United States: Coming To The Table: Arbitration And Civil Litigation In The People’s Republic Of China The Legal System

At the time the People’s Republic of China ("PRC" or "China") unveiled its Open Door policy in 1978, it was operating under what has been described as a legal vacuum. Immense and rapid changes have occurred in almost every aspect of China (including its legal system) in the last 25 years. China has made significant progress in the area of dispute resolution, more than is generally known by the international business community. China’s accession to the WTO is stimulating further ongoing reforms that will bring China’s dispute resolution systems more in line with international practice.

China is a civil law jurisdiction based on a codified system of law similar to many continental European jurisdictions. The National People’s Congress or its Standing Committee enacts national laws in the PRC.

Most foreign businesses have favored arbitration as a method of formal dispute resolution in China. This is largely due to lack of confidence or familiarity with the PRC Court system.

Arbitration in China is governed by the PRC Arbitration Law (effective September 1, 1995). Only institutional arbitrations are allowed in the PRC. The following are the arbitral bodies in the PRC:

• China International Economic and Trade Arbitration Commission ("CIETAC"), also known as the Court of Arbitration of the China Chamber of International Commerce ("CCOIC" Court of Arbitration), and China Maritime Arbitration Commission ("CMAC"). CIETAC has been established for nearly 48 years (since 1956). It is based in Beijing and has subcommissions in Shanghai and Shenzhen. It is perhaps the most well-known arbitral body in China and one of the most widely used arbitral bodies in the world.

• "Local" arbitration commissions established under the PRC Arbitration Law in large and medium-sized cities in China.

All PRC arbitral bodies may administer both foreign-related and purely domestic arbitrations unless their arbitration rules provide otherwise. CIETAC has extensive experience in administering foreign-related arbitrations, whereas the "local" arbitration commissions tend to have more experience in resolving domestic disputes. However, there is no geographical limit to the jurisdictions of the "local" arbitration commissions (or CIETAC for that matter) so that, for example, if the relevant agreement so stipulates, the Beijing Arbitration Commission could hear a dispute between two Shenzhen companies in relation to a Shenzhen project.

Commencing the Arbitration. The arbitration process commences when the claimant submits an application for arbitration together with the applicable fees to the arbitral commission. The amount of the fee usually depends on the amount in dispute. Foreign lawyers are permitted to represent clients and appear in the arbitration, although the PRC Ministry of Justice requires the participation¹ of a local lawyer from a local firm (alongside a foreign law firm, if desired) if there is a need to comment on PRC law issues.

Choosing a Panel. An arbitral panel will typically consist of three members, one appointed by each party or the chairman of the arbitration commission in the absence of such appointment or, if requested, by the party concerned. The third or presiding arbitrator is appointed jointly by the parties or by the chairman of the arbitral commission at the parties’ joint request. If the third arbitrator fails to be so appointed, the chairman of the commission will make the appointment.

Arbitrators are to be chosen from the lists of arbitrators maintained by the respective commissions. The list maintained by CIETAC comprises more than 500 arbitrators (including a large number from countries such as the U.S., U.K., Germany, France, Japan, Singapore, and Italy as well as Hong Kong).

Awards and Costs. Arbitral awards are final and binding on the parties, and there is no right of appeal. The arbitration fees are advanced by the claimant² and eventually allocated by the arbitrator(s) in the award. CIETAC arbitrators have the power to order the unsuccessful party to pay "compensation" in respect of the successful party’s legal costs and other expenses provided that such compensation does not exceed 10 percent of the amount awarded.

Efficiency and Fairness. Arbitrations in China tend to be quicker than arbitrations in common law jurisdictions. There is no discovery procedure, and hearings tend to be relatively short (typically one to two days). In CIETAC arbitrations, a final award should be made within nine months for a foreignrelated case and six months for a purely domestic one from the date the arbitral tribunal is formed (typically not more than five to six weeks after the claim is lodged). However, this time limit may be extended by CIETAC in appropriate cases.

In a survey of U.S. businesses in Beijing conducted by the American Chamber of Commerce in 2001, the majority view of respondents who have had actual experience of arbitration in China is that arbitrations there are less costly, more efficient, and no less fair when compared to arbitrations in other international arbitration centers.³

Statistics released by CIETAC⁴ also show that foreign parties have similar rates of success in CIETAC arbitrations compared with local parties.

Enforcement. China is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention") and is therefore obliged to enforce awards made in other Convention countries (most countries are parties to the Convention). For the same reason, Chinese arbitral awards are also enforceable in these countries.

Hong Kong arbitral awards are enforceable in Mainland China pursuant to the PRC Supreme People’s Court’s "Arrangement for Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region," which took effect on February 1, 2000. Mainland Chinese awards are similarly enforceable in Hong Kong by virtue of the Hong Kong Arbitration (Amendment) Ordinance 2000, which took effect on the same date.

Taiwanese arbitral awards are also enforceable in Mainland China under the Supreme People’s Court’s 1998 "Directive for Recognition of Civil Judgments of the Courts of Taiwan Region" (effective May 26, 1998).

Arbitration awards are enforced through the Intermediate People’s Court at the province or city where the unsuccessful party is situated. Different rules apply to enforcement of foreign- related arbitral awards. A foreign-related arbitral award is subject only to procedural review by the PRC courts and, consistent with international arbitration practice and the principles of the New York Convention, the grounds for refusal of enforcement are very limited. The Supreme People’s Court issued a Notice in 1995 stating that a court must seek the approval of a superior court, ultimately to the level of the Supreme People’s Court, if enforcement of a foreign-related arbitral award is to be refused.

On March 1, 2002, the "Provisions on Certain Questions Concerning the Jurisdiction of Foreign-Related Civil and Commercial Litigation Cases" (issued by the Supreme People’s Court) came into force. The effect of these provisions is to help ensure that foreign-related arbitration cases are dealt with by courts that are likely to have the relevant experience and expertise, including the Intermediate People’s Courts in the capital cities of province-level regions or within Economic and Trade Development Zones that are approved by the State Council or Special Economic Zones.

Some foreign commentators have alleged that China’s record in terms of enforcement of foreign-related arbitral awards has been poor. However, many of these allegations are based on anecdotal evidence, and they also often do not differentiate between refusal of enforcement and otherwise unsuccessful enforcement. In any litigation or arbitration anywhere in the world, the most likely reason for the successful party’s failure to obtain what he is entitled to under the judgment or arbitral award is that the unsuccessful party does not have sufficient or reachable assets to satisfy the same. Also, if the successful party has to resort to enforcement to obtain money under a judgment or award, it is likely that the unsuccessful party falls into the above category. The situation in China is similar.

Although most foreign businesses are cautious about litigating in the Chinese courts, the number of foreign entities involved in civil litigation in the PRC has increased noticeably. This is inevitable as foreign businesses continue to expand their operations in the PRC or their trade with PRC entities.

Civil procedure in the PRC is governed by the PRC Civil Procedure Law (which came into effect in April 9, 1991) and the judicial interpretation of this law made from time to time by the PRC Supreme People’s Court. Civil cases relating to a foreign country or Hong Kong, Macau, and Taiwan are subject to distinct rules under Civil Procedure Law. This law is also subject to the provisions of international treaties concluded or acceded to by China.

The Courts. China’s court system is established by reference to administrative regions and organized at four levels:

• The District People’s Courts (in city districts, counties, and small cities);

• The Intermediate People’s Courts (in medium-sized and large cities and autonomous prefectures);

• The High People’s Courts (situated in each of the 22 provinces, five autonomous regions, and four municipalities directly under the control of the Central Government); and

• The Supreme People’s Court based in Beijing

Each court is divided into divisions that deal with civil, administrative, criminal, and enforcement matters. There are also special courts dealing with specialized matters such as maritime, military, and railway transportation, etc.

All courts have first-instance jurisdiction, and they are assigned first-instance cases depending on the amount in dispute or the nature of the case: the larger the amount, the higher the level of the trial court. Except in the case of special courts, most courts above the District Court level also hear appeals from the courts immediately below them.

Number, Qualification, and Appointment of Judges. Apart from summary proceedings in the district courts, which are usually presided over by a single judge, civil trials in courts of all levels are usually presided over by a panel of three judges, and cases are decided by a majority or unanimous vote of the panel. All appellate cases are also usually heard by a panel of three judges.

The National People’s Congress appoints judges in the Supreme People’s Court. Judges at local levels are appointed by the corresponding local People’s Congress, although there have been suggestions that judges should be appointed, and their tenure decided upon, by the Chief Justice.

Like in other civil law jurisdictions and unlike in common law jurisdictions, judges in China are not typically recruited from the ranks of senior lawyers and may start their judicial career at a young age. Since the early 1990s, the courts have initiated a process of improving the qualifications of its judges, many of whom have hitherto been retired police or army officers who have had no legal training or experience. As of January 1, 2002, a judge will generally be required, as a minimum, to hold a law degree or non-law degrees coupled with legal knowledge acquired elsewhere, and have two years of practical legal experience. To ensure consistency in legal qualifications, a single National Judicial Examination for all entry-level judges, prosecutors, and lawyers was also introduced on January 1, 2002. An increasing number of Chinese judges have been sent to developed countries such as the United States and United Kingdom under various programs to share and gain experience and receive training.

The Trial Process. Trials are conducted in open court except in special cases, such as those involving state secrets or where the privacy of individuals needs to be protected. Cases involving trade secrets may also be conducted in camera at the parties’ request.

Although Chinese courts retain their inquisitorial powers, the present trend is toward limiting the exercise of such powers. Nowadays, the burden of producing requisite evidence lies mainly with the parties. On its own initiative, the court will collect and introduce evidence where the interest of the state, the public, or third parties may otherwise be adversely affected. In addition, the court may exercise its power to collect evidence at a party’s request in relation to (i) material in the possession of government agencies to which such party has no access, (ii) material relating to state or trade secrets or personal privacy or where the parties are otherwise unable for good reason to gather the requisite evidence themselves. In civil cases, witnesses are expected to give oral evidence in court. Witnesses may be questioned by the presiding judges and, with the consent of the judges, by the parties.

There are no time limits for the court to render judgments of foreign-related cases (including those relating to Hong Kong, Macau, and Taiwan). However, especially in major cities, inordinate delay is not common, and a foreign litigant can expect to have a first-instance judgment within a year from commencement of proceedings, if there are no complications.

Appeals. There is a right of appeal on both legal and factual issues to the court immediately above the trial court. The appellate court’s review of factual issues is not limited to evidence adduced in the first instance. It may also review evidence presented by parties and gathered by the appellate court itself but it will usually only do so in respect of new evidence. Otherwise, the appellate court will not review facts but may re-examine the judgment below for procedural irregularity or substantive impropriety.

Costs. The courts do not require a party to post a bond or provide other forms of security for costs and expenses. Court fees are borne generally by the losing party, but the prevailing party’s own fees and expenses, including its lawyers’ fees, are not awarded unless parties have specifically agreed otherwise or this is provided by the governing foreign law.

Enforcement of Judgments. If the unsuccessful party fails to comply with a civil judgment, the successful party is entitled to apply for enforcement. The trial court may transfer the request for enforcement to another court if necessary. The court may take various enforcement measures against the judgment debtor, including freezing the debtor’s bank account(s) and transferring his deposits, detaining or drawing from the debtor’s income, and sealing up, distraining, freezing, auctioning, or selling the debtor’s assets or property to satisfy the judgment. Controversially, the court may also require a third party that is related to the judgment debtor to pay the amount of the debt, although such third party may object within a specified time. A judgment debtor who is able to satisfy the judgment but simply refuses to do so may be subject to a fine, detention, or even criminal prosecution.

A civil judgment of a foreign court is enforceable only where there is an applicable international treaty or a basis for reciprocal recognition and enforcement. On this basis, at the moment, only the judgments of courts in France, Italy, Russia, and Ukraine are recognized and enforceable in China as of right. Judgments of the courts in Taiwan are also recognized and enforceable in the PRC under the Supreme Court’s Directive for Recognition of Civil Judgments of the Courts of Taiwan Region. For other cases, the successful party under the foreign judgment must commence fresh proceedings in China. In such case, the Chinese court will consider the foreign judgment in arriving at a decision.

Features. Compared to courts in common law jurisdictions, the PRC Court is more likely to accede to a request for making an order to preserve the amount or property in dispute upon the posting of security of equivalent amount prior to the commencement of proceedings. This is a feature of litigation in China that is beneficial to plaintiffs. The Chief Justice of China has admitted that there are instances of corruption among judges but stressed that "the Supreme People’s Court is resolute in purging the ranks of judges and judicial officers of corrupt."⁵ By and large, judges in the major cities in China display a higher degree of competance.

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