Piloting

In January, China’s Ministry of Justice approved a proposed plan (the Plan) by Shanghai authorities on “exploring a closer cooperation pattern and mechanism between Chinese and foreign law firms within the Shanghai Free-Trade Zone (Shanghai FTZ).”

The Plan features two opening measures: First, those foreign law firms who have representative offices located within the Shanghai FTZ are allowed to mutually accredit lawyers as legal counsel to each other with Chinese law firms via agreement; second, foreign law firms are allowed to set up joint operations with Chinese firms within the FTZ.

More precisely, the first provision permits Chinese law firms to dispatch PRC-practising lawyers to the representative offices of foreign law firms as counsel for PRC law; it also permits foreign law firms to dispatch foreign practising lawyers as counsel for foreign law to Chinese law firms; the exchanged counsel are then allowed to work together within their own licensed areas and authorisation, “in a manner of dividing responsibilities and coordination.”

The second provision gives permission to those foreign law firms who already have representative offices in China to set up joint operations located within the Shanghai FTZ with Chinese law firms, under the agreed rights and obligations and “in a manner of dividing responsibilities and coordination” - the foreign and Chinese parties are each allowed to provide legal services regarding foreign and PRC law, respectively. During the period of joint operation, the legal status, official name and finances of both sides must remain independent and they shall bear civil liability independently.

The Hong Kong and Macau law firms that already have representative offices in the mainland are also eligible to participate in this piloting plan.

The Plan also promised to significantly quicken the approval procedure of opening an office or registering/changing the representative person within the FTZ, reducing the maximum processing time of foreign firms’ application from three months to 30 working days, and domestic firms’ from 30 to 10 working days.

Opening

Thanks to the globalisation and China’s opening up of its economy, the need for cross-jurisdiction legal services for cross-border economic activities is constantly increasing.

“What the Plan mentions is not entirely a new thing. Actually, there have been some joint operations in practice,” says Lin Wei, managing partner of Zhonglun W&D’s Shanghai office.

Since 2003, under the framework of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), joint legal ventures between the mainland and Hong Kong law firms have already been permitted. The CEPA also allows permanent residents of Hong Kong who hold a law degree from a Chinese university to take the State Judicial Examination to get the relevant qualification, and practise PRC law after training.

Attempts of China-foreign cooperation too have been tried out. MWE China Law Offices’ strategic alliance with McDermott Will & Emery is an example of such cooperation. McDermott Will & Emery sends reinforcement to the MWE China team on cross-border cases when needed, while MWE China is also involved in its American partner’s Asian expansion in Korea.

In another recent example, UK firm Clyde & Co has formed a joint law venture (JLV) with Chongqing local firm Westlink earlier this year. Michael Cripps, Clyde & Co’s Shanghai partner says “it (the JLV) is extremely important for Clyde & Co” to provide broader capability to practise PRC law.

In terms of staffing, it is common for Chinese nationals to work in international firms, with foreigners being employed by top Chinese firms.

However, currently the red lines are clear: Foreign lawyers must not practise PRC law or appear in Chinese courts; foreign law firms must not provide services related to PRC law; and Chinese nationals hired by foreign law firms must give up their PRC licence and forfeit their eligibility to advise on PRC law during their service term.

The details and supporting regulations in this regard are yet to be announced. Whether the Plan is able to make the essential changes will depend on whether its implementation regulation allows foreign lawyers to register in China, according to Lin.

“If this restriction is to be lifted, it will change the climate of the legal market,” he says.

Ma Yi, an official in charge of lawyer administration at the Shanghai Bureau of Justice, told local media that the ultimate goal of the FTZ’s legal service industry’s opening up is “Chinese lawyers and foreign lawyers practising in the same firm, in the name of a same firm.”

Welcoming

The detailed regulations for implementation are expected to be decided by the second half of this year, but the Plan has, nonetheless, become a hot topic of discussion in concerned circles.

Despite similar discussions related to the Qianhai special economic zone in Shenzhen, all the measures taken by the Shanghai FTZ, the first national pilot FTZ and testing bed for larger- scale reforms, are considered to be indicators for future policies. The promotion of China-foreign cooperation in the legal industry within the Shanghai FTZ shows China’s increasing willingness to gradually open up its legal market.

Generally, for Chinese firms, policies reducing the restrictions on foreign law firms and encouraging cooperation with them are both opportunities of self-upgradation and internationalisation, as also challenges of bigger competition.

“The measure is more positive than negative. We welcome it,” says Lin.

He suggests that once a joint law venture is set up, one single firm is able to advise on both Chinese and foreign laws, which is beneficial for Chinese firms that are keen to go international, says Lin.

Managing partner Xu Guojian of Boss & Young Attorneys-At-Law agrees that more foreign participation is good news.

“The Chinese firms will get more and more international attention. As we keep exploiting the domestic and international market, we will gradually grow into important players domestically and internationally,” Xu says.

The China legal market is so large that the only thing Chinese firms need to do is to focus on improving their own professional skills and company governance. “I don’t think competition from outside is the problem. Rather, it is [that] we are not capable enough to fully exploit, develop and utilise the market. The most important thing is self-improvement,” he says.

Waiting

How far the Plan is from its ultimate goal remains a question, since the implementation details are yet to be revealed.

“We are extremely interested in the development of the FTZ, but whether to take action to register within it needs to wait and [to be] seen,” says Xu.
Given the existing cooperation model’s efficient running, whether the Plan is able to make better-performing cooperation possible will be proven only with time.

As soon as the JLV is launched, shocking difficulties during integration and everyday operations are likely to come up, owing to the huge gap in internal management and operational procedures between an average Chinese firm and its foreign colleague.

“So a practical possibility is leading international firms forming JLVs with personal Chinese firms. Those smaller and highly corporatised firms are likely to be taken as an entrance to the Chinese domestic market,” says Xu.

Another concern is that under the current legal frame, the Plan is also restrained by the ban that “foreign law firms must not provide services on PRC law.”

Ma says if a foreign firm signs a staff exchange agreement with a Chinese firm, when it comes to a cross-jurisdiction case, each of the firms can have their own Chinese and foreign counsel to work together to provide legal services. However, the Chinese and foreign parties will have to remain technically independent. And any PRC law-related legal opinion or proposed dispute solution by a Chinese counsel at the foreign firm or the JLV will still have to be issued under the name of the Chinese firm.

Xu points out that naming the actual service provider is very important for the client, since the compromising mechanism might cause misidentification and give rise to problems.

“The services provided by the Chinese counsel at a foreign firm or a foreign counsel at a Chinese firm are credited to their original firms. Once there is a problem involving liability, how can we identify and divide the responsibilities? This issue needs to be addressed and clarified in the implementation,” he says.