China: Litigation

In China, if parties are not able to settle their commercial disputes by themselves through negotiation, usually they resort their disputes to either litigation or arbitration. It is not very common for parties to engage in a separate mediation by an independent mediator without submitting their disputes to litigation or arbitration. However, the court usually encourages the parties to mediate first either by a judge or with a mediation centre after the plaintiff files the case with the court. In addition, mediation is usually conducted by the judge or arbitrator during the litigation/arbitration proceedings, if the parties so agree.

When a settlement is reached through mediation hosted by the judge, the court will issue a letter of mediation to confirm the settlement agreement between the parties, which shall come into legal effect once the parties acknowledge receipt of the letter. The letter of mediation is confidential to the public with some exceptions, and is enforceable like a court judgment.

If the mediation fails, the court will continue trying the case and finally issue a judgment. Such mediation process involving court participation is commonly used and popular in Chinese litigation practice.

The Civil Procedure Law of the People’s Republic of China (“CPL”) is the main procedural rules governing commercial litigation in China. The latest version was amended in 2017.  In addition, various judicial interpretations rendered by the Supreme People’s Court of China are also crucial for procedural matters in litigation practice.

China has only one unified court system, which is comprised of courts of four levels. The Supreme People’s Court of China is the highest judicial authority in China. Below the Supreme People’s Court are the Higher People’s Court at the provincial level, Intermediate People’s Court at city level and Basic People’s Court at county and municipal district levels.

Generally, most of the cases are commenced before the Basic People’s Court. However, based on the seriousness and amount in dispute, certain cases may start from the Intermediate People’s Court or Higher People’s Court for trial of first instance. In principle, the Supreme People’s Court may also hear the first instance case, but in reality, that is extremely rare. Foreign related cases are generally commenced before the Intermediate People’s Court, if not higher.

China has also set up specialized court in certain cities, like intellectual property court, maritime court, financial court, internet court, etc.

Litigation parties are entitled to appeal only once under the Chinese law. The court of second instance may reject the appeal, directly amend the judgement of first instance, or remand the case to the court of first instance for a re-trial. The judgment will come into effectiveness after the judgment is rendered by the court of second instance. After the judgement comes into effectiveness, if any of the parties believes that there is mistake in the effective judgement, it may apply for a re-examination to the court which is one level higher than the court who makes the effective judgement. The higher court will review the re-examination application and make its decision. The court which makes the effective judgement or its higher courts may also re-examine a case on its own initiative, should they find that there is mistake in the effective judgements.

There is no mandatory requirement in China limiting the time from commencing civil litigation procedure to starting a trial. However, according to the CPL, a domestic civil litigation shall be completed within six months from commencement if ordinary procedure is applied, and three months if summary procedure is applied. Where there is a need for extension due to exceptional circumstances, after acquiring the approval from the president of the court, an extension of no more than six months can be granted.

It is worth noting that for a litigation where foreign element is involved, there is no limitation of time for the court to close the case. The legislature generally contends that foreign related litigation is more complicated and time-consuming.

The court hearing in China shall be held in public, except where state secrets, personal privacy is involved or otherwise stipulated by law. For a case which involves commercial secrets, a litigant may apply for a hearing in camera and it is within the court’s discretion to decide whether to grant the application.

There is no access for general public to acquire the documents filed at court. However, according to Article 156 of the CPL, the public can inspect judgments and rulings which have come into effect, except where the contents involve state secrets, commercial secrets or personal privacy. The judgements and rulings of all courts are published on a website designated by the Supreme People’s Court of China.

The limitation period for civil claims are three years unless otherwise provided by law. The period starts from the date on which the right holder knows or should have known that the right has been damaged. Courts in China will not protect a party’s right for more than 20 years from the date the damage occurs.

There are several exceptions of the general three-year period. For example, Article 129 of the Contract Law of PRC says lawsuit for an international sale of goods contract and a technology import and export contract are time-barred after 4 years from the date to be calculated; Article 45 of Product Quality Law of PRC says that the statutory limitation for legal actions involving claims for compensation for damage caused by a defect in a product shall be 2 years; Article 135 and 171 of Civil Aviation Law of PRC says air transport litigation as well as disputes regarding compensation for damage to a third party on the ground shall be time-barred after 2 years.

In general, pre-action conduct is not required in China. Only in employment disputes, the plaintiff shall bring a labour arbitration at the labour arbitration committee before filing of a court trial, no matter whether the plaintiff is an employer or an employee. Otherwise the court would decline the case. No other pre-action requirement is needed for initiating a lawsuit in China.

Litigation in China commences when the court of first instance accepts the case. Based on CPL, the thresholds for court to accept a case include: 1) the plaintiff is a stake holder in the dispute; 2) the defendant is specified; 3) the remedies to be sought and supporting facts are submitted; 4) subject to the jurisdiction of the court.

After filing by plaintiff, the court of first instance shall within seven days accept the case which satisfies the thresholds of filing, or otherwise issue a ruling on non-acceptance of the case. Plaintiff disagreeing with such ruling has the right to appeal once accordingly.

Service is necessary in China. It is made by court not the parties. Where the party being served cannot be duly found, the documents of complaint shall be served by way of a public announcement (e.g., an announcement on a newspaper). With effect from the date of public announcement, the documents shall be deemed served after 60 days. When a foreign element is involved in the case, that period of time is 3 months.

Jurisdiction in China is determined by two dimensionalities: grade jurisdiction (which level of the court will have jurisdiction) and territorial jurisdiction (which location of the court will have jurisdiction). The grade jurisdiction involves an analysis on the seriousness of the case. Factors, such as the amount at dispute and the nationality of the parties, will be taken into consideration when deciding seriousness of the case. Territorial jurisdiction is affected by the nature of the case and domicile and/or habitual residence of the parties. Usually, the court at the location of defendant’s domicile and habitual residence has jurisdiction.

Chinese law allows the parties of a contractual dispute or other property dispute to select in writing of the court for trial. The selection shall be within the scope of the courts which have actual connection with the dispute, i.e. the court of plaintiff’s domicile, place of contract performance, place of contract execution, and location of the subject matter. The selection shall not violate the provisions of statutes on grade jurisdiction. Disputes of real estate, disputes arising in port operations, and inheritance disputes are cases subject to exclusive jurisdiction which cannot be selected by parties’ agreement.

Basically, the matter of applicable laws exists only in case with foreign-related civil relations. Domestic Chinese disputes shall automatically apply the Chinese law. Foreign-related civil relations refer to the relations that: (1) at least one party of the dispute is a foreign citizen, foreign legal entity, foreign organization, or a stateless person; (2) the habitual residence of one party of the dispute is located outside the territory of China; (3) the subject matter of the case is located outside the territory of China; or (4) the legal facts that trigger, change or terminate the civil relation take place outside the territory of China.

For the disputes where foreign-related civil relation exists, law application is governed by the Chinese choice of law statute, the Act of Application of Laws to Foreign-related Civil Relations of PRC. The principle of this statute is to apply the law which is most closely related to the relations involving in the foreign related disputes if the parties do not make the choice by themselves.

According to Article 124 of the CPL, courts in China may dispose the cases without a trial if: (1) the case is identified as an administrative lawsuit and the civil procedure rules shall not apply; (2) both parties to a lawsuit have entered into a written arbitration agreement; (3) the dispute should be handled by other authorities such as social security authorities; (4) the case does not fall under the jurisdiction of the court which the plaintiff claims to; (5) there is effective judgment, ruling or settlement agreement over the case, and the litigant of that case files a lawsuit again; (6) the plaintiff files a lawsuit within the period for which filing of lawsuit is prohibited.

Apart from the above circumstances, there is a special procedure under CPL named “Order of Payment”. An Order of Payment applies when a creditor requests for payment of money by a debtor. As a pre-condition for this special procedure to apply, there shall be no other disputes on merits between the parties and the Order of Payment can be served on the debtor directly by the court without going to trial.

There are two kinds of interim remedies available in China: preservation, and earlier enforcement.

Preservation is an interim remedy that the court, pursuant to an application by a party of the litigation, make a temporary seizure to the counterparty’s property, evidence, or to order the counterparty to undertake certain acts or forbit the counterparty from certain acts. For preservation measures to apply, the circumstance of the case shall be urgent where the legitimate rights and interests of applicant will be subject to irreparable damages if the preservation measure is not implemented timely. Preservation shall be limited to the scope of the claims or the properties related to the case. The court adopting preservation measures may order the applicant to provide guarantee.

Earlier enforcement is an interim remedy that applies only to cases for alimony, payment of maintenance, payment of child support, pension, medical care, labour remuneration and other similar cases where there is an urgent need for earlier enforcement to apply. This measure requires (1) the rights and obligations relationship between the litigants shall be clear, (2) failure to grant earlier enforcement shall have a serious impact on the applicant’s livelihood or business activities, and (3) the respondent has the capacity for performance. The court adopting earlier enforcement may order the applicant to provide guarantee.

After a claim has been commenced, the defendant shall submit its answer to the claim within 15 days from the date receiving plaintiff’s claim (30 days will be applied if defendant’s domicile is outside China). Failure to submit an answer will not affect the process of the trial.

Meanwhile, where a party in litigation objects to the court’s jurisdiction, such objection shall be raised during the timeframe for submission of answer, which is within 15 days from the date receiving plaintiff’s claim (30 days will be applied if defendant’s domicile is outside China). Where the parties do not raise any objection to jurisdiction and answer to the claims, the parties shall be deemed to acknowledge that the court which accepts the case has jurisdiction, except where the rules on grade jurisdiction and exclusive jurisdiction are violated.

The Chinese law does not recognise the concept of discovery. However, the court usually requires the parties to exchange their respective documentary evidence before the hearings with the presence of the judge. Where a litigant is unable to gather certain evidence on their capacity due to objective reasons, or the court hold the opinion that certain evidence is necessary for trial of the case, the court has the discretion to investigate and collect such evidence.

Where one party alleges that certain document is in the possession of the other party, it may apply for a court order demanding the other party to provide such document. The recently amended Civil Evidence Rules which come into effectiveness on 1 May 2020 provide in more details as to how this document request application should be made and the test that the court adopts in making decisions on such applications. In addition, the court may make an adverse inference against one party if that party refuses to produce certain document as ordered by the court.

Chinese laws do not recognize rules of privilege. Evidence which involves state secrets, commercial secrets and personal privacy shall be kept confidential, and shall not be presented at open hearings.

In China, witnesses shall appear in court to testify and answer questions raised by the parties in court. Under the following circumstances, upon consent by the court, a witness may testify by way of written testimony, audio-visual transmission technique or audio-visual materials: (1) the witness is unable to be present in court due to health reason; (2) the witness is unable to be present in court due to long journey and inaccessibility; (3) the witness is unable to be present in court due to force majeure; or (4) other justifiable reason which impedes the witness from testifying. The testimony of a witness who fails to appear in court without due cause shall not be taken independently as the basis for determining case facts.

Chinese law does not have the concept of cross-examination or deposition. However, upon consent by the court, a litigant may question a witness during the trial process. Witnesses are not examined outside the court or before the hearings.

Either party to a litigation may apply the court for the permission to invite a person with special expertise to be present in court, giving opinions on specialized issues. If the court approves such application, the respective expenses shall be borne by the party that files this application.

In addition to that, parties may apply for, and the court can itself initiate an appraisal process on specialized issues of fact finding. When the parties apply for an appraisal in process, the parties of the action shall reach an agreement on the appointment of a qualified appraiser. If such agreement cannot be reached, it is the court to decide the appraiser’s appointment.

The appraiser’s report can be challenged by litigants of the case. Where a party disagrees with the appraisal report or the court deemed it to be necessary for the appraiser to be present in court, the appraiser shall testify in court. Upon notification by the court, where the appraiser refuses to testify in court, the appraisal report shall not be used as the basis for ascertainment of the respective facts.

Basically, there are two categories of decisions to be rendered by Chinese courts: the judgment, which decide the questions of merits of the case, and the rulings, which deal with the procedural issues.

There are only three kinds of rulings made by Chinese courts that can be appealed, which are rulings of: (1) non-acceptance of a case, (2) objection to jurisdiction, and (3) rejection to hear a case. Where a litigant disagrees with these ruling, the litigant has the right to appeal within 10 days from the date of service of the ruling (30 days will be applied if the party has no domicile in China). Other rulings cannot be appealed and is effective once made.

A foreign judgement can be ratified and enforced by Chinese court based on the following procedure:

• Based on the international treaty/convention executed by China; or
• Based on the principle of reciprocity.

The ratification and enforcement of foreign judgments shall not be contrary to the fundamental principles of the laws of China or the sovereignty, security or public interest of China.

Generally, the court costs are borne by the losing party. But there is no clear rule in China on how to allocate other litigation expenses. Practically speaking, with regard to a contractual dispute, if there is no specific agreement reached between the parties, the court is reluctant to rule on the losing party to bear expenses of the winning party. However, if it is a tort dispute (e.g., the infringement on intellectual property), the court is more likely to admit reasonable expenses of the winning party, including the attorney fees, if the winning party properly provides proof of the expenses.

Chinese court will try a case with multiple plaintiffs and/or defendants if the subject matter of the litigation is in common or the subject matters are of the same type. In such cases, if multiple litigants from one side have common rights and/or obligations with regard to the subject matters of the litigation, once an action of one of these litigants is recognized by all others, this action shall be binding to all the litigants of this side. However, if there is no common rights and obligations pertaining to the subject matters, the litigation actions of one litigant shall not be binding upon the others.

According to Article 56 of the CPL, where a third party has independent right of claim to the subject matter of a litigation, the third party has the right to intervene the litigation. Independent right of claim means third parties with this right are at liberty participate in the litigation proceedings or not. They are more like the plaintiff in litigation. Where a third party does not have independent right of claim to the subject matter of the litigation but has a legal interest in the outcome of the case, it may apply to participate in the litigation, or the court may notify this third party to participate.

China has no rules yet for funding litigations. However, funding a litigation is not otherwise prohibited. Since there is no compulsory requirement on disclosing of third party funding, no funder is publicly known to be liable for the costs incurred by the other side.

One obvious advantage of Chinese litigation is its convenience on enforcement. In recent years, Chinese courts adopted a series of measures to enforce the judgments. For disputes involving a losing party whose assets are mainly located within the territory of China, the winning party could make full use of the enforcement mechanism to execute the judgment.

One obvious disadvantage of Chinese litigation is the language being used in court. Chinese is the only language used in court. All the documents written in other language shall be translated into Chinese first and then be used for Chinese litigation. Meanwhile, before the issuance of the recently amended Civil Evidence Rules in China, which come into effectiveness on 1 May 2020, all the evidence formed outside of China had to be notarised by notary public and legalised by the relevant Chinese embassies. Such process sometimes spent substantial time and costs for the litigants to prepare. However, according to the new Civil Evidence Rules, only official documents formed in a foreign country shall still be notarised. Since the amended Civil Evidence Rules only came into effectiveness on 1 May 2020, it will take some time to see how these rules be implemented and interpreted by the Chinese court in practice.

Firstly, due to the Covid-19 pandemic, it is anticipated that various commercial disputes arising from the pandemic might show up quickly post the pandemic. Secondly, as China opens its financial market, we anticipate that disputes arising from investment, mergers and acquisition, securities, finance, corporate governance, etc. might grow fast in the next 5 years. Thirdly, as the Chinese government actively promotes the development of technology, disputes related to intellectual property, trade secret, technology transfer, etc. may also grow in the coming years.

Chinese courts are in the process of reforming its court system. For example, the internet courts in Beijing and Hangzhou have started to operate the online trial system, which does not require the parties to appear in court room in person and permit the parties to attend the trial through instant messaging system. No hard copy is needed in such courts if there is no disagreement on the authentication of the exhibits. Another example is that the courts in Shanghai have started to use audio recognition technology for a machine produced transcription. Currently, almost all the courtrooms in major cities of China have the capacity to video the whole process of the trial hearing.

The outbreak of the Covid-19 pandemic has accelerated the impact of technology on commercial litigation in China. In order to ensure timely hearings, the Chinese courts generally encourage the application of virtual hearings by way of video conferences, etc. Although there is certain inconvenience occurred for the virtual hearings, such as connectivity problems, multi-parties, it appears that such inconvenience will be overcome as the relevant technology is improved.