4th Plenum and the Supreme People’s Court

4th plenum voting

4th plenum voting

According to the Wechat postings of one of its members, the judicial reform office of the Supreme People’s Court has been working overtime for months to prepare for the 4th Plenum.  It appears, at least from the initial 4th Plenum communiqué, that the hard work has paid off.  We will know more about the leadership’s plans for legal reforms when the full decision is released.  Four quick questions about the communique are set out below (to be supplemented as time permits).

Some questions for the Supreme People’s Court and the judiciary:

1.The communique stressed the need for improving the quality of legislation, including incorporating more public consultation and experts.  Will this reduce the need for judicial interpretations? What will this mean for the drafting of judicial interpretations?  Will the Supreme People’s Court require public consultation for its own judicial interpretations?  The release this month of drafts for public comment of the environmental public interest litigation regulations and the trademark validity administrative case rules are a step in the right direction.

2. The communique called for greater judicial transparency, as was highlighted in the Court’s 4th Five Year Reform Plan.  In its press releases to the domestic audience, the Supreme People’s Court has mentioned the visits it has hosted of the foreign press, foreign diplomats, and ordinary citizens, and of analogous events at the local level.  When can we look forward to easier access by all (foreign or domestic) to proceedings in the Chinese courts (at least in non-sensitive cases)?

3.  The communique indicated approval by the leadership of the establishment of circuit courts that cross administrative lines, a concept mentioned in the 4th Five Year Reform Plan (see this earlier blogpost).  It also reflects the use in China of foreign legal concepts or frameworks (as is frequently stressed, a reference and not as a transplant).

4.  It also called for an end to “interference” by leading cadres in specific court cases.  How will this long-standing practice will be curbed?  In recent weeks, articles have appeared in the legal press on changes to the Party Political Legal Committees. Will those changes imply less involvement in actual cases? And what is the distinction between “interference” and “leadership”?

 

 

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.

Consulting the public on judicial interpretations (向社会公开征求意见)

This post looks at the role of public consultation when the Supreme People’s Court (Court) drafts judicial interpretations.

This is an important area in which the Court can institute reforms, but has not yet focused on.

Since taking office, Zhou Qiang, the new Court president has made a push for greater transparency in the judiciary, recently urging courts to guarantee the public the right of access to judicial information and supervision.   Earlier this spring, the Court organized a conference on judicial openness, but the conference did not address judicial interpretations, but rather transparency in the area of judicial decisions. Recently the Court released a number of its judicial decisions, but not yet the regulations under which the decisions were released.

How does the Court consult now?

Since 2007, public consultation has been an optional step in drafting judicial interpretations.  Previously, there was no such requirement.

The 2007 judicial interpretation regulations require the drafting group within the Court to “extensively solicit opinions” as part of the drafting process. It means continuing with their customary practice of consulting with affected ministries and other selected organizations. The drafting group can only seek public consultation if the judicial interpretation “involves the vital interests of the people or important difficult issues” and a Court leader has approved.

I described the “customary practice” in my 1993 article on the Supreme People’s Court—after the drafting group within the Court had a draft, which it would often send to the lower courts for their views, the drafting group would send a draft to an invited group, such as affected ministries, and experts at research institutes and universities. In recent years international institutions, such as the Asian Development Bank, have provided technical assistance to the Court in drafting judicial interpretations.  The process is similar to that described by Jamie Horsley for other legislation, who has written extensively on public participation in China.

Chinese leaders, however, have traditionally made law and policy through selective consultations with trusted groups of government officials, academics and other identified experts, supplemented by orchestrated “field investigations” to ascertain the “will” of the people.

Both Chinese and foreign academics have called upon the Court to increase public consultation.

When has the Court consulted the public?

The Court launched its first formal public consultation at the end of 2003, by releasing a draft of the second interpretation of the Marriage Law for public consultation.

In the last few years, among the areas in which the Court has released a consultation draft include:

  • Finance lease contracts;
  • Sales contracts;
  • Internet copyright.

Why wasn’t the public consulted?

For many other interpretations, the Court did not issue a draft for public consultation.  One example is the judicial interpretation of the Law on Foreign-Related Civil Relations. The law and its interpretation relate to China’s body of conflicts (choice of law) and is aimed at developing a comprehensive set of conflict (choice) of law rules for China, based on international principles.  The judicial interpretation sets out legal rules on areas such as:

  • The meaning of mandatory provisions of Chinese law;
  • The applicability of Chinese conflicts of law rules to the jurisdictions of the Hong Kong SAR and Macau SAR; and
  • The meaning of “foreign related.”

These seemingly theoretical issues affect persons ranging from multinational corporations, companies trading with China, parties to arbitrations, to individuals married to Chinese nationals.

According to press reports and my contacts, the Court consulted certain academic experts and lower courts in areas with many foreign disputes.  However a draft was not publicly circulated.  Rationales for not circulating a draft that may easily identified include:

  • Court personnel considered that they and their stable of experts had a good grasp of the issues and did not require widespread input; or
  • Public consultation would require more staff time to sift through the submissions to sort out the ones with useful input.

The danger is that the Court promulgates rules that are inappropriate, unworkable, and are out of touch with the actual practice.

Start with the Civil and Commercial area

The Court should start with the easily doable. The civil and commercial area presents fewest politically sensitive issues.  It would be the easiest area of law in which to permit broad public consultation.


[1] “As for the judicial interpretations involving the vital interests of the people or major difficult problems, public opinions may be solicited upon the decision of the standing vice president or president after obtaining the approval of the leader of the court-in-charge.” Article 17, Provisions of the Supreme People’s Court on Judicial Interpretation Work.