Chinese law “elephant”

 

story25i1Thank you very much to all of my followers for following me.  I plan to tweak the type of content that I am providing, providing fewer long analytical blogposts, because I want to concentrate on writing a book on Supreme People’s Court (SPC) in the era of reform, in the style of this blog and in my free time work on income-generating projects.

The blog will continue to highlight SPC developments (& cases), but more briefly (with the exception of several articles still in draft). As before, I will speak at conferences and appear on panels, or as a guest speaker in classes touching on the Chinese court system.

It is my hope that some followers with the financial wherewithal to do so will consider supporting (in some fashion) the blogs that are enabling the English speaking and reading public to perceive (through translation or bite-sized analysis) the “elephant” that is the Chinese legal system.

Through my “brother” blog Chinalawtranslate.com, the non-Chinese reading world is able to access translations of many of the most important legal documents issued by the Chinese government (and Communist Party) institutions, with some analytical blogposts and charts or other graphics. Many of those translations are of documents that are not translated by the commercial translation services. The translations are accessed and cited by a broad range of government and academic institutions (worldwide) as well as the media, NGOs, students, and individuals.

My own blog, contrary to what a Times of India article recently wrote, is not a “state-owned publication linked to the Supreme People’s Court.”  For that, the Times of India should be looking to the Supreme People’s Court’s (SPC’s) own English language site. The link between the SPC and this blog is only in the form of careful observation on my side and recognition of the existence of a focused foreign observer on the other.  I have also been shown personal kindness by a certain number of SPC judges (as well as some of their counterparts in the lower courts). An earlier blogpost gives further background on why I am publishing this.

As before, I will be available for consultation on law/court reform topics, as well as areas in which big data (and the profile) of litigation in the Chinese courts sheds light on the Chinese economy, society, etc. Chinese law firms who recognize that their English language publications need an overhaul should also contact me.

Anyone with comments or questions should feel free to contact me at: supremepeoplescourtmonitor@gmail.com.

 

 

Why the Supreme People’s Court’s new demand guarantee interpretation is important

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On 18 November, the Supreme People’s Court(SPC)  issued the Regulations on Some Issues Concerning the Trial of Independent Guarantee Disputes  (Independent Guarantees Interpretation) (审理独立保函纠纷案件若干问题的规定). It was publicly released at a 22 November press conference.  This document is a judicial interpretation (see this explanation) that becomes effective on 1 December. The Independent Guarantees Interpretation is important because:

  • it relates to guarantees issued by the four main Chinese banks (total amount of USD 353 billion in 2015), so the amounts will be far greater when the other banks are included);
  • large numbers of commercial transactions by Chinese companies outside of mainland China.

Along with the enormous increase in Chinese companies investing and undertaking projects abroad and being required to provide a demand guarantee when doing so has been an explosion of litigation in China [to be updated with data when available] by companies seeking to prevent the bank that has issued the demand (independent) guarantee from doing so when the foreign party to which the guarantee has been issued seeks to be paid out under the guarantee because the performance by the Chinese company fails to comply with contractual requirements.  It has also led to litigation outside of China, such as in the English courts.

As Professor Vivienne Bath has explained in a recent article:

in a number of cases, Chinese courts have attempted to reinforce their own jurisdiction in multinational disputes by issuing stop orders to Chinese parties directing them not to make payment on negotiable instruments or guarantees issued in support of a principal contract which is the subject of litigation. In the case of a Chinese bank with international interests and assets and an international reputation,this puts the bank in a very difficult situation.

It is for that reason that Judge Zhang Yongjian, head of the #4 Civil Division of the SPC (responsible for foreign-related commercial/maritime issues) revealed (at the press conference at which the interpretation was released) that the China Banking Regulatory Commission (CBRC) and the China Banking Association have been lobbying the SPC to issue this interpretation quickly. (The drafting began in early 2013 and informal work began in 2012), while discussions about the issue date back to 2007 (if not before). A drafting group within the #4 civil division was responsible for drafting it).

For those with no background about what these are, a demand/independent guarantee (called an independent guarantee in Chinese (独立保函), is often used in construction, engineering and many other types of infrastructure projects (and trade, such has shipbuilding and turbines), when the owner of the project requires the performing party to guarantee his performance with a guarantee issued by a bank. It means that if the contractor fails to meet his obligations, the project owner can be easily compensated. The bank guarantee generally needs to be backed by company funds. These are extremely important with so many Chinese companies focusing on infrastructure projects overseas, under the Chinese government’s One Belt, One Road and Go Global strategies and Chinese companies seeking to produce goods with greater added value, as Judge Zhang noted.

The International Chamber of Commerce’s (ICC’s) Uniform Rules for Demand Guarantees (URDG 758) are the internationally agreed international standard on demand guarantees, having been officially endorsed by the UN Commission on International Trade Law (UNCITRAL) at its 44th annual session in June-July, 2011.  The Independent Guarantees Interpretation sets out the applicability of URDG 758 in Chinese disputes, governing law, jurisdiction, and other issues and draws on it, the United Nations Convention on Independent Guarantees and Standby Letters of Credit, and other international rules.  (Judge Zhang used the phrase “充分借鉴吸收” (fully considered and absorbed).

Maneuvering around existing domestic legislation

The language of the interpretation maneuvers around Article 5 of China’s Security (Guarantee Law) and Article 172 of the Property Law and their restrictions on independent guarantees in domestic transactions, because independent guarantees have grown to be a big business among domestic financial institutions (according to Judge Zhang) (The interpretation allows parties to agree that the provisions of URDG 758 will be applicable.).

The Security Law states:

A guarantee contract is an ancillary contract of the principal contract. If the principal contract is nullified, the guarantee contract shall be null and void accordingly. Where it is otherwise agreed in the guarantee contract, such agreement shall prevail.

Similarly, the Property Law states that “for the creation of a security right, a guarantee contract shall be concluded in accordance with the provisions of the law and other relevant laws. A guarantee contract is an ancillary contract of the principal contract. When the principal contract is nullified, the guarantee contract shall be null and void accordingly, unless otherwise stipulated by law.

Tightening the fraud exception

The interpretation tightens the fraud exception from the requirement to make immediate payment and specifies the conditions under which courts can issue stop orders. The SPC looked to the international agreements mentioned above, foreign legislation, and foreign cases when drafting its own provision (Article 12).  Judge Zhang admits that the misuse of this exception by local courts has led to foreign banks being reluctant to negotiate letters of credit issued by Chinese banks. (This observer suggests that one reason could be that large local companies may pressure local courts to so rule).

Consultation process in drafting

Judge Zhang noted that the drafting process was one of the highlights of the interpretation.  In my earlier blogpost on the draft interpretation, I noted that the SPC consulted with (formally or informally):

  • the Ministry of Commerce;
  • leading Chinese lawyers;
  • some of the leading arbitration commissions;
  • representatives from the principal Chinese banks and major state-owned companies.

Judge Zhang noted that they consulted with:

  • the lower courts;
  • National People’s Congress’ Legislative Affairs Commission;
  • State Council’s Legislative Affairs Office;
  • People’s Bank of China;
  • CBRC;
  • State Administration of Industry & Commerce;
  • China Banking Association;
  • China International Contractors Association; and
  • ICC China Committee.

According to an “authoritative person,” the above list is not exhaustive.

From my own contacts, and from reports of at least one conference on trade finance in Beijing attended by representatives from the ICC and the SPC, there were discussions with the ICC.

SPC judges organized research and met with financial institutions.  But Judge Zhang also said that they sought public opinion through the SPC’s website. What he did not say was that the consultation period was for nine days (as I noted in my blogpost of almost three years ago).

As I said then (and have said numerous times on this blog and to individual SPC judges), my view that it is best for the SPC to solicit public comments on important civil/commercial issues such as this one and give persons a reasonable comment period, and for bilateral investment treaties to incorporate a requirement to require this.

For anyone involved in any aspect of a project in which a Chinese contractor provides a demand/independent guarantee, reviewing this judicial interpretation is crucial. I expect the commercial translation services will translate it (and law firms, Chinese and international, will issue alerts parsing its provisions).

 

Inspectors stationed at the Supreme People’s Court & Procuratorate

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CIG mobilization meeting at the SPC

Close followers of the Supreme People’s Court (SPC) media outlets will have noticed a 15 November report of a mobilization meeting of the Central Inspection Group (CIG) #2 inspecting the SPC’s Communist Party group.  A brief report on CCTV is found here. Further digging reveals that news of the inspection was released on the Central Commission for Discipline Inspection (CCDI) website in early November, and that the inspection is part of the current round of CIG inspections of 27 Party, government, and other entities.  Other legal institutions being inspected in this round include the Supreme People’s Procuratorate (SPP) and the China Law Society (a mass (government organized non-government organization)).  The Ministry of Public Security was inspected earlier this year in an earlier round,  along with the State Council’s Legislative Affairs Office, the National People’s Congress (including its Legislative Affairs Commission), the State Intellectual Property Office, and many others.

report on CIG #7’s mobilization meeting at the SPP was released at the same as the SPC’s, and is worded similarly to the SPC report.These institutions are being inspected for approximately a two month period, from 11 November (14 November for the SPP) to 10 January 2017.

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CIG mobilization meeting at SPP

Background on CIGs and how they operate can be found in a recent New York Times article (focusing on the Ministry of Public Security’s inspection) and this scholarly article by Professor Fu Hualing of the University of Hong Kong’s law faculty.

According to these  notices, the focus is on the Party leadership of these institutions, at the highest and next highest level, and compliance with political and Party discipline.

Some comments

Matters that require the attention of the SPC’s  senior leadership (and similarly the SPP’s), of which there are many (one small example is considering whether a draft judicial interpretation is ready for passage) , are likely to find a much slower response time, as persons in the most senior positions, and those senior personnel with whom they work most closely, will most likely be preoccupied with responding to the requests of the inspectors. (This insight is derived from my personal experience (with school inspectors), my many discussions with in-house counsel facing government inspectors, and the rich professional/scholarly commentary on government inspections/audits).

I can only hope (as a long-time foreign observer of the SPC (and less so of the SPP), that the leaders of these institutions have done a good job in personal compliance, as well as signalling to their institutions the importance of complying with various types of political and Party discipline, because a well-functioning Chinese judicial system (and a prosecutorial system) is important not only for China, but the rest of the world.

One small example of the work facing the SPC that is relevant to the rest of the world is one of the Chinese government’s commitments at the Hangzhou G20 meeting, which requires the SPC to take on a major role in improving the operation of China’s bankruptcy system:

China and the United States recognize the importance of the establishment and improvement of impartial bankruptcy systems and mechanisms. China attaches great importance to resolving excess capacity through the systems and mechanisms relating to mergers and acquisitions; restructuring; and bankruptcy reorganization, bankruptcy settlement, and bankruptcy liquidation, according to its laws. In the process of addressing excess capacity, China is to implement bankruptcy laws by continuing to establish special bankruptcy tribunals, further improving the bankruptcy administrator systems and using modern information tools. China and the United States commit to, starting as early as 2016, conduct regular and ad hoc communication and exchanges regarding the implementation of our respective bankruptcy laws through forums or mutual visits.

 

First US President (-elect) to litigate in Chinese court

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Donald Trump vs. PRC Trademark Review & Adjudication Board

President-elect Donald Trump is a person of many firsts. It is well known that he is litigious (involved in at least 3500 lawsuits in the US federal and state courts).  What is not known outside of China is that he is the first person to be elected president of the United States who has sued in the Chinese courts (and lost).  The image above is of the judgment of the Beijing Higher People’s Court (the official version in SPC case database linked here, but also available here), upholding a decision by the Beijing Intermediate People’s Court (up to 52,000+ pageviews). The Beijing Intermediate People’s Court reviewed Trump’s challenge of a ruling of the PRC Trademark Review & Adjudication Board (TRAB) on the use of the TRUMP trademark. He is one of many in the foreign business community who have been losers in China’s first to file trademark system (summarized here).

Before getting to the legal issues, a note about Trump’s name. In this case his name is translated as唐纳 川普 (his last name is the contraction for Sichuan Putonghua).  It is the translation used colloquially in China, but the official media translates his name as 唐纳德·特朗普.

Trump’s 2006 Chinese trademark application was made to the Trademark Bureau on 7 December 2006 in class 37 (Building construction; repair; installation services), while individual Dong Wei applied for the TRUMP trademark on 24 November 2006 in a subclass of class 37, for building construction supervision.

On 30 November 2009, the Trademark Bureau rejected Trump’s trademark application as it related to hotel, residential, and commercial real estate construction information.  Trump sought reconsideration of the Trademark Bureau’s decision by TRAB. TRAB upheld the Trademark Bureau’s ruling in its 2014 decision (评字(2014)第2758号)

Will this case mean that the new administration is more or less interested in continuing judicial exchanges with the Supreme People’s Court, such as the U.S.-China Judicial Dialogue in Support of Reform and Economic Growth ?

 

Big data on China’s case database

Screen Shot 2016-07-30 at 12.13.38 PMThe Supreme People’s Court (SPC) database, China Judgments Online, receives good marks from most commentators inside and outside of China and it is one of the successes of the judicial reforms that President Zhou Qiang often discusses with visiting foreign guests as well as domestic officials.  Only now has a team of researchers from Peking University drilled down on the case database (but only through 2014, because the data was not complete for 2015) (short version found here and full version here). They found that there is room for improvement.

The researchers found that only about 50% of number of cases resolved in the Chinese courts (about 30.5 million during 2014-2015) have been uploaded to the case database (14.5 million).

Level and type of case

Almost 80% of the cases uploaded are from the basic level courts, with intermediate level courts accounting from almost 19%, and fewer than 1% from the SPC.

Approximately 63% of the cases are civil, with 20% criminal, enforcement 15%, and administrative cases less than 4%. 

Are courts uploading cases to the database consistently?

 

 

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Geographic distribution of uploaded judgments

 

The map above is based on an analysis of 2014 data.  Shaanxi, Zhejiang, Shandong, Anhui, and Hebei provinces were the best performers, particularly Shaanxi; Henan, Fujian, Hunan, Hubei, Guangxi, and Ningxia were in the second tier, uploading at least half.  The less transparent courts include Tibet, Xinjiang, and Guizhou.

[I personally expected that Shanghai, Jiangsu, and Guangdong would be more transparent.]

Are cases uploaded consistently throughout the year?

At least in 2014, there was a half year and year end rush to upload cases.  It appears that the uploading of cases is one of the items for judges performance appraisal.

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Issues cited

  • More than half of judicial documents have not been uploaded to the database, including judgments in some of the more controversial cases.
  • Technical issues complicate the uploading process.  Because the courts are administered locally, the IT systems are local as well.
  • The regulations set out vague standards for taking down a judgment/ruling. When objections are made, the cases are taken down with little review. [As I have commented in relation to streaming of court cases, the absence of privacy legislation is an issue, because judges lack specific guidance on what information is regarded as private.]
  • Large gaps exist between the coastal and inland provinces in uploading judgments, with long delays an issue as well, although the regulations require judgments to be uploaded 7 business days after they take effect (this provision is unchanged from the 2013 version).
  • Monitoring of the database is an issue.  The SPC has been stressing the quantity of judgments uploaded, while insufficient attention is paid to quality.  [This may have something to do with tendency of some Chinese academics to focus on theory or comparisons among jurisdictions, rather than engage in a more focused study on what their own court system is actually doing.]

Comment

The Chinese government has allocated  USD $40 billion to the Silk Road Fund associated with the One Belt One Road strategic initiative, to improve infrastructure overseas.  China’s judiciary, an important part of the nation’s legal infrastructure, requires better funding as well.  Even a tiny percentage of that $40 billion would go far to contribute to improve courts’ IT infrastructure, not to mention improved salaries, and the retention of the research departments of local courts.

Investment in the courts is needed to bolster the Chinese (not to mention foreign) public’s confidence in the Chinese courts’ ability to provide a better quality of justice.

As my law school classmate, Justice John Roberts, said several years ago, when confronted by budget cuts to the US federal judiciary:

At the top of my list is a year-end report that must once again dwell on the need to
provide adequate funding for the Judiciary.I would like to choose a fresher topic, but duty calls. The budget remains the single most important issue facing the courts….

The Judiciary continues to depend on the vision and statesmanship of our colleagues in the Executive and Legislative Departments. It takes no imagination to see that
failing to meet the Judiciary’s essential requirements undermines the
public’s confidence in all three branches of government. Both A Christmas
Carol and It’s a Wonderful Life have happy endings. We are encouraged
that the story of funding for the Federal Judiciary—though perhaps not as
gripping a tale—will too.

 

 

 

Chinese companies on World Bank’s name & shame list

screen-shot-2016-11-03-at-5-27-48-pmThe Supreme People’s Court and other Chinese government institutions have been making increasing use of name & shame lists to call attention to illegal behavior by institutions and individuals and to prevent them from benefiting from their illegal behavior (as I discussed in this blogpost). International institutions, such as the World Bank, Asian Development Bank, African Development Bank, Inter-American Development Bank and the European Bank for Reconstruction and Development, name and shame as well.  They list firms and individuals that have been disbarred (by their own or counterpart institution) from being awarded a multilateral development bank contract because they have been sanctioned for fraud or corruption violations (the World Bank list is here and a comprehensive introduction is found here). The World Bank cooperates with other international and national regulatory and enforcement organizations, such as the European Anti-Fraud Office and the UK’s Serious Fraud Office.

I recently published a brief blogpost on the website of the Wong MNC Center, calling attention to the significant number of Chinese companies, particularly state-owned companies, that are on the World Bank (and other multilateral development banks) blacklists. I noted that there do not seem to be clear repercussions for those companies and queried whether China’s Asian Infrastructure Investment Bank (AIIB) will follow the practice of the other multilateral development banks.AIIB has recently appointed Mr. Hamid Sharif, formerly of the Asian Development Bank, to be Director General of the AIIB’s Compliance, Effectiveness and Integrity Unit, and Gerard Sanders to be its general counsel. Sanders worked for many years in the legal department of the European Bank for Reconstruction and Development. Both men would take the disbarment system as an accepted part of the international development bank regulatory system.  Some issues I didn’t have a chance to raise:

  • A significant number of Chinese companies did not participate in the sanctioning proceedings or make use of the appeal procedures. This attitude is analogous to the way some  Chinese companies view foreign arbitration and other foreign dispute resolution (the three nos–see my earlier blogpost on this).An experienced Chinese consultant that I contacted privately remarked that Chinese firms take the “Four No” approach—do not recognize, do not accept, do not commit themselves, and there are no consequences in China;
  • Some of the Chinese companies that have been or are currently being disbarred are party to major contracts (or memoranda of understanding) under various Chinese government initiatives.  According to a recent report in the Philippine press, China Road & Bridge and affiliated companies (blacklisted by the World Bank until 2017) are among the major beneficiaries of President Duterte’s recent trip to China.  Other blacklisted companies are doing projects in Africa and Central America.
  • Officials of the Supreme People’s Procuratorate, as seen in this 2014 article, are advocating better international cooperation with anticorruption efforts in the business sector and mention the international development bank blacklists as a given part of the international anticorruption landscape.  They reveal that there are major compliance issues among Chinese SOEs operating abroad, with bribery as one of many problems and a generally prevailing indifferent attitude towards legal compliance.
  • It appears there will eventually be a better integration of the multilateral development bank blacklists with the Chinese system, but this will take time and many hours of quiet advocacy to put in place. It would be unfortunate if these efforts are accelerated because disbarment of Chinese companies under the World Bank system results in further investigations or sanctions in Europe, United Kingdom, or elsewhere in the world.

 

Supreme People’s Court’s new document protecting private enterprise

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The Supreme People’s Court (SPC) recently published a policy document on protecting private (民间) enterprise, although the document itself was approved almost two months previously.  It is linked to State Council and Central Leading Group for Deepening Overall Reform policy documents of earlier this year.  The State Council policy document admitted that private companies have trouble receiving “national treatment (“难以享受同等“国民待遇”). The SPC policy document further relates to a 2014 SPC policy document on private (non-public (非公有制) enterprise.  It conveys the following messages:

  • Too many lower courts are invalidating contracts because contracts have not received government approval, instead of applying the Contract Law on this point properly;
  • Too many lower courts are causing private investors to lose ownership of their companies, particularly those that are affiliated (挂靠) with government (the affiliation system was a way for entrepreneurs to avoid restrictions on private business by affiliating their operations with government).
  • Courts are preventing private investors from transferring their shareholding;
  • Courts are not sufficiently protecting the rights of private investors  who take a minority stake with other investors (especially state-owned ones). As this blogpost pointed out, it is not unusual for majority/controlling investors to engage in illegal, unfair, and abusive acts, such as abusive related company translations, creating fraudulent or defective board resolutions, failing to distribute profits, failing to keep other shareholders informed (the SPC’s judicial interpretation on this issue has not yet been issued);
  • Courts are failing to distinguish between corporate and personal/family assets, requiring private investors to repay corporate debts with their personal assets;
  • Courts are failing to uphold lending contracts between companies, although a 2015 SPC judicial interpretation confirmed their validity (under certain conditions);
  •  Courts are failing to protect the ownership rights, intellectual property rights, and operational rights of private companies, and prevent the “illegal seizure” of private property.
  • Courts are failing to uphold the rights of private enterprises to invest abroad.
  • On labor issues, courts should seek to balance the interests of the workers with the continued survival of companies, and seek to reduce labor costs.  Especially for small and medium enterprises (this earlier blogpost highlighted how often private companies are sued in Guangdong in labor cases), courts should seek to resolve disputes through conciliation. For companies in trouble, courts should use measures such as taking security to prevent employers from maliciously harming worker’s interests.

Commentary in People’s Court Daily had this to say:

Private entrepreneurs face hidden obstacles and difficulties, both from the legal system and in practice.  There are hidden inequalities in their legal status, particularly when they are facing monopoly [duopoly] state owned enterprises (SOEs), given huge power of the SOEs. Second, the investment environment for private companies is unstable. Government policies and measures often change, such as when government signs basic infrastructure contracts with government, but then government changes the related urban plan.  Third, private entrepreneurs in the past have failed to receive equal legal protection, because of judicial local protectionism and inconsistencies in judicial decision-making.

A prominent legal blogger suggested that local courts frequently abuse their authority to seal up or freeze business assets of private companies, causing significant losses.

Comments

The Chinese government is promoting public private partnerships (PPP) but has not been able to attract substantial interest in the projects for a number of reasons, including regulatory risk. Private investors are also concerned that the local courts will not protect their rights in the event of a dispute.

Statistics released by the Chinese government earlier this fall reveal that overseas investment by Chinese private enterprise in 2015 surpassed investment by state-owned enterprises, accounting for 65% of outbound investment, with observers disagreeing on the extent to which it represents capital flight. The failure of private investors “to feel justice in every case” (linked to the lack of autonomy of Chinese courts hearing cases involving the rights of private entrepreneurs) will lead them to invest less in the Chinese economy, and diversify even more assets to jurisdictions more protective of private property interests.  Those other jurisdictions will benefit from an inflow of capital and entrepreneurial spirit.

On labor issues, the SPC has indicated what current government policy is and what the courts need to do to implement it. It is unclear whether these policies will be effective in reducing labor unrest.