12 April 2018

China year in review: where we have been and where we are going

By Meg Utterback, Guo Shining, Holly Blackwell and Nicholas Lee

2017 was a big year for the rule of law in China. We saw many legal initiatives aimed at expanding and improving options for cross border dispute resolution. KWM covered many of these developments in periodical articles published through various media outlets, including our website[1], WeChat and third party publications[2].  This article will bring you up to date on what you may have missed and provide a snapshot of the developments that we found to be noteworthy.

The courts

Here are some of the developments from China last year that affected or will affect the role of courts in hearing cross-border disputes.

Principle of reciprocity

In China, foreign court judgments are enforceable pursuant to international treaty or on the basis of reciprocity.[3] In the absence of a binding treaty, litigants must rely on the principle of reciprocity to enforce foreign court judgments in China.  Until recently, there was no report of a foreign court judgment being enforced in China on the basis of reciprocity.  This changed with the recent enforcement of US and Singapore court judgments.

For the first time ever, the Wuhan Intermediate Court enforced a monetary judgment from the Los Angeles Superior Court in California in the case of Liu Li v Tao Li and Tong Wu (Liu Li).[4] In applying the principle of reciprocity, the Wuhan court cited the case of Hubei Gezhouba Sanlian Industrial Co Ltd v Robinson Helicopter Co Inc, [5] in which a federal court in California had enforced a Hubei High Court judgment.  In Jiangsu Province, the Nanjing Intermediate People’s Court also enforced a monetary judgment from the Singapore High Court in the case of Kolmar Group AG v Jiangsu Textile Industry (Group) Import & Export Co Ltd [6](Kolmar).  As in Liu Li, the court relied on the principle of reciprocity by citing the case of Giant Light Metal Technology (Kunshan) Co v Aksa Far East Pte Ltd,[7] in which the Singapore High Court had enforced a judgment from the Suzhou Intermediate Court in Jiangsu Province.

Whilst the recent Liu Li and Kolmar cases demonstrate the applicability of the principle of reciprocity in China, they also illustrate the potential limits on the use of such principle. For instance, a foreign party attempting to enforce a foreign judgment in China will need to establish de facto reciprocity between China and the foreign state by demonstrating that the foreign state has already enforced a Chinese court judgment. For countries like Australia, where the courts are yet to enforce Chinese judgments, this may be a barrier to judgments being enforced in China.  We are optimistic that the next Chinese recognition and enforcement of a foreign judgment on the basis of reciprocity will be of an English judgment, in light of an English High Court’s recent recognition of a Chinese maritime court judgment. Proceedings to potentially recognize the first English court judgment in China are currently underway in Shanghai.

Though recognition and enforcement of an English judgment is yet to be seen, there is still a silver lining for matters where the foreign jurisdiction has yet to recognise and enforce a Chinese judgment. For Belt and Road Initiative (BRI) countries, under the Several Opinions of the Supreme People’s Court on Providing Judicial Services and Safeguards for the Construction of the “Belt and Road” by People's Courts issued by the Supreme People’s Court (SPC) in 2015, a Chinese court can assume de jure reciprocity and take the first step in establishing the reciprocal relationship with the foreign state. 

The Hague Convention

Another significant recent development to the liberal approach to enforcement of foreign court judgments was China’s signing of the Hague Convention on Choice of Court Agreements (Hague Convention). In brief, the Hague Convention provides that courts of member states must respect exclusive jurisdiction clauses in commercial agreements by staying proceedings in favour of the courts of other member states.  Importantly, the Hague Convention also provides commercial certainty by mandating that member states must also recognise and enforce judgments of the courts of other member states. This in theory sounds promising, but the scope and use of the Hague Convention is limited. 

China has only signed the Hague Convention and not yet ratified it. Ratification can take time. By way of example, the US signed the Hague Convention in 2009 but has yet to ratify it.  Even when ratified, the Hague Convention has limited territorial reach. Unlike the New York Convention, which extends to more than 150 countries, at present the Hague Convention extends to only 30 countries. 

The Hague Convention only applies to exclusive choice of court agreements, as defined in Article 3. It will only come into play where a Chinese party has agreed to submit to the exclusive jurisdiction of a foreign court or a foreign party acquiesced to the exclusive jurisdiction of a Chinese court. 

The application of the Hague Convention is also subject to a number of exceptions. For example, judgments which are not covered or cannot be enforced include those concerning employment, capacity of a natural person, insolvency, transportation, maritime, antitrust, personal injury, tort, property rights and certain intellectual property matters. The Hague Convention also does not apply to arbitration or related proceedings or to interim relief.  

International commercial courts

China has recently approved plans to establish a BRI-specific dispute resolution mechanism. Under the proposal, the SPC will establish three international commercial courts. These courts will sit in Xi’an, Shenzhen and Beijing. The Xi'an court will handle cases related to the Silk Road. The Shenzhen court will deal with cases related to Maritime Silk Road disputes. The Beijing court will be the headquarters. It appears the SPC is looking to model these international commercial courts on the existing Singapore International Commercial Court (SICC) and the Dubai International Finance Centre Court (DIFC).

Unlike the SICC and DIFC, which have their own panels of foreign judges, China has only a limited number of local judges qualified to hear such disputes, and local laws may prohibit foreign judges from sitting in Chinese courts. Even in that limited pool of judges not all will be able to hear disputes in English. Moreover, the current Civil Procedure Law puts obstacles in the way of the international commercial courts hearing cases in English. The international commercial courts and their implementation will need further definition before they are a viable option for BRI contracting parties.

Arbitration

Here are some of the key recent developments in arbitration in China.

New CIETAC Investment Arbitration Rules and CIETAC Investment Dispute Resolution Centre

On 1 October 2017, the Investment Arbitration Rules of the China International Economic and Trade Arbitration Commission (Rules) entered into force. The Rules and the newly established CIETAC Investment Dispute Resolution Centre in Beijing (CIETAC IDRC) seek to “fill the gap” in the area of Chinese international investment arbitration. In our earlier article, KWM lawyers provide a summary of the Rules and their features.[8]

The Rules are important as they mark China’s first attempt to establish a domestic arbitral institution for international investment disputes. This, at the same time as the establishment of the international commercial courts, clearly indicates the increasing desire of Chinese parties to resolve disputes on their home ground.  As Wang Chengjie, Secretary General of CIETAC has stated, “[t]here are cases in which the Chinese side was treated unfairly because of a lack of understanding in Chinese laws and practices. We hope China’s Arbitration Rules can help reduce unnecessary losses on both sides”.[9]

The creation of the Rules and the CIETAC IDRC offer an alternative to traditional choices for resolving investor-state disputes such as the World Bank’s International Center for Settlement of Investment Disputes (ICSID), the United Nations Commission on International Trade Law Arbitration Rules (UNCITRAL Rules) and the International Chamber of Commerce International Court of Arbitration (ICC). These traditional choices have been typically identified as the rules and institutions for proceedings between a foreign investor and a host State under many bilateral investment treaties.  Whether foreign investors and States will move away from these well-established arbitral institutions in favour of CIETAC IDRC and how the Rules will be adopted is yet to be seen. Conceivably, they could be included in investment contracts between Chinese investors and host country governments. They could also be incorporated into China’s investment treaty regime. 

Shenzhen Court of International Arbitration

In December 2017, the Shenzhen government announced that the previous Shenzhen Court of International Arbitration and Shenzhen Arbitration Commission (SAC) will be combined into one arbitration center named the Shenzhen Court of International Arbitration (SCIA). The newly merged SCIA will have jurisdiction over disputes submitted to its predecessor institutions. The combination is likely intended to meet the needs of domestic and international companies driving Shenzhen’s rapid economic growth, particularly in the technology sector, and to better serve BRI participants and the Greater Bay Area (comprising Guangdong, Hong Kong SAR and Macao SAR).

Both the previous Shenzhen Court of International Arbitration and SAC had their own rules. The SAC rules were more closely aligned with Chinese civil procedures; the Shenzhen Court of International Arbitration rules were largely based on the UNCITRAL Rules. The SCIA Council, which comprises members from both predecessor institutions, is still in the process of formulating and implementing a new set of arbitral rules (including certain supplementary and auxiliary rules and procedural directives) and a panel of arbitrators. Until that process is completed, the rules of the SAC and the previous Shenzhen Court of International Arbitration continue to apply to existing contractual arrangements, and each arbitral institution's panel of arbitrators remain intact. 

SPC regulations on the enforcement of arbitration agreements and awards

Finally, in late December 2017, the SPC released two regulations addressing judicial review of arbitration cases, namely the Regulation on Reporting Judicial Review of Arbitration Cases and the Regulation on Hearing Judicial Review of Arbitration Cases (collectively Regulations). The Regulations became effective on 1 January 2018.

In 1995, the SPC established an internal reporting system for judicial review of foreign-related arbitration cases. The Regulations replace the previous internal reporting system with a reporting and review system that now applies to judicial review of foreign-related and domestic arbitration awards.

Under the Regulations, the reviewing court must report to its superior court when it decides to deny the validity of an arbitration clause or to set aside or not to enforce an arbitration award. If the superior court agrees with the lower court’s decision, it must then report the decision to the SPC for further review and the SPC will then give the final decision. Elevated reporting to the SPC applies when a foreign-related arbitration clause or award is at issue, and when a domestic arbitration clause or award is at issue and parties from different provinces are involved or public interest has been cited as a basis to deny enforcement of the arbitration clause or award. If, however, the matter is purely domestic and does not involve considerations of public interest, the final decision will come from the high people’s court in the place where the application is made, not the SPC.

The Regulations address only the procedure for higher court reporting. They do not address the substance or timeline for review. The Regulations may provide a limited opportunity for party participation if a higher court determines that the “relevant facts” are unclear. In such case, the higher court may direct questions to the parties, in which case a written reply from the parties may be appropriate, or may return the case to the lower court for further investigation.

The Regulations also contain provisions which clarify and adopt a pro-arbitration approach to determining the governing law of a foreign-related arbitration clause, and provide a mechanism for a foreign respondent involved in Chinese court or arbitral proceedings to recognize a foreign arbitral award in China where the lack of assets or a domicile would have previously barred it from doing so.

Concluding remarks

The last twelve months have seen many notable developments in the cross-border disputes sphere in China. These developments have cut across State policy, judicial decisions and arbitral institutions. They demonstrate China’s interest in assuming a role in the resolution of disputes involving Chinese parties and in providing an increasingly transparent and predictable domestic forum for resolution of these disputes. They provide new options for parties considering doing business with China and for Chinese businesses going outbound.



[1]“CIETAC Investment Arbitration Rules”, https://www.chinalawinsight.com/2017/12/articles/global-network/cietac-investment-arbitration-rules/; “China Signs the Hague Choice of Court Convention”,  https://www.chinalawinsight.com/2017/09/articles/global-network/china-signs-the-hague-choice-of-court-convention/#_ftn1.

[2] “Recent Developments in the PRC: A Change in Tide for Arbitration?” http://arbitrationblog.kluwerarbitration.com/2017/12/05/recent-developments-prc-change-tide-arbitration/.

[3] References to the enforcement of foreign court judgments are generally intended to include recognition and enforcement of those judgments, unless otherwise noted.

[4] Liu Li v Tao Li and Tong Wu, (2015) E Wuhan Zhong Minshang Waichuzi No 26.

[5] Hubei Gezhouba Sanlian Industrial Co Ltd v Robinson Helicopter Co Inc, 2009 WL 2190187 (CD Cal 2009).

[6] Kolmar Group AG v Jiangsu Textile Industry (Group) Import & Export Co Ltd, (2016) Su 01 Xie Wai Ren No 3.

[7] Giant Light Metal Technology (Kunshan) Co v Aksa Far East Pte Ltd (2014) SGHC 16.

[8] CIETAC Investment Arbitration Rules”, https://www.chinalawinsight.com/2017/12/articles/global-network/cietac-investment-arbitration-rules/.

[9] “China launches first Investment Arbitration Rules to defend rights”, The State Council of the People’s Republic of China, available at: http://english.gov.cn/news/video/2017/09/20/content_281475871634494.htm.




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