This article is an extract from GTDT Market Intelligence Dispute Resolution 2022. Click here for the full guide.
1 What are the most popular dispute resolution methods for clients in your jurisdiction? Is there a clear preference for a particular method in commercial disputes? What is the balance between litigation and arbitration? What are the advantages and disadvantages of the most popular dispute resolution methods?
Generally speaking, it is hard to tell any particular preference in terms of the choices of dispute resolution methods in the People’s Republic of China (the PRC or mainland China. For the purpose of this chapter only, it does not include the Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan region), and it would always be a case-by-case decision, depending upon the particular circumstances that the clients are facing when negotiating the contracts.
Having said that, it goes without saying that the annual volume of civil litigations is overwhelmingly larger than that of arbitration, given litigation is the default method for the resolution of civil disputes. However, arbitration is steadily gaining popularity in the commercial sphere. The judgement-like enforceability, availability of court-ordered interim measures, smooth transition between arbitral proceedings and court enforcement proceedings, and the comparative procedural flexibility and efficiency make arbitration somehow a more desirable method for dispute resolution.
When it comes to cross-border disputes, the international enforceability of arbitral awards under the New York Convention would be pivotal to the clients when choosing dispute resolution methods. Notably, mainland China has been one of the most arbitration-friendly jurisdictions in the world. For example, the judicial review of validity of arbitration clause and arbitral awards in China is administered under a special Judicial Review Reporting System, under which any rulings to invalidate an arbitration clause, or to set aside or not to recognise and enforce an award, must be reported to the Supreme People’s Court of the PRC (SPC) for approval. Such a unique system secures the unified nationwide standard for arbitration related judicial review.
2 Are there any recent trends in the formulation of applicable law clauses and dispute resolution clauses in your jurisdiction? What is contributing to those trends? How is the legal profession in your jurisdiction keeping up with these trends and clients’ preferences?
As indicated above, arbitration has become many clients’ first choice when drafting their dispute resolution clauses, and interestingly, in the foreign-related transactions, there has been an increase in the number of cases where the parties choosing to apply Chinese law and submitting the disputes to arbitration institutions in mainland China. It may be thanks to the fast-developing arbitration-friendly judicial environment in mainland China. More than that, the PRC Civil Code, which came into effect on 1 January 2021, has codified hundreds of pieces of legislation passed in past decades into one single code, and hence greatly improved the accessibility of PRC laws.
Besides, for instance, mainland China entered into 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 in 2019 (the Arrangement), which allows the parties to a Hong Kong arbitration to apply for court-ordered interim measures in mainland China and vice versa, and makes mainland China a convenient seat of arbitration for Hong Kong-related disputes. I have represented several successful cases concerning the application for interim measures under the Arrangement, which are among the first cases where the PRC courts granted interim measures in aid of Hong Kong arbitration proceedings since the Arrangement came into force.
In addition, it is not uncommon to see the parties from different jurisdictions choosing litigation in mainland China. As a lawyer specialising in, among other things, foreign-related or overseas disputes resolution, it has been part of my regular practice to represent foreign clients to litigate in mainland China. Recently, I won the trial before Beijing Intellectual Property Court for a well-known US trade show and exhibition company in a copyright licensing contract dispute, where the four parties from three jurisdictions expressly agreed to submit the disputes to the competent PRC courts and be governed by the PRC laws
3 How competitive is the legal market in commercial contentious matters in your jurisdiction? Have there been recent changes affecting disputes lawyers in your jurisdiction? How is the trend towards “niche” or specialist litigation firms reflected in your jurisdiction?
In general, the legal market in mainland China is highly competitive. After more than 40 years of development, China has developed a sophisticated and tiered legal market, with the so-called Red Circle firms on the top of the hierarchy and capturing a large share in the high-end market. The Red Circle is an informal term referring to the leading law firms in mainland China that are perceived as prestigious or of high-quality, similar to the Magic Circle in the UK and the White Shoe in the US.
But in the past decade, with the further segmentation of the market, many boutique or niche firms have also emerged and established themselves in their specialist fields, which has intensified the competition in the market. Additionally, since China is such a vast jurisdiction, there remain many mid-size firms that possess regional competitive advantages in their respective geographical locations, such as Chengdu and Hangzhou.
Besides, the regulatory factors also play an important role in the market competition. For example, according to the Opinions on Further Regulating Lawyers’ Service Fees issued in December 2021, lawyers may only charge winning bonuses not exceeding 18 per cent of the subject amount of the case, which to some extent further intensified price competition among law firms. (Note, the administrative price ceiling to a certain extent forced all firms to compete within a limited price range and therefore many firms preferred the low-price strategy over product differentiation as the latter may not be well rewarded under the price cap.)
4 What have been the most significant recent court cases and litigation topics in your jurisdiction?
Speaking of significance, what might be referred to is the Kangmei Pharmaceutical Case. In November 2021, the Guangzhou Intermediate People’s Court handed down the judgment against publicly listed Kangmei Pharmaceutical, that held Kangmei Pharmaceutical in breach of its disclosure obligation by making false statements and material omissions in its annual report, and ordered the compensation of 2.459 billion yuan to a total of 55,326 shareholders. This is not only the largest litigation in the history of the PRC securities law, but also the very first Special Representative Litigation (SPL) in mainland China after the promulgation of the Provisions on Issues of Representative Securities Litigation (the Provisions) in 2020.
The SPL is a class action mechanism specifically designed for the better protection of the investors in the securities market. Under SPL, an ‘investor protection institution’, which is currently the China Securities Investor Services Centre, if authorised by 50 or more investors, can join a class action as the representative of all the qualified investors except for those who expressly opt out. Another salient characteristic of the SPL is its cost-effectiveness. The courts fees may not be paid in advance and can even be refunded to the losing plaintiffs upon the court’s discretion, which largely extends the access to justice for aggrieved investors.
Another feature worth noting in the Kangmei Pharmaceutical Case is whom the court found liable. Besides Kangmei Pharmaceutical itself, its former chairman and his spouse, several former senior management members of the company, the accounting firm and the chartered accountant who signed off the fraudulent financial reports were all held jointly liable to the investors. Moreover, even five independent directors who pleaded to having no active involvement in the financial fraud were ordered to share 5 per cent to 10 per cent of the total liability. This case is the first in its kind in terms of the amount of compensation and the scope of liability, and its influence is far-reaching. Following this case, the previously overlooked risks of directors and officers of public companies have become a hot topic in mainland China, and the number of investor protection cases has surged. The author’s team is currently acting for a commercial bank as the claimant in an arbitration concerning false statement and material omission in public offering of asset-backed securities (ABS), which may be another step to widen the scope of the investor protection under the PRC securities law and which is, as we understand, the first false statement and material omission case in the ABS financing area.
5 What are clients’ attitudes towards litigation in your national courts? How do clients perceive the cost, duration and the certainty of the legal process? How does this compare with attitudes to arbitral proceedings in your jurisdiction?
Clients generally perceive litigation as a reliable method to resolve disputes. Compared with the major common law jurisdictions, the costs of litigation in mainland China are relatively economic and the expected duration of the proceedings, which, of course, depends on the nature of the disputes, the dispute resolution strategies of the parties and caseload of the particular court, is normally shorter.
On the other hand, compared with litigation, arbitration still has its own indispensable features, and has won the popularity of the clients in the commercial disputes. According to data released by the major arbitral institutions in China, there were nearly half a million cases submitted to arbitration in 2019. However, as mentioned above, compared with litigation, the arbitration caseload is still very small, and arbitration definitely has room to attract more end users.
6 Discuss any notable recent or upcoming reforms or initiatives affecting court proceedings in your jurisdiction (including any changes as a result of the Covid-19 pandemic).
One of the most notable recent reforms affecting court proceedings in China can be the 4th amendments to the Civil Procedure Law of the People’s Republic of China (the CPL Amendments), which were passed on 24 December 2021 and came into effect on 1 January 2022, aiming to further optimise the allocation of judicial resources, promote the separation of complex and simple cases, deepen the reform of the civil litigation system, improve judicial efficiency and promote judicial justice.
Among others, the virtualisation of civil proceedings is one of the worth mentioning features in the CPL Amendments. Online hearings and electronic services are, of course, not something new in China, especially after the outbreak of covid-19. In fact, the SPC already promulgated the Online Litigation Rules of the People’s Courts in 2021, and in many cities in mainland China including Beijing, the online civil proceedings have become the standard practice while the traditional on-site physical hearings turned to be the exceptions when pandemic is serious. But the CPL Amendments are the first at the legislative level to recognise that the civil proceedings can be conducted online upon the parties’ consent and shall have the same legal effect as the on-site ones. The CPL Amendments also enlarges the application of electronic service in civil proceedings that allows the judgments, rulings or court mediation paper to be served electronically. With that legislation, we may see the virtualisation of civil proceedings become the new norm and more technologies will be employed to empower the PRC courts to go virtual. For instance, there have been a number of courts in the major cities launching their own Apps or WeChat Mini-Programs that provide litigation-related services. There was even a case before a local court in Shenzhen where all the services and proceedings were conducted completely online through the court’s WeChat Mini-Program, and that programme was well designed with impressive user experience.
7 What have been the most significant recent trends in arbitral proceedings in your jurisdiction?
In the same way as in litigation, one of the most significant recent developments in arbitration is also the virtualisation of proceedings due to the impact of covid-19, and because of the flexible nature of arbitration, online arbitration has received more recognition and acceptance by both the participants and arbitral institutions.
The major arbitral institutions have all released their own rules or practical guide for online arbitration respectively since 2020. In early 2020, the China International Economic and Trade Arbitration Commission (CIETAC) promulgated its guide for arbitral proceedings amid covid-19 and developed its own online filing and hearing systems. In practice, the CIETAC systems have almost the same tech advantages as developed by the courts and have received high praise from end users. The Beijing Arbitration Commission (BAC) or Beijing International Arbitration Center, another major arbitral institution in mainland China, also updated its rules at the end of 2021 to accommodate for the increased use of online arbitration and electronic services, which, inter alia, expressly recognised the virtual hearing as one of the hearing methods and gives the tribunal the final says on the forms of hearing after having regard to the parties’ opinions. The new BAC rules also refined the provisions on the means of electronic services and granted the BAC and the tribunal the authority to decide which kind of services is to be adopted in the case. Similar developments can be seen all around mainland China and by now, the majority of arbitration proceedings in mainland China more or less involves virtual features from filing to hearing.
8 What are the most significant recent developments in arbitration in your jurisdiction?
One of the most significant recent developments in arbitration in mainland China may be the draft Amendment to the PRC Arbitration Law (the Draft Amendment), which has the potential to be a milestone development on the arbitration legal framework in mainland China.
The current Arbitration Law in mainland China was promulgated in 1994, and amended twice in 2009 and 2017, but has not undergone any substantial revisions. As a piece of legislation with 26 years of history, the Arbitration Law has become somewhat obsolete to modern economic activities and legal practice in many perspectives, and thereby hindering the internationalisation and innovation of arbitration practice in mainland China. To deal with these issues, the Ministry of Justice of the PRC launched the revision to the Arbitration Law in 2018, and released the Draft Amendment on 30 July 2021 for comments. The Draft Amendment signals a range of ground-breaking changes to the existing arbitration regime in mainland China, such as recognition of ad hoc arbitration, opening of market entrance for foreign arbitral institutions to administer foreign-related arbitrations, fewer restrictions on the validity of arbitration agreements, increased availability and enforceability of interim measures, etc, which bring the Draft Amendment very much in line with other leading arbitration-friendly jurisdictions.
Given the ground-breaking nature of the Draft Amendment, it also naturally sheds some uncertainties, and some innovative provisions contained therein seem hard to fit in with the existing laws. For example, the Draft Amendment proposed that the parties to the arbitration may apply to the court or tribunal to grant interim measures including asset preservation, evidence preservation, injunction and other temporary measures as necessary, but such temporary measures are unprovided and undefined either in the Draft Amendment or other laws, and in fact, the interim measures granted by the courts in mainland China are normally not as temporary as under common law jurisdictions. How such provisions, if enacted, would operate in practice and what kind of temporary measures would be made available to the parties are by now unclear.
All in all, the Draft Amendment remains an encouraging step toward the modernisation of the arbitration legal regime in mainland China. But given its imperfections as mentioned above, it is yet to be finalised, and perhaps will come out with a raft of supporting legislation or judicial explanations and make significant changes to the arbitration practice in mainland China in the future.
9 How popular is ADR as an alternative to litigation and arbitration in your jurisdiction? What are the current ADR trends? Do particular commercial sectors prefer or avoid ADR? Why?
ADR has been regarded as one of the most commonly used dispute resolution methods in mainland China and has been embedded as an integral part of both litigation and arbitral proceedings, which reflects traditional Chinese ideals of harmony. Today, in drafting arbitration clauses, it is common practice for parties first to agree to attempt consultation or mediation prior to going for litigation or arbitration. Both the Civil Procedure Law and the Arbitration Law of the PRC encourage the parties to resolve their disputes by mediation or reconciliation on a voluntary basis. It is reported in the Annual Report on International Commercial Arbitration in China (2020–2021) that, in mainland China, the number of arbitration cases settled by mediation or reconciliation in 2020 accounted for 35 per cent of the total number of the commercial arbitration cases in mainland China.
In 2016, the SPC issued Opinions on Further Deepening the Reform of Diversified Dispute Resolution Mechanism, which aimed to promoting the use of ADR in mainland China and vowed to, among others, (1) establish the pre-litigation mediation proceedings; (2) establish a professional mediator system and implement the appropriate separation between mediation judge and trial judge; and (3) promote market-oriented dispute resolution services — professional mediation organisations are encouraged to provide paid services and operate in a market-oriented mode in the fields such as trading, banking and financing, investment and securities, and intellectual property.
The author has always been a firm promoter for ADR during his own practice. Based on extensive practical experience, he has proposed theories of dispute resolution called Smart Dispute Resolution and Arbitration Plus (ie, prioritising the formulation and customisation of dispute resolution strategies and management of procedures, highlighting the use of arbitration as the basis while taking advantages of ADR approaches including mediation orreconciliation and other means to resolve disputes systematically and efficiently, emphasising the responsive and effective communication with the clients, adjudicators and even the counterparties).
10 What is the position in relation to litigation funding in your jurisdiction? Is funding available? Have there been any significant developments in this area in your jurisdiction?
There is no express legal prohibition or restriction on litigation funding, also known as third-party funding (TPF), in mainland China, meaning that TPF is not illegal. Moreover, responding to the demand for the treaty-based investment arbitration and calls from the international community, some major domestic arbitral institutions in China, such as CIETAC and BAC, have incorporated a number of provisions in their rules for treaty-based investment arbitration that allow and/or recognise the use of TPF. In the meantime, we have also already seen a few third-party funders that have found their place in the domestic legal market of China in recent years.
However, TPF is still underdeveloped and the market is not fully explored due to the lack of clear legal and regulatory guidance. My team has specifically written an article on this topic, which was published by China International Arbitration Review and can be accessed here (https://mp.weixin.qq.com/s/fp6ZHt2_JtEr4rxRPM0lyw), calling for legislative, judicial and regulatory attention to the issues that TPF encountered and looking ahead to the future development of TPF industry in mainland China.
Wilson would like to thank his associates Xinping Chen, Tian Yang and Xihao Zhao for their assistance in preparing this chapter.
The Inside Track
What is the most interesting dispute you have worked on recently and why?
A Singapore International Arbitration Centre case regarding international sale of goods during covid-19. The case concerned two engineering and supply contracts related to a construction project of the cold rolling steel mill, between a large Chinese equipment manufacturer and a listed company (the buyer) in a country along the Belt and Road. We assisted the client in collecting and preserving evidence on the status of the equipment and machinery, the client’s readiness of performance and the purchaser’s unwillingness to perform, later revealed to be key issues in the dispute. We successfully helped the client to file the arbitration before the purchaser did so and argued the governing law shall be the CISG instead of the counterparty’s local law as the law of the place where the project was located, thereby gaining an advantageous position in both procedure and substantive laws for the client. We then independently represented the client throughout the exchange of pleadings and disclosure of evidence and sit with the barrister as the co-counsels for a five-day oral evidential hearing. At the end, the tribunal upheld all the claims of the client and dismissed all the counterclaims brought by the respondent. This dispute is of considerable complexity in both law and fact. More than that, this case shows how parties might be exposed to legal risks that they had never contemplated due to covid-19, and how the timely legal action and professional legal counselling may help.
What do you consider to have been the most significant legal development or change in your jurisdiction of the past 10 years?
Specialisation and internationalisation of commercial dispute resolution. In recent years, judicial and regulatory reforms, especially the establishment of specialist financial courts, have greatly enhanced the professionalisation and specialisation of dispute resolution in the banking and financing sectors.
Meanwhile, a more comprehensive legal reform is also taking place in mainland China, which includes revision of the Civil Procedural Law and Arbitration Law, introduction of the concept of stare decisis by requiring the courts to research precedents before handing down judgments for certain kinds of cases, and establishing the Chinese International Commercial Court.