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China – Amendments To The PRC Civil Procedure Law And Their Effect On Arbitration.

6 May, 2013

 

On 1 January 2013, a series of amendments to the PRC Civil Procedure Law (“CPL“) (《中华人民共和国民事诉讼法》) came into effect.

Many of the amendments relate to arbitration, with a view to improving the arbitral process in mainland China. Key arbitration-related amendments include the introduction of injunctive relief as a new class of “conservatory measures” (“保全措施”) available from the PRC courts, the introduction of pre-arbitration conservatory measures (including injunctive relief, asset preservation and evidence preservation); and narrower grounds on which the PRC courts can refuse to enforce domestic arbitral awards.

 

These key amendments are summarised in the attached table.  for further detail, please continue reading.

 

OVERVIEW

 

The arbitration-related amendments all indicate that mainland China is becoming a more arbitration-friendly jurisdiction by:

 

  • increasing the scope of disputes which may be arbitrated;
  • improving the regime for the enforcement of awards and providing more transparency around enforcement decisions; and
  • providing the parties to arbitral proceedings with increased rights to seek relief from the PRC courts in aid of arbitration.

 

However, there remains uncertainty around the scope and practical effect of the amendments, such that clarification in due course from the PRC courts would be welcome. In the meantime, it is helpful to be aware of the new tools which are now available.

                                                                                

The key arbitration-related amendments are:

 

1.      the introduction of injunctive relief as a new class of “conservatory measures” (“保全措施”) available from the PRC courts;

2.      the introduction of pre-arbitration conservatory measures (including injunctive relief, asset preservation and evidence preservation); and

3.      narrower grounds on which the PRC courts can refuse to enforce domestic arbitral awards.

 

Other arbitration-related amendments include:

 

1.       clarification that non-contractual commercial disputes (except those which are otherwise subject to exclusive jurisdiction of the PRC courts under PRC law) can be submitted to arbitration;

2.      the introduction of sanctions against parties who “maliciously collaborate” with others using “litigation, arbitration, mediation or any other means” in order to avoid the enforcement of a legal instrument; and

3.      a requirement that PRC courts provide written reasons for their decisions when they refuse to enforce or set aside arbitral awards.

 

KEY ARBITRATION-RELATED AMENDMENTS

New injunctive relief (Article 100 of the amended CPL)

 

Article 100 of the amended CPL combines concepts of “asset preservation” (“财产保全”) (formerly available under Article 92 of the old CPL), pursuant to which a party may make an application to preserve assets if it believes that a ruling may be impossible or difficult to enforce due to the behaviour of the other party or for any other reason (for example, if the other party transferred its assets out of the jurisdiction or otherwise tried to hide its assets), with additional powers allowing the PRC courts to:

 

  • “order a party to conduct a specific action” (“责令作出一定行为”); and
  • “prohibit a party from conducting a specific action” (“禁止作出一定行为”).

 

These mandatory and prohibitory injunctive reliefs, together with the existing asset preservation measures, are collectively referred to as “conservatory measures” (“保全措施”).  These new measures are broadly similar to the mandatory and prohibitory injunctive reliefs available in common law jurisdictions.  The court also has the discretion to order security when it is granting an application for relief under Article 100. 

 

Although Article 100 does not expressly state whether it applies only to litigation or also to arbitration, in our view, it is likely to be available in aid of arbitration as well as litigation. Also, although the provision itself is not wholly clear, we understand Article 100 to apply after proceedings have commenced, and the separate provisions of Article 101 (discussed below) to apply to pre-commencement situations.   

With respect to arbitration proceedings, a separate protection under Article 28 of the PRC Arbitration Law allows parties to apply to a PRC court for asset preservation via the relevant arbitration commission, where the conduct of the other party (or any other factor) is likely to make it difficult or impossible to enforce an arbitration award.  

 

The intended interplay between Article 100 of the amended CPL and Article 28 of the PRC Arbitration Law remains to be clarified through PRC court interpretation. 

Injunctive relief and asset preservation available pre-arbitration (Article 101 of the amended CPL)

 

Article 101 provides that a party may apply to a PRC court for “conservatory measures” before commencing litigation or arbitration proceedings, in “urgent” circumstances (“情况紧急”).  The requesting party must prove that it “would suffer irreparable damage if the party fails to petition for conservatory measures” (“使其合法权益受到难以弥补的损害”). The court will revoke any relief granted under this Article if the requesting party does not file litigation or arbitration proceedings within 30 days of the date of the court order.

 

Parties seeking orders for conservatory measures under Article 101 must provide security before any orders are granted. Although this is a drawback for applicants it does, to some extent, protect respondents against vexatious or abusive applications.

Article 101 provides that the application for pre-arbitration conservatory measures should be made to the “people’s court”.  At least with respect to asset preservation applications, this provision is potentially in conflict with Article 28 of the PRC Arbitration Law, which provides that applications for asset preservation must be made to the PRC court via the arbitration commission administering the arbitration. It is not yet clear whether courts will draw a distinction between Article 101 of the amended CPL (which speaks specifically to pre-arbitration measures) and Article 28 of the PRC Arbitration Law (which refers to the “commission administering the arbitration” and thus suggests that the arbitration is already underway) to allow parties to seek relief directly from the court before commencing arbitration.

 

Evidence preservation (Article 81 of the amended CPL)

 

Article 81 of the amended CPL addresses questions of evidence preservation (previously covered by Article 74 of the old CPL).  A new paragraph 2 has been added, which allows a party to apply to a PRC court for evidence preservation before commencing arbitration or litigation proceedings in “urgent circumstances.” In its application, the party must prove that “it is likely that evidence may be destroyed or become difficult to obtain later on” (“证据可能灭失或者以后难以取得”).

 

This provision on pre-arbitration applications for preservation of evidence is potentially in conflict with Articles 46 and 68 of the PRC Arbitration Law, which provide that applications for preservation of evidence (in domestic and foreign-related arbitrations respectively) are to be made to the PRC court via the relevant arbitration commission. As with asset preservation, it is not yet clear whether courts will draw a distinction between Article 81 paragraph 2 of the amended CPL (which speaks specifically to pre-arbitration measures) and Articles 46 and 68 of the PRC Arbitration Law (which refers to the “commission administering the arbitration” and thus suggests that the arbitration has already commenced) to allow parties to seek relief directly from the court before commencing arbitration. 

 

Scope of application – “domestic”, “foreign related” or “foreign” arbitration

 

Although other areas of PRC law draw clear distinctions between arbitrations that are “domestic” (i.e. between Chinese parties, with a seat in mainland China), “foreign-related” (e.g. involving one foreign party or between two Chinese parties where the subject matter of the dispute is outside mainland China and with a seat in mainland China) and “foreign” (“foreign-related” arbitrations with a seat outside mainland China), none of Article 81, Article 100, or Article 101 refers to these distinctions.

 

However, Article 272 of the amended CPL specifies that, with respect to foreign-related arbitrations, if a party has applied for preservation measures, then the arbitral institution should refer the party’s application for decision to the intermediate people’s court in the place where the party against whom the application is made has his domicile or where his property is located.

 

Given the above, in our view, domestic arbitrations and foreign-related arbitrations seated in mainland China should be covered by Articles 81, 100 and 101 of the amended CPL (subject to the question of whether access to the courts is direct or through the relevant arbitral institution, arising from the interplay with provisions of the amended CPL and the PRC Arbitration Law discussed above).

However, the provisions’ applicability to foreign arbitrations remains an open question, which will need to be clarified by the PRC courts.  In our view, these provisions are unlikely to apply in support of foreign arbitration, as the amended CPL applies to civil proceedings in mainland China and the relevant provisions do not expressly refer to proceedings outside mainland China.

 

Grounds upon which the PRC courts can refuse to enforce domestic arbitral awards

 

The amended CPL narrows the “evidence-related” grounds upon which the PRC courts can refuse to enforce domestic arbitral awards. In particular, the following provisions in the old CPL have been removed:

 

  • “the main evidence for establishing the facts was insufficient (认定事实的主要证据不足的)”; and
  • “the application of the law was incorrect (适用法律确有错误的)” (Articles 213(4) and 213(5) of the old CPL).

 

This is a welcome change in that these “evidence-related” grounds had previously led effectively to a de novo review of the facts and/or law of the case by the PRC courts.

Two additional grounds for refusing enforcement have, however, been added by the amended CPL.  Articles 237(4) and 237(5) provide that the PRC courts can refuse to enforce domestic arbitral awards if:

 

  • “the evidence on which a case is adjudicated is forged” (“裁决所根据的证据是伪造的”); or
  • “the opposing party withholds any evidence from the arbitral institution, which suffices to affect the fairness of the award (对方当事人向仲裁机构隐瞒了足以影响公正裁决的证据的)”.

 

These amendments bring the CPL into line with the grounds for setting aside domestic arbitration awards under the PRC Arbitration Law (Article 58). The grounds for refusing to enforce a “foreign-related” onshore arbitral award remain unchanged (Article 260 of the old CPL, replaced by Article 274 of the amended CPL):

 

  • the parties have neither included an arbitration clause in their contract nor subsequently reached a written arbitration agreement;
  • the party opposing enforcement was not requested to appoint an arbitrator or take part in the arbitration proceedings or that party was not able to present his case for reasons outside of its control;
  • the composition of the tribunal or the arbitration procedure was not in conformity with the rules of arbitration; or
  • matters decided in the award exceed the scope of the arbitration agreement or are beyond the arbitral authority of the arbitration institution.

OTHER ARBITRATION-RELATED AMENDMENTS

 

The other arbitration-related amendments to the CPL include:

 

(i) clarification that non-contractual commercial disputes (except those which are otherwise subject to exclusive jurisdiction of the PRC courts under PRC law) can be submitted to arbitration;

(ii) the introduction of sanctions against parties who “maliciously collaborate” with others using “litigation, arbitration, mediation or any other means” in order to avoid the enforcement of a legal instrument; and

(iii) the requirement that the PRC courts provide written reasons for their decisions when they refuse to enforce or set aside arbitral awards.

 

On the whole, although the scope and mechanics of some of the amendments are unclear and require further clarification from the PRC courts, these amendments are a welcome and helpful step in China’s development as a pro-arbitration jurisdiction.


herbert smith Freehills
 
For further information, please contact:
 
Jessica Fei, Partner, Herbert Smith Freehills
jessica.fei@hsf.com
 
Brenda Horrigan, Partner, Herbert Smith Freehills
brenda.horrigan@hsf.com

 

Jessica Booth, Herbert Smith Freehills
jessica.booth@hsf.com 

 

Herbert Smith Dispute Resolution Practice Profile in China

 

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