Settlement of Employment Termination
July 8, 2009
It is common practice for an employee and employer to attempt to negotiate the monetary amount that the employer is required to pay the employee upon termination of employment. Any agreement in such circumstances will generally involve an employer paying an amount equivalent to its potential legal liability or lower. However, a question arises as to whether, under China’s Labour Contract Law, such an agreement is enforceable if an employee ultimately reneges on its agreement and takes the dispute to labour arbitration. The notion of free will and fair bargaining underpin Chinese contract law and the Chinese legal system in general. Accordingly, there may be such occasions where such an agreement could be struck down by the P. R. of China court.
It is advised that employers that it is in their interest to avoid labour arbitration as, in most cases, it favors the interests of employees. Further, in labour arbitration and litigation in China there is little possibility of recovering your legal costs and, accordingly, even if you are ultimately successful, there is a strong likelihood that you will incur legal expenses greater than the potential liability. For these reasons, many employers make every effort to settle matters with employees. The assumption is that in coming to an agreement with an employee, arbitration will be avoided.
Article 5 of the Law of the People’s Republic of China on Labor Dispute Mediation and Arbitration states that labour arbitration is available “where a labor dispute arises, if a party does not desire a consultation, the parties fail to settle the dispute through consultation, or a party does not execute a reached settlement agreement”. It seems, on the face of the matter, that where there is an agreement between the parties, there is no jurisdiction for the dispute to go to labour arbitration.
If an employee reaches an agreement with an employer regarding the termination of the labor contract and the economic compensation is far from the statutory standards, generally the agreement shall be deemed as invalid because it exempts the employer from statutory liability
and extinguishes the rights of the employee. The concepts of free-will and fair bargaining are critical principles underpinning Chinese Contract Law, particularly in the employment context. Article 4 of the Contract Law provides that ‘[t]he parties have the right to lawfully enter into a contract of their own free will in accordance with the law, and no unit or individual may illegally interfere therewith.’ Further, Article 3 of the Labour Contract Law provides that ‘[t]he principle of lawfulness, fairness, equality, free will, negotiation for agreement and good faith shall be observed in the formation of a labor contract.’ Whilst a settlement agreement in relation to economic compensation payable to an employee is not technically a “labour contract”, the matters outlined in Article 3 reflect common principles. Accordingly, where the agreed amount is well below the legal entitlement it will be difficult for the employer to show that the principles of fair-bargaining existed. In such circumstances, after an employee obtains economic compensation according to the agreement, if the employee applies for arbitration or files a suit to ask the employer pay the balance of the legal entitlement, the application shall be supported.
It is clear that the critical issue is whether there is fair-bargaining between the parties. As such, if the agreement stipulates the calculation methods and standards of economic compensation and the employee acknowledges that the agreed economic compensation is far from statutory standards, it shall be deemed that the employee has disposed of his or her rights, and any application to alter the terms of the agreement would be rejected. Further, if after an employee obtains economic compensation in accordance with an agreement with an employer, he or she applies for arbitration or files a suit beyond the statutory limitation period (it should be noted that the statutory limitation period is 1 year from the date of termination) for the balance of the employer’s legal liability, the employees rights shall be extinguished.
NancySun, Attorney & MatthewMcKee, Foreign Legal Counsel
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An Oral Contract is Enforceable Under Chinese Law
June 20, 2009
The Contract Law at Article 10 provides that contracts can be formed through a writing, orally or through “other means.” If the conduct of the parties is sufficient to show the parties intended to enter into a contract, then the courts should enforce such contract as a contract formed by “other means.”
First, many of businesspersons believe that an oral contract is not enforceable under Chinese law. This is not true. Article 10 of the Contract Law clearly provides that oral contracts are valid and enforceable.
Second, there is a general trend in the Chinese courts to limit enforcement of oral contracts. The Supreme Court constantly battles against this trend. Lower courts have avoided enforcing contracts arising from conduct, and the Supreme Court is now pushing the courts to expand their jurisdiction to cover such contracts.
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Mainland further facilitates recognition of Taiwan court decisions
June 16, 2009
The Supreme People’s Court (SPC) of China issued a judicial interpretation Thursday to further regulate mainland courts’ recognition of verdicts on civil cases made by Taiwan courts.
The judicial interpretation, effective Thursday, further specifies the range of civil cases entitled to recognition and clearly states that verdicts made by Taiwan courts, once recognized by mainland courts, have the same effect in the mainland as verdicts made by mainland courts.
Recognition is for Taiwan people who live in the mainland and are involved in civil cases for which a Taiwan court already issued a verdict.
Due to decades of political stand-off, judicial systems of the mainland and Taiwan used to have little exchanges or cooperation, which made jurisdiction very difficult — especially when economic exchanges between the two sides increased and more Taiwan businessmen came to live in the mainland.
As a follow-up effort to an agreement on mutual judicial assistance signed by top negotiators from the two sides on April 26 in the east mainland city of Nanjing, the new judicial interpretation says that civil cases on commercial affairs, intellectual property and maritime affairs are also entitled to recognition.
Previously, most of the Taiwan court verdicts recognized by mainland courts were on civil cases about relationships and identities, a judge from the No. 1 Civil Tribunal of SPC, who spoke on condition of anonymity, told Xinhua Thursday.
In addition to court verdicts, conciliation statements and orders of payment on civil cases made by Taiwan courts and arbitrations reached by Taiwan arbitration institutions are also entitled to recognition, according to the interpretation.
Those who apply for recognition could ask for property preservation at the time the case is submitted or after it is heard. Property preservation should be applied for with “effective guarantee” before the court decides to recognize the previous verdict or not, the interpretation said.
Property preservation refers to the imperative measures taken by courts to restrict involved parties’ disposal of controversial properties when the case is put under examination.
“Property preservation aims at best balancing the interests of the plaintiff and the defendant,” the same judge said.
The time limit to apply for recognition is extended to two years after the verdict or arbitration was made in Taiwan. The previous time limit was one year.
The interpretation also states that those who apply for recognition bear responsibilities to prove the evidence they provide, such as authenticity and effectiveness of the verdict, and existence of the properties.
Source: http://www.ipr.gov.cn
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