CHINA (PRC FIRMS): An Introduction to International & Cross-Border Disputes (PRC Firms)

CHINA (PRC FIRMS): An Introduction to International & Cross-Border Disputes (PRC Firms) in China

Although PRC litigation does not have the sophisticated mechanism of discovery and examination of witnesses, it is very efficient. Following a campaign in 2021, most cross-border litigations at the first instance could be resolved within one year. In the area of international arbitration, companies and practitioners are encouraged to explore the property preservation measures in favour of HK arbitrations. A claimant in an HK arbitration may apply to mainland court to freeze the assets of the respondent within the PRC, which would secure subsequent enforcement and facilitate settlements.

Resolving Cross-Border Litigation in China is Becoming More Efficient

Unlike common law jurisdictions, a PRC litigation is inquisitorial in nature. There are no rules to compel the production of documents or cross-examination under the PRC rules of civil procedure. In a typical PRC litigation, the plaintiff files a claim with supporting evidence, the defendant files a defence with supporting evidence, and then the court holds a half-day trial and renders a judgment.

The court is required to render a judgment within six months for a domestic case. A cross-border litigation, however, usually takes the court a much longer time to hand down a judgment—could be two or three years.

In 2021, the PRC judiciaries launched a campaign to eradicate corruption and enhance accountability. This campaign attracted little or no attention abroad but has had a tremendous effect in the PRC legal community. PRC courts have introduced stringent rules governing the relationships between judges and attorneys and imposed tight limits over the time to render a judgment in a cross-border case. Subject to certain exceptions, a foreign company now can expect to receive a judgment within one year after filing its claim.

Amendment to the Civil Procedure Law 

The Amendment of the Civil Procedure Law of PRC came into force on January 1, 2022. Though no specific provision directly concerns foreign-related litigations, two provisions below should be noted by foreign parties involved in PRC litigations.

First, civil proceedings may be conducted online through the information network platform with the consent of the parties. Secondly, the court’s documents with respect to a judgment, ruling or consent judgment can be served by electronic means with the consent of the parties. As the quarantine measures in the PRC change from time to time during the COVID-19 pandemic, these new developments in respect of how court proceedings and services may be conducted would provide flexibility to facilitate the litigations and to reduce the influence of travel restrictions and any delay of courier services.

International Arbitration and Freezing Orders in Favour of Hong Kong Arbitrations

A substantial percentage of foreign companies choose international arbitrations to resolve their disputes with their PRC counterparties. Hong Kong is widely considered by parties as a neutral and impartial venue for international arbitrations. Facing the competition with Singapore, Hong Kong entered an Interim Measures Arrangement with Mainland China in 2019 to maintain its status as a centre of international arbitrations.

Under the arrangement, parties to arbitral proceedings seated in Hong Kong would be able to apply to the mainland courts for interim measures. Such measures include property preservation, which is similar to a Mareva injunction and often known as a “freezing order.”

From October 1, 2019, to December 29, 2021, over 60 interim measure applications have been made to 25 mainland courts for the preservation of assets worth RMB15.4 billion in total. According to information made available by the HKIAC, 41 orders have been issued by PRC courts, amongst which 38 were granted the applications and 3 rejected. The total value of assets preserved by those orders amounted to RMB12.7 billion.

A property preservation order not only secures the enforcement of a subsequent arbitral award, but also encourages the parties to settle the dispute in a timely manner. Many practitioners have regarded the arrangement as a game-changer and the number of interim measures applications under the arrangement keeps increasing.

Proposed Amendments to PRC Arbitration Law 

China published a Revised Draft of Arbitration Law (the “Draft”) in July 2021. The Draft reflects a progress to adopt international arbitration standards.

For foreign-related disputes, it is noteworthy that an ad hoc arbitration is allowed in “foreign-related” commercial disputes (Article 91) under the Draft. The current Arbitration Law requires the parties to choose a designated arbitration commission in the arbitration agreement, without which the arbitration agreement would be invalid. The Draft is aimed at recognising and establishing the legal framework for ad hoc arbitrations in the PRC.

Singapore Convention 

United Nations Convention on International Settlement Agreements Resulting from Mediation (the “Convention”) became effective on September 12, 2020. By signing this Convention, the PRC embraces the trend of international mediation practice.

However, it is not clear when the PRC will ratify the Convention. And there is a gap that needs to be bridged between the traditional Chinese mediation system and the one under the Convention.

Enforcement  

The PRC is a party to the New York Convention and is obliged to enforce an arbitral award issued in a party state. Contrary to the popular perception, the PRC is quite supportive of enforcement of arbitral awards. Under the rules promulgated by the Supreme Court, an intermediate court has the jurisdiction to decide to enforce a foreign award, and must obtain the consent of both the High Court at the provincial level and the Supreme Court before it may refuse to enforce a foreign award. Such an award must be enforced if either the High Court or the Supreme Court so decides.

In some circumstances, however, the PRC court may refuse to enforce a foreign award due to public interest concerns. In Mainland China, redemption, trading, and circulation of virtual currencies are prohibited as a matter of law and public policy. In 2018, the Shenzhen Intermediate People’s Court set aside an arbitral award that orders a compensation in favour of the claimant of the US dollar equivalent of Bitcoins on the ground that the award was against the public policy.

Under PRC law, Bitcoins do not have the same legal status as a fiat currency and cannot circulate in the market as a currency. An arbitral award which ordered damages in US dollars in lieu of the Bitcoins was considered to amount to a conversion between Bitcoins and fiat currency and would not be enforced.

COVID-19 and the Rise of Masks Trade Dispute and PE Dispute

The PRC is not immunised from the swiping and disruptive impact of COVID-19. It adopts a zero-tolerance policy towards COVID-19. The border is largely locked down. The PRC courts also impose strict requirements for persons attending a hearing in person. Meanwhile, many international arbitrations are conducted virtually.

Following the surge of masks supplies from China to overseas, there is a surge of cross-border litigations arising from the purchase and sale of masks. Moreover, many start-ups are severely affected by the lockdown caused by COVID-19. When they cannot fulfil their promised growth under a contract towards their investors, a surge of cross-border disputes in relation to private equity investment has emerged.