Dispute Resolution In Greater China

Article by Johnson Tan, Peter Wang, Iain Seow, Victor Chang and Marianne Chao

Greater China comprises the People’s Republic of China, the Hong Kong Special Administrative Region and Taiwan. The region represents the world’s biggest and fastest growing emerging market, attracting capital, goods and services from across the world.

It has long been recognised that in order to retain investor confidence in the region, disputes must be resolved in a fair, transparent and cost-effective manner. With the accession of China and Taiwan into the World Trade Organisation, significant changes are taking place, particularly in Mainland China, with regard to the implementation of internationally accepted rules of business. Even so, dealing with disputes remains a daunting affair for most foreign businesses that may be unfamiliar with the variety of applicable laws and procedures in the region.

Although they share the same cultural heritage, the legal systems in Mainland China, Hong Kong and Taiwan are very different. The manner of dispute resolution also differs in each jurisdiction. However, as trade and investment continue to flow across the region, disputes are no longer confined to one jurisdiction but often involve two or all three. Dealing with cross-border disputes remains a complicated and challenging task for most businesses in the region.

The key to avoiding disputes in the region is a strong appreciation of the business, cultural and regulatory environment where one’s business is conducted. However, when disputes arise, a clear understanding of the legal systems and dispute resolution mechanisms of the region is essential to ensure that these disputes are effectively managed to meet commercial or strategic objectives.

The aim of this article is to provide an understanding of the legal systems and the dispute resolution mechanisms in Mainland China, Hong Kong and Taiwan.

Jones Day has been in the Greater China region for more than 20 years and has offices in each of the gateways of China – Beijing, Hong Kong, Shanghai and Taipei. Commercial dispute resolution is a major part of the Firm’s Greater China practice.

We aim to deliver consistent, top quality and cost-effective dispute resolution service to meet the legal and commercial objectives of our clients. This means making sensible cost/ benefit choices, employing aggressive case management procedures and taking a deliberate, proactive approach to the prompt resolution of appropriate cases – steps that contribute significantly to reducing the total costs of resolving disputes in the region.

Our strength lies in our ability to operate as one firm throughout the Greater China region. This enables us to utilize both local and international resources in an integrated manner to provide timely value-added, creative and successful solutions for our clients. Our presence in China, Taiwan and Hong Kong means that we are able to be "on the ground" with clients in the region and still advise senior management no matter where they are located.

As one of the major international disputes practices in the region, we are able to bring a critical mass of commercial excellence to our work. In addition to being leading practitioners in China, Hong Kong and Taiwan, almost all our lawyers are multilingual (conversant in English and Mandarin, Cantonese, Shanghainese and other major Chinese dialects) and have practiced in other major international jurisdictions such as England and Wales, the United States, Australia, New Zealand and Singapore.

We represent international and local corporations, financial institutions, professional bodies, government agencies and people in all facets of commercial dispute resolution, including:

• litigation in local courts;

• international and local arbitration; and

• alternate dispute resolution.

We are experienced in dealing with disputes relating to corporate governance, joint ventures, corporate finance, construction and engineering projects, employment, energy projects, financial institutions, fraud, insolvency, securities regulation and technology. Our lawyers have been involved in some of the largest and most complex litigations and arbitrations in the region.

We also recognize that disputes are better avoided than fought. As such, we work closely with our clients to develop effective compliance, operating procedures and strategies to reduce the risk of disputes.

Jones Day is one of the world’s largest law firms, with more than 2,000 lawyers in 29 offices around the globe. We provide commercial and authoritative advice across the full range of legal services required by major corporations. We have nine offices in Asia, seven in Europe and 13 in the United States. We represent approximately half of the Fortune 500 companies worldwide.

Jones Day has built one of the largest and most successful dispute resolution practices in the world, comprising more than half of the Firm’s global operations. Unique among global law firms, Jones Day offers the resources and experience of the world’s leading litigation practice, top litigators and local knowledge in the jurisdictions where we operate.

In January 2002, The American Lawyer named Jones Day as "Litigation Department of the Year". According to The American Lawyer, Jones Day ranks as both "bigger and better" than any of the other litigation departments which were examined:

"More Supreme Court wins. Thriving practices in securities litigation defense and global arbitration. Marquee clients worldwide. No matter how we judged them, one litigation department consistently stood out as the best last year… Jones Day’s."

More recently Chambers and Partners, a leading UK-based publisher of directories to the worldwide legal profession, recognised Jones Day’s litigation practice as the best among all international law firms.

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 China in the last 24 years that have culminated recently in China’s accession to the World Trade Organisation.

China is a civil law jurisdiction which adopts 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.

China has made significant progress in the area of dispute resolution, more than is generally known by the international business community. Its accession to the WTO is stimulating ongoing judicial reforms that will bring China’s dispute resolution system more in line with international practice.

This chapter concentrates on the predominant forms of dispute resolution in China, namely arbitration and civil litigation involving foreign parties.

Up to now, foreign businesses have favoured arbitration as a method for dispute resolution in China due to their lack of familiarity with the PRC’s system of civil procedure or lack of confidence in the court system. Arbitration in China is governed by the PRC Arbitration Law.

Arbitral bodies in the PRC comprise the following:

• China International Economic and Trade Arbitration Commission (CIE TAC), also known as the C our t 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 50 years. It is based in Beijing and has subcommissions in Shanghai and Shenzhen. It is 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 throughout China.

All PRC arbitral bodies may administer both foreign-related and purely domestic arbitrations unless their arbitration rules provide otherwise. There is no geographical limit on their jurisdiction.

Choosing a Panel. An arbitral panel will typically consist of three members, one appointed by each party or the chairman of the arbitration commission at the parties’ request. The third, who acts as chief arbitrator, is appointed jointly by the parties or by the chairman of the arbitration commission. The parties choose arbitrators from lists of arbitrators maintained by the respective commissions. The list maintained by CIETAC, for example, comprises more than 500 arbitrators (including a large number from overseas jurisdictions such as the US, UK, Germany, France, Japan, Hong Kong, Singapore and Italy).

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 which usually depends on the amount in dispute. Foreign lawyers are permitted to represent clients and appear in the arbitration. Arbitrations in China tend to be quicker and simpler than arbitrations in common law countries. Hearings typically last one to two days. In CIETAC arbitrations involving foreigners, a final award should be made within nine months 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.

Awards and Costs. Arbitral awards are final and binding on the parties and there is no right of appeal. CIETAC has 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% of the amount awarded.

Enforcement. China is a signatory to the 1958 UN 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. For the same reason, Chinese arbitral awards are also enforceable in these countries.

Hong Kong arbitral awards are enforceable in 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 (HKSAR)", which took effect on February 1, 2000. Mainland awards are similarly enforceable in Hong Kong by virtue of the Hong Kong Arbitration (Amendment) Ordinance 2000 that took effect on the same date.

Taiwanese Arbitral Awards are also enforceable in the Mainland 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 in the province where the unsuccessful party is situated. Different rules apply to enforcement of foreignrelated arbitral awards and purely domestic ones. A foreignrelated 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 the court above it (ultimately to the level of the Supreme People’s Court), if a foreign-related arbitral award is not to be enforced.

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

Civil procedure in the PRC is governed by the PRC Civil Procedure Law 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, Macao and Taiwan are subject to distinct rules under China’s civil procedure laws. International treaties concluded or acceded to by China supersede inconsistent provisions of the PRC civil procedure law.

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

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

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

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

• the Supreme People’s Court situated in Beijing.

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

All courts have first instance jurisdiction depending on the amount of money in dispute or nature of the case.

The 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 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 People’s Supreme Court.

Judges at local levels are appointed by the corresponding local people’s congress of the region in which the court is situated.

Since the early 1990s, China has initiated a process of improving the qualifications and standard of its judges. These reforms include the recent introduction of a single National Judicial Examination for all entry-level judges, prosecutors and lawyers to ensure consistency in legal qualifications. In addition to passing such examination, judges are now also required to have certain academic qualifications and a minimum number of years of practical legal experience.

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 need to be protected. Cases involving trade secrets may also be conducted in camera at the parties’ request.

Although Chinese courts retain inquisitorial powers, the present trend is towards limiting the exercise of such powers. The burden of producing evidence lies mainly with the parties. The court will on its own initiative collect and introduce evidence where the interest of the state, the public or third parties may be adversely affected. In addition, the court may exercise the power of collecting evidence at a party’s request in relation to material in the possession of government agencies to which such party has no access, material relating to state or trade secrets or personal privacy, or where the parties are unable to do so themselves for good reason. 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 (which is liberally granted), by the parties.

Parties to litigation may be represented by PRC lawyers or non-lawyer representatives. Foreign lawyers are not admitted to appear in PRC courts.

There are no time limits for the court to render judgments or otherwise dispose of foreign-related cases (including cases relating to Hong Kong, Macao and Taiwan).

Appeals. There is a right of appeal on both legal and factual issues to the court immediately above the trial court.

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 judgment, the successful party may apply to the trial court for enforcement. The enforcing court may take various enforcement measures against the judgment debtor. Moreover, 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 exists an applicable international treaty or a basis for reciprocal recognition and enforcement. At the time of writing, 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.

Jones Day has in total more than 10 lawyers who practice in dispute resolution in Mainland China. In addition to English, most of these lawyers are fluent in Mandarin, Cantonese, Shanghainese and other Chinese dialects. Two of our lawyers were formerly judges in PRC courts.

Jones Day’s dispute resolution practice in China is based on lawyers with years of experience acting for foreign financial institutions, multinational corporations, local businesses and state-owned enterprises in dispute matters. We focus primarily on the following types of disputes:

• Construction, engineering and infrastructure

• Commercial fraud

• Information technology

• Intellectual property

• International trade

• Joint ventures

• Power and energy

• Property development

• Financial and investment regulations

• Trade financing

• Winding-up and bankruptcy

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.