Litigation 2021

Last Updated December 04, 2020

China

Law and Practice

Authors



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China adopts the socialist legal system with Chinese characteristics, which largely follows the civil law tradition as a result of learning from the latter. Therefore, statutory law is the most important source of law in the Chinese legal system. It is worth noting that, in recent years, China’s Supreme People’s Court (SPC) has attached great importance to uniform application of the law. Specifically, it constantly raises the importance of precedents in judicial practice by providing guidance for China’s judicial practice in the form of “Guiding Cases”. Although these Guiding Cases are not yet formal sources of law in China, they serve as reference for the judges when deciding on similar cases.

PRC courts mainly adopt the inquisitorial approach. The judges largely control the trial proceedings: they guide the parties to conduct fact-finding and court debates and may inquest the parities as the judges see fit. Of course, the parties and their counsel still need to present their respective evidence during the trial, cross-examine the other party’s evidence (primarily documentary evidence), and comment on the application of law or challenge that of the opposing side.

Normally, most legal process in China will be conducted through both written submissions and oral arguments. Only in the cases of second instance/appeal where no new evidence, facts or grounds are presented the court may find it unnecessary to hold an in-person hearing, as well as in some special procedures, no hearing will be required.

The court system in China can be divided into four levels:

  • the first level is the SPC, which is the highest judicial organ in China;
  • the second level is the higher people’s courts (the “higher courts”), which are located in every province, autonomous region, and municipality;
  • the third level is the intermediate people’s courts (the “intermediate courts”), which are established in each prefecture-level city; and
  • the last and basic level is the primary people’s courts (the “primary courts”), which are established in each county, district, or county-level city.

China adopts the two-tier trial system, and the court system is not structured according to the court’s litigation function (eg, trial court or appellate court). Cases of first instance are mostly tried in the primary courts while some foreign-related cases and cases with major impact may be tried in the intermediate courts, the higher courts, or even the SPC within their respective jurisdictions. Decisions made by the court of first instance may be appealed to the court of second instance. Decisions from the second-instance are effective and binding, but they may be revised through a retrial proceeding in certain circumstances.

In addition, the jurisdiction of courts is generally determined based on geographical location and their levels. But specialised courts with exclusive jurisdiction over certain cases also exist, such as intellectual property (IP) courts, maritime courts, and financial courts.

According to the Civil Procedure Law, all trials are open to the public except where there is the involvement of state secrets or privacy, or where otherwise stipulated by the law. For a divorce case or a case involving commercial secrets, where a litigant applies for a closed hearing, the lawsuit may be tried in a closed hearing.

The court shall pronounce judgment for all cases regardless of open hearing or closed hearing. The public may inspect the legally effective judgments and decisions except where the contents involve state secrets, commercial secrets, and/or personal privacy.

In China, litigants are entitled to entrust the following persons as the agent in legal proceedings:

  • a lawyer or grass-roots legal service provider;
  • a close relative or employee of a litigant; and
  • a citizen recommended by the community, employer, or the relevant social organisation.

A power of attorney signed or sealed by the principal shall be submitted to the court when the agent is entrusted. Foreign lawyers cannot join the proceedings as litigation agents in China, but can observe the hearing with permission from the court.

PRC law does not prohibit third-party litigation funding, which is conceptually similar to litigation financing in legal practice. A litigant may seek a third party to pay the attorney’s fees, notarisation fees, appraisal fees, and other expenses of the proceedings. However, third-party funding is rare in China.

PRC law does not stipulate specific provisions for what types of lawsuits are available for third-party funding. In general, commercial cases are likely to be suitable cases. Pursuant to the SPC’s opinion, payment of plaintiffs’ litigation costs through the environmental public interest litigation fund is encouraged in environmental public interest litigation.

PRC law does not specify the parties who may obtain third-party funding. According to the current practice of litigation financing, third-party funding is available for both the plaintiff and the defendant.

PRC law does not restrict the amount of third-party funding. Generally, the amount of funding will be determined by the negotiation between the funder and the litigants.

There are no specific provisions under PRC law relating to third-party funding. Therefore, it is up to the funder to decide what costs it will fund.

Pursuant to the Administrative Measures on Fees for Lawyer Services, contingency fees are permitted only in civil cases involving property relationship and the clients are informed of the government-guided prices but opt for a contingency fee. When a contingency fee is charged, a law firm and the client shall enter into a contract and the contingency fee shall not exceed 30% of the total amount of the subject matter in such contract.

PRC law does not set any time limits for obtaining third-party funding.

In most cases, there is no prerequisite before the plaintiff files a lawsuit. However, PRC law sets out some special circumstances under which the plaintiff shall satisfy certain preconditions before filing a lawsuit, such as the parties in labour disputes shall go through labour arbitration before filing a lawsuit and when directors or senior executives violate the law and cause damage to the company, the shareholders shall submit a written request to the board of supervisors/supervisor to urge the company to sue before suing on the shareholder’s name.

The plaintiff is not required to send a pre-action letter to the potential defendant and the potential defendant is not required to respond to such letter under PRC law.

PRC law provides that the general limitation period to initiate an action to the court is three years unless otherwise provided by law. Besides, there are also some special periods, such as:

  • the limitation of a claim for payment of insurance money by the insured party or the beneficiary of a life insurance policy from the insurer is five years; and
  • the limitation on filing a lawsuit concerning a dispute arising from an international contract for the sale of goods or a contract for the import and export of technology is four years.

Generally, limitation periods are calculated from the date when the right-holder knows or ought to be aware of the damage and the identity of the obligor unless otherwise provided by law. And the longest limitation of protection is 20 years unless the court decides to extend the limitation per the application of the right-holders under some special circumstances. Also, limitation periods can be suspended or interrupted in accordance with the law.

Jurisdictional requirements stipulated in the Civil Procedure Law apply to all courts in China. When a lawsuit is filed, the court will examine whether it has jurisdiction based on hierarchical jurisdiction rules and territorial jurisdiction rules. In general, the court at the location of the defendant’s domicile shall have jurisdiction. If the domicile and habitual residence of the defendant are different, the court at the location of habitual residence shall have jurisdiction. However, the court at the location of the plaintiff’s domicile shall have jurisdiction over certain proceedings, such as the identity relationship lawsuit filed against a person who does not reside in China, a missing/declared-missing person, or a person who is subject to mandatory education measures or under imprisonment.

In certain types of lawsuit, the courts designated by law have exclusive jurisdiction. For example, for port operation disputes, the court at the location of the port shall have jurisdiction; for real property disputes, the court at the location of the real property shall have jurisdiction.

The plaintiff needs to submit the following documents when filing a lawsuit to the court in China:

  • a statement of claims (including the basic information of the parties, claims, underlying facts, and reasons);
  • supporting evidence;
  • identity information of both the plaintiff and the defendant; and
  • a power of attorney and other identity information documents of the lawyer (if a lawyer is engaged as the agent).

After the court has officially accepted the case, the plaintiff may amend the documents, such as the claims, or submitting supplementary evidence, etc. It should be noted that, in most circumstances, the plaintiff shall finalise the claims and produce all evidence within the time limit determined by the court.

According to the Civil Procedure Law, service is the court’s responsibility, while the plaintiff needs to provide the defendant’s address and contact information upon filing the case. After a court accepts the case, it will deliver the copy of pleadings and evidence submitted by the plaintiff to the defendant within five days from the date of the opening of the case file.

A lawsuit can be filed against a defendant who is not a resident in China for a contract dispute or any other property rights dispute, provided that:

  • the contract is executed or performed in China;
  • the subject matter of the litigation is located in China;
  • the defendant has properties in China which can be seized; or
  • the defendant has established a representative organisation in China.

The court may take different measures to serve a non-resident defendant, such as service through:

  • methods stipulated in an international treaty;
  • diplomatic channels;
  • entrustment of the embassy or consulate of China;
  • an agent entrusted by the defendant;
  • a representative organisation of the defendant established in China;
  • mail (if applicable);
  • facsimile or email; and
  • publication.

Under PRC law, the failure of the defendant to respond to a lawsuit shall not affect the trial of the case by the court.

In particular, if the defendant does not submit a statement of defence as required by the court, the court will continue with the proceedings. If the defendant refuses to be present in court upon being served summons without justification or leaves the courtroom during the hearing without the court’s permission, the court may render a default judgment.

PRC law permits joint actions and representative actions. If one of the litigants is comprised of two or more persons, with the same subject matter or of the same type, and the court deems that the lawsuit can be tried concurrently, the court may try the lawsuit as a joint action upon consent by the parties. Where the parties on one side of a joint action are numerous (more than ten), such parties may appoint a representative or representatives to participate in the action.

If the number of litigants of a representative action is uncertain when filing, the litigants shall elect a representative or the court may designate a representative from the litigants when necessary. The court may issue a public announcement, stating the facts of the case and the claims, and notify the right-holders to register within a stipulated period.

PRC law has no requirement to provide clients with a cost estimate of the potential litigation at the outset, but legal services fees shall be subject to the government-guided prices and market-regulated prices. In practice, the client usually requests the lawyer to estimate litigation costs at the outset.

According to the provisions of the Civil Procedure Law, there are three main types of interim motions in China. For these interim motions, the court may also take preservation measures on its own without the application of the parties when necessary. 

Evidence Preservation

This is used:

  • where evidence is likely to be lost or difficult to be obtained later, a litigant may apply to the court for evidence preservation in the course of proceedings; or
  • in urgent cases, an interested party may apply to the court (at the place where the evidence is located or the respondent is domiciled, or the court which has jurisdiction over the case) for preservation of evidence before filing a lawsuit or applying for arbitration.

Property Preservation

For cases in which the judgment may be difficult to enforce or other damage may be caused due to one party’s conduct or other reasons, a litigant may apply to the court for the preservation of property either before or after a case has been filed. And the court may take appropriate measures to seize, detain, or freeze the assets accordingly.

Conduct Preservation

In the same circumstances as property preservation, a litigant may also apply to the court to compel a party to perform or prohibit it from performing certain acts. In practice, pre-litigation conduct preservation is usually applicable to IP disputes. In 2018, the SPC issued a judicial interpretation that specifies the procedure for applying conduct preservation in cases of IP disputes.

Firstly, in China, a party cannot obtain an early judgment on some or all of the disputed issues before the case is concluded. However, according to the Civil Procedure Law, the court may issue a ruling on advance enforcement in some cases, upon the application of a party, specifically:

  • cases to recover support, alimony, childcare, pension, or medical expenses;
  • cases to recover labour remuneration; and
  • cases requiring advance enforcement under urgent circumstances.

The cases concerning advance enforcement shall meet two conditions:

  • the rights and obligations between the parties are clear, and the denial of advance enforcement will seriously affect the applicant’s living situation or business operation; and
  • the respondent is capable to perform.

The court may order the applicant to provide security, and if the applicant fails to provide security, the application will be dismissed. 

Secondly, PRC law does not provide for any particular procedure for the other party to strike out claims before trial or substantive hearing. Once the case is accepted by the court, what is available to the defendant is the objection to the court’s jurisdiction; for example, on the ground that the arbitration agreement precludes the court’s jurisdiction. 

In common law jurisdictions, dispositive motions refer to motions filed with the court that may put an end to all legal proceedings in that court, which means such motions can either wipe out the case entirely or certain portions of it. Most of these motions fall under a motion to dismiss or a motion for summary judgment.

In China, no concept matches the dispositive motions. Once the plaintiff files a lawsuit, there is no means for the defendant to halt the proceedings. However, after receiving the case materials, the court may refuse to accept the case, or dismiss the case once accepted, if it deems that the conditions for initiating an action are not met. Under Article 119 of the Civil Procedure Law, such conditions include:

  • the plaintiff shall be a citizen, legal person, or other organisation that has a direct interest in the case;
  • there exists a definitive defendant;
  • the plaintiff has provided specific claims, facts and reasons for the case; and
  • the case shall fall within the scope of civil lawsuits which can be accepted by the court and the jurisdiction of such court.

PRC law provides that where a party who must participate in a joint action fails to join a lawsuit, the court shall notify such party to join in the proceedings. The interested parties may also apply to the court to join the case.

Joining as a Plaintiff

First, under some circumstances, parties may join a lawsuit as plaintiffs, such as:

  • in inheritance proceedings which are initiated by part of the successors, the court shall notify the other successors to join the proceedings as co-plaintiffs;
  • in cases regarding infringement of joint estate, which is initiated by part of the co-owners, the other co-owners shall be the co-plaintiffs; and
  • in public interest cases, other departments and relevant organisations that are entitled to file a lawsuit by the law may apply to the court to join the proceedings as co-plaintiffs before the hearing.

Joining as a Defendant

Second, parties may also join a lawsuit as defendants, for example:

  • if the plaintiff claims that the labour dispatching institution shall be responsible for the damages caused by the dispatched worker in the performance of work duties, the employer who accepted the dispatched worker and the labour dispatching institution should be co-defendants;
  • in an action arising out of a dispute over a contract of guarantee, if the creditor makes claims against both the guarantor and the guarantee, the court shall include the guarantor and the guarantee as co-defendants; and
  • if an incapacitated person or a person with limited capacity for civil conduct causes damages to others, the guardian shall be the co-defendants.

Independent Claims and Legal Interests

Third, PRC law provides that a third party may be added to a lawsuit, in the following two scenarios:

  • a third party who deems that it has an independent claim over the subject matter of a suit shall have the right to apply to the court to join the proceedings; and
  • a third party who does not have an independent claim to the subject matter, but has a legal interest in the outcome of the case, may also join the proceedings through application or the court’s notification.

Moreover, a third party who has been ordered to assume civil liability by a court shall have the rights and obligations of a litigant to the case, such as the right to appeal.

In addition, where a party who must participate in a joint action fails to join in the proceedings for a cause not attributable to the party or its agent ad litem, the party may file a petition for retrial within six months from the date when the party knows or should have known the action. 

PRC law does not provide any regulations that the plaintiff/claimant shall pay a sum of money as security for the defendant’s costs under the defendant’s application. However, the court may order the plaintiff to provide security before granting a preservative measure or ruling on advance enforcement. 

The movant applying for interim motions shall pay to the court an application fee, which shall ultimately be borne by the losing party, subject to the decision of the court. Also, when the court decides to take preservation measures, it may order the movant to provide security at its own expense, and if the moving party fails to comply, the court will dismiss the application.

Under the provisions of the Civil Procedure Law, when an interested party applies to the court for preservation measures before filing a lawsuit or applying for arbitration due to an urgent situation, the court must make a verdict within 48 hours after accepting the application. If the court determines to take preservation measures, such measures shall be implemented immediately. If the applicant fails to initiate an action or arbitration within 30 days after the preservation measures being taken, the court shall remove the preservation.

For the litigants who apply for preservation measures in the course of proceedings, the court shall make a verdict within 48 hours only in case of emergency, and the court’s decision to take preservation measures shall be implemented immediately, but no general time limit is stipulated in normal circumstances. Nonetheless, concerning the property preservation, a judicial interpretation issued by the SPC stipulates that the court shall make a verdict within:

  • five days after accepting the application; or
  • five days after the provision of security when security is required in such case.

Once a ruling is made to take preservation measures, the measures shall be commenced within five days.

There is no discovery mechanism under PRC law. As such, the court cannot compel the litigants to produce evidence relevant to the case during the proceedings. However, PRC law provides for the burden of proof, specifically:

  • A party shall provide evidence to prove the facts on which the claims are based or to refute the facts on which the claims of the opposing party are based. If a party fails to provide evidence or the evidence provided is insufficient to support the alleged claims, the party who bears the burden of proof shall bear the adverse consequences.
  • Article 95 of the newly revised Several Provisions of the Supreme People's Court on Evidence for Civil Actions (Amended in 2019) (the “Evidence Provisions”) provides that if a party controlling the evidence refuses to submit the same to the court without any justifiable reasons, a claim by the other party (who bears the burden of proof) that such evidence is unfavourable to the controlling party may be upheld by the court. Nevertheless, the court will be cautious to draw such inference. 
  • As for witness testimony, the Evidence Provision stipulates that the court shall require the witness to appear in court and be examined by the judge and the parties. A litigant may also apply to the court for a witness to testify before the time limit for producing evidence expires. The statement and testimony of a witness made during the preparatory stage before the trial or during the investigation and inquiry by the court shall be deemed as testifying in court. Besides, the testimony provided in writing or otherwise by a witness who fails to appear in court without justifiable reasons shall not be considered as the basis for identifying the facts of a case.

In China, evidence can be obtained from third parties who are not named as a plaintiff or defendant during the legal proceedings. For one thing, the parties to the case may apply to the court for an investigation and collection of evidence before the time limit for producing evidence expires when it is unable to collect certain evidence by themselves due to objective reasons. The court may issue an investigation order to the applicant to collect such evidence from a third party accordingly.

To petition the court to investigate and collect evidence, a party shall submit a written application setting out the details of the evidence; for example, the name of the person or entity to be investigated, the address, the title or content of the evidence, the necessity of evidence to be investigated and collected by the court, the facts that need to be proved, and the definite clues for tracing the evidence.

For another thing, the court is also entitled to investigate and collect evidence from third parties (including relevant entities and individuals) in its discretion, in which case the third party cannot refuse. The court may delegate the investigation to another court where the matter/evidence is under investigation and request the entrusted court complete the investigation within 30 days after receiving the letter of entrustment.

As discussed in 5.1 Discovery and Civil Cases, PRC law does not provide for a discovery mechanism.

In China, the development of evidence and its procedure to be admitted into the record usually involves a process of evidence collection, production of evidence, exchange of evidence, cross-examination, and the verification and determination of evidence, specifically:

  • First, the court will serve the parties with a notice on the production of evidence during the preparation period before trial, which will set out the principles and requirements applicable to the burden of proof, the time limit, and the legal consequences for failure to produce the evidence within the prescribed time limit. The parties shall collect and submit evidence to the court within the time limit.
  • Second, the court will organise an exchange of evidence between the parties under the judge’s supervision. In the course of the exchange of evidence, the judge shall record in the case file the facts and evidence to which the parties have no objection. If any party objects to a piece of evidence, such objection and the reasons will be recorded in the file. The main issues in dispute between the parties will be determined through the exchange of evidence.
  • Third, in a trial, evidence shall be presented in court and cross-examined by the parties. The cross-examination shall focus on the authenticity, legality, and relevance of the evidence. Evidence not cross-examined by the parties shall not be considered as the basis for determining the facts of a case.
  • Fourth, the judge shall verify the evidence under the applicable legal procedures comprehensively and objectively. Evidence reflecting the reality of a case, being relevant to the facts to be proved, and whose source and form complying with the provisions of laws shall be deemed as the basis for determining the facts of a case.

PRC law does not recognise the concept of legal privilege. That said, the Lawyers Law provides for the lawyers’ duty of confidentiality. A lawyer shall keep the state secrets and trade secrets obtained during practice confidential, and shall not disclose the client’s privacy.

In China, in-house counsels are generally not regarded as practising lawyers. With the Measures for the Administration of Corporate Lawyers coming into effect on 1 January 2019, in-house counsel working for a state-owned enterprise who are certified as corporate lawyers now enjoy the same rights as the practising lawyers. In-house counsel can meet clients, review case files, investigate, collect evidence, etc. Different from the external counsel, the in-house counsel shall handle legal affairs as entrusted or assigned by the corporation that they work for and shall not:

  • engage in non-gratuitous legal services;
  • work part-time in a legal service institution (eg, a law firm); or
  • handle litigation or non-litigation legal affairs as a lawyer outside the corporation.

In theory, in-house counsels who are licensed and managed by the competent judicial administrative department shall also assume the same duty of confidentiality as practising lawyers (although not clearly stipulated in the Measures for the Administration of Corporate Lawyers).

In China, there is no legal provision that disallows a party from disclosing a particular document during the proceedings. Even if the evidence involves state secrets, trade secrets, and/or individual privacy, such evidence is still required to be submitted to the court. However, the aforementioned evidence and evidence which shall be kept confidential according to the law shall not be cross-examined in a proceeding open to the public.

PRC law does not provide for injunctions, but the law does provide for certain reliefs that have similar functions to injunctions. The reliefs fall under two categories: permanent reliefs and interim reliefs.

Permanent reliefs include cessation of infringement, removal of obstacles, elimination of danger, restitution of property, restitution to the original condition, and continued performance. The aforementioned reliefs may be granted either individually or concurrently. Furthermore, certain permanent reliefs are provided for under particular legislation; for example, copyright law, trade mark law, and patent law specifically provide for ordering the cessation of infringement.

Interim reliefs refer to interim property preservation and conduct preservation. The interim reliefs can be initiated by the litigants by application, or imposed by the court on its initiative. In case of emergency, a party may also apply to the court for pre-litigation preservation, in which security must be provided by the applicant. See 4.1 Interim Applications/Motions.

In the case of interim and pre-litigation relief, the court shall issue a verdict within 48 hours after the receipt of the application when it is urgent. If the court grants relief, such decisions shall be enforced immediately.

Under PRC law, there is no requirement for the court to notify the respondent or hold any hearing when deciding on interim or pre-litigation relief. If the opposing party’s property has been subject to property preservation measures such as seizure, impoundment, or freezing, the court will immediately notify that party. The party whose property has been preserved may apply to the court for reconsideration once, while the execution of the relief will not be suspended when the relief is reconsidered.

Article 105 of the Civil Procedure Law provides that if the application for preservation is erroneous, the applicant shall compensate the respondent for the loss suffered by the respondent as a result of the preservation. However, the applicant shall not be liable if the preservation measure has been removed by the court based on the respondent’s provision of security.

In the course of proceedings, when the court takes preservation measures on application or ex officio, it shall determine whether the parties should provide security and the amount of such security case-by-case. If the court orders the applicant to provide security but it is not provided, such application will be dismissed. As for pre-litigation property preservation, the security shall be provided by the applicant in an amount equal to that of the request for preservation.

Besides, during the period of property preservation, if the security provided by the applicant for preservation is insufficient to compensate for the losses that may be caused to the respondent, the court may order the applicant to increase the security accordingly; if the applicant refuses to do so, the court may render a ruling to entirely or partially remove the preservation.

PRC law is unclear as to whether relief is available against the defendant's assets outside China. Even if a Chinese court issues such an order, it would be difficult to enforce in other jurisdictions.

A better approach to obtain relief against assets outside China is to apply for an injunction to the court where the assets are located. For example, the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (HKSAR), which came into effect on 1 October 2019, provides that a party to arbitral proceedings administered by a Chinese arbitral institution may, pursuant to the Arbitration Ordinance and the High Court Ordinance, apply to the High Court of the HKSAR for interim measures in aid of the arbitration. Likewise, a party to arbitral proceedings administered by a Hong Kong arbitration institution may apply to the PRC mainland courts for interim measures in aid of the arbitration.

PRC courts cannot impose injunctive reliefs directly against a third party who is not a party to the case.

The Civil Procedure Law and its judicial interpretation provide that once preservation measures have been handed by a court, if a respondent in the proceedings (i) conceals, transfers, sells or destroys property that has been seized or impounded; or (ii) transfers property that has been frozen, the court may impose a fine, detention or even criminal liability on the defendant.

PRC courts try the cases by way of oral hearing. In China, a court hearing is organised as follows:

  • Pre-hearing preparation:
    1. The court clerk ascertains whether the litigants and other participants in the proceedings are present in court, and proclaims courtroom order.
    2. The presiding judge verifies the litigants, proclaims the cause of action, announces the list of the judge(s) and the court clerk, notifies the litigants of their relevant litigation rights and obligations, and enquires whether the litigants have applied for abstention.
  • Court investigation:
    1. Litigants make opening statements.
    2. Litigants present evidence, including the witness’s testimony, documentary evidence, physical evidence, audio-visual materials and electronic data, written expert opinions, and inquest records (or testifying by expert and/or inspector). Although witness evidence is possible, it is not often used.
    3. Litigants cross-examine evidence produced by other party(ies), including questioning a witness/expert.
  • Court debate: litigants debate orally at the hearing.
  • Closing statement: litigants make closing statements.
  • Possible mediation: after the closing argument, the presiding judge will consult each party’s opinion on possible mediation.
  • Judgment: where mediation is unsuccessful, the court will make a judgment.

Case management hearings occur as follows:

  • Pre-hearing conference: if a case has numerous evidence and complicated facts, the PRC court may decide to hold a pre-hearing conference prior to the court hearing to enquire as to the litigants’ opinions on some key issues and to organise the exchange of evidence. 
  • Hearing for reviewing litigants’ objections to the jurisdiction: if the judge deems it necessary, such hearing may be held; but the judge does not always do so.
  • Hearing for reviewing litigants’ applications for assets, behaviour, and/or evidence preservation: Also, such hearings may be held only when the judge finds it necessary.

There is no jury in China, instead, there are people’s assessors. In certain cases, people’s assessors will take part in a collegial panel to hear cases with the judges, in which only the judges can act as the presiding judge. People’s assessors can only participate in cases of the first instance, and the court chooses people’s assessors randomly from a list.

The Civil Procedural Law, Interpretations of the SPC on Application of the Civil Procedural Law and the Evidence Provisions govern the admission of evidence in China.

To be admissible, evidence must be presented in court and be cross-examined by the other party(ies) to the case. Judges may examine and assess evidence based on the following criteria:

  • whether the evidence is the original and whether the photocopies and reproductions are consistent with the original;
  • whether the evidence is relevant to the facts of the case;
  • whether the evidence conforms to the law in terms of its form or source;
  • whether the content of evidence is authentic; and
  • whether the witness or the person providing the evidence has an interest in the party.

Ultimately, judges will verify the evidence under applicable legal procedures comprehensively and objectively, use logical reasoning and common sense to reach independent judgments concerning whether the evidence has probative force and probative value according to the law, and disclose the reasons for and conclusions reached in their judgments.

PRC law does not specifically provide for “expert testimony”, but there are three ways in which an expert may participate in the civil proceedings.

  • First, the Civil Procedural Law recognises appraisal opinion as a form of evidence, which is usually issued by experts. A party may apply to the court for an appraisal on specialised issues or the court may decide to conduct such an appraisal on its own. The parties may jointly appoint an appraiser, failing which the court shall make an appointment. The appraiser shall testify before the court if a party objects to their appraisal opinion or the court deems it necessary.
  • Second, Article 79 of the Civil Procedural Law provides that a party may apply to the court for persons with special expertise to appear before the court to give opinions. This is often referred to as the expert auxiliary system.
  • Third, certain IP courts are staffed with technical investigation officers.

Hearings are open to the public, except for the cases involving state secrets or personal privacy. For a divorce case or one that involves commercial secrets, such a case may be tried in a closed hearing upon litigants’ application. The transcripts of the hearing are not publicly accessible.

China practises the inquisitorial model of litigation whereby the judges actively steer the trial. The judge retains full control of the proceedings, and the parties can only speak at the hearing if the judge so permits.

If a civil case is heard under the summary procedure, the court shall announce the judgment right after the hearing, except where the court deems it improper to do so. A written judgment shall still be delivered after the oral announcement. Summary procedure applies to cases where the facts are clear, the rights and obligations between the parties are easily identifiable, and the parties have no material dispute. In other circumstances, the court usually delivers judgments at a date later than the hearing.

For first instance proceedings, if standard procedure applies, the court shall conclude the case within six months from the date of acceptance. If summary procedure applies, the court shall conclude the case within three months. Extension of time limits is subject to leave from the president of the court or the direct higher court under special circumstances.

For second instance proceedings, the court shall conclude the case within three months from the court accepting the appeal. The extension of the time limit is subject to leave from the president of the court or a direct higher court under special circumstances.

The above timeframes do not apply to civil cases involving foreign elements, and there are no specific rules applicable to the time limit for the court to try foreign-related cases.

Generally, for domestic commercial disputes, the typical duration is six to nine months for first instance trial and three to six months for second instance trial. As for foreign-related commercial disputes, it may last longer, with an additional three to six months.

The parties to a lawsuit are entitled to settle on their own without court approval. Under such circumstances, the plaintiff usually withdraws the case before judgment.

Further, the court may carry out mediation during civil trials subject to the parties’ willingness. In the mediation process, if the parties reach a mediation agreement, such agreement is subject to the review and approval by the court. If the court so approves, it will issue a paper for civil mediation confirming the mediation agreement. The paper for civil mediation enters into legal effect upon receipt by both parties.

The parties may keep the settlement confidential. For mediation moderated by the court, the court shall keep such mediation non-public if a party so requests. Mediation papers are not available to the public, except for those arising out of civil public interest litigation.

If the parties settle on their own, after which the plaintiff withdraws the case, the settlement agreement cannot be directly enforced by the court. In case of a breach, the party shall claim for contractual breach at the competent court to obtain an enforceable judgment.

For mediation conducted by the court, the mediation document issued by the court is directly enforceable.

A settlement agreement constitutes a binding contract between the parties which can only be revoked if the circumstances warrant a revocation under the PRC Contract Law; for example, serious misunderstanding, clear unfairness, fraud, or coercion.

For mediation papers issued by the court, if evidence proves that the mediation was conducted in violation of the principle of voluntary participation or the content of the mediation agreement is against the law, a party may petition for a retrial, thereby setting aside the mediation document.

The successful party may receive monetary compensation, liquidated damages, and non-monetary reliefs, such as specific performance or cease of certain conduct. Another form of remedy available is the declaratory relief, where the court makes a determination as to the rights and obligations of the parties without awarding any substantive relief; for example, declaring that there is no breach of contract. The court may further award a form of remedy that modifies the legal relationship between the parties; for example, termination of contract.

At the trial stage, a court may, pursuant to the application by a litigant, order the counterparty to undertake certain acts or prohibit the counterparty from undertaking certain acts. Further, the court may rule on advance enforcement upon the application for the following cases:

  • recourse of alimony, payment of maintenance, payment of child support, pension, medical fees, etc;
  • recourse of labour remuneration; or
  • there is a need for advance enforcement under urgent circumstances.

Under the PRC law, damages are generally awarded to compensate for the losses suffered by the aggrieved party and based on the principle of foreseeability. Therefore, they do not possess a punitive function. However, in limited statutory circumstances, punitive damages may be awarded. For example, Article 47 of the Tort Liability Law provides that where defective products are manufactured or sold despite knowledge of the product defects and have caused death or serious health problems of others, the aggrieved party shall have the right to request punitive damages.

PRC law does not set maximum limits for damages, except for the PRC Maritime Law, which specifically stipulates the maximum amount of damages for personal injuries or damage to cargo.

Pre-judgment Interest

The successful party could request and be awarded pre-judgment interest, and the interest rate should follow the agreements of the parties if available. In case of no specific agreement in this regard, the judge may order the counterparty to bear the relevant interests. For example, in the sales contract dispute, the judge may decide the penalty interest for overdue payment based on the loan prime rate of the People's Bank of China for RMB-denominated loans of the same type and period.

Post-judgment Interest

Generally, interest is calculated up to the date of the actual payment. If a party fails to make the payment within the time limit specified in the judgment, that party shall pay a punitive interest. For example, if the debtor fails to make payment pursuant to the judgment, ruling or any other legal document, it will be required to pay double interest.

The successful party to a case may apply to the court to commence the enforcement of the judgment. The court will issue a notice to the party against whom enforcement is sought and order them to render performance within a specified period. If the party fails to perform the obligations per the notice, the court may take enforcement measures such as seizing, freezing, transferring, or selling the property of the respondent.

The court may also withhold or withdraw the respondent’s income, which is then transferred to the applicant. Where the respondent refuses to perform the acts stipulated in the judgment, the court may carry out mandatory enforcement or entrust a relevant organisation or any other person to perform the required act, and the respondent shall bear the expenses incurred. Where the respondent fails to perform the obligations under the judgment, the court may also notify relevant authorities to restrict them from leaving China, an announcement of the details of the non-performance in credit system records, or through public media.

The court may also issue orders restricting the respondent’s spending activities to what is necessary to maintain a reasonable living standard. For example, a judgment debtor may be restricted from taking flights or high-speed rail as means of transportation. If the respondent deliberately evades enforcement, they may be subject to judicial detention or even criminal liability.

The parties to a foreign judgment may apply directly to an intermediate court in China which has jurisdiction for ratification and enforcement. Or, the foreign court that made the judgment may request for ratification and enforcement by the Chinese court under the provisions of the international treaty concluded (or participated in) by that country and China or in accordance with the principle of reciprocity.

Chinese courts will examine according to the international treaty concluded (or participated in) by China or under the principle of reciprocity. If neither the basic principle of Chinese law, nor the sovereignty, security, or public interest of China is violated, the court shall rule on ratification of the validity. Where there is a need for enforcement, an enforcement order shall be issued and enforced.

Except for the case tried by the SPC for the first instance, any party who is not satisfied with the outcome of the first instance could appeal the case to an appellate court. The appellate court could be the intermediate people’s court, the higher people’s court, or the SPC, depending on the level of the court that heard the first instance.

There is a parallel procedure available for challenging judgements by way of “trial supervision” on widely drawn grounds, such as insufficiency of evidence, error of law or deficiency of process. Unlike an appeal, the invoking of the trial supervision process does not operate as an automatic stay of execution, and there is significant discretion as to whether a court will agree to undertake trial supervision.

To appeal a case to a higher court is the statutory right under the PRC Civil Procedure Law. As long as the party submits a duly signed appeal petition and appropriate authorisation documents within the specified time limit, the appeal will be accepted. However, after the decision of second instance, there is no further automatic right of appeal, while retrial is possible in cases with special circumstances.

A party shall file the appeal within 15 days after the receipt of the judgment of the first instance, or ten days for the civil ruling. If the party has no domicile within the PRC, the foregoing period will be extended to 30 days. The party who initiates the appeal could submit the appellate petition to the court of the first instance or the appellate court directly.

The appeal procedure is commenced when a party files the appeal. There are no precise limitations on grounds for appeal.

As a general rule, the appellate court will only focus on reviewing the relevant facts and applicable law for the appeal request, instead of re-trying the whole case. Usually, an oral hearing will be arranged, unless the collegiate bench deems the hearing is not necessary if the appellant does not raise any new facts/grounds, or submission of any new evidence.

Parties are allowed to raise new defences and supplement new evidence during the hearing of second instance. Notably, the SPC issued a new juridical interpretation concerning the evidence in civil litigation in 2019 which came into force in May 2020. According to the foregoing rules, the evidence that the parties could supplement during the hearing of the second instance is not limited to the certain types originally prescribed by the law but extended to any evidence that may support the parties’ views.

In China, the right to appeal is an absolute right granted by the law and is not subject to any court approval.

The main power of the appellate court is to render decisions on the judgments/orders by the court of first instance. More specifically:

  • The appellate court will uphold the judgment/order of first instance if it deems the facts ascertained in the original judgment or ruling are clear and the application of laws is correct; otherwise, it may amend, revoke or modify the original judgement/order by issuance of a judgment or civil ruling.
  • If the basic facts ascertained in the original judgment are unclear, the appellate court may request the court of first instance to retry the case or amend the judgement after ascertaining the facts by itself.
  • If the judgement/order of first instance has material procedural defects, such as the omission of parties or an unlawful default judgment, the appellate court may request the court of first instance to retry the case.

As to the court fee, it will be borne by the losing party. The court will also apportion the court fee between the parties if the plaintiff lands only a partial victory.

As to the unilateral expenses incurred in the proceedings, such as guarantee service fee, notarisation fee, translation fee, and the like, unless there is a clear agreement between the parties or in an IP case, the court is unlikely to shift such kind of expenses to the other party. Besides, during the hearing, there also might be other expenses incurred that are related to both parties, such as the expenses for judicial testimony, or proof of foreign law. As to these kinds of expenses, the court will decide thereof in the judgment.

Attorney fees are generally not recoverable from the losing party, except in IP cases, or in the event that the parties expressly covenanted for fee-shifting.

As stated in 11.1 Responsibility for Paying the Costs of Litigation, the losing party is usually ordered to pay the winning party’s court fees, but it is very rare for Chinese courts to order a losing party to pay a winning party’s legal costs. The expenses incurred for the proceedings are awarded at the discretion of the court.

PRC law is silent on interest on costs. It is generally believed that such costs do not give rise to interests.

In China, there are several modes of alternative dispute resolution (ADR), including arbitration, court-administered mediation, people’s mediation, and commercial mediation. At present, arbitration is the most popular ADR method in the PRC. The other ADR methods are used by more corporations and individuals thanks to the improvement of the relevant legislation. Generally, disputes settled by ADR methods will to some extent become more efficient and cost-effective compared with the traditional court trial.

There are specific laws and rules on arbitration, court mediation, and people’s mediation under the PRC law. Arbitration and people’s mediation do not form part of the court procedures; both are separate proceedings.

Although the judge in civil proceedings may ask the parties whether they are willing to settle before making a judgment, parties are not required to agree on mediation. The mediation under the civil proceedings is completely voluntary and no sanction will be imposed if the party refuses to attend the mediation.

As for arbitration, Article 5 of the Arbitration Law asks the court to respect the valid arbitration agreement between the parties. Therefore, the court will not hear the case if there exists a valid arbitration agreement.

According to statistics, there are more than 250 arbitration institutions in the PRC. The most renowned among them are the China International Economic and Trade Arbitration Commission (CIETAC), the Shanghai International Arbitration Centre (SHIAC), the Shenzhen Court of International Arbitration (SCIA), and the Beijing Arbitration Commission (BAC).

Currently, the PRC court is advancing the “multipartite mediation”. Therefore, many courts have established litigation-mediation connection centres, to combine litigation and mediation to better settle disputes. In light of this development, some courts will also request the parties to go through the mediation process before the case is formally filed.

The main legal provisions relating to the arbitration issues are provided in the Arbitration Law and its judicial interpretations. Also, the SPC has recently (in 2017, 2018, and 2019) promulgated the following important judicial interpretations and arrangement:

  • Rules on Issues relating to the Reporting and Review of Cases Involving Judicial Review of Arbitration;
  • Rules on Several Issues relating to the Hearing of Cases Involving Judicial Review of Arbitration;
  • Rules on Several Issues concerning the Handling of Cases of Enforcement of Arbitral Awards by the People’s Courts; and
  • Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and the HKSAR.

Generally speaking, the relevant disputes involving marriage, adoption, guardianship, maintenance between family members and inheritance, or administrative disputes do not fall into the scope of arbitration.

There are two ways under the PRC law for a party to challenge the validity of an arbitral award; ie, apply for set-aside or non-enforcement of the award. If a domestic arbitral award has any of the following circumstances, a party may apply to the competent court where the arbitration institution is located to set aside the arbitral award:

  • there was no arbitration agreement;
  • the subject matter addressed in the award is not within the scope of the arbitration agreement or the arbitration commission has no power to arbitrate the subject matter;
  • the constitution of the arbitral tribunal or arbitration procedure violates statutory provisions;
  • the evidence upon which the award is based was forged;
  • the other party has withheld evidence that is sufficient to affect the fairness of the award; or
  • arbitrators have accepted or solicited bribes, resorted to deception for personal gain, or perverted the course of justice in the award.

For foreign-related arbitral awards, the last three grounds relating to evidence or bribery do not apply.

The court could also set aside the award if it determines that the award is against the public interest.

If a party applies to the court for enforcement of an arbitral award, the other party may request for non-enforcement of the award to the same court on the same grounds as above.

Chinese arbitration awards are enforceable like domestic judgments, subject to certain exceptions broadly equivalent to the grounds of appeal mentioned in 13.3 Circumstances to Challenge an Arbitral Award.

Foreign arbitration awards in commercial cases are regarded as “foreign awards” under the PRC law. They are enforceable in China under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), to which China is a contracting state. The PRC court will base its decision on enforcement of Article V of the New York Convention. In case of refusing enforcement, a special procedure applies (the “Reporting Procedure”), whereby local courts intending to refuse enforcement must report the same to the higher court; and in case the higher court intends to refuse enforcement, it must report to the SPC for approval, which makes non-enforcement extremely difficult.

The PRC court is promoting the development of “case law”. Though the PRC legal system is a system of statute law, in recent years, the PRC court is devoted to unifying the standards for the application of law, which is accomplished through the establishment of a guiding and reference case system. 

Besides, the Fifth Five-Year Reform Outline for the People's Courts (2019-23) clarified that “to establish a record filing mechanism for trial guidance instruments issued by higher people’s courts and reference cases... to improve the compulsory retrieval and report mechanism for similar cases and new cases”.

Predictably, PRC law will be witnessing the increased significance of the roles that cases/precedents play in the court proceedings.

COVID-19 has been quickly reshaping how trials are conducted in PRC. During times of travel restrictions when people cannot physically sit together, court cases would be heard remotely in heavy reliance on the virtual hearing facilities. Even at times when travel restrictions are lifted, when people can attend the court hearing in person, some courts still retain the virtual hearing option.

The SPC also issued a series of special judicial interpretations to address the legal issues related to COVID-19; for example, guidance on force majeure, time limit of trials, and other suggestions which apply during the pandemic era, to facilitate the courts and the parties to tide over the difficult times.

In particular, the latest judicial interpretation provides that during the last six months of the limitation of legal proceedings, the party could apply for suspending the limitation of legal proceedings based on force majeure, if it cannot exercise its right of claim due to the pandemic or prevention and control measures relevant to the pandemic.

Similarly, to deal with the difficulties that COVID-19 created for the Chinese companies (eg, when performing the contract), the China Council for the Promotion of International Trade (CCPIT) once issued the certificate of hardship upon individual application. The certificate aims to assist the applicant in demonstrating the hardship when performing the contract.

The government has not passed any legislation or order suspending the operation of limitation periods. The parties can certainly apply on a case-by-case basis as to whether limitation periods should be suspended as per the applicable provisions of the law.

King & Wood Mallesons

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Beijing, 100020
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Commerce & Finance Law Offices was established on 16 May 1992. The firm's headquarters are located in Beijing, with branches in Shanghai, Shenzhen and Hong Kong. The firm is recognised as a “Red Circle Firm”, which means it is considered one of the top law firms in China. The firm has over 100 partners and over 400 professionals, all of whom either graduated from the top law schools in China or obtained their degrees or additional qualifications from law schools in the UK, USA, Germany and Canada. Many have work experience in international law firms. C&F is experienced and distinguished in representing clients in arbitration cases. During the past decade, the firm has handled over 100 arbitration cases each year, most of which are complex commercial disputes.

First Civil Code of China

The Civil Code of the People’s Republic of China (PRC) (Civil Code), the first Civil Code in Chinese history, was issued by the National People’s Congress in May 2020. It consists of 1,260 articles, including seven books, namely: General Provisions, Real Rights, Contracts, Personality Rights, Marriage and Family, Succession, Tort Liability, and Supplemental Provisions.

It is worthy of note that the Civil Code adds many new contents to respond to the need of social development. For example, it includes regulations regarding e-contracts to protect commercial behaviours in the era of the internet. Besides, it also specifies the ambiguous and unclear contents in the civil laws currently in effect, such as improving the regulations regarding the legal liabilities of unauthorised agency and clarifying the time of contract termination.

Implementing the Civil Code

The Civil Code will come into effect on 1 January 2021. The influence of its implementation on the current laws, regulations, and other regulatory documents and the issues regarding the transition and application of new and old laws, however, have yet to be determined. It is certain that the General Provisions of the Civil Law of the PRC (General Provisions of the Civil Law) implemented in advance and eight specific civil laws, such as the General Principles of the Civil Law of the PRC, the Real Right Law of the PRC, and the Contract Law of the PRC, shall be repealed, along with legislative interpretations regarding the General Principles of the Civil Law of the PRC and the Marriage Law of the PRC. Nevertheless, whether the relevant judicial interpretation issued by the Supreme People’s Court of the PRC (SPC) shall be repealed remains unclear.

As a source of law in China, judicial interpretation is essential in legal practice. In fact, some revisions of the articles of the Civil Code are absorbed and improved from the provisions of the current judicial interpretations which comply with the development of commercial affairs to the level of law, such as the stipulation of precontract. After the repeal of the aforementioned laws, the relevant judicial interpretations may not cease to be effective therewith. How to adopt them needs to be resolved by new interpretations or other regulatory documents.

As mentioned above, the transition and application of the Civil Code and the current laws are also to be clarified. For reference, the SPC issued the Ninth Minutes of the National Court of Civil and Commercial Trial Work ("Ninth Civil Minutes") after the implementation of the General Provisions of the Civil Law, which provides a guidance on the transition and application of the General Provisions of the Civil Law and three specific civil laws and the issues regarding its retrospective effect.

Taking the retrospective effect issues as an example, the Ninth Civil Minutes pointed out that the General Provisions of the Civil Law is not retrospective in principle, while there are exceptions; eg, “if a contract was entered into before the implementation of the General Provisions of the Civil Law, and it is null and void in accord with the law in effect at that time while it shall be effective or may be revoked in accord with the General Provisions of the Civil Law, the latter should be applied.” By specifying the law application rules of new and old laws in various situations, the cost of the implementation of the Civil Code will be effectively decreased, and the foreseeability of judicial adjudication will be increased.

Impact of the COVID-19 Pandemic

The global outbreak of COVID-19 has had a huge impact on the public service and other sectors across the world. In China, domestic and cross-border disputes have increased rapidly in many industries, such as commercial real estate, transportation, and hospitality. Taking the Chinese commercial real estate sector as an example, society, including the legal profession, has actively taken actions to reduce economic losses.

In the early stages of the COVID-19 outbreak, many large commercial real estate companies in China voluntarily provided preferential policies to tenants, including rental reduction and even exemption. Chinese administrative authorities have also introduced relevant policies to help medium, small, and micro enterprises get through the tough time. For example, general lessors were encouraged, while lessors of state-owned real estate enterprises were demanded to provide medium, small, and micro enterprises proper rental relief, so as to maintain the contractual relationship and the stability of the market. However, the tenants were still faced with serious situations of decreased customer flow and loss of revenues due to the limitation of population flow, which could hardly be covered by rental relief. Meanwhile, the lessors were also confronted with uncontrolled loss. The disputes remaining undissolved between the two parties led to increasing litigations.

Dispute rules

Chinese judicial authorities have issued rules regarding the aforementioned disputes. They mainly clarified the hotly discussed issues regarding the applicability of force majeure and the principle of changed circumstances to the breach of contract that resulted from the COVID-19 pandemic.

Most of the guiding opinions on cases related to the COVID-19 pandemic issued by courts at various levels in China pointed out that the pandemic, along with the prevention and control measures, was unpredictable, unavoidable and insurmountable, therefore, for a contract signed before the pandemic outbreak, if the COVID-19 pandemic and the prevention and control measure led to the impossibility or significant difficulties of performance of the contract, the event or circumstance should be deemed as force majeure; however, if the contract was not caused to be unable to be performed, the continuation of performance would be evidently unfair, or if the purpose of the contract became impossible to achieve, the principle of changed circumstances could be cited. The Guiding Opinions on Several Issues Concerning the Proper Trial of Civil Cases Involving the COVID-19 (I) promulgated by the SPC on 16 April 2020 adopted the aforementioned rules.

Some local courts specified the application of the aforementioned rules under certain circumstances. For instance, the Beijing Second intermediate court issued a guidance which stipulated that if the lessor rescinded the contract due to the failure of payment of the rent, while such breach of contract resulted from the pandemic and can be remedied, the court would hold the contract to be valid on the ground that such breach was immaterial. The inclination of the courts demonstrated the clear intention of encouraging transactions and reducing the impact of the pandemic on the economy.

Trial activities

The outbreak of the COVID-19 pandemic also impacted the trial activities. Chinese courts adopted a more mandatory approach to use online court hearings. Although a concerned party had the right to refuse the online court hearing, judges would normally not agree to trial on-site unless one had justifiable reasons, due to the huge amount of cases and time limit of trial proceedings. On the contrary, the arbitration emphasises the autonomy of will of the parties and the compliance of proceedings. Therefore, the arbitral tribunal would hold hearings on site unless both parties agreed to proceed online, considering the absence of rules regarding online hearings in the current arbitration rules of major arbitration institutions in China.

Due to the mandatory policies of strict limits of gatherings and intra-province mobilisation during the pandemic, most hearings had to be cancelled or postponed. It was also revealed that the hardware and software of online hearings of some arbitration institutions were outdated. The development of a videoconference system at many arbitration institutions commenced rather late, and the investment was finite because of the scale of the arbitration institutions. Thus, the arbitration institutions’ videoconference system was not as good as that of courts.

Meanwhile, considering the confidentiality of the arbitration and the stability of the hearings, arbitration institutions prefer to avoid using an online conference system developed by a third commercial company. Experiencing the COVID-19 pandemic, a great improvement in technical support for the online hearing system of the arbitration institutions could be expected.

Recovering economy

The COVID-19 pandemic came gradually under control in Mainland China around June 2020 and the economy has been recovering as people’s lives have gradually returned to normal. During the China National Day and Mid-Autumn Festival public holidays, there were 637 million domestic visitors in Mainland China, 79% of that experienced in 2019, and tourism revenue reached RMB466.56 billion, 69.6% of that of 2019.

Although international investment and trade were influenced by the pandemic to some degree, they have gradually been recovering and even made progress on account that the circulation of bulk commodities was not correlated closely with the population flow. From the external trade data released recently, the export goods value in the first three-quarters of 2020 shows a 0.7% year-on-year growth. The development of external trade in China has not been hindered but has also improved with an increase in China’s global proportion of the volume of trade.

Dispute resolution activities have also returned to normal. After the COVID-19 pandemic, arbitration institutions efficiently arranged hearings to process the caseload build-up as soon as possible. The major arbitration institutions, such as the China International Economic and Trade Arbitration Commission, have been occupied since July 2020. However, to what extent the pandemic will affect the economy and the legal business in the long term remains to be observed.

Judicial Innovation Led by Free Trade Zones

By 2020, 21 Free Trade Zones (FTZs) have been established or approved to be established in China, covering all coastal provinces and major hinterland provinces. Although there is still room for improvement in the amount and system of FTZs and the economic vitality of each FTZ is uneven, the trend of openness is prominently shown by the innovation of the FTZs administrative and judicial system.

Taking foreign arbitration institutions as an example, the Overall Plan for the Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone proposed that a well-known overseas arbitration and dispute resolution institution could set up a branch in the FTZ to conduct arbitration business with respect to civil and commercial disputes arising in international commercial, maritime affairs, investment, and other fields after registration and filing under the relevant provisions. Furthermore, the Measures for the Administration of Overseas Arbitration institutions’ Establishment of Branches in the Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone was issued on 21 October 2019 and came into effect on 1 January 2020. It provides a particular guidance for overseas arbitration institutions to establish branches and conduct business in the Lin-gang Special Area of Shanghai Pilot FTZ. Meanwhile, it also underlines that a branch of a foreign arbitration institution shall not conduct arbitration with respect to pure domestic disputes.

Previously, foreign arbitration institutions could not conduct arbitration or receive judicial support such as interim measures from domestic courts in China according to the Arbitration Law of the PRC (Arbitration Law). Even though some major arbitration institutions, including the International Chamber of Commerce and Singapore International Arbitration Center, established representative offices in Shanghai in 2015, the representative offices were not qualified to conduct a dispute resolution business. Since the aforementioned policies were introduced, the concerned parties of foreign-related disputes have more choices when selecting dispute resolution institutions. Whether these policies could prove that the restrictions on arbitration in China have gradually lifted is still worthy of observation.

New policies

New judicial policies have been firstly put into experimental use in the FTZs for years. For example, the validity of ad hoc arbitration is never recognised under the Arbitration Law. In 2017, Article 9 of the Opinions on Providing Judicial Guarantee for the Development of Pilot Free Trade Zones issued by the SPC provided a legal basis for experiments of ad hoc arbitration in the Pilot FTZs. According to Article 9, ad hoc arbitration in FTZs is valid if the following requirements are met: enterprises registered in FTZs agree with each other to arbitrate the relevant disputes by specific personnel at a specific location in Mainland China according to specific arbitration rules.

After the implementation of the opinions, there appear to be successful ad hoc arbitration cases in practice. According to the information released by the Shanghai Banking Industry Disputes Resolution Center, it accomplished the first ad hoc arbitration in a FTZ in September 2017 and the first cross-FTZ (ie, the parties located in two FTZs) ad hoc arbitration in April 2018. Nowadays, it is admitted that ad hoc arbitration in FTZs still has some problems, such as lacking a uniform system, orderly management and clear policies to ensure judicial support, but the essential role played by FTZs as the leading power of judicial reform and innovation in China could not be neglected.

Compliance Challenge Arising from US-China Trade Disputes

The trade disputes between the United States and China (Trade Disputes) started when the US government unveiled the Section 301 investigation report on 28 March 2018. After both governments reached the first phase of an economic and trade agreement, the main measures in the Trade Disputes have transferred from the imposition of tariffs to technical blockades. The competition between the USA and China in the knowledge-intensive industries will constantly be the focus of attention of the international community in the future.

With the US-China Trade Disputes, the regulatory and compliance requirements in both countries become more unpredictable for enterprises with cross-border business. As reported, Chinese securities regulatory institutions have conducted investigations on potential conflicts of interest and strictly excluded investors with US-funded backgrounds during the process of Ant Group (which belongs to the Alibaba Group) being listed in both Hong Kong and Mainland China simultaneously, which makes the supervision of Ant Group’s financing process much more rigorous than that of general listed enterprises. According to British media, the US government may impose sanctions against Ant Group, such as a list of prohibitive transactions and prevention of American investors’ participation in Ant Group’s IPO, for the reason that Ant Group has threats to the security of American users’ sensitive banking data.

It is worthy of discussion that whether the act of government under the Trade Disputes constitutes force majeure. For one thing, the imposition of punitive tariffs on some import commodities does not have a material influence on import and export trade enterprises’ performance of the contract, which does not fulfil the substantive requirement of force majeure. However, if the continuation of performance under the circumstances is evidently unfair or the purpose of the contract becomes impossible to achieve, a party can request for alternation or termination of the contract. Further, if the contract is unable to be performed due to the government’s administrative order related to prohibitive transactions, which is unpredictable, unavoidable, and insurmountable when signing the contract, a party may claim exemption from liability. Therefore, with the Trade Disputes, the parties can split the risk of tariff increases as a term in the contact or list the substantial increase of tariffs and the government’s administrative order as a reason for termination of the contract. Although the specific terms of a contract may mitigate the risk in the business activities, it is likely that the economy and trade between the two countries will still be unavoidably influenced by the Trade Disputes.

Commerce & Finance Law Offices

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King & Wood Mallesons is recognised as one of the world's most innovative law firms and offers a different perspective to commercial thinking and the client experience. With access to a global platform, a team of over 2,700 lawyers in 28 locations around the world works with clients to help them understand local challenges, navigate through regional complexity, and to find commercial solutions that deliver a competitive advantage. As a top PRC law firm and with the ability to provide advice on PRC, Hong Kong, Australian, English and American laws, the firm helps clients to open doors and unlock opportunities as they look to Asian markets to unleash their full potential.

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Commerce & Finance Law Offices was established on 16 May 1992. The firm's headquarters are located in Beijing, with branches in Shanghai, Shenzhen and Hong Kong. The firm is recognised as a “Red Circle Firm”, which means it is considered one of the top law firms in China. The firm has over 100 partners and over 400 professionals, all of whom either graduated from the top law schools in China or obtained their degrees or additional qualifications from law schools in the UK, USA, Germany and Canada. Many have work experience in international law firms. C&F is experienced and distinguished in representing clients in arbitration cases. During the past decade, the firm has handled over 100 arbitration cases each year, most of which are complex commercial disputes.

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