Supreme People’s Court & foreign-related disputes

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Judge Zhang Yongjian, chief judge of the Supreme People’s Court (SPC)’s #4 Civil Division (responsible for foreign, Hong Kong, Macau, and Taiwan related commercial issues) previously featured on this blog, gave an interview to Legal Daily on the sidelines of the NPC meeting. This quick blogpost sets out some of the useful information from the interview:

He provided some data on the number of cross border cases:

  • Total number of foreign-related cases of all types (first, second instance, retrial, enforcement) heard and resolved: 25900, up 9.38%, among which 1061 were criminal,19200 civil and 3629 administrative, and about 2000 enforcement cases. The civil and commercial cases increased almost 11% compared to last year and accounted for about 75% of all foreign-related cases.
  • Total number of Hong Kong, Macau, Taiwan related civil and commercial cases closed: 27053 civil and commercial cases, Judge Zhang said that they accounted for 85% of all cases involving “greater China.”

The cases coming before the Chinese courts differ from the old trading and joint venture disputes, with many more cases involving demand guarantees, international factoring, private equity funds, stock options in companies listed overseas listed companies, cross-border telecommunications (fraud?), bonded trade disputes.

(As this observer has previously predicted), the number of cases related to One Belt One Road (OBOR) is increasing relatively quickly, while the number involving the United States, Britain, Germany, are decline. Cross-border project contracting and international logistics related cases are on the increase, as well as foreign-related intellectual property cases and maritime cases. Although Judge Zhang did not say so, it appears that many of these disputes are related to Chinese companies going out as well as OBOR, and may reflect inadequate documentation of the projects. The increase in maritime cases is linked to the ongoing decline in the shipping industry.  Chinese maritime courts have heard cases related to the Hanjin bankruptcy as well as large numbers of cases involving ship crew.

Challenges for the Chinese courts in hearing cross border cases:  encountering many “blank spaces” in Chinese legislation; conflict of laws with neighboring countries.  Other ongoing bottlenecks for Chinese courts in hearing cross-border cases–service of process to overseas parties; obtaining evidence crossborder; determining facts that have occurred abroad; determining and applying foreign law.

Judge Zhang highlighted the solutions for the Chinese courts in dealing with the difficulties:

  • SPC issuing judicial interpretations and other judicial guidance;
  • establishing a case guidance and reference system for the lower courts, including model cases, guiding cases, and selected cases (i.e. as selected by the SPC), to guide and limit judges’ discretion.
  • The SPC selecting some commercial cases (relating to free trade zones, internet finance, cross border investment financing) with an international impact as a model.
  • To enable correct and just hearing of cases, the higher and lower courts should be in touch in a timely matter and establish a system for supervision before, during and after a case. [What this means for judicial autonomy in hearing cases and the appeal system is not said.]
  • On the goals for 2017, those include establishing an OBOR dispute resolution center (推进设立“一带一路”争端解决中心的建立,促进“一带一路”建设). This is likely linked to the May, 2017 OBOR Conference to be held in Beijing.  Judge Zhang did not further specify, but it seems unlikely to mean establishing China’s own investment dispute resolution center. Perhaps this means increasing the role of Chinese courts in hearing cross-border cases involving OBOR jurisdictions.

Judge Zhang mentioned that he and his colleagues in 2017 have a variety of difficult issues that will be the subject of judicial interpretations or policy documents. This observer hopes that they will find it appropriate to consult the international legal community when drafting the following judicial interpretations that are on their agenda:

  • Enforcement of foreign civil and commercial judgments (possibly related the the Judgments Convention being negotiated under the auspices of the Hague Conference on Private International Law, and in the near term, to the enforcement of judgments through mutual judicial assistance treaties;
  • cross-border guarantees;
  • labor issues for ship crew;
  • damages in marine environmental cases;
  • jurisdiction in foreign-related cases, particularly civil and commercial cases;
  • judicial review of arbitration (this has been signalled for at least two years).

Judge Zhang signalled that they want to establish an English language website on foreign-related civil and commercial matters.  It is hoped that this new website will post information in a more timely manner than the current SPC English language website. An (unsolicited) recommendation is to hire an expatriate editor (similar to Xinhua and other Chinese media outlets) to assist in delivering content that meets institutional requirements and interests the foreign user.

All these developments relate back to one sentence in the Fourth Plenum Decision:

Vigorously participate in the formulation of international norms, promote the handling of foreign-related economic and social affairs according to the law, strengthen our country’s discourse power and influence in international legal affairs, use legal methods to safeguard our country’s sovereignty, security, and development interests.

 

 

 

What the Central Economic Work Conference means for the Chinese courts

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©China Daily

The day after the Communist Party Central Committee’s Central Economic Work Conference concluded, the Supreme People’s Court’s (SPC’s) Party Committee held a meeting to study the “spirit of the Central Economic Work Conference.”  According to SPC President Zhou Qiang, the Central Economic Work Conference has the following takeaways for the courts:

First, adhere to strict and impartial justice, and create an open, transparent and predictable rule of law business environment 

Among the points– “We must insist on protecting the lawful rights and interests of Chinese and foreign parties equally according to law and building a more competitive international investment environment.”

Note, of course, that the foreign chambers of commerce in China have other views of the current state of the business environment at the moment, but agree that rule of law, transparency, and predictability are critical for improving China’s economic performance.  The following is from the European Union Chamber of Commerce in China’s  Business Confidence Survey 2016 

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AmCham China: “Respondents now cite inconsistent regulatory interpretation and unclear laws as their No. 1 business challenge.”

Second,  use the rule of law to actively promote the supply side structural reform

Zhou Qiang called on the lower courts to work better on bankruptcy cases, give full play to the role of the information network of bankruptcy and reorganization of enterprises, actively and safely deal with “zombie enterprises”, to optimize the allocation of resources to resolve the excess capacity.

But actually, bankruptcy cases remain fraught.

According to SPC Senior Judge Du Wanhua, charged with making bankruptcy law work better, in China bankruptcy requires a unified coordination mechanism  with government and courts, under Party Committee leadership.

In recent high profile corporate bankruptcies, such as LDK Solar, the local governments say that they cannot afford to rescue the companies, and so the burden must fall on creditors. The LDK case has drawn complaints from bankruptcy practitioners that the local government-led restructuring was designed to force banks to swallow the losses. Another lawyer commented that local governments’ intervention in bankruptcy cases has often disrupted their fairness.

It is likely that we will see more developments in 2017 concerning bankruptcy.

The third is to further increase the protection of property rights

Among the points Zhou Qiang made:

  • We must strengthen the protection of property rights of various organizations and natural persons;
  • We should have the courage to correct a number of mistaken cases concerning infringement of property rights.

These statements relate to three documents issued in late November and early November on protecting property rights, linked to the Central Committee/State Council’s November 4 document on the same topic, following the document issued in late October (and describe in my recent blogpost). They include:

All three relate to (well-known) abuses of China’s justice system, including:

  • turning business disputes to criminal cases (a risk for both Chinese and foreign businesses);
  • courts freezing assets far exceeding the amount in dispute (this is one example);
  • court confiscating the personal property of the entrepreneur and his (her) family, failing to distinguish between corporate and personal property;
  • courts failing to give parties opposing freezing or confiscation order a chance to be heard;
  • courts failing to hear disputes between government and entrepreneurs fairly.

The first document (apparently drafted by the SPC Research Department, because its head explained its implications at the press conference at which the first two documents were released) repeats existing principles that state-owned and private litigants, Chinese and foreign litigants should be treated equally.  It repeats existing principles that public power must not be used to violate private property rights.

The Historical Property Rights Cases Opinion (apparently drafted by the SPC’s Trial Supervision Division, because its head explained its implications at that press conference) calls on provincial high courts to establish work groups to review mistaken cases and to avoid such tragedies in the first place, focusing on implementing the regulations restricting officials from  involving themselves in court cases and the judicial responsibility system.

The third document seeks to impose better controls on the use of enforcement procedures by the lower courts.

Comments

It is hoped that these documents can play some part in improving the quality of justice in China, despite the difficulties posed while the local courts remain under local Party/government control, and may lead to the release of unfairly convicted entrepreneurs and the return of unfairly confiscated property. Perhaps these documents may provide some protection to local judges seeking to push back against local pressure.  On the historical cases, the SPC Supervision Division should consider appealing to current or retired judges who may have been involved in these injustices to come forward (without fear of punishment), as they likely to be able to identify these cases. A defined role for lawyers would also be helpful.

On the equal protection of enterprises, it should be remembered that the SPC itself has issued documents that give special protection to some parties, such as “core military enterprises.”

It appears that these documents respond to the following:

  • years of criticism of  differential legal treatment of and discrimination against private entrepreneurs;
  • academic studies by influential institutions on the criminal law risk faced by private entrepreneurs;
  • Downturn in private investment in the Chinese economy;
  • Lack of interest on the part of private enterprise in private-public partnerships;
  • Increase in investment by private enterprise abroad, most recently illustrated by the Fuyao Glass investment in Ohio;
  • articles such as this one describing Chinese entrepreneurs as either in jail or on the road to jail.

Fourth, proactive service for the construction of “one belt one road” 

This section repeats many of the themes highlighted in the SPC’s earlier pronouncements on One Belt One Road (OBOR or Belt & Road), the maritime courts, and foreign-related commercial developments. The Chinese courts continue to grapple with the increased interaction and conflicts with courts in foreign jurisdictions. The OBOR jurisdictions are handicapped by a dearth of legal professionals with familiarity with the Chinese legal system.

We should expect to see more developments directly or indirectly linked to OBOR, including a more standardized approach to the judicial review of arbitration clauses.

Fifth, strengthen the judicial response to the risks and challenges of the economy

Among the issues that President Zhou Qiang mentioned

  •  Internet finance;
  • Internet fraud;
  • illegal fund-raising and other crimes;
  • real estate disputes;
  • cases involving people’s livelihood, increasing the recourse of migrant workers and other cases of wage arrears.

These are all ongoing, difficult issues for the courts. Legislation does not demarcate clearly the line between legal and illegal forms of financing as discussed here. Migrant workers, particularly in the construction industry, are often not hired under labor contracts but labor service contracts, which reduces their entitlements under the law. As the Chinese economy continues to soften, it is likely that complex real estate disputes (of the type seen in 2015) will burden the lower courts.

We are likely to see further developments in these areas.

President Zhou Qiang told the courts to make good use of judicial “big data” to detect trends and issues so the courts can put forward targeted recommendations for reference of the Party committee and government decision-makers. He has made this point repeatedly recently.

For foreign observers of China, judicial big data is in fact a useful source of indicating trends across the Chinese economy, society, and government.  This blog has flagged some analyses, but there is much more than can and should be done.

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).

 

Comments on cooperation between the US and China on judicial reform

One of the lesser known outcomes of Xi Jinping’s trip to the United States is the commitment by the United States government to work with China on judicial reform.

The official White House press release (mirrored in statements by the Chinese Ministry of Foreign Affairs) states:

the United States and China commit to conduct high-level and expert discussions commencing in early 2016 to provide a forum to support and exchange views on judicial reform and identify and evaluate the challenges and strategies in implementing the rule of law.  U.S. participants are to include leading members of the U.S. judiciary, U.S. government legal policy experts, and officials from the Departments of Commerce and Justice and the Office of the United States Trade Representative.  Chinese participants are to include officials from the Central Leading Group on Judicial Reform, leading members of the Chinese judiciary, and Chinese government legal policy experts.  This dialogue is to result in an improvement in the transparency and predictability of the business environment.  This dialogue does not replace, duplicate or weaken existing regular bilateral legal and human rights dialogues between the United States and China.

This statement deserves more attention from the legal community than it has received so far.  Some brief comments below:

  • It is good for China and the rest of the world for Chinese judicial reform to be the subject of inter-government dialogue aimed at positive results.  Whatever improvements eventually result from this dialogue will eventually benefit both Chinese and foreign litigants.
  • The Communist Party’s Central Leading Group on Judicial Reform is explicitly named as one of the participants from the Chinese side.  It approves major Chinese judicial reforms (the text of the 4th five year judicial reform plan evidences that), so it makes sense for it to have one or more representatives involved in future dialogue (although technically it is not a “judicial institution.”
  • It is likely to include leading members of the Supreme People’s Court, but is unclear what other institutions will be involved.  Do the legal policy experts of the Chinese government also include the State Council’s Legislative Affairs Office?
  • The question is what issues the dialogue will focus on.  It is clear that the intent is to focus on technical legal issues, but which ones?  Perhaps the Law Committees of Amcham China and Amcham Hong Kong can draft a list of issues for the US government agencies involved in the dialogue to consider.
  • Among the issues I would nominate would be those related to better integrating the Chinese courts with its counterpart institutions in the rest of the world.  The Supreme People’s Court One Belt One Road (OBOR) opinion (see my earlier blogpost) mentioned that China was looking to expand bilateral and multilateral mutual judicial assistance arrangements, for better delivery of judicial documents, obtaining evidence, and recognition and enforcement of foreign court judgments.  My fellow blogger, Mark Cohen, recently wrote about the issues relating to the problems of litigants in the US courts seeking evidence relating to Chinese counterfeiters. The number of cases in foreign courts involving Chinese commercial activity is likely to increase and better judicial assistance structures should be put in place.
  • Related to the previous issue would be improving the international standing and influence of the Chinese courts (as the OBOR opinion states is a goal) in a positive way, by being a more neutral forum for cross-border disputes.  Statements such as the one made by Chinese judges in the Huawei vs. InterDigital case (pointed out by Mark Cohen in a recent presentation) do not give foreign litigants confidence that their cases will be heard fairly in Chinese courts.  The judges wrote: “Huawei is good at using antitrust laws as a counter-weapon, which other Chinese companies should study…. domestic enterprises [should] break through technical barriers in the development of space for their own gain, through bold use of antitrust litigation.”

If you have further issues to add to the list, please use the comment function!

Supreme People’s Court and “One Belt One Road”

Judge Luo Dongchuan. chief judge,#4 civil division

Judge Luo Dongchuan. chief judge,#4 civil division, at the OBOR Opinion press conference

On 7 July the Supreme People’s Court (the Court) issued an opinion (意见) policy document on how the courts should provide services and protection to “One Belt One Road” (OBOR Opinion) (关于人民法院为“一带一路”建设提供司法服务和保障的若干意见). This blogpost explains why the Supreme People’s Court issued it, what the policy document provides and what it means for legal professionals. The typical (model) cases issued at the same time include the Sino-Environment case, subject of an earlier blogpost  (and deserve closer analysis).

Why was the One Belt One Road document issued?

One Belt One Road (OBOR) is a major government strategic initiative.  As a central government institution, the Court must do its part to support OBOR.  Major SOEs contemplating investing in OBOR projects or trading with companies on OBOR recognize that their interests are best protected through legal infrastructure and the Court has an important role in this. MOFCOM and other related regulatory agencies realize this as well. Local courts linked to the Belt or the Road, are dealing with new demands because of OBOR and are looking to the Court for guidance.

The OBOR Opinion was drafted with input from these regulatory agencies and certain legal experts, but was not issued for public comment.

What the OBOR Opinion covers

The OBOR Opinion covers cross-border criminal, civil and commercial, and maritime as well as free trade zone-related judicial issues.  It also deals with the judicial review of arbitration.

Criminal law issues: the lower courts are requested to improve their work in cross-border criminal cases, and the courts are to do their part in increased mutual judicial assistance in criminal matters.  The focus is on criminal punishment of  those characterized as violent terrorists, ethnic separatists, religious extremists, and secondarily on pirates, drug traffickers, smugglers money launderers, telecommunication fraudsters, internet criminals, and human traffickers. It also calls on courts to deal with criminal cases arising in trade, investment, and other cross-border business, and deal with criminal policy and distinguishing whether an act is in fact a crime, so that each case will meet the test of law and history.  The political concerns behind criminal law enforcement issues are evident in this.

Much of the focus in the OBOR Opinion is on civil and commercial issues, including the exercise of jurisdiction, mutual legal assistance, and parallel proceedings in different jurisdictions and in particular, improving the quality of the Chinese courts in dealing with cross-border legal issues. These issues are explained in more detail below

One of the underlying goals set out in the OBOR Opinion, is to improve the international standing and influence of the Chinese courts and other legal institutions.

What does it mean for legal professionals

The OBOR Opinion signals that the Court is working on a broad range of practically important cross-border legal issues.  Some of these issues involve working out arrangements with other Chinese government agencies and are likely to require several years to implement.  The OBOR Opinion mentions that the Court:

  • seeks to expand bilateral and multilateral mutual judicial assistance arrangements, for better delivery of judicial documents, obtaining evidence, recognition and enforcement of foreign court judgments.
  • supports and promotes the use of international commercial and maritime arbitration to resolve disputes arising along One Belt One Road.  China will promote the use of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) between countries on One Belt One Road and encourage countries that have not yet acceded to the Convention to do so.
  • supports and promotes the use of various types of mediation to resolve OBOR related cross-border disputes.
  • it signals that the Court will become more involved in Chinese government initiatives such as the Asian Infrastructure Investment Bank, the conference of supreme courts under the Shanghai Cooperation Organization, and other international or regional multilateral judicial cooperation organizations.
  • is signalling the lower courts that they should limit the range of cross-border contracts being declared invalid or void.
  •  sets out the new thinking on the issue of reciprocity in the enforcement of foreign judgments, in particular that Chinese courts can take the initiative in extending the reciprocity principle to parties from other jurisdictions.  This is practically significant for foreign parties and their counsel, and has been discussed repeatedly by both practitioners and academics (such as these);
  • will improve Chinese legal infrastructure on overseas evidence, overseas witnesses giving evidence, documenting the identity of overseas parties, “to better convenience Chinese and foreign parties. ”  This would involve evolving from the current system embedded in Chinese legislation of requiring notarization and legalization of many documents (because mainland China is not yet a party to the Hague Convention on the Abolishing the Requirement of Legalization of Foreign Public Documents. This is a positive sign;
  • The Court has on its agenda further legal infrastructure on the judicial review of arbitration (as signalled at the end of last year), involving foreign/Hong Kong/Macau/Taiwan parties, aimed at supporting arbitration and having a unified standard of judicial review on the following issues:
    • refusing enforcement of arbitral awards; and
    • setting aside arbitral awards.
  • has on its agenda judicial legal infrastructure for supporting the resolution of bilateral trade, investment, free trade zone and related disputes.
  • Reflecting language in the 4th Plenum, it calls for China to be more greatly involved tin the drafting of relevant international rules, to strengthen China’s voice concerning issues of international trade, investment, and financial law.
  •  mentions that an improved version of the Court’s English language website and website on foreign-related commercial and maritime issues is forthcoming.  Specific suggestions can be emailed to supremepeoplescourtmonitor@gmail.com.

Shine light on draft judicial interpretation on “twisting the law in arbitration”!

images-1The Supreme People’s Court and Supreme People’s Procuratorate are together drafting a judicial interpretation on Article 399a of the Criminal Law, the crime of “twisting the law in arbitration.”  My understanding is that one of the criminal law divisions of the Supreme People’s Court is involved in the drafting, rather than the #4 civil division, well-known internationally for its expertise in arbitration issues. According to an article published by the Guiyang Arbitration Commission, in late April, the State Council Legislative Affairs Office distributed the draft to some arbitration commissions for comment.  Given the many legal issues it raises for domestic and foreign arbitrators (and the Chinese government’s international/regional obligations), it should be issued publicly for comment.

What is Article 399a of the Criminal Law?

Article 399a, is part of  Chapter IX:  Crimes of Dereliction of Duty.

Where a person, who is charged by law with the duty of arbitration, intentionally runs counter to facts and laws and twists the law when making a ruling in arbitration, if the circumstances are serious, he shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention; and if the circumstances are especially serious, he shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years.”(依法承担仲裁职责的人员,在仲裁活动中故意违背事实和法律作枉法裁决,情节严重的,处三年以下有期徒刑或者拘役;情节特别严重的,处三年以上七年以下有期徒刑.)

Article 399a,  (which seems to have been drawn from analogous provisions in Japanese and Taiwan law), was promulgated despite protests from the arbitration community. Harsh criticism continues to be published (in Chinese), such as Professor Song Lianbin’s Critical Analysis of the Crime of Deliberately Rendering an Arbitral Award in Violation of LawRecently, Duan Xiaosong, a Chinese law lecturer, published an article in a US law review on Article 399a, but the article apparently did not catch the attention of international practitioners.

Issues include:

  • Article 399a is a duty crime (one committed by officials). How is it that Chinese arbitrators who are not officials, or foreign arbitrators can commit this crime?
  • The procuratorate investigates duty crimes.  This means that the procuratorate must review an award to make a decision whether to investigate whether an award has been intentionally rendered “in violation of facts and law.” Will a procuratorate be able to conduct this review applying foreign law?
  • If a procuratorate prosecutes a case under Article 399a, it also requires a court to undertake a substantive review of an arbitral award.
  • Judicial interpretations of both the Supreme People’s Court and Procuratorate raise important issues.  As suggested in several earlier blogposts, part of the judicial reforms should include greater requirements for public comment on draft judicial interpretations. Depending on how familiar the US and EU bilateral investment treaty negotiators are with the details of Chinese law, this may be raised by negotiators.

Comment

Because this judicial interpretation has implications for China’s obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and the analogous arrangement with Hong Kong, the draft should be made public so that the greater arbitration community, domestic and foreign, is able to provide detailed analysis and commentary on it. This is the interests of the international and Chinese legal communities.

What you should know about foreign-related cases in the Chinese courts post 4th Plenum

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The integration of China with the outside world through investment, trading, shipping, and licensing, inevitably (in some cases) leads to litigation in a Chinese courtroom (even if a contract has an arbitration clause), as companies large and small have found out.  Some recent examples are listed below:

The Supreme People’s Court (Court) recently held its 4th National Work Conference on Foreign-Related Commercial and Maritime Adjudication (4th National Work Conference) in early November, shortly after the 4th Plenum. This is a conference that the Court organizes occasionally for judges hearing  commercial and maritime cases involving foreign parties. The Court uses work conferences to transmit the latest central legal policy, harmonize court practices consistent with those policies, and find out what the latest difficult legal issues are. (This is a practice similar to other Party/government agencies).

The 4th National Work Conference highlighted some of the provisions of the 4th Plenum:

  • Vigorously participate in the formulation of international norms;
  • Strengthen our country’s discourse power and influence in international legal affairs;
  • Strengthen law enforcement and judicial cooperation between the mainland, Hong Kong, Macau and Taiwan;
  • perfect our country’s judicial assistance systems;
  • ensure that the courtroom hearings play a decisive role.

Additionally, the Court emphasized other principles  such as —

  • vigorously asserting jurisdiction (which is also asserted vis a vis the Hong Kong courts–see this commentary on a Hong Kong divorce case), which deserves closer attention in Hong Kong;
  • Correctly applying international treaties and governing law principles.
  • Safeguarding national rights and interests.

Some background if you need it

“Foreign-related” is a concept of many years standing that means that a foreign element is involved, because of a party’s nationality, location of the property disputed, or other factors (as explained here).The concept of “foreign-related” further relates to other important questions, such as selecting arbitration outside of China and foreign governing law.

Following national work conferences, the Court  often issues follow-up “Conference Summaries” to guide the lower courts on the agreed upon approach to new or contentious issues. These do not have the status of a judicial interpretation but courts refer to them when deciding cases. According to Court rules, courts can cite judicial interpretations (but not Conference Summaries).  It doesn’t seem that the Conference Summary has yet been issued.

Status update on foreign-related cases in the Chinese courts

In China, 203 intermediate and 204 basic level courts have jurisdiction over first instance foreign-related cases.  In the period 2010-end June 2014, the Chinese courts heard 287,262 first and second instance cases foreign-related maritime and commercial cases, an increase of 41% over the previous period. The cases are mostly heard by courts in coastal areas, but as foreign investment goes inland, disputes inevitably follow.

Head’s up for the foreign legal community

Following the Work Conference, Judge Luo Dongchuan, head of the #4 Civil Tribunal of the Court, was interviewed by Legal Daily. Judge Luo mentioned many important future legal developments, highlighted below.

1. Reforms relating to four important practical issues

  • Establishing an electronic platform for service of legal process outside of the jurisdiction (intended to mean Hong Kong, Macau, Taiwan, as well as foreign countries);
  • Investigating and obtaining evidence (this is likely linked to current anti-corruption efforts by the Chinese government to pursue (and retrieve assets from) corrupt officials who have settled overseas)
  • Determining foreign law, through establishing a database of experts (Chinese and foreign).
  • Restricting parties to litigation from leaving China (Chinese legislation on these procedures is difficult to parse (see my earlier article on this subject and another related one).

2. Maritime court related reforms

  •  The Court is considering establishing maritime circuit courts, to deal with disputes arising inland arising from logistics cases in the maritime courts.
  • The Court intends to promote the maritime courts and a forum for hearing cases involving maritime pollution from on-shore sources (the largest source of maritime pollution China).
  • The Court is looking into reforming the maritime court’s jurisdiction, so that it will have jurisdiction over civil, criminal, and civil maritime cases.

3. Recognition of foreign court judgments

Judge Luo mentioned that the Court is researching the recognition and enforcement of foreign court judgments involving property.  (This appears to be at an early stage.)

3. Arbitration related reforms

Judge Luo emphasized that the Court supports arbitration.

Because arbitration is so important, the Chinese courts will try to uphold the validity of vague [poorly drafted!] arbitration clauses.

A new judicial interpretation on the judicial review of arbitration-related issues will go into the Court’s judicial interpretation drafting plan in 2015.

The Court intends to reform jurisdiction in judicial review of arbitration issues, to consolidate them in specialized courts, expanding the pilot projects underway in Guangdong, Inner Mongolia, and elsewhere (as designated by the Court.  Earlier this year, the Guangdong Higher People’s Court published a report on its experience so far.

4. Electronic platform

The Court is considering establishing an electronic platform for foreign-related cases.  This may relate to making litigation procedures for parties more transparent.

 Some unsolicited suggestions for the Supreme People’s Court

Consider the following:

  • Overhaul the Court’s English language platform, so that it provides useful official information for the foreign reader who does not know Chinese;
  • Issue more draft judicial opinions for public comment and give the public (foreign and Chinese) a more sensible time period to comment, particularly for draft regulations relating to any of the issues discussed above. The issues mentioned above are very important to the foreign business and legal community.  The current 30 day time period extremely short by international standards.  Given the opportunity, international and foreign organizations and law firms will comment, but it takes time for translation and busy lawyers and other legal professionals to make comments.
  • Consider what can be done to make the Chinese courts a more user-friendly forum for international commercial disputes.  For example, consider what is needed for China to become a party to the Hague Convention on the Legalization of Foreign Public Documents (which will involve reforms by multiple government departments) and other related conventions.  The current system of legalization of foreign evidence is difficult for foreign parties and puts the Chinese system behind the 107 countries in the world that are signatories).