China: School of Hard Knocks for UK Education Providers

It was only a few years ago that hordes of British schools descended upon China. Chinese parents valued a British education both on its own account but also as the United Kingdom became a leading destination for Chinese studying at universities overseas. The promise of influencing an inexhaustible supply of eager students who would become future leaders coupled with streams of gold was intoxicating.

Unfortunately, hang overs often follow intoxication. And there is something of a hangover in certain circles at present. The education sector, particularly the private for profit sector has been impacted by a combination of tighter PRC government regulations, a post-COVID funk, cost of living concerns, concerns as to employment of young graduates and a general malaise of the Chinese middle class. In addition, to demand side issues the British schools in China have also been hit by supply issues – teaching staff were difficult to keep hold of during COVID and have proven difficult to attract since – China is now seen by many as a challenging posting not a rite of passage. So many Chinese parents are asking "is a British education really British if there is no one British dispensing it?".

In the past few months, we have been seeing many British schools struggling with their Chinese partners. Pushed by market conditions many schools especially in third tier cities are charging less for the student places. In addition, there was the impact of losing higher level of school directly restricted by rules barring private education. Worse still if the school was reliant on expats … well not so many of those now and this population is unlikely to recover any time soon. 

The financial pain being felt by the Chinese partner was then passed onto British schools – sometimes in hard negotiations to push down service fees – in some cases seeking to reduce the British school's involvement to simple naming – in other cases answering the phone with a disguised voice saying "I don't speak English" when the British school contacts the Chinese partner about outstanding payments.

The first response of many British schools is to pore over their contracts to see how best to deal with demands by Chinese partners. In some cases, this may be the first time the contracts have been read carefully or at least skeptically. Certainly, this is the case for most Chinese partners in respect of contracts. 

Unfortunately, British schools are finding to their chagrin that life is often more complicated than what is contained on paper. 

The first problem can be that while English law and English courts may have resulted in a warm and secure feeling for the British school at the time of signing the reality is that such provisions can be very difficult to take action.

A final judgment passed down by such English courts may be technically enforceable by a PRC court in accordance with the Laws on Civil Procedures of PRC, provided that such country have a reciprocal relationship in respect of judicial assistance with PRC or are co-members of international treaty for judicial assistance. If no such relationship or treaty exists (as is currently the case) then enforcement will depend on the discretion of the PRC court. It should be noted that in almost all cases the PRC courts will exercise their discretion to not enforce such overseas judgment. There has been a landmark case in 2022 where a PRC court has enforced an English judgement[1] but this should not be overly relied upon as it belies the difficulties and expense of enforcement. It is better to agree arbitration which has a far better track record of enforcement – while still presenting practical difficulties. 

Further, the pangs of hopelessness on the part of the reader when realizing that many provisions of the hard fought contract are practically unenforceable is further accentuated by the realization that many of the "other worldly" protective provisions are just unrealistic. A favorite protective clause for some law firms were "phantom school fee" provisions. These clauses foresee that if the Chinese partner did not meet the agreed roll out plan it would nevertheless pay the British schools license fees as if such schools had actually been opened, operating and generating revenue. Many British schools blithely insisted on such clauses seemingly never querying whether seeking to hold a Chinese partner financially responsible for license fees of non-existent schools was a sensible approach. 

However, for most British schools the unenforceable and fanciful contract is a largely theoretical problem. British schools poring over their contracts are not in the most part looking to start a protracted legal action, they are looking for an escape route exit from their China project. 

British schools exits from China are often complicated for the following reasons:

Pragmatic Review of Contracts and Materials – as outlined above the contracts may not be perfect but it is still important to review them. The reason for this is not only to consider whether you have a case against the Chinese partner but also to judge whether you are at risk of being in breach if you take unilateral action. In some cases, the British school has just had enough of the situation and just wish to get out. Accordingly, before ceasing to cooperate check you have legitimate grounds for termination. 

Most parties restrict themselves to merely reviewing the main contract. Much of the most important evidence and means by which to determine the best approach forward can be gleaned from historical background (i.e. emails, communications, debriefing of personnel involved etc.). It is important that as much evidence as possible be reviewed as often information provided to the school's leadership will be self-selected or passed on by its own staff that was involved. These members will have their own interests regarding the outcome, or at least a certain bias in respect of the dispute. Self-selected information means that the leadership is limited to reviewing static contracts drafted years ago, along with a few official letters between the parties. This information will be of very little assistance in finding a solution. Much of the most relevant information will be in emails, WhatsApp messages, WeChat messages, outside sources, and within the heads of relevant staff.

If you read just one letter, email, or message, you get an indication of a certain narrow issue. But if you read all emails, messages, and have an overall view of what is happening in the school and the Chinese partner. Then you will have a far better understanding of the real situation and how best to find a solution. 

In addition, in many cases the Chinese "partner" is not the real partner but merely a middleman often with an agenda contrary to the business that is bankrolling the schools. To determine the right strategy to resolve the situation it is crucial to look at the financial situation of the school, performance, financial situation of the Chinese partner, current intentions of the true Chinese partner etc.

Secure the IP – as outlined above, for many Chinese partners the easy solution is to reduce the British school to merely lending its name to the Chinese school. In order to protect the name it is important to see if you have registered the trademark in China. It is surprising but a number of British schools operating in China have still failed to register their trademark in China. The cost is modest (i.e. approximately £700) for 10 years protection. This should be done before the Chinese partner pre-emptively registers the trademark.

Have a Plan – When a school project falls into dispute, all parties feel aggrieved. British schools will tend to focus on how badly they have been treated or how the contract is not being followed rather than how to resolve the situation. The Chinese partner will be focussed on how the project is no longer economically viable. Pontificating on a lack of justice or being frustrated will not lead to resolution. Before deciding on a strategy, it is crucial to understand what is realistically possible. 

Know what you Want - Objectives of the British school may include:

Identifying your key priorities and having a plan that is realistic aim is crucial. In some cases, it may be to sensibly scale back the services and thereby lower the cost. In others the parties may seek a phased but amicable disengagement. All these may be a little difficult but invariably far superior to resorting to litigation.

China has become a far more challenging market for both Chinese education companies and British schools in recent years. Although many of the contracts were signed in an atmosphere of cooperation and goodwill, many of the provisions are overly harsh and seeking to bluntly rely on such terms is unlikely to lead to a good outcome or even a less bad outcome. 

Although the contract is important it is crucial to consider all the background, the stakeholders and the actual situation in order to find the right solution to the current impasse. For some schools it is possible to rejig the cooperation and wait for brighter days. For others it is how to best plan a graceful exit. It is unlikely that for any party that litigation will be the optimal solution.

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