Court briefs - Spring 2015

China Dispute Resolution Beijing/Hong Kong/Shanghai Court Briefs Spring 2015 www.bakermckenzie.com Beijing Suite 3401, China World Office 2 China World Trade Centre 1 Jianguomenwai Dajie Beijing 100004, PRC Tel: +86 10 6535 3800 Fax: +86 10 6505 2309 Hong Kong 14th Floor, Hutchison House 10 Harcourt Road Central, Hong Kong Tel: +852 2846 1888 Fax: +852 2845 0476 Shanghai Unit 1601, Jin Mao Tower 88 Century Avenue, Pudong Shanghai 200121, PRC Tel: +86 21 6105 8558 Fax: +86 21 5047 0020 Our “Court Briefs” newsletter endeavours to capture trends and developments in PRC disputes. As with previous editions, this newsletter provides a digest of highlights from recent court and administrative decisions; and judicial announcements. We hope you will find this newsletter both useful and interesting. With Best Wishes, China Dispute Resolution Group Brief Highlight Civil Procedure Electronic evidence and public interest litigation among key features in latest Supreme People’s Court Interpretation The Supreme People’s Court’s Interpretation on the revised Civil Procedure Law came into force on 4 February 2015. The Interpretation provides, among other things, detailed guidance on jurisdiction, procedures for submitting evidence, criteria for what is a foreign-related case, court standards for requesting security for preservation measures, appeals, retrials and enforcement of a judgment or arbitral award, and third party applications for revocation of judgments. Of interest are the provisions relating to electronic evidence and public interest litigation. In This Issue Brief Highlight Civil Procedure ............................... 1 Court/ Administrative Decisions Arbitration ...................................... 2 Company......................................... 3 Dispute resolution clauses ............ 4 Injunctions...................................... 4 Product Liability ............................. 5 Trade Secrets ................................. 6 Legislation/ Judicial Notices 2 China Dispute Resolution Court Briefs | Spring 2015 Brief Highlight (cont'd) Electronic evidence has been stated to include information formed or stored in electronic media in the form of e-mails, electronic data interchange, online chatting records, blogs, microblogs, short messages, electronic signatures and domain names. Provisions on electronic data are to apply to audio materials and video materials stored in electronic media. The Interpretation has also expanded on the new public interest litigation right brought in by the 2012 Amendment to the Civil Procedure Law. That amendment allowed institutions and relevant groups to initiate actions in cases where social public interest is injured, for example, in environmental pollution and consumer right matters. Organs and relevant organizations (according to laws such as the Environmental Protection Law of the People’s Republic of China and the Law of the People’s Republic of China on the Protection of Consumer Rights and Interests) will be able to file a public interest lawsuit against behaviour damaging public interests such as polluting the environment and infringing the legitimate rights and interests of numerous consumers. The criteria, among other things, includes a definite defendant, a concrete claim and preliminary evidence on any damage to public interests. [Supreme People’s Court, 4 February 2015] Court/ Administrative Decisions Arbitration ICC award from Singapore enforced pursuant to the New York Convention, Qingdao Intermediate People’s Court The Qingdao Intermediate People’s Court has recognised and ordered enforcement of an ICC award granted in Singapore, in accordance with the New York Convention. Trust Bridge Pte. Ltd (“Trust Bridge”) entered into a sale and purchase agreement (“Agreement”) with the respondent, Qingdao Yongxinda Petroleum Chemicals Pty Ltd (“Yongxinda”) on 15 May 2012. The Agreement, which was governed by English law, stipulated that all disputes were to be resolved by one or more arbitrators according to the rules of ICC with the seat in Singapore. In June 2012, Yongxinda breached the Agreement as a result of which Trust Bridge suffered a loss of USD252,500. Trust Bridge submitted a request for arbitration to the ICC on 3 August 2012. Yongxinda failed to respond to any ICC notices or tribunal requests nor did it attend the arbitration hearing. On 24 October 2013, the arbitrator issued a final award in favour of Trust Bridge (“Award”). During the application for enforcement, Yongxinda ignored the court’s notices and was absent from court. After an open hearing, the court recognised the Award and ordered enforcement on the following basis: 1) The initial dispute between the parties, being an international commerce contractual dispute, is capable of being resolved by arbitration under the PRC Civil Procedure Law and Arbitration Law. 2) Both Singapore and the PRC are signatories to the New York Convention, hence the Award can be recognised and enforced by PRC courts. 3) The court has jurisdiction to enforce the Award against Yongxinda as Yongxinda’s registered business address is in Qingdao City. 4) Yongxinda failed to raise any objections to the Award and the court did not find any harm to public order if the Award is recognized and enforced in China. 5) Yongxinda was unreasonably absent from the hearing despite notices and should thus bear the adverse legal consequences. [Judicial Opinions of China, 30 October 2014] Spring 2015 | China Dispute Resolution Court Briefs 3 Principal bound by arbitration clause agreed to by agent, Intermediate People’s Court of Jiangsu Province The Intermediate People’s Court of Jiangsu Province has ruled that an arbitration clause agreed to by an agent is binding on the principal. The case involved a chain of corn distribution pursuant to various contracts. Corn was imported into the PRC by the first defendant (“Chinese Importer”) pursuant to an Importation Agreement (“Importation Agreement”) with the US corn producer (“US Exporter”). Under an Importation Agency Contract (“Contract”), the Chinese Importer agreed to be the agent of Beijing Hong Hu Investment Management Pty Ltd (“Beijing Hong Hu”). Clause 17 of the Contract provided for disputes to be resolved by arbitration at CIETAC in Beijing if negotiation fails (“Arbitration Clause”). Beijing Hong Hu agreed to act as the Plaintiff’s agent in procuring importation of the corn pursuant to an Importation Agency Agreement (“Agreement”). Under the Agreement, the Plaintiff agreed to uphold the Contract and paid RMB17 million in deposits to Beijing Hong Hu. In March 2014, the US Exporter sought to terminate its contract. The Plaintiff brought court proceedings against the US Exporter and the Chinese Importer. The defendants challenged the court’s jurisdiction on the basis that the Plaintiff was bound by the Arbitration Clause. The court ruled that it did not have jurisdiction to hear the case and held that the Plaintiff should be bound by the Contract. Although not a named party in the Contract, the Plaintiff was Beijing Hong Hu’s principal under the Agreement. According to Article 403 of the PRC Contract Law, by instituting court proceedings, the Plaintiff was found to be exercising the rights of its agent, Beijing Hong Hu. Consequently, the Plaintiff’s application was struck out in accordance with the relevant articles under the Civil Procedure Law and the Opinions of the Supreme People’s Court on Several Issues Concerning the Application of the Civil Procedure Law of PRC. [Judicial Opinions of China, 21 July 2014] Company Equity transfer agreement held invalid due to ineffective board resolution, Supreme People’s Court The Supreme People’s Court has ruled that an equity transfer agreement was invalid due to the transferor’s failure to comply with corporate requirements. As a result, the court ordered that shares be transferred back to the transferor. The board of directors of Falmac Ltd. (“Falmac”), a listed company on the Singapore Stock Exchange, passed board resolutions for Falmac to transfer its entire shares in Falmac Machinery Limited (“Falmac Machinery”) and Falmac Textile (Tianjin) Company Limited (“Falmac Tinjin”) by way of debt for equity swap to CITIC (HK) Company Limited (“CITIC HK”). The board resolutions were signed by five directors with Falmac’s company seal affixed. On the same day, the chairman of Falmac issued a power of attorney to authorize a director to sign the relevant documents in relation to the share transfer on behalf of Falmac. The equity transfer agreement between Falmac and CITIC HK was made on 30 July 2009 (“Agreement”). Under the Agreement, CITIC HK agreed to accept shares in Falmac Machinery from Falmac as repayment of outstanding debts. Since then, CITIC HK became a shareholder of Falmac Machinery. The following deficiencies and issues were identified by the court: 1) Details of the board resolutions and the Agreement were not disclosed to the Singapore Stock Exchange. 2) Pursuant to Article 116 of Falmac’s Articles of Association, the directors are not entitled to implement any business and assets resolutions unless these resolutions were approved and amended by the shareholders at the general meeting. In the present case, the board resolutions in question have never been passed by Falmac’s shareholders at any general meeting. The resolutions were therefore not enforceable. 3) The power of attorney signed by the then chairman bore Court and Administrative Decisions (cont'd) 4 China Dispute Resolution Court Briefs | Spring 2015 no legal effect as no board resolutions for the signing of the power of attorney had been passed by the board of directors. 4) The director appointed to sign the Agreement resigned before he signed the Agreement. A board resolution in relation to his resignation was passed at the board meeting on 29 July 2009. Upon termination of his directorship, the director’s corresponding right had automatically been terminated. Further, the court considered that CITIC HK should have been aware that Falmac’s directors were not the owners of Falmac Machinery and had no authority to transfer Falmac’s stake in Falmac Machinery without the authorization of Falmac’s shareholders or Falmac’s Articles of Association. In consideration of the above, the court ruled that the Agreement made by Falmac and CITIC HK on 30 July 2009 was invalid and ordered that CITIC HK transfer its 100% stake in Falmac Machinery back to Falmac. [Judicial Opinions of China, 18 August 2014] Dispute resolution clauses Dispute resolution clauses unclear as to forum ruled invalid, Supreme People’s Court The Supreme People’s Court has confirmed that a dispute resolution clause which does not expressly identify the forum or a clear mechanism for choosing one is invalid. Three companies entered into two Share Sale and Purchase Agreements (“SPA”) on 17 and 18 November 2011 respectively. Both SPAs provided that: “any dispute between the parties should be resolved by friendly negotiation. Where it cannot be resolved after negotiations, the party not in breach will appoint a people’s court to hear the dispute” (“DR Clause”). On 19 August 2013, the Plaintiff commenced proceedings at the Higher People’s Court of Gansu Province, based on the place where the SPAs were entered into. The Defendant challenged the court’s jurisdiction, arguing that the DR Clause is invalid due to lack of clarity and that the appropriate forum should be determined pursuant to Article 23 of the Civil Procedure Law. Under Article 23, contractual disputes should be heard where the defendant is located or where the contract is performed. In this case, it would mean only the Higher People’s Court of Inner Mongolia has jurisdiction. On appeal by the defendant, the Supreme People’s Court (the “SPC”) referred to Article 34 of the Civil Procedure Law which provides that: “The parties to a contractual dispute … may agree in writing to be subject to the jurisdiction of the people’s court at the place having connection with the dispute, such as where the defendant is domiciled,…, where the contract is signed, …, etc., provided that such agreement does not violate the provisions of the Law regarding court-level jurisdictions and exclusive jurisdictions.” The DR Clause did not identify a particular court nor was it possible to clearly determine who was “the party not in breach”. The SPC found the DR Clause to be invalid. The court applied Article 24 of the Opinions of the Supreme People’s Court on Several Issues Concerning the Application of the Civil Procedure Law of PRC, and confirmed that a dispute resolution clause is invalid if the “selection of jurisdiction … is ambiguous”. Consequently, the SPC ordered the case to be transferred to the Higher People’s Court of Inner Mongolia. [Judicial Opinions of China, 28 April 2014] Injunctions Factors for granting injunction to prohibit infringement of trade secrets, Anhui Tongling Intermediate People’s Court The Anhui Tongling Intermediate People’s Court has set out factors for granting an injunction to prevent trade secret infringement. The court considered the following factors including those from foreign precedents: a) Whether the claimant had a real chance of success at trial; b) Whether irreparable harm would be caused to the claimant if no injunction was issued; c) Balancing the interests between the claimant and the defendants; Court and Administrative Decisions (cont'd) Spring 2015 | China Dispute Resolution Court Briefs 5 d) Whether granting the injunction would harm public interest; and e) The manner of executing the injunction if granted. In this case, the claimant was a company specialising in environmental technology and had invented a patented device which could separate rain water from sewage. Xu had signed a confidentiality agreement with the claimant, under which he agreed not to take up employment of a nature similar to that of the claimant’s business within two years of cessation of employment. Xu subsequently resigned and used a hard disk drive to copy confidential technological information from the claimant. Xu soon joined a company competing with the claimant. The claimant commenced legal proceedings against the competing company and Xu (collectively the “Defendants”) and requested the court to order the Defendants to immediately 1) cease infringing activities; 2) cease using the trade secrets of the claimant; and 3) cease selling products manufactured using the trade secrets of the claimant. The court granted the injunction on the condition that the claimant provided security. [Anhui News, 12 October 2014] Product Liability Both producer and seller held liable for defective product, The People’s Court of Dong Yang City, Zhejiang Province, 9 September 2014 The People’s Court of Dong Yang City, Zhejiang Province has confirmed that both a producer and seller are liable for defective products under PRC Tort Law, which among other things, provide for a doctrine of no-fault liability. In this case, the plaintiff Xiang claimed that the gas moped was a defective product that did not meet the technical requirements of the Motorized Bicycles Safety Requirements. Xiang alleged that the accelerator pedal of his gas moped failed to return to the engine idle position, causing him to sustain injuries and damages. In addition, the Catalogue for the Guidance on Adjustment of Industrial Structure (2011 edition) and Notice No. 184 issued by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC, listed gas mopeds as a product to be removed and could no longer be produced or sold. Xiang brought proceedings against the seller for breach of several regulatory provisions including the Law of the PRC on Product Quality and also claimed against the producers of the gas moped. The court found that the gas moped was defective because it did not meet the technical requirements of the Motorized Bicycles Safety Requirements. The court also reviewed the principles under PRC Tort Law including: 1) Article 41 provides that the producer of the defective product would be held liable even if he was not at fault. It is necessary to prove a) that the product was defective; b) that the defect would cause damage or risk of damage to others or their property; and c) causation. This is subject to a few exceptions, including the fact that the defect was not yet in existence when the product went into circulation. 2) Article 42 provides that the seller of a defective product would be held liable if at fault. After paying for damages, the seller could claim from producers or those responsible for the defect, unless it could not find the producer or those responsible for the defect. 3) Article 43 provides that the doctrine of no-fault liability is applicable to both producer and seller when viewed in relation to the consumer, who could claim from both. If the defect is caused by the seller, the producer can then claim against the seller after first compensating the consumer, and vice versa. In this case, the court confirmed that the liability of producers and sellers was not joint and several due to the different underlying reasons for assuming liability. Producers can be found liable due to their ability to control the quality of the products they produce, while sellers can be held liable pursuant to their guarantee of quality given in sales contracts. The court found that Xiang contributed to the accident for Court and Administrative Decisions (cont'd) 6 China Dispute Resolution Court Briefs | Spring 2015 driving the gas moped without a driving licence and for carrying two adults on the gas moped, thereby exceeding the weight limit. This reduced the damages he could claim from the producer and the seller. [Judicial Opinions of China, 18 September 2014] Online trading platform not guilty of defrauding consumers despite false description, Intermediate People’s Court of Guangzhou City, Guangdong Province The Intermediate People’s Court of Guangzhou City has held that an online retail platform’s liability for false description of goods depends upon its participation in the production, editing or recommendation in relation to the fraudulent promotion material. An appellant had brought proceedings seeking compensation from a producer and seller of skincare products for misleading and fraudulent conduct. The producer and seller were alleged to have used exaggerated or false descriptions to promote their products. The products were sold via Tmall. com (“Tmall”), a leading online retail platform. The company that ran Tmall was also named as a defendant. Tmall was not found liable in the first instance as it merely provided a trading platform and did not provide services specifically in relation to the products. On appeal, the appellant claimed that under the Interim Measures for the Trading of Commodities and Services through the Internet (since expired on 15 March 2014), Tmall was an “internet service provider” and was prohibited from making false promotions or representations. The appellant claimed that under these Interim Measures, internet service providers were responsible for checking and monitoring operators who provide commodities or services through the internet trading platform. It claimed that Tmall was jointly and severally liable with the seller. This was on the basis that Tmall had failed to take the necessary action after being aware of the infringing conduct, thereby breaching PRC Tort Law and the Law of the PRC on the Protection of Consumer Rights and Interests. The court rejected the appellant’s claims and held that Tmall was not liable as it did not take part in the production or editing, nor did it provide any recommendation in relation to the fraudulent promotion material. Tmall was unable to foresee that the information contained in the advertisement was false. There was no proof that Tmall directly participated or implemented the tortious conduct of the producer and the seller. There was also no proof that Tmall failed to take necessary measures when Tmall became aware of the situation. [Judicial Opinions of China, 23 September 2014] Trade Secrets Trade secrets claim fails due to lack of characteristics for owner to reap economic benefits, Hubei Wuhan Donghu Technology Development District People’s Court Hubei Wuhan Donghu Technology Development District People’s Court has confirmed that trade secrets information should contain characteristics enabling the owner to reap economic benefits. The plaintiff, Sheng Fu Tong, is an e-commerce company which developed four business models - 1) a pre-paid card system, 2) value-added system, 3) luxury goods online market, and 4) e-commerce card endterminal development and marketing. The defendant, Jin Peng, was the Plaintiff’s former chief executive officer. The defendant was in charge of the development of the four business models mentioned above. The plaintiff alleged that immediately prior to the implementation of the four business models, the defendant resigned and took away information about the four business models. The defendant then set up a new company in Wuhan based on the plaintiff’s four business models. The plaintiff sued the defendant for infringement of trade secrets. The court considered that although the business models included contemplated functions or purposes, there was no information about specific technical plans or marketing strategy. The business models did not have characteristics enabling Court and Administrative Decisions (cont'd) Spring 2015 | China Dispute Resolution Court Briefs 7 the owner to reap economic benefits. The court also found that information about e-commerce card end-terminal functions is publicly available on platforms such as Baidu and Docin. The court did not agree that the plaintiff’s business models could be considered a trade secret. [Judicial Opinions of China, 6 February 2015] Security measures required to maintain confidentiality of trade secrets, Liaoning Dalian Intermediate People’s Court Liaoning Dalian Intermediate People’s Court has confirmed, among other things, that claimants for infringement of trade secrets cases should adduce sufficient evidence to show that they introduced security measures to protect the confidentiality of their trade secrets, in order to comply with the requirements in the Anti-Unfair Competition Law and the Interpretation Of The Supreme People’s Court On Some Matters About The Application Of Law In The Trial Of Civil Cases Involving Unfair Competition. Zhanfeng, a human resources/ headhunting company, sued its former employee Liu Baogang for extracting client information, human resources information, contract information and meeting minutes when his employment was terminated. Zhanfeng alleged that Liu had used such information to solicit its clients and poach key employees, resulting in huge economic losses to Zhanfeng. The Dalian Xigang Basic People’s Court rejected the claim as Zhanfeng had failed to discharge the burden of proof in proving that the relevant information constituted trade secrets. On appeal, the Liaoning Dalian Intermediate People’s Court upheld the first instance decision. Zhanfeng was unable to provide the creation dates of the client information, and could not prove which information was not searchable through the internet. Zhanfeng also failed to prove that the alleged trade secrets were not commonly understood or not easily obtainable by competitors in the same industry. The court emphasized that it is important tor the claimant to prove that it had introduced security measures to protect the alleged trade secrets, and said that the mere existence of confidentiality agreements is not sufficient. [Judicial Opinions of China, 25 September 2014] Court and Administrative Decisions (cont'd) Legislation/ Judicial Notices Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law to Trial of Civil Dispute Cases of Infringement of Personal Rights via Information Networks The Supreme People’s Court’s Provisions on Several Issues concerning the Application of Law to Trial of Civil Dispute Cases of Infringement of Personal Rights via Information Networks (the “Provisions”) took effect on 10 October 2014. The Provisions are intended to cover disputes relating to disclosure of personal rights via the internet.The personal rights include individual names, reputation, honour, portrait and privacy. The Provisions provide for potential civil liability where an internet user or an internet service provider discloses information about an individual and that disclosure causes harm to the individual concerned. “Information” can include genetic information, medical history, medical inspection records, criminal records, household addresses and private activities. Certain circumstances are exempted where the disclosure is: 1) consented to by the individual concerned; 2) to the extent necessary, for public interest; 3) made by schools, research institutions or similar organisations in the public interest for the purpose of conducting academic research or surveys, with the written consent of the individual concerned, and through means which would not enable the identity of the individual to be ascertained; 8 China Dispute Resolution Court Briefs | Spring 2015 This publication has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this publication is not an exhaustive treatment of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this publication is accepted by Baker & McKenzie. If advice concerning individual problems or other expert assistance is required, the services of a competent professional adviser should be sought. Unsubscribe To unsubscribe from our mailing list or to change your communication preferences, please contact hklaw@bakermckenzie.com. ©2015 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. Please contact the listed attorneys of Baker & McKenzie if you have any questions regarding issues raised in this publication. Cynthia Tang +852 2846 1708 cynthia.tang@bakermckenzie.com Anthony Poon +852 2846 1919 anthony.poon@bakermckenzie.com Disclaimer: 1. We are obliged to mention that Baker & McKenzie is licensed as a foreign law firm in the People’s Republic of China and is not permitted to render formal opinions on PRC law. However, we have recently formed a Shanghai Free Trade Zone Joint Operation with Chinese law firm FenXun Partners and the Joint Operation can issue formal PRC legal opinions. To find out more about how the Joint Operation can add value to your business, kindly visit www.bakermckenziefenxun.com. 1. The case summaries in this publication are extracted from various sources including media reports and journal publications. The factual and legal accuracy of the sources have not been independently verified and Baker & McKenzie takes no responsibility for any discrepancy or inaccuracies (if any) contained. Please contact us if you wish to obtain further information on any of the cases mentioned. 4) made by the individual concerned on the internet or the information has already been disclosed via lawful means; 5) in relation to personal information which has been obtained via lawful means; 6) required under applicable laws or regulations. Where a network user or internet service provider discloses personal information as described in item (4) or (5) above, the court shall support the request of a right holder for the network user or internet service provider to be assumed liable in tort. Such disclosure has to violate public interest or social ethics, or infringe upon the vital interests of the right holder which is worthy of protection. Judicial Notices/Legislation (cont'd)