Arbitration and litigation explained

China Law & Practice's Annual Review was released at the Awards Ceremony in Beijing this month. Part of the Annual Review comprises insights from leading lawyers. In this Q&A, Vincent Mu discusses dispute resolution and how CIETAC's internal struggles are affecting arbitration.

1. What have been the key legislative updates or changes affecting litigation and arbitration over the past 12 months?

The following legislation is most likely to affect the litigation system in China:

• PRC Criminal Procedure Law (promulgated March 14 2012);

• PRC Administrative Enforcement Law (promulgated June 20 2011);

• Supreme People's Court, Interpretation on Issues Relevant to the Application of the Law in Trials of Disputes over Sales and Purchase Contracts (promulgated May 10 2012);

• Supreme People's Court and Supreme People's Procuratorate, Interpretation on Several Issues Concerning the Specific Application of the Law when Handling Criminal Trials of Insider Trading and Divulgence of Insider Information (promulgated March 29 2012);

• Supreme People's Court, Interpretation on Several Issues Concerning the Application of the áPRC Marriage Lawñ (3) (promulgated August 9 2011);

• Supreme People's Court, Provisions on Several Issues Regarding Entrusted Enforcement (promulgated May 3 2011);

• Supreme People's Court, Circular on the Issuance of the «Several Opinions on Punishing Evasion of Enforcement in Accordance with the Law» (promulgated May 27 2011);

• Supreme People's Court, Circular on Lawfully and Properly Hearing Cases of Disputes over Private Lending to Promote Economic Development and Maintain Social Stability (promulgated December 2 2011); and

• China Banking Regulatory Commission, Implementing Opinions on Encouraging and Guiding the Entry of Private Capital into the Banking Sector (issued May 26 2012).

2. From your experience, what types of disputes have been most common in the past year? Are there any reasons for the growing emergence of these types of disputes?

China has seen an increase in shareholders' disputes in the past year, in particular disputes among shareholders in Sino-foreign joint venture companies.

We believe three factors can be attributed to this phenomenon. Firstly, historically, many Sino-foreign joint venture companies were formed because of China's restrictions on market entry policies. In finding a local partner, some foreign companies base their search not purely on commercial considerations, but on meeting the requirements for investment by the government. As China has loosened restrictions in recent years, some foreign investors decided to split from their partners and this has created numerous shareholder disputes in these joint venture companies.

In recent years, China has also promulgated some new laws and regulations regarding the PRC Company Law including the Provisions on Several Issues Concerning the Application of the «PRC Company Law» (1), (2) and (3) from the Supreme People's Court. These provisions have clarified some vague issues in the law, making corporate litigation more predictable. This also gives incentives to shareholders who want to resolve disputes with partners.

Finally, a diversified investment pattern also creates new types of disputes. As a result, legal professionals have witnessed unprecedented disputes such as controversy over the validity of the valuation adjustment mechanism.

3. What was one of your highlight cases or litigations this year and why was it challenging? What precedents, if any, did it set for litigation and arbitration in China?

I would choose the breakup of a variable interest entity (VIE) structure. A PRC company obtained financing from a US listed company through a VIE arrangement. After years of operation, disagreement arose between the founder of the PRC company and the board of the US listed company. In its shareholder and board resolutions the US listed company attempted to remove the founder from all positions and to deprive him of all powers and rights under the VIE structure. Both parties went into a series of litigations and arbitrations in Shanghai, the US, Singapore, the British Virgin Islands and Hong Kong over the control of the companies under the VIE structure. The disputed amount in the case exceeded Rmb300 million ($47 million). Martin Hu & Partners represented the founder in the arbitration in China, and successfully broke up the VIE structure by obtaining a favourable arbitration award where the VIE structure was ruled null and void for violating the prohibitive provisions of the administrative regulations of the state. The parties finally reached a settlement.

4. Clients are often concerned that court judgments are not effectively enforced. How do you respond to these concerns and what measures do you recommend to them if judgments are not enforced?

We have seen the Chinese courts make significant progress in judgment enforcement. In May 2011 alone, the Supreme People's Court promulgated two important pieces of legislation on judgment enforcement, namely the Supreme People's Court, Provisions on Several Issues Regarding Entrusted Enforcement and the Supreme People's Court, Circular on the Issuance of the «Several Opinions on Punishing Evasion of Enforcement in Accordance with the Law». This demonstrates the Supreme Court's intention to build up a more reliable judgment enforcement system. Enterprises concerned about enforcement are recommended to:

• try to find out the financial status of the defendant before starting a lawsuit;

• make good use of supplementary measures in judgment enforcement, such as judicial preservation; and

• not to wait, but proactively collect information concerning the defendant's assets and closely monitor news of the defendant such as in insolvency announcements, as this will significantly increase the chances of successful enforcement.

5. CIETAC has revised the Arbitration Rules, which took effect in May this year. What changes do you think are the most important and practical for both domestic and foreign parties? What issues need to be further improved and why?

The most prominent event in the arbitration area of China this year could be the dispute between CIETAC Beijing, CITEAC Shanghai and CIETAC Shenzhen.

Before May 2012, according to the CIETAC Arbitration Rules of 2005 commonly adopted by CIETAC Beijing and other CIETAC commissions, if parties stipulate in their arbitration agreement that the dispute is to be “submitted to China International Economic and Trade Arbitration Commission for arbitration”, CIETAC Beijing and other CIETAC commissions may accept and hear the case on their own. However, according to the new Rules adopted by CIETAC Beijing as of May 1 2012, cases under a similar arbitration clause may only be submitted to and heard by CIETAC Beijing, which ruled out the jurisdiction of other CIETAC commissions. The new Rules led to a strong backlash from CIETAC Shanghai and Shenzhen, both of which declared independence afterwards. CIETAC soon adopted its own arbitration rules of 2012, while CIETAC Shenzhen announced that it will continue following the CIETAC Arbitration Rules of 2005.

This has resulted in the complicated situation of three arbitration commissions with three sets of arbitration rules. What is even worse is that it has called the validity of the arbitration award by these arbitration commissions into question. Since CIETAC Beijing has declared the new rules of CIETAC Shanghai illegal and the CIETAC Arbitration Rules of 2005 outdated, we may see a series of cases requesting repeal and non-enforcement of arbitration awards rendered by these two arbitration commissions.

The Supreme People's Court will make the final decision on the validity of certain arbitration awards, namely foreign-related arbitration awards, which could lead to two precedents. If CIETAC Shanghai renders an award by its newly appointed arbitrators based on its new rules, the Supreme People's Court could repeal this award. Similarly, if a party submits a case to CIETAC Shenzhen for arbitration based on an arbitration agreement which stipulates “the dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration”, and CIETAC Shenzhen accepts the case and renders an award, the Supreme People's Court could repeal this award.

If the Supreme People's Court decides not to repeal the above two awards, CIETAC Shanghai and Shenzhen will preliminarily secure their independence, and there will be three coexisting arbitration commissions under the name of CIETAC. If the Supreme People's Court decides to repeal the two awards, the tension between three arbitration commissions will get worse.

6. What factors do foreign clients need to take into account when involved in arbitration in China? What are their major concerns and how do you address these concerns?

In general, there is no difference between China's arbitration system and that of other major jurisdictions. We have been frequently asked the following questions by our foreign clients during their arbitration cases though, which we consider as typical questions.

Will an arbitration award rendered by a Chinese arbitration commission gain recognition and enforcement in other countries?

China is a party to the New York Convention and so an arbitration award rendered by a Chinese arbitration commission will gain recognition and enforcement in an overseas jurisdiction under the Convention. From the perspective of the Convention, there is no difference between a Chinese arbitration award and awards from other parties to the Convention.

Are interim measures such as preservation and seizure available during the arbitration?

Yes. But an arbitration commission cannot enforce the interim measures on its own, but through a competent court.

Will a Chinese arbitration commission strictly follow the regulations on trial deadlines?

In general, arbitration commissions will do their best to comply with the regulations on trial deadlines, while sometimes the deadlines have to be exceeded in more complicated cases. In our experience, arbitration commissions will generally proceed with caution when extension of deadline is required, such as giving written notice and notifying the anticipated time length of extension.

Can I request a Chinese arbitration commission to use the rules of other arbitration organisations, such as the International Chamber of Commerce and Singapore International Arbitration Centre, or to use languages other than Chinese throughout the hearing?

Yes. But the parties have to reach this agreement either in their arbitration agreement or before arbitration begins.

7. How was your experience of using CIETAC's online arbitration service? What issues do companies need to be aware of when opting for online arbitration?

So far, we have not tried CIETAC's online dispute service. This could be mainly attributed to clients' ignorance of the mechanism, but we believe most Chinese clients will disregard this as Chinese people are more comfortable with face-to-face communication and would consider it strange to resolve a dispute without meeting the arbitrators.

8. What are the biggest challenges or risks for a Chinese company involved in international arbitration?

When a Chinese enterprise is involved in an international arbitration, it faces the same predicament that a foreign party would face when required to arbitrate in China – the party will need the assistance of a local lawyer to represent the case due to lack of knowledge of the legal system and rules. However, due to the language barrier, the party will normally retain another lawyer in its own country, who will then serve as the communication medium with the foreign lawyer. This lawyer-lawyer arrangement makes cross-border arbitration possible, but its drawbacks are also obvious: it causes misunderstanding, low efficiency, and disputes between lawyers and clients. In the near future, the possibility of completely resolving this problem is low and the only hope lies in the internationalisation of Chinese enterprises and the localisation of international law firms, as opposed to the localisation of international enterprises and the internationalisation of Chinese law firms. It may reduce the distance between the two, and make it possible for international commercial arbitration to be conducted in a more efficient way.

仲裁及诉讼阐述

胡光律师事务所的牟笛律师为我们讨中国诉讼及仲裁的最新发展，并为外国企业就有关事项提供意见

1. 在过去12个月，诉讼及仲裁方面出台了什么主要法规？