Amended Civil Procedure Law is good news for arbitrations in mainland China

An amended Civil Procedure Law of the People’s Republic of China (the “CPL“) （中华人民共和国民事诉讼法） comes into force on 1 January 2013 and introduces some important changes to the domestic and foreign relation arbitration regimes in China. These amendments include: 

1. The introduction of direct applications to the PRC courts for pre-arbitration evidence and asset preservation for domestic/foreign related arbitrations seated in China. (These measures are referred to in China as “Conservatory Measures” (保全措施)).
2. A narrowing of the scope for challenges to domestic awards at the enforcement stage.
3. New provisions on vexatious litigation and arbitration claims to avoid complying with agreements in the enforcement stage.
4. A requirement for courts to issue written rulings and provide reasons for decision where it sets aside an award (previously this only applied to refusals to enforce).
5. An amendment to clarify that parties can agree to arbitrate non-contractual disputes.

Pre-arbitration asset and evidence preservation

The amended CPL extends existing rights in civil litigation to apply to a court for Conservatory Measures before the commencement of domestic arbitration and foreign related arbitrations seated in China (although please note our comments below in relation to the latter). This is a significant development in that under the current regime, parties must wait until after the arbitration has been commenced before applying for these orders.

Further, when parties under the current regime do apply they need to do so via the arbitration commission who will then, in turn, pass the application to the court. This cumbersome procedure may ultimately undermine the process.  For example, evidence may be destroyed or the assets may be gone by the time any order is in fact made by the court. These requirements are changed in the amended CPL, as follows:

• A new article 81 of the amended CPL provides that: “Where under an emergency event where it is likely that evidence may be destroyed or become difficult to obtain later on, an interested party may, prior to instituting a lawsuit or applying for arbitration apply to the people’s court at the place where the evidence is located, the domicile of the party against which the application is made or the competent people’s court with jurisdiction over the case to preserve the evidence.” (因情况紧急，在证据可能灭失或者以后难以取得的情况下，利害关系人可以在提起诉讼或者申请仲裁前向证据所在地、被申请人住所地或者对案件有管辖权的人民法院申请保全证据。).
• A new article 101 of the amended CPL provides that: “Where an interested party whose legitimate rights and interests, due to an emergency, would suffer irreparable damage if the party fails to petition for property preservation promptly, may, before instituting a lawsuit or applying for arbitration apply to the people’s court at the locality of the property, the domicile of the party on which the application is made, or the competent people’s court with jurisdiction over the case, for the property preservation measures.” (利害关系人因情况紧急，不立即申请保全将会使其合法权益受到难以弥补的损害的，可以在提起诉讼或者申请仲裁前向被保全财产所在地、被申请人住所地或者对案件有管辖权的人民法院申请采取保全措施。).

Claimants making these applications must also provide security, potentially up to the amount of evidence or property preserved, or the court will not grant the application. This requirement (which existed before the proposed amendments to the CPL) is often seen as a real disincentive for foreigners from common law jurisdictions that are used to providing an undertaking as to damages when seeking broadly similar injunctive relief.

After the application for property preservation is made, the court is required to make a decision with 48 hours. If the property preservation order is made, the execution will then begin immediately. If the applicant does not commence arbitration within 30 days of the date of the order, the court will revoke the order (a change from 15 days under the existing article 93).

Foreign related arbitration

There is some uncertainty as to the application of these provisions to foreign related arbitrations. This is because while use of the term “arbitration” (仲裁) in article 81 and 101 can be interpreted to include all types of arbitration in mainland China, the same characters are used elsewhere in the code to refer solely to domestic arbitration. For example, in article 237 of the amended CPL, arbitration (仲裁) is used to refer to arbitration in the context of enforcement of domestic arbitration awards (see below). Moreover, “foreign related arbitration” (涉外仲裁) is used in other articles of the CPL which specifically deal with foreign related arbitration (e.g. articles 271,272, 273 and 274 of the amended CPL).

The position is only likely to be clarified by the courts when parties to foreign related arbitrations start making applications here in China under the amended CPL. In the longer term, the Chinese courts might issue separate guidance on the point. We will update the blog when either event occurs. In the interim, it would be sensible to seek legal advice before applying for conservatory measures for foreign related arbitrations.

Review of domestic awards by PRC courts

Under the current regime (the existing article 213 of the CPL), the PRC courts have very broad powers to refuse enforcement of domestic arbitration awards, including under article 213 (4) and (5) which provide that a court can deny execution where “the main evidence for ascertaining the facts was insufficient” (认定事实的主要证据不足的) or “the law was applied incorrectly” (适用法律确有错误的).  The result of these powers is that there is considerable scope for a case effectively being “reheard” de novo by local Chinese courts.

Article 213 is replaced under the amended CPL with a new article 237 which provides that the PRC courts can only refuse to enforce domestic arbitration awards if “the evidence based 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 to the arbitral institution, which suffices to affect the impartiality 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).

This is a significant change in the scope for refusal to enforce domestic awards. The new article 237 also brings the CPL in line with the PRC Arbitration Law (中华人民共和国仲裁法) as the grounds for refusing to enforce a domestic award under the new article 237 now correspond to the grounds for setting aside a domestic award under article 58 of the PRC Arbitration Law.

Other amendments: Non contractual claims, avoidance of obligations, reasons for decision

There are a few other minor changes in the amended CPL which affect the arbitration regime in mainland China that are of note. The first is the deletion of the words “to a contract dispute” in the existing article 111 (new 124), which prevent a court from accepting an action where the parties to the action have entered into an arbitration agreement.  This amendment makes it clear that non-contractual commercial disputes (except those which are otherwise subject to exclusive court jurisdiction under PRC law) can be submitted to arbitration in the PRC.

The second amendment is the new article 113 which prohibits a party who is subject to enforcement from maliciously collaborating with another to avoid obligations under a legal instrument using “litigation, arbitration, mediation or any other means” (诉讼、仲裁、调解等方式).  If a party is found liable under this provision the people’s court has the power to fine or detain the offender (depending on the severity of the conduct). If the conduct constitutes a crime (i.e. a separate offence has been committed under the Criminal Law of the PRC), the offender can be investigated for criminal responsibility.

The other arbitration-related amendment is the introduction of a new article 154. This article provides that where a PRC court sets aside or refuses to enforce an award they have to issue a written ruling (裁定书) containing their legal reasoning as to why the award is set aside or enforcement is refused.  Previously, they only had to issue a written ruling where they refused to enforce an award (without specific requirement to include their legal reasoning). While the position is not absolutely clear, the separate enforcement regimes for domestic (Article 237 of the amended CPL referred to above) or foreign related (Article 274 of the amended CPL) both require “rulings” (裁定) and given that Article 154 is of general application to all court proceedings which require rulings, our current view is that it applies to both domestic and foreign related awards.

The future

These are significant changes in terms of the domestic/foreign related arbitration regime in China which reflect that the Chinese government is conscious of the need to bring its domestic and foreign related arbitration regimes into line with international practice. We will be keeping a close eye on how the changes take effect in practice and in particular those areas which we have highlighted as uncertain in their application.