Shanghai Free Trade Zone Launches Pilot Scheme for Sino-Foreign Law Firms

November 27, 2014 Posted by China Briefing Reading Time: 5 minutes

SHANGHAI – Being a foreign lawyer in China isn’t easy. Foreigners are prohibited from directly participating in the country’s legal affairs or providing Chinese legal consulting services. It is also impossible for foreign lawyers to obtain a license to practice law in China, based on the fact that China’s National Judicial Examination (the “Chinese bar exam”) is closed to foreigners.

Fortunately, foreign law firms have recently been permitted to cooperate with their Chinese counterparts to jointly provide legal services for both Chinese and foreign clients in the Shanghai Free Trade Zone (FTZ).

On November 18, the Shanghai FTZ officially launched a pilot scheme allowing eligible foreign and Chinese law firms to enter into a joint operation or establish an agreement to mutually dispatch lawyers as foreign/Chinese legal consultants, in a move to further liberalize the legal services industry and promote cooperation between Chinese and foreign law firms.

To specify the relevant requirements for Chinese and foreign law firms seeking to engage in the pilot scheme, the Shanghai municipal government released a set of “Implementing Measures (Hu Fu Ban Fa [2014] No.63)” which clarified that an eligible Chinese law firm must meet the following conditions:

Has been established for three years;
Is established in the form of partnership;
Has over 20 professional China-licensed lawyers on staff;
Has a sound management system and the capability to provide high-quality legal services;
Has not been subject to any administrative punishments in the past three years; and
Has set up its headquarters in Shanghai (including the Shanghai FTZ), or located its headquarters in other parts of China and operating a branch in Shanghai (including the Shanghai FTZ).

On the other side, both of the following conditions must be satisfied by foreign law firms seeking to engage in the pilot scheme:

Has established a representative office (RO) in Shanghai for three years, or has established one RO elsewhere in China for three years and another in Shanghai (including the Shanghai FTZ); and
All the existing ROs have not been subject to any administrative punishments in the past three years.

Shanghai FTZ to Expand Liberalization of the Legal Services Industry in China

Notably, the Measures stipulated that at a minimum, either the foreign law firm should have a representative office (RO) in the Shanghai FTZ or the Chinese law firm (or its branch) should be established in the FTZ.

Further, the Measures clarified that the Chinese and foreign lawyers to be seconded should meet certain criteria, such as having 5 years of work experience and expertise in both Chinese and foreign legal affairs. However, the chief representative and/or person in-charge of a law firm may not be appointed as a legal consultant to another firm. The number of lawyers to be dispatched by a given law firm shall not exceed three, and a written agreement must be signed for a cooperative period of over two years.

With the pilot scheme underway, eligible foreign law firms meeting the above conditions can now set up a joint operation in the Shanghai FTZ with Chinese firms, whereby they may provide legal services to Chinese and foreign clients based on Chinese and foreign laws, and in accordance with the rights and obligations stipulated in their joint operation agreement. However, neither branch offices of Chinese law firms nor ROs of foreign law firms are permitted to apply for joint ventures.

Shanghai FTZ Paves the Way for Arbitration Reform in China

During the period of joint operation, the two parties’ legal status, names and finances should remain independent, and they should independently bear civil liability. Previously, only Hong Kong and Macau law firms were allowed to enter into such arrangements with Chinese law firms under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA).

Based on the experience of previous reforms implemented in the Shanghai FTZ, it is very likely that this pilot program will be implemented nationwide before long. Such has been the case in numerous examples, such as with industry restrictions for foreign investment, foreign exchange measures, and incorporation requirements. On a related note, companies established both inside and outside of the FTZ are already permitted to resolve disputes through mediation or arbitration using the FTZ’s own set of arbitration rules.

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