering effort in establishing ESG-related obligations for all companies, even though the requirements are only high-level at this stage. 

As we are still expecting further implementation rules to be promulgated to provide further guidance for companies in this regard, it is crucial for foreign investors to keep an eye on the Chinese markets to stay up-to-date on the country’s ESG disclosure requirements, as well as other recognized international standards, such as the International Financial Reporting Standards (“IFRS”) and the Sustainability Disclosure Standards developed by the International Sustainability Standards Board (“ISSB”), which, although not explicitly referred to in the Sustainability Report Guidelines, pose substantial impacts on the measurements and methods ultimately adopted therein.

On April 22, 2024, the People’s Bank of China (“PBOC”) published on its website the draft version of the Implementation Rules for the Regulation on Supervision and Administration of Non-bank Payment Institutions (《非银行支付机构监督管理条例实施细则征求意见稿》) (“Draft Rules”) to solicit public comments. The Draft Rules is the first implementation rules for the Regulation on Supervision and Administration of Non-bank Payment Institutions (《非银行支付机构监督管理条例》) (“New Regulation”) which came into effect on May 1, 2024. This article aims to provide an overview of the key changes introduced by the Draft Rules. 

1. Business Types

According to the New Regulation, China-based payment services providers (“PSPs”) and all foreign PSPs that provide cross-border payment services to Chinese users are required to obtain Payment Services Permits (支付业务许可证) issued by PBOC. Under the legal framework prior to the implementation of the New Regulation, a Payment Services Permit may cover one or more of the following business types:

• Internet Payment (互联网支付);
• Mobile Phone Payment (移动电话支付);
• Prepaid Card Issuance and Acceptance (预付卡发行与受理) or Prepaid Card Acceptance (预付卡受理);
• Bankcard Acquiring Business (银行卡收单); and
• Digital TV Payment (数字电视支付).

Due to the rapid technology developments which have revolutionized people’s way of life, the categorization system above has grown increasingly inadequate in accurately classifying contemporary payment services. The New Regulation therefore introduced a simplified categorization for issuing the Payment Services Permits, featuring only two categories, namely, Stored Value Account Operation (储值账户运营) and Payment Processing Operation (支付交易处理). Article 57 of the Draft Rules outlines how the existing business types may be aligned with the New Regulation’s categorization, as shown below:

2. Registered Capital

Prior to the implementation of the New Regulation, PSPs were generally subject to a uniform CNY 100 million minimum registered capital requirement, regardless of their different scopes of business. In the New Regulation, however, PBOC is given the leeway to impose different thresholds of registered capital to fit different business types. The Draft Rules now takes a step further and proposes to clarify the calculation method for such capital thresholds, as summarized below:

Minimum Registered Capital = Base Registered Capital + Added Capital

Where the Base Registered Capital is CNY 100 million, and the Added Capital is calculated as below:

It should be noted that if a PSP fits descriptions in categories 1), 3), and/or 5) above, then its applicable Added Capital should be the sum of the amounts specified in all applicable categories.

3. Net Asset to Customer Reserve Fund Balance Ratio

The New Regulation also introduces a new principle that PSPs should have sufficient net assets to operate. Article 61 of the Draft Rules proposes that the minimum net assets of the PSP should satisfy certain thresholds calculated based on the daily average of the balance of customer reserve funds:

According to Article 78 of the Draft Rules, DAB shall be calculated as the mean of the customer reserve fund balances recorded at the end of each day throughout the most recent calendar year (January 1 to December 31). 

4. Transitional Period for Existing PSPs

For PSPs licensed to operate before the effective date of the New Regulation, there could be a risk if they do not currently meet the minimum registered capital requirements and minimum net assets requirements proposed in the Draft Rules. According to Article 76 of the Draft Rules, existing PSPs shall have until the expiry of their current payment business license (i.e., until the next license renewal) to meet the qualification requirements and net asset to customer reserve fund balance ratio requirements (as discussed above). For a PSP whose license will expire within 12 months, the transitional period will be extended to 12 months.

5. Missing Clarity for Foreign-based PSPs

The New Regulation has drawn a lot of attention from foreign-based PSPs largely due to the requirements under the second paragraph of Article 2, which requires any non-bank institution outside China that intends to provide cross-border payment services to domestic users to establish a non-bank payment institution in China.

In current practice, many foreign-based PSPs provide cross-border payment services and foreign exchange settlement to their PRC customers through their Chinese partners who possess a payment services license and qualification to process cross-border RMB/foreign currency transactions. While both the foreign-based PSPs and their local partners are eagerly waiting for the other shoe to drop – if their business model can continue, or the foreign-based PSPs must conduct business via a Chinese PSP in its own name, both the New Regulation and the Draft Rules are still silent on this issue.

6. Concluding Remarks

The Draft Rules has provided much-needed clarification on certain issues regarding the transition from the existing legal framework to the New Regulation, such as the categorization of business types, registered capital, net assets, and the transitional period.

On the other hand, the Draft Rules remains silent on certain vague areas under the New Regulation, such as the definition of the cross-border payment services provided by foreign non-bank payment institutions. Please note that the Draft Rules is still in public consultation phase. As such, it is important to recognize that the final versions of the implementation rules may be different from the current draft. We will closely monitor further legislative actions.

On December 17, 2023, the State Council of China promulgated the Regulations on Supervision and Administration of Non-bank Payment Institutions (in Chinese: 非银行支付机构监督管理条例) (“New Regulations”). The formal promulgation of the New Regulations concludes the three years of public reviews and discussions over the draft for comment version of the Regulations on Supervision and Administration of Non-bank Payment Institutions which was promulgated on January 20, 2021 (“Draft for Comments”). This article seeks to provide a brief overview on the key points introduced by the New Regulations.

Reclassification of Payment Business

The current prevailing legal framework in China on the regulation of payment services was established around 2010, with the main regulation being the Administrative Measures of People’s Bank of China on Payment Services Provided by Non-financial Institutions (in Chinese: 非金融机构支付服务管理办法) (“PBoC Measures”).

The PBoC Measures regulates the payment business in three categories:

With the development of various recent technologies, especially QR code payment services, the boundaries between online payment and other categories of payment services are very much blurred. As a result, the market sometimes finds it difficult to determine the applicable regulation category for certain products.

The New Regulations simplifies the categorization. Based on whether the payer’s prepaid funds can be received, payment business is divided into two types, namely, stored-value account operation and payment transaction processing. 

It is noteworthy that the two categories system under the New Regulations is not a “natural transition” from the PBoC Measures system. As such, after the New Regulations take effect on May 1, 2024, how the currently existing payment licenses under each of the three categories operate under the new two-category system, is yet to be clarified by the authorities.

Services to Corporate Customers

In the Draft for Comments, it was proposed that there should be restrictions on the opening of accounts for corporate users (“2B Accounts”). The legislators were concerned that, compared with commercial banks, payment institutions very often have weaker KYC (a.k.a. know your customers) and KYB (a.k.a. know your business) systems. In a few recent case reports, it is also indeed true that certain payment institutions provided payment services to corporate accounts which are related to criminal activities such as telephone fraud, etc. due to failure to verify transaction parties and relevant information.

The New Regulations replaces the restriction by a general proposal, which recommends that “the government shall encourage non-bank payment institutions to cooperate with commercial banks, in order to provide payment services for institutional users through bank accounts”.

It is our understanding that the legislation has moved away from the restriction of 2B business for payment institutions, and embraces a more carefully monitored arrangement, with still room for 2B business.

Clarification on Cross-border Payment Business by Foreign Institutions

Article 2 of the New Regulations stipulates that, where a non-bank institution outside China intends to provide cross-border payment services to domestic users, it shall establish a non-bank payment institution in China pursuant to the provisions hereof, unless otherwise stipulated by the State.

For a long time, there have been no unified and explicit normative documents regarding the cross-border payment services provided by foreign payment institutions.

Based on the wording of the New Regulations, it should not be necessary for foreign institutions to maintain a licensed business presence in China if its operations are for payment transactions completely outside China, regardless of whether its customers are based in China or not.

The wording of the New Regulations also seems not to forbid the current practice in the market where foreign institutions cooperate with Chinese payment service providers to provide cross-border payment services. Article 19 of the New Regulations clearly stipulates that payment institutions providing payment services for cross-border transactions shall comply with the relevant provisions on cross-border payment, cross-border RMB business, foreign exchange management and cross-border data flow.

Considering that the PBoC issued the Administrative Measures on Cross-border Payment Services in 2021 (“Exposure Draft”) after the Regulations had established the regulatory framework of the payment industry, we believe that we can look forward to the promulgation of detailed rules on cross-border payments soon.

Stricter Requirements on Personal Information Protection

Article 32 of the New Regulations sets forth requirements relating to the protection of personal information obtained by payment institutions. In general, the New Regulations reflect the relevant requirements expressly provided in China’s Personal Information Protection Law. For example, the New Regulations emphasize the principle of legality, appropriateness, necessity and integrity in the processing of users’ information, require payment institutions to disclose the rules for processing users’ information, expressly state the purpose, methods, and scope of processing users’ information, and obtain users’ consent (unless otherwise required by laws and administrative regulations). The New Regulations also requires payment institutions not to collect users’ information unrelated to the services they provide, and not to refuse to provide services for reasons such as users’ disagreement with the processing of users’ information or withdrawal of users’ consent.

In addition, when sharing users’ information with affiliated companies, the New Regulations requires payment institutions to inform users of the name and contact details of such affiliated companies, to obtain the users’ separate consent on the content of information to be shared, as well as the purpose, duration, methods, and protection measures for the processing of information, etc. Furthermore, the New Regulations requires payment institutions to supervise their affiliated companies to ensure compliance with the laws and regulations and controllable risks. These requirements are significantly stricter than those under the Draft for Comments, and it is the first time that a financial regulatory document explicitly stipulates the sharing of users’ information by relevant financial institutions with affiliated companies.

Concluding Remarks

The New Regulations comprehensively iterates and upgrades the regulatory rules in the payment industry. With respect to the type of business, the New Regulations reclassifies the payment business into two types and makes room for payment institutions to conduct 2B business. The New Regulations explicitly provides for the supervision of cross-border business. In terms of data and systems management, the New Regulations emphasizes the independence of payment institutions’ operations and systems and provide for the protection of personal information. During a press interview on December 18, 2023, the respective responsible persons from the People’s Banks of China and Ministry of Justice introduced that the authorities next work plan will be making the rules for the transition from the PBoC Measures to the New Regulations, and further refining the administrative approvals and punishment procedures. We will continue to follow up with the latest developments.

In today’s interconnected global business environment, establishing partnerships with Chinese suppliers has become a worthy strategic move for companies worldwide. However, managing commercial relationships with Chinese suppliers can pose challenges, and among these, one often overlooked yet critical aspect lies in the registered Chinese names of the Chinese suppliers, as ignorance of such information can expose businesses to various complications. In this article, we delve into the legal risks arising in this regard and provide practical suggestions based on the laws of China. For the purpose of this article, the discussion excludes Hong Kong SAR, Macau SAR, and Taiwan Province.

Chinese Names and Their English Translations

As Chinese is the only official language in China, any company in China is officially registered with its name in Chinese only. In its daily operation, on the other hand, a company can freely use its English name for marketing and other purposes.

In our practice, we have encountered many situations where English names are misused in cross-border transactions and transaction documents. Such misuses include but are not limited to:

1) Chinese name not accurately translated – Some companies might transliterate their Chinese names into Pinyin, translate them word-for-word, or use English expressions denoting similar concepts. The practices make it challenging to accurately identify the exact company just by referring to its English name.

2) Correct English name, but registered in a jurisdiction other than the Chinese mainland – This issue frequently arises due to the common practices adopted by many trading companies based in China’s mainland to, for example, set up an offshore company in Hong Kong or another jurisdiction to avoid the complexities of foreign exchange or taxation. In those jurisdictions, registering an English name is often allowed or even preferred. Such approach per se is justifiable, but the problem is, some Chinese companies that established offshore businesses may use the English names of their offshore companies in their daily contact with their foreign counterparts and even have these foreign companies issue proforma invoices and receive payments.

3) Intentional use of false English name – The most severe offense is where the English name used by a “Chinese company” does not correspond to any registered entity in China and is purely fabricated.

Legal Risks 

Understandably, legal risks follow when it is not possible to identify a supplier in China via its name. Such legal risks will be briefly discussed below.

Identifying the Defendant

According to Chinese civil procedure laws, it is required to provide an accurate Chinese name to the court in order to initiate legal proceedings in China. Without it, the court will not be able to admit the case.

If in a lawsuit, the counterparty goes by its English name, and such name is not accurately translated, it often proves difficult to find its exact registered Chinese name. This issue is exacerbated by the fact that in practice, an English name can often refer to different entities in China.

The problem with different businesses sharing the same English name is even more evident when dealing with affiliated companies. In a recent case we handled, a company goes by Guangzhou ABC Co., Ltd. breached a sales contract with our client. Since the company did not disclose its Chinese name, we had to trace the term “ABC” and see if we can identify a Chinese company using the name. We ended up identifying four companies with similar translated names, all of which seemed to be affiliated entities.

To cut through the intricacy, we sued all four companies, as it was impossible to identify which one had direct business dealings with our client. During the hearing, one of the companies admitted to doing business with our client. However, we were wary about accepting this acknowledgment because the company in question had minimal registered capital among the four and seemed incapable of repaying the losses incurred by our client. Although the court eventually found all four companies liable with significant efforts on our part, success is not always guaranteed, and this risk must be closely monitored.

Challenges in Jurisdiction

Once a dispute arises between a foreign company and its supplier, the foreign company normally considers filing a lawsuit against the supplier in the Chinese mainland for the sake of costs and the convenience of enforcement, or simply because it is unaware of any other entity involved in the transaction besides the “Chinese company”. However, such choice of jurisdiction is frequently challenged, with the opposing party claiming that the English-named company on the transaction document is already registered in another jurisdiction, such as Hong Kong, and therefore suing the Chinese company is inappropriate.

Past cases reveal that judges tend to dismiss cases filed in China due to a lack of jurisdiction based on the above arguments. In such instances, a foreign company might find itself in a vulnerable situation since it has already incurred significant costs, such as legal fees, translation expenses, and other related expenses in China that all go down the drain due to the dismissal. In the meantime, they would have to bear additional costs to pursue legal actions in other jurisdictions.

Scam Threats

Some people employ the deceptive tactic of intentionally using false English company names to conceal their identities and engage in scams, taking advantage of unsuspecting clients. This scheme proves particularly frustrating for our clients seeking legal assistance in China, as the scams might have no connection to China at all, which is not uncommon in recent cases we dealt with, even though those companies present themselves as Chinese companies.

Therefore, foreign companies need to be vigilant if any of their Chinese counterparties refuses to disclose its registered Chinese name or provides false information. Such behaviors are highly indicative of potential scams, and in most cases, losses incurred will hardly be recovered.

Be Sure to Verify the Company Names in China-Related Transactions

As can be seen from the above, it is extremely important for a foreign company to know its Chinese counterparty’s registered Chinese name and to use it properly in a transaction involves Chinese elements. For doing so, we normally advise our clients to:

1) request Chinese counterparties to provide the company name in Chinese – This can be achieved by asking for their business license to ensure accurate representation.

2) verify the Chinese name using the company registration system in China – It is recommended to use Chinese government databases like the National Enterprise Credit Information Publicity System (NECIPS) to cross-reference the provided information. NECIPS is a free platform accessible to the public, and individuals have a basic knowledge of Chinese can navigate it.

3) ask their Chinese counterparties to use their official Chinese names, disclose their Unified Social Credit Codes, and use official stamps in transaction documents, such as proforma invoices or contracts. The Unified Social Credit Code is a unique identifier obligatory for every business and organization operating in the Chinese mainland (note that entities from Hong Kong SAR, Macau SAR, and Taiwan Province don’t have this code since these are separate jurisdictions). This approach will also help identify a company without any confusion.

Conclusion

In light of the above, it is crucial for overseas companies to request and identify the official Chinese names of their Chinese counterparties in today’s cross-border transactions. One English name may be used by different entities, and confusion in the jurisdiction can result in dismissed cases, causing financial losses or even posing a scam threat. To mitigate these risks, it’s advised to obtain a Chinese counterparty’s name in Chinese, verify the Chinese name through government databases, and request for the use of Chinese names and official identifiers in transaction documents.

In fact, acquiring an accurate Chinese name of a company not only mitigates risks but also allows for thorough research into the company’s background, shareholders, registered capital, and business qualifications, facilitating informed decision-making.

However, finding out a company’s name is just the first step. For businesses initiating ventures with new Chinese counterparties, it is strongly recommended to conduct due diligence on these business partners, with the help of a law firm having expertise in verifying business information in China. This additional scrutiny ensures a thorough examination of the business landscape, effectively mitigating risks and enhancing the likelihood of successful and secure transactions.

The 2023 United Nations Climate Change Conference (“COP28”), convened in December 2023, highlighted certain critical issues that concern China, such as fossil fuels, clean energy, key technologies, food and land use, among others. At COP28, China shed light on both its climate response trajectory and its advances on the environmental, social, and governance (“ESG”) fronts. The Chinese government has been taking strides in strengthening environmental regulations, addressing social issues, and improving corporate governance since China veiled its national strategy of the “Dual Carbon” goal in 2020, which aims to peak carbon emissions before 2030 and achieve carbon neutrality by 2060.  

As foreign direct investment (“FDI”) has long been recognized as an important source of financing for achieving those goals, foreign investors are increasingly being encouraged by the Chinese government to invest in and support projects that promote ESG. This article aims to provide an overview of the ESG legal framework and initiatives in China and highlight recent legislative developments related to ESG disclosure and greenwashing from an FDI perspective.

ESG-Related Initiatives in China

Chinese sustainability efforts gained momentum in 2016, when the National Development and Reform Commission (NDRC), the People’s Bank of China (PBOC), the China Securities Regulatory Commission (CSRC), and other Chinese regulatory authorities launched the Guidelines for Establishing a Green Financial System (《关于构建绿色金融体系的指导意见》), which aim to provide top-down support and direct capital towards environment-friendly economic development. Since then, China has emerged as an active player on the global ESG scene, especially in the financial markets, evidenced by green finance pilot projects and initiatives across the country in recent years.

Notably, in 2021, the Guangzhou Futures Exchange (GFEX) signed a Memorandum of Understanding with the Hong Kong Exchanges and Clearing Limited (HKEX) for strategic cooperation in promoting the sustainable development of the Guangdong-Hong Kong-Macao Greater Bay Area, as well as to explore the feasibility of cooperation on product development in both onshore and offshore markets, in support of China’s “Dual Carbon” goal.

ESG Legal Framework

Even though China has become a significant player in the world’s ESG markets, the country is relatively late in passing ESG-related laws and regulations compared to peers and has so far established no uniform and specific regulatory standards. As of the moment, major laws of China related to ESG include the Environmental Protection Law (《环境保护法》), the Labor Law (《劳动法》), the Advertising Law (《广告法》), the Law on the Protection of Rights and Interests of Consumers (《消费者权益保护法》), the Anti-Unfair Competition Law (反不正当竞争法), the Antitrust Law (《反垄断法》), etc. These laws cover various industries and a broad range of issues such as climate change, waste and pollution, health and safety, false advertising, greenwashing, as well as bribery and corruption.

In recent years, the following landmark developments have further aligned China’s current ESG legal regime:

1) The revised Company Law (《公司法》), which will take effect on July 1, 2024, clearly stipulates that companies shall, in doing business, take into full consideration the interests of their employees, the consumers, and other stakeholders, as well as social and public interests, including the protection of the environment, and shall assume social responsibilities. While further rules and guidance need to be introduced to facilitate the implementation of the revised law, it marks a pioneering effort in establishing ESG-related obligations for all companies.

2) At the beginning of 2022, PBOC, CSRC, China Banking and Insurance Regulatory Commission (CBIRC), and other Chinese regulatory authorities issued the Fourteenth Five-Year Plan for Financial Standardization Development (《金融标准化“十四五”发展规划》), which identifies key tasks and goals for the next five years, including clear and enforceable green finance standards, which are “united at home, internationally aligned,” on ESG disclosure and assessment, as well as carbon accounting for financial institutions and other entities concerned.

3) In April 2022, the Carbon Financial Products (《碳金融产品》) released by the CSRC puts forward normative requirements and provides guidance for the classification and launch of carbon financial products.

4) The Guidelines for Green Finance in the Banking and Insurance Industries (《银行业保险业绿色金融指引》) (“Guidelines”) , issued by the CBIRC in June 2022, took effect immediately upon its release. The Guidelines is regarded as a milestone in the development of green finance in China as it sets out systematic and comprehensive requirements on ESG management by banking and insurance institutions, as well as a top-down approach with senior management and the board shouldering the responsibility to promote green finance within their organizations.

ESG Disclosure Framework

In recent years, much of the emphasis on ESG in China has been placed on ESG disclosure, which is essential for overall ESG compliance. As such, it is crucial for foreign investors eyeing the Chinese markets to stay up-to-date on the country’s ESG disclosure framework and requirements, as these framework and requirements have an overall impact on factors that drive investment decisions, such as corporate governance, financial performance, risk management, etc. 

Currently, China only imposes compulsory ESG disclosure obligations on certain companies, typically “dirty” manufacturing companies and those that have previously violated environmental or labor regulations. For other companies, ESG disclosure is on a voluntary basis.

Mandatory ESG Reporting Requirements

2022 and later years have seen a steep growth in regulations and standards related to mandatory ESG disclosure requirements in China.

The Measures for the Administration of the Legal Disclosure of Environmental Information by Enterprises (《企业环境信息依法披露管理办法》), which was promulgated by China’s Ministry of Ecology and Environment (MEE) and took effect in 2022, contributes significantly towards China’s corporate social credit system and serves as a tool for the government to hold market entities accountable for violations of environmental laws and regulations. According to the measures, companies that are major pollutant emitters and publicly traded companies that have been penalized for environmental violations within the past year are required to disclose environmental information on a mandatory basis. When preparing the environmental disclosure reports, companies are further required to follow the rules specified in the Guidelines on the Format for the Legal Disclosure of Environmental Information by Enterprises (《企业环境信息依法披露格式准则》) issued by MEE in 2022.

In the same year, CSRC released the Guidelines on Investor Relations Management of Listed Companies (《上市公司投资者关系管理工作指引》) to specifically instruct listed companies to disclose ESG information to investors.

Stock exchanges in China have also been active in developing an ESG disclosure regime and have played a key role in promoting the innovation and development of green securities as well as supporting the listing of green enterprises. For example, in 2022, the listing rules of the Shanghai Stock Exchange made it mandatory for all listed companies to disclose major environmental accidents or other major accidents or events that may exert negative impacts on the performance of their social responsibilities, which had already been a compulsory obligation for companies on the STAR Market (the Science and Technology Innovation Board) of the exchange since 2019.

Voluntary ESG Disclosure Requirements

In addition to the mandatory disclosure reporting requirements, voluntary ESG reporting guidelines have also been released to encourage and assist entities to steadily shift from passive compliance with the requirements to active deployment of certain measures.

In April 2022, the China Enterprise Reform and Development Society, an organization supervised by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) promulgated the Guidance for Enterprise ESG Disclosure (《企业ESG披露指南》) (“ESG Disclosure Guidance”). The ESG Disclosure Guidance presents an inaugural ESG reporting framework that focuses on enhancing regulation for ESG reporting and sets out comprehensive standards for companies to adapt their ESG strategies at their own discretion. 

Although the standards in the ESG Disclosure Guidance are not mandatory, they attest to China’s determination to standardize and mandate environment reporting obligations for companies as part of the country’s efforts to reach its environmental targets, such as climate emission reduction. Such standards will potentially raise the bar of reporting for companies that are not subject to specific reporting requirements at the moment.

Greenwashing Risks

Given the growing importance of ESG as a key consideration in investment decisions, there is a potential risk that companies may exaggerate their ESG performance and contribution through incomplete or fabricated ESG disclosures, namely, engage in “greenwashing,” to attract investors and obtain additional profits. 

China has not enacted a specialized law to regulate greenwashing, but it has regulated the above-mentioned misconducts through its Advertising Law, Anti-Unfair Competition Law, Law on the Protection of Rights and Interests of Consumers, Trademark Law (《商标法》), etc.

For example, Article 4 of the Advertising Law stipulates that advertisements shall not contain false content and shall not deceive and mislead consumers. Article 8 of the Anti-Unfair Competition Law also stipulates that operators shall not promote a product or service in a false or misleading manner. Another example is that the use of words such as “green,” “eco,” and “sustainable” to describe products that are not eco-friendly could be seen as greenwashing, which may be considered fraudulent under the Trademark Law.

Therefore, foreign investors are advised to identify the ESG factors that are most relevant and significant to the Chinese companies’ operations and their stakeholders, integrate ESG into risk assessments, develop ESG-specific policies and procedures, and implement ESG measures featuring consistent ESG disclosures and in line with their needs and risk appetite.

Conclusion

As awareness of ESG issues grows globally, incorporating ESG factors into investment decisions is likely to remain a prominent trend in China and elsewhere, especially as China is now considering deploying a more comprehensive mandatory ESG disclosure regime. 

Having said so, ESG-related laws and regulations in China are still in the early stages, and the presence of overlapping and sometimes conflicting standards can be a significant obstacle to the sustained development of China’s ESG market, as it can create confusion for international investors. 

Foreign investors are advised to take a better look at the regulatory landscape in China and stay informed about changes in laws and regulations that may impact their investments.  Failing to incorporate ESG into their decision-making may not only cost them a competitive edge in the market but also increase the likelihood of exposing them to legal challenges in the future.