China: Arbitration in the Pilot Free Trade Zone: The new alternative for IP disputes

Last Updated: 19 September 2014
Article by Qu Miao

On April 8th, 2014, the Shanghai International Arbitration Center officially issued the China (Shanghai) Pilot Free Trade Zone Arbitration Rules (the "FTZ Rules"). The FTZ Rules, which brings a lot of bold attempts and innovation based on the present legal frame and arbitration practice, is of important innovative significance. The FTZ Rules will enter into force on 1st May. This article will focus on the influence that the FTZ Rules will impose on IP disputes.

The innovative aspects of the FTZ Rules include: (1) the provisions regarding the interim measures; (2) the provision about the open panel of arbitrators; (3) the provision of combined trial of certain cases; (4) the provision of third party's participation in the arbitration (including other parties of the arbitration agreement or even non-parties of the arbitration agreement); (5) the provision of evidence rules; (6) the provision that mediation may be conducted both by an arbitral tribunal or by an independent mediator; (7) introducing a friendly arbitration system; and (8) introducing procedures for disputes with small claims. The innovative arrangements which are most relevant to IP disputes are reflected in the above (1)?(5) and (8), which will be illustrated in detail as follows:

I. Innovation and Breakthrough of Interim Measures

As we all know, interim measure is a kind of important remedy in IP litigation. The evidence preservation measure, among the interim measures, has a decisive influence on the burden of proof regarding a large amount of hidden IP infringing activities. Preliminary injunction is very important to avoid additional losses of IP right holder.

The FTZ Rules have a special chapter on interim measures, i.e. Chapter 3 Articles 18 to 24, which stipulates clearly that all parties may apply to the court at the place of implementing the interim measures for evidence preservation, property preservation or preliminary injunction directly or via the arbitration commission during the procedure of arbitration, either in or before the process of arbitration.

  1. Important breakthrough
    1. The arbitral tribunal has the authority to decide on some interim measures.
    2. The FTZ Rules stipulates clearly for the first time that if it is permitted by the laws in the jurisdiction where the interim measure is sought, the tribunal (or the emergency tribunal) has the authority to decide on temporary measures. Although organizations other than the courts are not allowed to make decisions on interim measures under the PRC Civil Procedure Law ("Civil Procedure Law"), arbitral tribunals in other countries and regions are authorized to do so. The arbitration tribunals in these jurisdictions have the right to decide whether to grant the interim measures to such applications and then to implement the interim measures in these countries.

    1. The diversification of interim measures
    2. Besides property preservation and evidence preservation, new types of interim measures such as act preservation (preliminary injunction) and other measures provided by law are added.

    1. Establishing the system of emergency tribunal to ensure effectiveness
    2. To coordinate with the urgency of interim measures, the FTZ Rules has established the system of emergency tribunal for the first time, which provides the formation of the emergency tribunal and the time limit of its decision. Under the premise that the emergency tribunal agrees and the payments have been made, the parties may get the decision on interim measures made by the emergency tribunal within 23 days.

    1. The application for interim measures can be filed both before and in the process of arbitration
    2. Article 19 and Article 20 of the FTZ Rules stipulate clearly and respectively that interim measures could be applied both before and after the application of arbitration.

  1. Application Tips:
    1. The FTZ Rules have no major breakthrough with respect to that the parties who intend to take interim measures within the territory of China. Due to the provisions of the Civil Procedure Law, the arbitration tribunal has no authority to decide on interim measures within China and the arbitration commission can only assist to forward the applications of the parties.
    2. If interim measures are to be implemented outside of China and the arbitration tribunals are authorized to decide on interim measures under the laws in that jurisdiction, the parties will benefit greatly from the FTZ Rules. It specially resolves the problem often faced by domestic enterprises in dealing with overseas disputes, in which, foreign legal proceedings are usually alien, expensive and time-consuming to domestic parties. Hence the parties of arbitration may make full use of the remedies provided by the laws of different countries to better protect their rights and interests.
    3. This system is of important realistic significance for disputes regarding confidential agreements, licensing agreements and technology contracts.

II. Breakthrough and Innovation of the Evidence System

A common issue during the process of IP litigations is the difficulty and heavy burden of proof in evidence production. Fact-finding is often a competition between the evidence produced by the parties. Under the current provisions of civil litigation in China, with the relatively less restricted application of the rules of evidence, it is difficult to reveal and discover evidence through the rules of evidence in civil litigations. Article 35 and Articles 44-47 of the FTZ Rules form the basic evidence system in arbitration proceedings.

A. Important Breakthrough:

  1. The arbitration tribunal has more autonomy in fact-finding and evidence collection
  2. Article 35.4 provides that, the tribunal may issue procedural directions and lists of questions, hold pre-hearing meetings and preliminary hearings, and produce terms of reference, and may also make an arrangement for the exchange and/or examination of evidence. Thus the arbitration tribunal has more autonomy in the procedural problems relating to evidence. In addition, Article 45 provides the discretion of the arbitration tribunal to conduct fact-finding and collect evidence on its own initiative.

  1. The parties have more flexibility to apply the evidence rules
  2. Article 44 provides "[w]here the parties have agreed on matters or rules relating to evidence, the parties' agreement shall prevail except where such agreement is unable to be implemented". Such provision ensures the principle of autonomy of the parties with regard to evidence and the evidence rules, offering more flexibility to the parties.

B. Application Tips:

  1. Under the circumstances that both parties are foreign entities, the parties may agree to apply the rules of evidence and items that both of them are familiar with and can understand well, hence to ensure the arbitration proceeding to be carried out in a more familiar and acceptable way although it is in China.
  2. The parties may also make a flexible agreement that are acceptable to both of them according to the special circumstances of their own case to ensure that the case can be tried with the utmost transparency and flexibility, and hence it is more likely to render an impartial ruling which is acceptable to both sides.

III. Procedures for Disputes with Small Claims

Besides the Regular Procedure and the Summary Procedure, the FTA Rules has further created the procedures for disputes with small claims, which is provided in Chapter 9.

A. Important Breakthrough:

  1. The amount in dispute: the max amount set forth for procedures for disputes with small claims is defined as RMB 100,000, which is further less than that of the Summary Procedures in general arbitration proceedings, i.e. RMB 500,000.
  2. Arbitration Tribunal: The tribunal constitutes a sole-arbitrator usually appointed by the Chairman of the arbitration commission, unless otherwise agreed to by the parties.
  3. Efficient: Generally, the tribunal shall quickly render the award within forty five (45) days from the date the tribunal is constituted. The Period of Defense and Notice of Hearing are also reduced to ten (10) days and seven (7) days respectively.
  4. Economic: The cost for procedures for disputes with small claims is only RMB 1,350, which is considerably economic and cost-saving.

B. Application Tips:

  1. The purpose of setting up the procedures for disputes with small claims is to solve those disputes with comparatively less large claims in a cost-saving, efficient and flexible manner. It is highly possible that this system provides an efficient and quick solution to IP disputes. In many IP disputes, the issue is not the amount, but more about the relief relating to acts, such as injunctions. As a result, this procedure offers the parties another possible solution.
  2. This system is very important to the practices of IP disputes such as confidentiality agreements and ownership disputes.

IV. Ending

The FTZ Rules, issued by the Shanghai International Arbitration Center, reflect the determination of the FTZ to get in line with international practice and offer more respect to the autonomy of the parties in terms of dispute resolution. In view that the FTZ Rules provide the parties with considerable autonomy, it may greatly enhance the protection and remedies available to the parties if they have professional guidance and services at the stage of entering into an agreement (especially the stage of signing the arbitration agreement) in future business activities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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