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.

The Court Misses an Opportunity to Consult the Public on the Demand Guarantee Interpretation

On 6 December the Supreme People’s Court (the Court) issued for a nine day comment period for public consultation their draft “regulations concerning some issues related to the trial of disputes involving independent guarantees” (draft demand guarantee interpretation).   The Court missed an opportunity for real public consultation on a judicial interpretation with significant domestic and international commercial implications.

Why was it a missed opportunity?

In the best of worlds, what could have happened?

  • The Court could have used the draft to showcase the Court’s new openness and transparency (which had begun even before the Third Plenum of the 18th Central Committee of the Communist Party (Third Plenum)).
  • The Court could have set a public consultation period long enough for interested parties (domestic and foreign) to provide meaningful input on the draft.  Interested parties could have had a chance review and consider the draft in light of issues that often arise in transactions when demand guarantees are issued by Chinese institutions, and compare it to the “international  standard” on the subject,the  International Chamber of Commerce’s Uniform Rules for Demand Guarantees (URDG).

The reasons why are the Court did so are explained below.

The demand guarantee regulations are classified as a type of judicial interpretation, which, as explained in a prior blogpost, are an important source of legal rules in China.

Why is the draft demand guarantee interpretation important?   Chinese banks often issue demand guarantees to foreign companies on behalf of Chinese contractors, exporters, and investors. When projects go wrong, Chinese companies often go to Chinese court to try to stop payment on their guarantees.

This blogpost describes:

  • What a demand guarantee is;
  • Why the Court drafted this interpretation;
  • What issues the interpretation raises;
  • How the Court handled public participation and possible reasons for doing so; and
  • Avenues for advocating a greater role for public consultation.
  1. What is a demand guarantee?

A demand guarantee (most often called an independent guarantee in Chinese (独立保函)), is often used in construction, engineering and other projects, when the owner of the project requires a contractor to guarantee his performance, often with a guarantee issued by a bank, so that if the contractor fails to meet his obligations, the project owner can be easily compensated.

2. Why the  Court drafted this interpretation

The Court drafted the demand guarantee interpretation because the lower courts are faced with the situation of trying an increasing number of cases involving demand guarantees, with inadequate legislation.

These cases arise because Chinese construction and engineering companies, taking an increasing share of the contracting market outside of China, seek to avoid paying on the demand guarantee to the foreign project owner.  Large construction or engineering contracts are usually secured by a demand guarantee.  The Chinese construction and engineering companies usually obtain these demand guarantees from Chinese banks. When foreign project owners make demands under the demand guarantees, because the construction project does not meet specified standards, Chinese contractors often apply to the Chinese courts to withhold payment to the foreign project owner.  A recent article by a Dacheng Law Firm partner described his experience acting for a Pakistani project owner.

3.  What issues does the interpretation raise?

The issues below concern banks and project owners, Chinese and foreign:

  • Whether demand guarantees should be applicable to domestic transactions;

The Security Law takes a negative view but see further discussion on this issue here;

  • Whether the court should be able to review the underlying transaction when reviewing demand guarantee disputes;

(Article 27 of the draft states yes, that in relation to fraud (as characterized by Article 18), the court should be able to engage in limited review of the underlying transaction)

  • Governing law of and applicability of Chinese mandatory regulations to demand guarantees; and

(the law agreed by the parties, and if the guarantee is silent, the law of the habitual residence of the guarantor; the mandatory provisions of security given to foreign parties are applicable);

  • Procedures for proceedings to withhold payment under a demand guarantee.

4. How the Court handled public consultation and why

The Court handled the public consultation quickly and quietly.   The possible reasons are described below.  The Court did not publicize the draft on its Weibo or Wechat accounts, nor did the Court’s newspaper, the People’s Court Paper, feature an article calling attention to the draft interpretation.  The nine day public consultation did not violate the Court’s own rules, which do not set out consultation periods or methods of consultation.

Why the brief consultation period?

  • Court officials may have felt that they had solicited enough expertise to issue the draft.

The No. 4 civil division, in charge of foreign-related cases and arbitration, had been working on this judicial interpretation for over two years and had organized several invitation-only conferences in 2012 and 2013 to discuss the draft.  This is standard practice in Chinese legislative drafting (as discussed in a this blogpost) and this article. Participant experts at these conferences included:

    • the Ministry of Commerce;
    • CIETAC;
    • the Beijing Arbitration Commission;
    • leading Chinese lawyers.
    • and likely representatives from the principal Chinese banks and major state-owned companies.
  • Personnel changes slowed the issuance of the interpretation.  During 2013, the Court leadership nominated a new head of the No. 4 civil division, but his appointment was subject to National People’s Congress Standing Committee confirmation, delaying action on this and other matters.
  • There may be a push to issue the interpretation before year-end, so that the lower courts can rely on it to resolve cases, a performance indicator for the lower courts.

5.  Can the Bilateral Investment Treaty Negotiations Push for a More Public Consultation of Judicial Interpretations?

The Chinese government is negotiating Bilateral Investment Treaties (BITs) separately with the United States and the European Union.  The 2012 U.S. Model Bilateral Investment Treaty contains a framework for including this type of judicial interpretation in BIT transparency obligations.  Those obligations require (to the extent possible) giving interested parties the chance to comment on “proposed regulations of general application of its central level of government.”  The WTO has jurisprudence on what this means.

If the language ultimately agreed between the United States and China is broad enough to encompass judicial interpretations related to investment, this will ultimately trigger an amendment to transparency requirements for judicial interpretations.

Chinese and foreign individuals and businesses would benefit from greater transparency in judicial interpretations.