Common Issues in Foreign-Related Dispute Resolution in China

A Practice Note outlining the Chinese courts' practices in relation to foreign-related litigation and arbitration matters and the clarifications issued by the Supreme People's Court on 31 December 2021 in a judicial paper titled "Meeting Minutes of the National Court's Symposium on Foreign-Related Commercial and Maritime Trials".

On 31 December 2021, the Supreme People's Court (SPC) of China (PRC) issued the Meeting Minutes of the National Court's Symposium on Foreign-Related Commercial and Maritime Trials 2021 (2021 Meeting Minutes). While documents of this type do not, strictly speaking, constitute judicial interpretations and cannot be cited as the basis for adjudication in PRC court judgments, the people's courts can reason according to the relevant provisions of the meeting minutes when specifically analysing the reasons for the application of law (Notice by the SPC on Issuing the Meeting Minutes of the National Court's Symposium on Civil and Commercial Trials 2019).

Given that these minutes are compiled based on the cases and experiences accumulated by people's courts of all levels from their trial work in the past few years, the minutes provide guidance on the courts' current consensus views and have significant value for practitioners dealing with cross-border dispute resolution matters in the PRC.

The 2021 Meeting Minutes consist of three sections:

• Foreign-related commercial affairs.
• Foreign-related maritime affairs.
• Judicial review of arbitration.

For more information on how the PRC distinguishes between disputes involving "foreign-related elements" and those that do not, see Practice note, Foreign Institutional Arbitration in China, Foreign-Administered Arbitrations: Disputes Without Foreign-Related Elements.

The issuance of the 2021 Meeting Minutes by the SPC is a welcome development. It provides clarification and guidance to the judicial bodies and litigants on key controversial issues in law and practice over the years.

This Note addresses a range of selected topical foreign-related issues that practitioners may frequently encounter in China litigation and arbitration proceedings.

Common Issues in Foreign-Related Litigation

Direct Submission of Jurisdiction Challenge from Overseas (Clause 9)

Under PRC law, when a claim has been commenced against a foreign party before a people's court and the foreign party (that has no domicile in China) objects to the jurisdiction of the court over the dispute, it can file a jurisdiction challenge application within 30 days from the date of receipt of the court documents (including the statement of claim) (Articles 130 and 275, Civil Procedure Law of the PRC 2021 (2021 CPL, with effect from 1 January 2022)). (A shorter time limit (15 days) applies to a foreign party with a domicile in China.)

In practice, the foreign parties submit the jurisdiction challenge application to the people's court directly by courier (from overseas), as the 30-day time limit may not be sufficient for the foreign party to prepare duly notarised and legalised authorisation documents (such as the Certificate of Incorporation and the Power of Attorney) for its local Chinese counsel to submit the application on its behalf.

Clause 9 of the 2021 Meeting Minutes has clarified that when submitting the jurisdiction challenge application via courier from overseas directly, the foreign party must submit a copy of its Certificate of Incorporation (or any other certificate that can prove the party's good standing) and its contact details, failing which the application will not be reviewed or considered by the PRC court. This means a copy version is allowed to be provided at the time of filing of the application, with the relevant notarisation and legalisation documentation to follow later.

Electronic Service of Documents (Clause 11)

Under PRC law, where the defendant is not domiciled in China, a people's court may serve the relevant court documents on the defendant in various ways:

• As per the international treaty concluded or acceded to between the home country of the defendant and China.
• Through diplomatic channels.
• By courier if permitted by the law of the home country of the defendant.
• By fax, email, or any other means by which the receipt of the service by the defendant can be confirmed.

(Article 274, 2021 CPL.)

Clause 11 of the 2021 Meeting Minutes states that electronic service of documents on a foreign defendant via fax and email is permissible provided that:

• The law of the home country of the defendant does not prohibit electronic service.
• Where the home country of the defendant is a contracting state of the Hague Service Convention and has made a declaration objecting to service by postal channels (under Article 10(a)), it should be presumed that electronic service will also not be allowed in that country.
• The service does not breach the provisions of any international treaty concluded or acceded to by China.

Going forward, if a foreign party receives documents from a PRC court via electronic methods (such as fax, email and so on), the foreign party should first check if the conditions for electronic service stipulated in clause 11 have been satisfied.

Jurisdiction of the Court of the Claimant's Domicile (Clause 34)

To enforce a judgment or ruling of a foreign court in China, the judgment creditor can directly apply to the relevant Intermediate People's Court depending on where the judgment debtor is domiciled or the location of their assets (Article 288, 2021 CPL).

Enforcement can also be sought against a judgement debtor, not domiciled in China or without any assets in China, but with a legal representative (an individual) domiciled or living in China. The judgment creditor can also concurrently apply to the local PRC court to restrain that legal representative from travelling abroad or engaging in excessive expenditure (Article 24, Interpretations of the Supreme Court of Several Issues Concerning the Enforcement Procedures in the Application of PRC Civil Procedure Law). This was to encourage the judgment debtor to perform their obligations under the foreign judgment.

Before the 2021 Meeting Minutes were issued, these pressure tactics proved to be challenging. The local PRC court would typically reject the application for recognition and enforcement of the foreign judgment in the first instance, citing a lack of court jurisdiction over the matter where the judgment debtor was not domiciled or without any assets in China.

Clause 34 of the 2021 Meeting Minutes states that the Intermediate People's Court where the judgment creditor is domiciled may also have jurisdiction over the matter. Therefore, the judgment creditor (if they are domiciled in China) would be able to make the necessary application to protect (and enforce) its rights and interests.

Property Preservation in Recognition and Enforcement of Foreign Court Judgments (Clause 39)

Before the 2021 Meeting Minutes were issued, Chinese law was silent on whether a PRC court could allow for the preservation of the assets of the defendant when the court is dealing with the application on recognition and enforcement of a foreign judgment.

There was one exception relating to Hong Kong court judgments under Article 14 of the Arrangement on Reciprocal Recognition and Enforcement of Judgments of Civil and Commercial Matters by the Courts of the Mainland and of HKSAR pursuant to the Choice of Court Agreements between Parties Concerned 2006, which states that:

“The court may, before or after accepting any application for recognition and enforcement of a judgment
and as requested by the applicant, impose property preservation or mandatory measures upon assets of the
party against whom the application is filed, in accordance with the law of the place where enforcement of
the judgment is sought on property preservation or injunction restraining the transfer of assets."

For more information, see Practice Note, Enforcing Judgments Between the Mainland and Hong Kong: Civil and Commercial Matters.

This exception for Hong Kong court judgments aside, PRC courts were typically disinclined towards granting applications for the preservation of assets.

Clause 39 of the 2021 Meeting Minutes expressly provides that after the PRC court has admitted the application for enforcement of a foreign judgment (and is still reviewing the application), it may consider allowing for property preservation by invoking relevant provisions of the 2021 CPL and related judicial interpretations. The 2021 Meeting Minutes also make it clear that the applicant should provide security in support of its application, failing which the application should be dismissed.

As per the 2021 CPL and relevant judicial interpretations, property preservation refers to the attachment of properties of the defendant. Target properties are seized, sealed up or frozen and cannot be directly disposed of. The aim is to protect the rights of interested parties and to ensure the enforcement of the final judgment. An application for property preservation can be made before formal proceedings are commenced or during the course of the legal proceedings.

Test for Determining the Concept of Reciprocity (Clause 44)

Article 289 of the 2021 CPL provides that a PRC court should review an application for recognition and enforcement of a valid foreign judgment on the basis of:

• International treaties concluded or acceded to by China.
• The principles of reciprocity.

The foreign judgment should be recognised and enforced in China unless the court finds that the judgment breaches the basic principles of PRC laws, or the national sovereignty, security, or social and public interests of China.

Although the PRC courts' understanding of the principle of reciprocity appears to have been shifting from "factual reciprocity" to "presumed reciprocity" (which is a more flexible standard for recognition and enforcement of foreign judgments), there was uncertainty in relation to the definition of reciprocity.

"Factual reciprocity" refers to the scenario where the home country of the foreign court concerned has precedence in recognising and enforcing the judgment of a PRC court (that is, for it to be recognised and enforced in a PRC court). Failing this precedence, the PRC court will not recognise and enforce the foreign judgment.

"Presumed reciprocity" represents a less onerous approach. A PRC court will consider whether the home country of the foreign court concerned:

Has not refused the recognition and enforcement of any PRC court judgment before.

Has a precedence of allowing the recognition and enforcement of court judgments of similar nature from other countries.

In this situation, there will be a presumption of a reciprocal relationship with the home country of the foreign court.

Clause 44 of the Meeting Minutes clarifies that the following standard can be used to determine whether there is a principle of reciprocity:

• Based on the laws of the country where the foreign court is located, civil and commercial judgments made by PRC courts could be recognised and enforced by the courts of that country.
• China has reached a mutually beneficial understanding or consensus with the country where the foreign court is located.
• The country where the foreign court is located has made a reciprocal commitment to China through diplomatic channels. Alternatively, China has made a reciprocal commitment to the country where the foreign court is located through diplomatic channels. And there is no evidence showing that the country where the foreign court is located has refused to recognise and enforce the judgments issued by PRC courts on the grounds that there is no reciprocal relationship between the two countries.

While clause 44 does not expressly state so, its interpretation of "reciprocity" reflects a shift from that of the more rigid "factual reciprocity" test to a more flexible "presumed reciprocity" one.

Common Issues in Foreign-Related Arbitration

Validity of "Arbitration-Comes-First" Clause (Clause 94)

Under PRC law, an agreement where the parties agree that the dispute can be submitted to an arbitration institution for arbitration or to a people's court for litigation is considered invalid. However, this would not be the case if a party has applied to an arbitration institution for arbitration and the other party fails to raise an objection within the specified period (before the first hearing of the arbitration tribunal). (Article 7, Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of the "Arbitration Law of the People's Republic of China" 2008 (2008 SPC Interpretation on Arbitration Law Application).)

Parties sometimes agree for disputes to be submitted to an arbitration institution for arbitration first and then submitted to a people's court for litigation. Clause 94 of the 2021 Meeting Minutes clarifies that this "arbitration first, then litigation" agreement should not render the arbitration agreement invalid, however the parties' agreement on subsequent court litigation would be regarded as null and void. Parties are not permitted to approach the courts in relation to the dispute on which an arbitral award has been issued.

Arbitration Based on Agreed Arbitration Rules (Clause 95)

Under PRC law, where an arbitration agreement is not clear or where it does not specify which disputes are subject to arbitration or the arbitration institution, the parties can agree to a supplementary agreement. If no supplementary agreement can be reached, the arbitration agreement is considered invalid (Article 18, Arbitration Law of the PRC 2017, with effect from 1 January 2018). Where the arbitration agreement only stipulates the arbitration rules applicable to the dispute, it is deemed that no arbitration institution has been agreed. However, this is not so if the parties have reached a supplementary agreement, or the arbitration
institution can be determined according to the agreed arbitration rules (Article 4, 2008 SPC Interpretation on Arbitration Law Application).

Clause 95 of the 2021 Meeting Minutes has clarified that if the parties have not agreed on a specific arbitration institution in the arbitration agreement but have agreed to apply the arbitration rules of a certain arbitration institution, the parties should be deemed to have agreed to the arbitration institution for arbitration, unless the arbitration rules stipulate otherwise.

This represents a positive step in the internationalisation and development of arbitration in China. It is also in line with Article 35 of the Draft Arbitration Law Amendments circulated for public consultation on 31 July 2021, which states:

"If the arbitration agreement does not clearly stipulate the arbitration institution, but the arbitration
institution can be determined based on the applicable arbitration rules, the arbitration institution should
accept the case; if there is no agreement on the arbitration rules, the parties may supplement the agreement;
if no supplementary agreement can be reached, the arbitration institution which first accepted the case
should have jurisdiction over the matter."

Inconsistent Dispute Resolution Mechanisms Between Main and Subordinate Contracts (Clause 97)

There was no clarity on inconsistent dispute resolution clauses in related contacts before the 2021 Meeting Minutes were issued.

Clause 97 of the 2021 Meeting Minutes stipulates that where parties agree to resolve disputes differently in a main contract and a subordinate contract, a people's court should determine the dispute resolution method based on the provisions in each contract. Where the main contract stipulates arbitration and the subordinate contract is silent, the arbitration agreement in the main contract cannot bind the parties to the subordinate contract, unless the parties to both contracts are identical.

This is largely in line with Article 24 of the Draft Arbitration Law Amendments, which states:

"Where a dispute involves a main contract and a subordinate contract, and there is inconsistency between
their arbitration agreements, the agreement of the main contract should prevail. Where there is no arbitration
agreement in the subordinate contract, the arbitration agreement of the main contract should be valid against
the parties under the subordinate contract."

Seat of Arbitration (Clause 100)

Clause 100 of the 2021 Meeting Minutes clarifies a crucial issue relating to the seat of arbitration. It states that arbitration awards issued by foreign arbitration institutions where the seat of arbitration is stated as Mainland China should be regarded as a China foreign-related arbitral award (and not a foreign arbitral award). Previously, the position in Mainland China on this issue was mixed with cases being decided either way (see Practice Note, Foreign Institutional Arbitration in China: Enforcing Foreign-Administered Awards from China-Seated Arbitrations). It is expected that this clarification will significantly enhance the internationalisation of arbitration in China.

For more information on the various categories of arbitral awards recognised under China, see Country Q&A, Enforcement of Arbitral Awards in China: Overview.

Issues relating to the seat of arbitration have also been addressed in the Draft Arbitration Law Amendments. While it does not expressly deal with the same scenario outlined in clause 100 of the 2021 Meeting Minutes, clause 27 of the draft amendments does clarify various issues relating to the seat of the arbitration. For example, where the seat of arbitration is unclear, it should be the same as the location of the arbitration institution that administers the case. Further, the draft amendments make a distinction between the seat of arbitration and the venue of the hearing of the arbitration. See also Practice Note, Foreign Institutional Arbitration in China: Proposed Amendments to the 2017 Arbitration Law.

Failure to Engage in Negotiation Before Arbitration (Clause 107)

Before the 2021 Meeting Minutes were issued, respondents often relied on Article V.1(d) of the New York Convention to resist the recognition and enforcement proceedings. A party's failure to engage in settlement negotiations before the commencement of arbitration as per their agreement was interpreted as the arbitral procedure not being in accordance with the agreement of the parties. (See also Practice Note, Enforcing arbitral awards under the New York Convention 1958: overview: Defences to and resisting enforcement: Article V.)

Clause 107 of the 2021 Meeting Minutes stipulates that where the parties agree in the arbitration agreement that "the dispute should be settled through negotiation first and then through arbitration if the negotiation fails," and then one party applies for arbitration without first going through negotiation, the PRC courts should dismiss the other party's request to refuse to recognise and enforce the arbitral award on the grounds that the counterparty’s breach of the agreement falls under Article V.1(d) of the New York Convention.

This clarification is timely and provides guidance to parties on the attitude of the PRC courts in granting refusals of recognition and enforcement of foreign arbitral awards.

Property Preservation in Recognition and Enforcement of Foreign Arbitral Awards (Clause 109)

Before the 2021 Meeting Minutes were issued, Chinese law was silent on whether PRC courts could allow for the preservation of the assets of the respondent at the stage of applying for the recognition and enforcement of a foreign arbitration award. However, as per the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong special Administrative Region 1999 (with effect from 1 February 2000) and its 2020 Supplemental Arrangement), it is possible to apply for the preservation of assets before or after the PRC court accepts an application for recognition and enforcement of a Hong Kong arbitration award.

Clause 109 of the 2021 Meeting Minutes clarifies that the PRC court may grant permission to a preservation of assets application by referring to the provisions of the 2021 CPL and relevant judicial interpretations. The applicant must provide security, otherwise the preservation of assets will be dismissed.

This is in line with the Article 47 of the Draft Arbitration Law Amendments, which states:

"Where a party applies to a people's court for preservation measures, the court should promptly make
preservation measures in accordance with the provisions of relevant laws.

Where a party applies to the arbitration tribunal for preservation measures, the arbitration tribunal should
make a timely decision and require the parties to provide a security. After the preservation decision is
submitted to the people's court with jurisdiction by the parties or the arbitration institution, the court should
promptly implement the decision in accordance with the relevant laws and regulations."

Also see Property Preservation in Recognition and Enforcement of Foreign Court Judgments (Clause 39)).

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Note: Reproduced from Practical Law with the permission of the publishers. For further information, visit practicallaw.com.