An Overview of the New Judicial Interpretation on the PRC Administrative Procedure Law and Practical Tips to Foreign Investors

REFORMED JURISDICTION RULES

According to Articles 14 and 15 of the Administrative Procedure Law, the basic-level People's Courts have general jurisdiction over first instance administrative cases with a few exceptions. For example, the intermediate People's Courts have first instance jurisdiction over “major and complicated cases within the region” (Article 15(3)). In the past, only major foreign-related cases, including those related to Hong Kong, Macau and Taiwan, should, in theory, have been heard by the intermediate courts at first instance. As the courts often took a conservative position when determining whether a case could be classified as “major”, in practice the basic courts dealt with most foreign-related cases. However, foreign parties (including those from Hong Kong, Macau and Taiwan) have questioned the independence and expertise of basic courts in dealing with foreign-related administrative cases.

The 2018 SPC Interpretation extends the first instance jurisdiction of intermediate courts to all foreign-related cases regardless of whether the cases are major cases or not. According to Article 5 of the 2018 SPC Interpretation, all foreign-related cases will be regarded as “major and complicated cases within the region” and therefore should be heard by intermediate courts at first instance. This development is likely to resolve the concerns of foreign parties over the competence of basic courts.

In addition, the 2018 SPC Interpretation adopted a flexible position towards first instance jurisdiction: the intermediate court, upon the request of the plaintiff or the basic court which has jurisdiction, may hear a case that falls under the first instance jurisdiction of the basic courts.

Specifically, according to Article 6 of the 2018 SPC Interpretation, if a plaintiff believes its claim is significant and thus inappropriate for the basic court which has original jurisdiction to hear the case, the plaintiff may file its claim directly with the intermediate court in the region. Upon the request of the plaintiff, the intermediate court may, based on the relevant circumstances of the case, decide to hear the case by itself or to designate another basic court to hear the case as appropriate. Of course, if the intermediate court deems it is appropriate for the basic court with original jurisdiction to hear the case, it will notify the plaintiff to file the case with the basic court.

Article 7 of the 2018 SPC Interpretation further provides that the intermediate court may hear a case under the original jurisdiction of a basic court upon the request of the basic level court. Where a basic court deems it is necessary for an intermediate court to hear a case it has already accepted, it may report the case to the intermediate court in the region for a decision on jurisdiction. The intermediate court may then decide to hear the case or designate another basic court to hear it, as appropriate. If the intermediate court deems it is appropriate for the basic court with original jurisdiction to hear the case, it will instruct the basic court to hear the case.

Although the rationale behind this new mechanism is not specifically written into the 2018 SPC Interpretation, it follows naturally that one of its purposes is to mitigate the potential risk of local-protectionism caused by influence of the local government. It remains to be seen how this new mechanism will be implemented in practice.

EXTENDING SCOPE OF THE ELIGIBLE PLAINTIFF

Previously, if the interests of a Sino-foreign joint venture (JV) were infringed by a governmental act, only the JV itself would be entitled to initiate administrative action against the government. In practice, however, Chinese JV partners, especially stateowned enterprises, are extremely reluctant to bring an action against the local government. This situation raises difficulties for foreign investors who are seeking judicial remedies for the JV's interests, and their own investment in the JV: without consent from the Chinese partner, a foreign investor has no standing to sue the government on behalf of the JV.

The 2018 SPC Interpretation changed this situation by expanding the scope of “plaintiff” in administrative litigation to include foreign investors as eligible plaintiffs. Section 2 of Article 16 of the 2018 SPC Interpretation provides that investors of a Sino-foreign equity JV or a Sino-foreign contractual JV are entitled to initiate an lawsuit against the government in their own name if the governmental act infringes upon the JV's interests. Based on this new provision, a foreign investor who believes that a governmental act infringes the JV's interest no longer needs to wait for consent of the Chinese partners in order to bring action, but is able to initiate an administrative action to protect the JV's interests in its own name.

UPDATED EVIDENCE RULES

Increased burden on the defendants

New evidence rules set out by the 2018 SPC Interpretation put an additional burden on the defendants in clarifying relevant facts. According to Article 41, the plaintiffs are entitled to request the relevant enforcement official's presence in the trial to provide further clarification of the facts and address questions from the judge and plaintiff's attorney, if the plaintiff has questions over following issues:

(i) the legitimacy and authenticity of the on-site transcript;

(ii) types and quantity of the detained assets;

(iii) sampling and maintaining of the inspected products; and

(iv) the identity of the enforcement official.

Article 44 further provides that if the court deems it necessary, it may require the enforcement officials to appear before the court and take questions.

In addition, Article 47 has shifted the burden of proving damages from the plaintiff to the defendant in administrative compensation or reimbursement cases if the plaintiff's failure to adduce evidence was caused by the defendant.

Discovery in administrative litigation

Under Article 46 of the 2018 SPC Interpretation, the plaintiff may apply to the court requesting the defendant (i.e. government body) to produce evidence that is favorable to the plaintiff if it can prove that the defendant indeed holds such evidence. In the event of the defendant's failure or refusal to provide the required evidence, the court will deem that the disputed facts in the underlying evidence are proved in favor of the plaintiff.

In administrative cases, the plaintiff's evidence is often in the possession of government agencies, which makes it difficult for plaintiffs to meet their burden of proof. The new Article 46 requirement is a significant development toward ensuring procedural fairness by levelling the playing field between the parties. For example, the authors previously advised a multinational company in an administrative case brought against a national-level government body before the Beijing No.2 Intermediate Court. One critical piece of evidence to prove a key fact in favor of the company was held by the defendant in that case. The plaintiff company applied to the government body for disclosure of the evidence but was told that the document had been destroyed. With the 2018 SPC Interpretation in place, defendants will no longer be able validly to destroy or withhold evidence that is unfavorable to them.

DETAILED GUIDANCE ON MEDIATION

Traditionally, mediation was not available in PRC administrative law cases for the reason that public power cannot be compromised through negotiation. However, the 2014 Amendment of the Administrative Procedure Law introduces mediation for administrative compensation cases or cases where the governmental organ exercises its discretion provided under the laws. Nonetheless, the new system cannot function well without detailed guidance on its process. The 2018 SPC Interpretation fills the gap by setting out a detailed process for mediation which is similar to the familiar process in civil litigation. For example, it allows the judge, in suitable cases and with the parties' consent, to proactively mediate the dispute. The judge may also ask a third party to join the mediation process either upon a party's request or at his or her own discretion. A mediation of the administrative litigation can also be initiated by the parties. The 2018 SPC Interpretation also makes it clear that the process of court mediation is confidential unless the parties jointly agree to disclose.

Where a settlement is reached through mediation, the court will prepare a consent order. A consent order will include the claims, the facts of the case, and the result of the mediation. The consent order has the same legal effect as an effective court judgment. Where an obligated party refuses to comply with a consent order, the opposing party may apply to the court for enforcement of the order.

PRACTICAL TIPS FOR FOREIGN INVESTORS OR COMPANIES DOING BUSINESS IN CHINA

Foreign investors or companies involved in an administrative litigation proceeding, or considering initiating one, should carefully review their case strategy taking into account the various changes described above. In particular, it is recommended that a foreign party:

1 . considers initiating an action in its own name where a Sino-foreign JV's interest is negatively impacted by a governmental act and if the Chinese partner is reluctant to initiate an administrative action against the government, the foreign party;

2 . considers whether there are any facts that could allow the case to be filed with the intermediate courts so that the governmental act in dispute will be reviewed by more experienced judges with higher authority;

3 . reconsiders its strategy for collection of evidence based on the updated evidence rules (for example, consider if it would be appropriate to file an application requesting that the defendant government agency produces evidence that it is known to hold);

4 . considers whether its case is suitable for mediation by the court and, if it is, start settlement talks with the defendant, particularly if it does not have a strong case; and

5 . in case of any potential dispute/action relating to a governmental act, consults attorneys with relevant experience and expertise.

Peng Shen, Special Counsel

Baker McKenzie (Beijing)

Xi Zhou, Partner

FenXun Partners (Beijing)

Hailin Cui, Consultant

FenXun Partners (Beijing)