The Asset Tracing and Recovery Review: China
China's legal system has gradually improved to accommodate the country's continued economic development, and it serves an increasingly active role in handling cross-border crime. While no specialised legislation has been enacted to address fraudulent conduct, there are various provisions under Chinese laws and regulations that provide remedies for fraud victims to trace and recover assets.
At a basic level, fraud victims may seek criminal and civil remedies in China.2 Fraudulent conduct can comprise various criminal offences, such as illegal fundraising, fraud and embezzlement. Victims generally report their cases to the public security bureau (the major criminal investigation agency), which has relatively broad powers and can take quick action against perpetrators of fraud and the assets in their possession. However, the public security bureau will often characterise as civil fraud those cases that occur during normal business transactions or that do not involve numerous victims, and will advise such victims to seek civil remedies. Furthermore, although victims can sometimes obtain recovery for losses during criminal proceedings, the compensation rate is often quite low in part due to the perpetrators having hidden or transferred assets. Thus, victims may not be able to obtain full recovery through criminal proceedings, and may have to seek further recovery through civil proceedings.
Victims may establish their civil claims based on a number of laws depending on the particulars of each case, such as the General Provisions of the Civil Law, the Tort Liability Law, the Contract Law and the Company Law, and also various financial laws and regulations. Victims can apply for property or conduct preservation measures (which are similar to freezing and restraint orders or injunctions) before or after filing a civil litigation or arbitration case, pending the outcome of a final judgment or award, which is often crucial for a successful recovery.
The Chinese legal system also features a regime enabling foreign victims to trace and recover assets in China while pursuing criminal or civil remedies in other jurisdictions. The regime includes the recognition and enforcement of foreign judgments and arbitral awards, and the freezing, confiscation of or return of the proceeds of fraud through criminal judicial mutual assistance mechanisms, among other measures. That said, in practice, there are various obstacles for victims attempting to make use of this regime. For example, interim measures or injunctions granted during litigation or arbitration proceedings in other jurisdictions are generally not enforceable in China. In addition, China adopts foreign currency control policies, and transferring money into or out of China must be done in accordance with the relevant laws and regulations. In the absence of clear implementing rules, banks may be reluctant to execute an order for the return of the proceeds of fraud. In general, successful asset recoveries in China must be well-planned and structured by assessing all potential legal remedies.
Legal rights and remedies
i Civil and criminal remedies
There are numerous civil remedies available to victims of fraud under Chinese law. The General Principles of the Civil Law define fraudulent conduct as conduct that purposefully represents false information to a victim or disguises any fact so as to induce a victim into making a false declaration of will.3 Recourses for victims of a fraud to trace and recover assets include those generally available under contract law, tort law, trust law and company law.
Where a victim of fraud is induced to enter into a contract against his or her will, courts or arbitral tribunals will generally find the contract to be revocable at the option of the victim.4 The legal effect of revocation is that the parties to a contract will be restored to the status quo ante, the assets acquired through the performance of the contract will be returned to their original owners, and any future obligations under the contract will no longer be binding. Monetary compensation may be available where specific assets cannot or need not be returned.5
In addition to revoking a contract, victims are also allowed to request perpetrators of fraud to undertake liability for breach of contract and compensate for the losses incurred by the victim, including resale losses, production losses and operating losses, among other things.
Victims of fraud may also seek a remedy where no formal contract has been established, such as for damage suffered during negotiations and in concluding a contract.6 In this case, damages are not typically calculated based on the benefits that a victim would have obtained had a contract been performed and had the representations been truthful. Rather, damages are restricted to a victim's losses in reliance, which generally include the direct cost of disbursements, such as transportation and communications fees. A victim may be entitled to compensation in the case of certain indirect losses, such as a loss of transaction opportunities. These losses, however, are typically difficult to prove in practice.
There is no precise concept of the tort of deception in China. However, this does not preclude victims of fraud from obtaining remedy under tort law. Based on general tort liability, a victim of fraud is certainly able to bring tort claims for damages or restitution against the perpetrators of fraud and those who abet them.
Unlike remedies under the Contract Law, persons not in privity of contract with victims may be held jointly and severally liable under tort law where they aid, counsel, direct or join in committing a fraudulent act, or help to transfer the proceeds of fraud.
The Company Law provides that each of a company's directors, supervisors and senior management personnel owes to the company a duty of loyalty and due diligence.7 The duty of loyalty and due diligence is yet to be well developed, but it is generally regarded as similar to the fiduciary duty under common law systems.
Where there is a fiduciary relationship between the victim and the perpetrator of a fraud, the victim may claim damages in respect of the damage suffered or the profits the perpetrator or fiduciary has obtained. If the victim chooses to claim for profits, it is not necessary to show that a loss has been suffered. A typical example of this kind of claim is where company directors or executives negotiate and receive commissions for transactions between the company and other parties. Under the Company Law, directors and executives are obligated to return such commissions to the company.8 This kind of claim has an advantage over other claims under contract law and tort law, which can only be successful if the victim proves the occurrence of losses.
In some cases, frauds involve abuse of the independent legal person status of corporations and the limited liability of shareholders. Specifically, the perpetrator of a fraud may be a corporate shareholder who uses the corporate form to commit a fraud and then relies upon the limited liability afforded to shareholders as a defence against direct or indirect liability for the fraud. Seeking to pierce the corporate veil under the Company Law is an appropriate approach in these circumstances, because it allows courts to hold controlling shareholders jointly liable for the obligations of the corporation.9 The core element to support piercing the corporate veil is to show that a controlling shareholder did not treat the corporation as an independent entity: for example, where the property and business of the corporation has been commingled with those of the controlling shareholder. However, in judicial practice it is often difficult for victims to succeed in piercing the corporate veil, except in the context of one-person corporations where the sole shareholder, rather than the victim, is obligated to prove that the corporation's assets are independent of the sole shareholder's assets.10
In practice, it is not unusual for the shareholders or actual controllers of a company to intentionally deregister the company to evade debts that the company owes to its creditors. Under the Company Law, creditors may make a special claim against the directors, controlling shareholders and actual controllers of a company that has been deregistered under a false liquidation report.11 Under these circumstances, all the directors, controlling shareholders and actual controllers may be held jointly and severally liable for the debts of the deregistered company.
In addition to civil remedies, law enforcement authorities can charge a perpetrator of fraud with criminal offences, such as fraud, contract fraud and illegal fundraising, under the Criminal Law. Victims should consider the following procedural and substantive matters to successfully resolve their cases.
Procedure for cases involving civil and criminal liability
In a civil case where the facts may constitute criminal fraud, courts will dismiss a fraud claim or suspend the enforcement of a civil judgment supporting the fraud claim and then transfer the relevant case materials to the public security bureau or procuratorate, which will review the materials and conclude whether to file criminal charges. If the procuratorate does not intend to file criminal charges or the court holds that the case does not constitute a crime, the victim has the right to reinitiate his or her suit based on the fraud claims or to request the court to resume the enforcement of the civil judgment.
Where the evidence in a civil fraud case may relate to a suspected crime or contain indicia of a suspected crime, the court will continue to hear the fraud claim or execute a civil judgment supporting the fraud claim and refer the evidence to the public security bureau or the procuratorate.
Order for the return and recovery of assets in criminal proceedings
In criminal proceedings, law enforcement authorities will often have seized, sealed or frozen the assets illegally obtained by a perpetrator. If the ownership of the assets is clear, victims may be allowed to recover the assets at an early stage after duly performing the relevant formalities. Where the ownership of the assets is unclear, the assets will be returned to the victims pro rata after a criminal judgment or ruling becomes legally binding, less any amounts that individual victims have already recovered.12
If a perpetrator's property is insufficient to satisfy all the civil and criminal liabilities imposed by effective civil and criminal judgments, criminal judgment orders for the return and recovery of assets to victims will receive priority over ordinary civil judgment liabilities.13
ii Defences to fraud claims
Statute of limitations
Chinese civil law generally supports the argument that a wrongdoer should not be subject to civil liability claimed by a claimant after the expiry of a statute of limitations, which may vary with the nature of the claims.14 For example, a claim for rescission of a contract because of fraud must be brought within one year of the date on which the victim becomes aware or should have become aware of the fraud and, in any event, within five years of the date on which the fraud was committed.15 The statute of limitations for fraud claims based in tort or relating to breaches of fiduciary duty and piercing the corporate veil is three years from the time the victim became aware or should have been aware of the fraud, and in no event more than 20 years from when the fraud was committed.16
For all claims except those otherwise stipulated by law, such as termination or revocation of a contract, limitation periods are generally allowed to be suspended, or renewed, when some specific requirements have been satisfied.17 Courts do not recognise the advance waiver by parties of the statute of limitations.18
Seizure and evidence
i Securing assets and proceeds
When seeking civil remedies by initiating civil litigation or arbitration in China, victims of fraud may apply to the competent Chinese court for the preservation of the perpetrator's assets.19 Asset preservation is a legal proceeding whereby claimants may seal or freeze assets of the counterparty for a limited period. After a final judgment or arbitral award is rendered, claimants may then apply for enforcement against the subject assets.
Grant of a preservation order
When granting a preservation order, Chinese courts consider only whether the claimant's interests in a later judgment or arbitral award may be jeopardised because of the defendant's action or any other reasons.20 Moreover, courts normally will not require the claimant to produce evidence to prove that the claimant's interests may be jeopardised. Rather, this condition may be easily met by a statement made in the application. Therefore, when seeking the preservation of a perpetrator's assets, claimants need not show the prima facie case for their legal rights; however, courts may require claimants to produce some evidence preliminarily to show their legal standing.
Provision of security
Generally, Chinese courts will require claimants to provide security for an asset preservation application.21 The form of security traditionally includes cash, real property and guaranties provided by designated security companies. In recent years, it has become increasingly common for courts to accept guaranties provided by insurance companies, which are more popular among claimants because of their lower cost.
Procedures, periods and durations
Normally, an asset preservation application will be submitted along with a case admission file. Since a case admission file already includes a statement of claims and supporting evidence, a claimant normally needs only to submit an additional application for asset preservation. After a court accepts the application, it will inform the claimant of its intention to grant the order and require the claimant to provide security, or require the claimant to provide additional materials (e.g., the defendant's asset information), before the order can be granted. Courts rarely dismiss an asset preservation application outright. After an order is granted by a ruling, the court may take another week to effectively preserve the subject assets, depending on the type and location of the assets to be preserved. Bank deposits may be frozen for a period of one year, and all other assets may be preserved for up to three years, commencing from the date of enforcement. The preservation period can be renewed by an application before its expiration if a lawsuit is still pending or if the final ruling or judgment has not been satisfied at the end of the period.
Asset preservation in a Chinese arbitration proceeding
Claimants can also apply for asset preservation in arbitration proceedings administered by a Chinese arbitration institution. Claimants usually need to submit their application to the arbitration institution, and the institution will forward the application to the competent Chinese court to enter and enforce the ruling. Chinese courts treat these applications forwarded by arbitration institutions no differently from those filed directly with a court in civil litigation cases.
Preservation measures before initiating a lawsuit
In emergency cases, fraud victims may also apply for the preservation of relevant assets before filing a litigation or arbitration case if, without immediate action, the victim's rights and interests will suffer irreparable harm.22 In such cases, the court has to make the ruling within 48 hours and, if the application is approved, the court will enforce the preservation order immediately.23 However, if a victim fails to file a litigation or arbitration case within 30 days of the preservation of assets, the court will lift the preservation measures.
Seizure of assets to secure the enforcement of a judgment or arbitral award
A claimant, after obtaining an effective court judgment, ruling or arbitral award, can file an application to a competent court for enforcement. After the court accepts the application, the claimant can request the court to seize or preserve any of the perpetrator's identifiable assets, with no security requirement.
Seizure of assets in criminal proceedings
In criminal investigations, law enforcement authorities are empowered to seize and place under seal property and articles relevant to a crime, which generally include proceeds of the crime, tools used to commit the crime and other property and articles related to the crime.24 However, the purpose of the law enforcement authorities in taking these measures is primarily to obtain evidence of a crime rather than to obtain recovery for the victims.
ii Obtaining evidence
In criminal proceedings, law enforcement authorities have broad powers to collect evidence. Rules on the exclusion of evidence are not as well established in China as in other jurisdictions, and thus the methods used to collect admissible evidence in criminal proceedings are extensive. In civil proceedings, however, fraud victims have very limited means to collect evidence. Normally, a fraud victim and his or her attorney will take one or more of the following measures to collect evidence from perpetrators or relevant third parties.
Attorney investigation orders
Courts increasingly issue attorney investigation orders to attorneys who need to collect evidence from third parties such as banks, hospitals and company registration offices. While Chinese law does not yet provide uniform rules on the issuance of attorney investigation orders, many local courts take the position that an investigation request made by attorneys in accordance with an investigation order is equivalent to an investigation request made by court officers. Enforceability of these orders varies depending on local rules issued by the high court of each province.
Evidence preservation proceedings
Victims can apply to the court to take measures to preserve evidence that could be lost or no longer obtained in the future.25 Technically, victims can apply to preserve evidence with or without a lawsuit, although courts are generally more willing to grant such applications with or during a lawsuit. Courts do not often grant evidence preservation orders, in part because the circumstances under which such orders are granted are very narrowly tailored.
Facts found by effective court judgments or arbitral awards
Under Chinese law, claimants can base claims on facts established by an effective court judgment or an arbitral award, with no need to further prove the facts.26 New evidentiary rules effective on 1 May 2020 have slightly changed the evidentiary effect of facts established by court judgments or arbitral awards. According to the new rules, a party is relieved of the burden of proving only fundamental facts established by a court judgment, and facts established by an arbitral award may be rebutted by producing contrary evidence.27 Therefore, for example, where a fraud case follows a criminal proceeding, a fraud victim can use in his or her civil suit the facts established in the criminal judgment. The victim can also apply to review and copy the criminal fraud case file, which will allow the victim to take extensive advantage of the investigation authority's discovery work.
Requests for production made during trial
Chinese law does not contain provisions for discovery procedures such as document production; however, if a perpetrator refuses to produce evidence in its possession, a victim can request the perpetrator to produce the evidence during trial. If the perpetrator refuses to produce the evidence without due cause, the court may conclude that the content of the concealed evidence supports the victim's claims.28
Fraud in specific contexts
i Banking and money laundering
Banks' liabilities in the context of a fraudulent transfer
Banks are legally obligated to safeguard the lawful rights and interests of their customers.29 Thus, banks may be found liable in the case of fraudulent bank card transactions. For example, in a case adjudicated by the Nanjing Intermediate People's Court,30 the bank involved was required to fully compensate the depositor for failing to identify a fraudulent transaction. The court reasoned that the bank was obligated to improve its anti-fraud technology to protect client deposits, and that the bank could not be relieved of this liability unless there was evidence demonstrating that the depositor had mishandled his account information. This viewpoint has also been adopted in proposed judicial rules that the Supreme People's Court has issued for public comment.31
In accordance with the relevant provisions under the Anti-Money Laundering Law,32 banks require their customers to provide valid identity documents and regularly review and monitor their customers' identities. Where a fraudulent transfer wires money into a perpetrator's bank account, the receiving bank may also be subject to tort-based claims for damages by the depositor. Instances exist where banks have been held liable for negligence in reviewing and verifying identity documents in cases of fraud.
Money laundering is a criminal offence under the Criminal Law.33 The Supreme People's Court issued a judicial interpretation in 2009 regarding the application of law in a trial regarding money laundering and other criminal cases, which clarifies certain elements of the establishment of the crime of money laundering.34
The People's Bank of China is the primary competent authority with respect to anti-money laundering and promulgates rules pursuant to the Anti-Money Laundering Law. Under these provisions, banks are required to implement sound internal controls and procedures to prevent money laundering and to report suspected instances of money laundering. These measures include customer identity verification, customer identity, transaction record-keeping and the reporting of large-sum or suspicious transactions.
The Enterprise Bankruptcy Law was passed in 2006,35 and was designed to bring the bankruptcy system in line with international standards as China transitions from a plan-oriented economy to a market-oriented economy. One of the main purposes of the Enterprise Bankruptcy Law is to achieve equitable treatment and sufficient compensation for all creditors. Thus, as in many other jurisdictions, bankruptcy administrators have the power to revoke or invalidate certain transactions, recover assets in the case of fraud and demand compensation from the legal representative of an insolvent enterprise, and also those directly responsible for an insolvency.
A bankruptcy administrator has the power to revoke acts relating to transfers of property for no consideration or at a patently unreasonable price, guarantees for unsecured debts, the satisfaction of debts not due and waivers of debts that occur within one year of a court's acceptance of a bankruptcy petition.36 Because of this mechanism, it is not uncommon in practice that a defrauded creditor chooses to file a bankruptcy petition against a debtor when there is minimal compensation available. Nevertheless, it is notable that the courts have great discretion in deciding whether to accept bankruptcy petitions.
Repayments by a bankrupt debtor to certain creditors are revocable if they are made within six months of a court's acceptance of a bankruptcy petition, except for those that benefit from the debtor's bankruptcy estate or that are made pursuant to a court ruling or arbitral award.37
Bankruptcy debtor transactions are invalid where they involve the concealment or dissipation of assets to evade debts, or the fabrication or recognition of false debts.38 Furthermore, the persons directly responsible for the fraudulent transactions may be sentenced to incarceration or subject to a fine, or both.39
The Contract Law recognises the doctrine of separability of dispute resolution clauses,40 and thus the validity of a dispute resolution clause will not be affected when a contract becomes invalid, or is revoked or terminated. Where a contract becomes revocable because of fraudulent conduct during its formation, any agreement to arbitrate within the contract will survive revocation.
If the evidence on which a domestic arbitral award is based is proven to be false, the arbitral award may be set aside in revocation review proceedings41 or ruled as unenforceable in enforcement proceedings.42 In contrast to the treatment of domestic arbitral awards, Chinese courts will not conduct a substantive review of foreign-related arbitral awards. Thus, fraud claims against evidence are not a statutory condition to set aside or refuse the enforcement of foreign-related arbitral awards. However, if the signatures on a contract are false or the signatories are not authorised to sign the contract without apparent agency, this will mean no agreement to arbitrate existed and will cause the arbitral award to be unenforceable.43
iv Effect of fraud on evidentiary rules and legal privilege
In both civil and criminal trials, the evidence provided by one party is generally examined by the opposing party from the perspectives of authenticity, legality and relevance, although the standards of proof and evidentiary rules vary in these two different proceedings.
In civil proceedings, evidence may not be admitted as the basis for ascertaining the facts of a case where it is formed or obtained by serious infringement upon the legitimate rights and interests of others, or in violation of prohibitive provisions of law or in grave breach of public order and good morals.44 However, evidence acquired through deception or misrepresentation may still be admissible in civil proceedings. For example, evidence that an owner of intellectual property rights obtains while under an assumed name from a suspected infringer will generally be admissible into evidence. In criminal proceedings, collecting evidence through deception is generally prohibited,45 with a limited exception in the case of undercover investigations, provided that no measures are used such as inducing others to commit crimes, endangering public safety or seriously threatening the personal safety of others.46
Unlike common law legal systems, the Chinese legal system does not have an exact concept of legal privilege. The Attorneys Law generally requires lawyers to keep in confidence information that comes to their knowledge during a representation, except where the information indicates that the client or others are preparing to commit or are currently committing crimes that endanger national security or public safety, or seriously jeopardise the personal safety of others.47 There are no special rules regarding lawyers' duty of confidentiality in the context of fraud.
i Conflict of law and choice of law in fraud claims
Under the Contract Law, the parties to a contract are allowed to make a choice of law only when a foreign-related civil relationship is established. Chinese law further clarifies that a civil relationship shall be recognised as foreign-related if any one of the following elements is present:
- at least one party involved is foreign;
- at least one party's habitual residence is located outside China;
- the object in dispute is located outside China;
- the legal facts that establish, change or terminate the civil relationship take place outside China; or
- other circumstances that can be deemed as a foreign-related civil relationship.48
Where a foreign-related contractual relationship exists between the victim and the perpetrator of a fraud and the contract contains a choice-of-law clause, Chinese courts will apply the chosen law to claims arising out of the terms of the contract, regardless of whether the chosen law otherwise has a connection to the relationship. For tort claims, however, Chinese courts will instead apply lex loci delicti, the law of the place of common habitual residence of the parties, or a separate choice of law should the parties so agree.49
In the absence of an agreement as to the choice of law, Chinese courts will apply the law of the habitual residence of the party whose performance of the contractual obligations best reflects the nature of the contract or other law that has the most significant relationship with the contract,50 except where the provisions of relevant international treaties apply.51
ii Collection of evidence in support of proceedings abroad
Foreign courts and lawyers are not empowered to summon witnesses to testify or to collect evidence in China for use in foreign legal proceedings. Chinese law permits evidence to be collected from a foreign national in China at the national's embassy or consulate;52 however, collection of evidence in support of proceedings abroad is mainly conducted through international conventions or bilateral treaties.
China joined the Hague Evidence Convention in 1997,53 under which the Ministry of Justice of China is designated as the central authority for receiving and transmitting letters of request for taking evidence from the competent authorities of other contracting states. Requests for evidence will generally be supported so long as the execution of a request does not harm China's sovereignty, national security or public interests, and a witness is not privileged from or is not obligated to refuse to give evidence. However, the process may be time consuming, and replies typically take more than one year.
As of December 2018, China has signed bilateral treaties with approximately 60 countries for judicial assistance in criminal or civil matters, most of which cover evidence collection. The Supreme People's Court has also made special arrangements with the Hong Kong and Macao Special Administrative Regions and Taiwan for evidence collection.
Under the Interpol operating framework, cooperation for evidence collection also exists between certain competent authorities. Pursuant to the framework, victims of cross-border fraud may report their cases to the national central bureau of Interpol located in their home country, which will then transfer the case to the relevant national central bureau with a request to take action. However, Interpol tends to focus on high-profile cases and does not publicise its working procedures. Thus, reporting to Interpol is not a standard approach and may only work in certain cases.
On 26 October 2018, China promulgated the Law on International Judicial Assistance in Criminal Matters (LCJA), which provides for evidence collection assistance in cross-border criminal cases. The LCJA establishes for the first time the general principle of equality and reciprocity for criminal judicial assistance between China and foreign countries. The LCJA requires prior approval from the competent Chinese authorities before any foreign authority, entity or individual may carry out activities related to a criminal proceeding within China, or before any Chinese authority, entity or individual may render criminal judicial assistance to foreign parties.54
iii Seizure of assets or proceeds of fraud in support of the victim of fraud
Chinese courts and public security bureaus that accept the fraud claims of a foreign victim may act to preserve the assets of the perpetrator or the proceeds of the fraud. Where a legal proceeding is initiated outside China, a foreign victim will have few direct means of preserving assets or proceeds and must instead rely upon bilateral treaties on judicial assistance. Most bilateral treaties relating to judicial assistance in criminal matters cover the seizure of assets and handover of illegal gains, among other matters. According to the LCJA, subject to prescribed requirements, a foreign country may request China to assist in sealing, seizing or freezing the property involved within China.
iv Enforcement of judgments granted abroad in relation to fraud claims
China is not yet a signatory to the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters.55 Under Chinese law,56 bilateral treaties or the principle of reciprocity may constitute a basis for recognising and enforcing foreign court judgments (excluding foreign divorce judgments).57 There is no official or clear definition of the principle of reciprocity under Chinese law. The judicial practice in China is that a Chinese court may recognise or enforce a foreign judgment only if Chinese court judgments have been previously recognised or enforced in the jurisdiction in which the court is located. Thus, it is not certain in practice whether Chinese courts will accept requests for reciprocity. In fact, Chinese courts have rarely recognised foreign court judgments in the absence of a treaty. Judgments rendered by courts in the Hong Kong and Macao Special Administrative Regions and Taiwan are recognised and enforced under separate judicial arrangements.
No special rules exist on the enforcement of foreign judgments in relation to fraud claims, and thus fraud claim-based judgments will comply with the same rules and procedures as other types of judgments.
v Fraud as a defence to enforcement of judgments granted abroad
Once the preconditions for the enforcement of a foreign judgment are satisfied, a Chinese court will examine the enforceability of the foreign judgment in accordance with the Civil Procedure Law and international treaties. Generally the defences to enforcement include, among other things:
- whether a judgment is final and effective;
- whether the enforcement is contrary to the basic principles of Chinese law, harms China's sovereignty or security, or is against its public policy;58
- whether the party has been duly served with a default judgment; and
- whether there are parallel proceedings handled by Chinese courts between the same parties and based on the same facts.
To our knowledge, existing Chinese laws and treaties do not expressly prohibit the recognition and enforcement of foreign judgments obtained by way of fraud. However, Chinese courts may nonetheless refuse to recognise such foreign judgments because they are contrary to basic Chinese legal principles or are against public policy.
China's announcement of the Silk Road Economic Belt and the 21st Century Maritime Silk Road (also collectively known as the Belt and Road Initiative) signals the country's strong desire to integrate into the world economy. A reliable and well-developed legal system is crucial to attracting foreign investment, and thus in recent years China has made progress in improving its legal system, particularly in the area of international cooperation.
i China's establishment of international commercial courts
On 29 June 2018, the First International Commercial Court and the Second International Commercial Court were unveiled in Shenzhen and Xi'an, respectively. To ensure the rule-based establishment of the China International Commercial Courts (CICC), on the same day, the Supreme People's Court promulgated the Provisions of the Supreme People's Court on Several Issues concerning the Establishment of International Commercial Courts (CICC Provisions), which came into effect on 1 July 2018. The CICC is designed to serve the construction of the Belt and Road Initiative and aims to be a widely accepted international commercial dispute resolution institution to impartially, efficiently, transparently and conveniently resolve cross-border disputes arising from the economic integration of countries participating in the Belt and Road Initiative. Correspondingly, the CICC Provisions have mainly created the following two unique mechanisms for the CICC:
- the establishment of an experts' committee consisting of Chinese and foreign legal experts who have substantial practical experience and international reputations, the members of which are commissioned to provide professional advice on specific legal matters such as ascertaining the foreign laws involved in foreign-related commercial cases; and
- the establishment of a one-stop diversified dispute resolution centre integrating litigation, arbitration and mediation.
Through the practical operation of these mechanisms, it is reasonable to expect that more foreign parties will be drawn to choose the CICC to settle their international commercial disputes.
ii China–Singapore memo on the recognition and enforcement of monetary judgments in commercial cases
On 31 August 2018, the Chief Justice of the Supreme People's Court and his Singapore counterpart signed the Memorandum of Guidance between the Supreme People's Court of the People's Republic of China and the Supreme Court of Singapore on Recognition and Enforcement of Money Judgments in Commercial Cases (Memorandum) during the second China–Singapore Legal and Judicial Roundtable held in Singapore. While not legally binding, the Memorandum is of great significance for China in the context of the Belt and Road Initiative, because it symbolises a strengthening of judicial cooperation with countries along the Belt and Road with respect to the mutual recognition and enforcement of civil and commercial judgments. The Memorandum will aid the normalisation and institutionalisation of judicial assistance between China and Singapore, and will meaningfully increase the predictability of the recognition and enforcement of court judgments between the two countries, although the Memorandum will still need to be tested in practice because of the differences in the countries' respective legal systems and the limitations inherent in its form. Nevertheless, the Memorandum has rightfully brought a great deal of optimism to the business community and legal professionals alike.
iii New Mainland–Hong Kong judgment recognition arrangement
The Supreme People's Court and the Department of Justice of the Hong Kong Special Administrative Region (HKSAR) signed the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region (New Arrangement) on 18 January 2019. The New Arrangement will come into force in both the Mainland and HKSAR following the promulgation of a judicial interpretation by the Supreme People's Court and the completion of the relevant procedures in the HKSAR. Under the New Arrangement, all legally effective judgments in civil and commercial matters as defined under both Mainland law and Hong Kong law, including effective judgments on civil compensation in criminal cases, are eligible for reciprocal recognition and enforcement between the Mainland and HKSAR. So far, reciprocal recognition and enforcement has only applied in cases where a 'people's court of the Mainland or any court of the HKSAR has made an enforceable final judgment requiring payment of money in a civil and commercial case pursuant to a choice of court agreement', according to the 1 August 2008 effective version of the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned.
iv Parties to institutional arbitral proceedings in Hong Kong may apply to Mainland courts for interim measures
On 2 April 2019, the Supreme People's Court and the HKSAR signed the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (Arrangement), which came into force on 1 October 2019 in both the Mainland and HKSAR. It is believed that the Arrangement is a breakthrough in the history of mutual judicial assistance between the courts of the mainland and of the HKSAR because it will allow the mainland courts to provide interim measures in aid of institutional arbitral proceedings administered in HKSAR. Previously, due to the non-existence of this legal instrument, the mainland courts had no legal basis to issue preservation orders (including property preservation, evidence preservation and conduct preservation) for parties to institutional arbitral proceedings in HKSAR, except in maritime cases.
v Civil Code
On 28 May 2020, the National People's Congress adopted the Civil Code of the People's Republic of China (Civil Code). The Civil Code will take effect on 1 January 2021 and will replace a number of existing civil law legal provisions, including:
- the Marriage Law of the People's Republic of China;
- the Inheritance Law of the People's Republic of China;
- the General Principles of the Civil Law of the People's Republic of China;
- the Adoption Law of the People's Republic of China;
- the Guaranty Law of the People's Republic of China, the Contract Law of the People's Republic of China;
- the Property Law of the People's Republic of China;
- the Tort Liability Law of the People's Republic of China; and
- the General Provisions of the Civil Law of the People's Republic of China.
Most of these civil law legal provisions will be incorporated unchanged into the Civil Code; thus, this legal development, while notable, has limited impact on the analysis presented in this chapter.
1 Ronghua (Andy) Liao is a partner at Han Kun Law Offices. The author acknowledges the contribution of his colleagues, including Chunyao (Alan) Lin, Junxin (Sam) Ye and John D Fitzpatrick.
2 For the purposes of this chapter only, references to the People's Republic of China (China) do not include the Hong Kong Special Administrative Region, the Macao Special Administration Region or Taiwan.
3 Opinions of the Supreme People's Court on Issues Concerning the Implementation of the General Principles of the Civil Law (for Trial Implementation), Article 68 (Sup. People's Ct., Fa Ban Fa  No. 6; promulgated 2 April 1988) 1988 Sup. People's Ct. Gaz. 2.
4 Contract Law of the People's Republic of China, Article 54 (as adopted by Nat'l People's Cong., Pres. Order No. 15; promulgated 15 March 1999, effective 1 October 1999) (Contract Law).
5 Contract Law, Article 58.
6 Contract Law, Article 42.
7 Company Law of the People's Republic of China (2018 Revision), Articles 147, 148 (as revised and adopted by Standing Comm. Nat'l People's Cong., Pres. Order No. 15; promulgated 26 October 2018, effective 26 October 2018) (Company Law).
8 Company Law, Article 148.
9 Company Law, Article 20.
10 Company Law, Article 63.
11 Provision II of the Supreme People's Court on Issues Concerning the Application of the Company Law of the People's Republic of China (2014 Revision), Article 19 (Sup. People's Ct., Si Fa  No. 2; promulgated 20 February 2014, effective 1 March 2014) 2014 Sup. People's Ct. Gaz. 6.
12 Criminal Law of the People's Republic of China, Article 64 (as revised and adopted by Standing Comm. Nat'l People's Cong., Pres. Order. No. 80; promulgated and effective 4 November 2017) (Criminal Law); Interpretation of the Supreme People's Court on the Application of the Criminal Procedure Law of the People's Republic of China, Article 360 (Sup. People's Ct., Fa Shi  No. 21; promulgated 20 December 2012, effective 1 January 2013), 2013 Sup. People's Ct. Gaz. 6, 7.
13 Several Provisions of Supreme People's Court on Enforcement of Property-Related Parts of Criminal Judgments, Article 13 (Sup. People's Ct., Fa Shi  No. 13; promulgated 30 October 2014, effective 6 November 2014).
14 General Provisions of the Civil Law of the People's Republic of China, Article 192 (Nat'l People's Cong., Pres. Order 66; promulgated 15 March 2017, effective 1 October 2017).
15 id., Article 152.
16 id., Article 188.
17 id., Articles 188, 194, 195 and 199.
18 id., Article 197.
19 Civil Procedure Law of the People's Republic of China, Article 100 (as revised and adopted by Standing Comm., Nat'l People's Cong., Pres. Order No. 71; promulgated 27 June 2017, effective 1 July 2017) (Civil Procedure Law).
21 Civil Procedure Law, Article 100.
22 Civil Procedure Law, Article 101.
24 Provisions on the Application of Relevant Sealing and Freezing Measures in the Handling of Criminal Cases by Public Security Organs, Article 2 (Sup. People's Ct. et al., Gong Tong Zi  No. 30; promulgated and effective 1 September 2013).
25 Civil Procedure Law, Article 81.
26 Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China, Article 93 (Sup. People's Ct., Fa Shi  No. 5; promulgated 30 January 2015, effective 4 February 2015) 2015 Sup. People's Ct. Gaz. 5, 6 (Civil Procedure Interpretation).
27 Provisions of the Supreme People's Court on Evidence in Civil Proceedings, Article 10, (Sup. People's Ct., Fa Shi  No. 19; promulgated 25 December 2019, effective 1 May 2020).
28 Provisions of the Supreme People's Court on Evidence in Civil Proceedings, Article 95, (Sup. People's Ct., Fa Shi  No. 19; promulgated 25 December 2019, effective 1 May 2020).
29 Law of the People's Republic of China on Commercial Banks, Article 6 (as adopted and revised by Standing Comm. Nat'l People's Cong., Pres. Order No. 34; promulgated 29 August 2015, effective 1 October 2015).
30 Case of dispute over debit card: Song Peng v. Indus. Comm Bank of China Co, Ltd, Xin Men Kou Branch (Nanjing Inter. People's Ct, (2016) Su 01 Min Zhong 116; publ. 2 February 2016).
31 Provisions on Several Issues in Trying Cases Involving Bank Card Disputes (Draft for Comment) (Sup. People's Ct.; issued 6 June 2018 for public comment until 30 June 2018).
32 Anti-Money Laundering Law of the People's Republic of China (Standing Comm. Nat'l People's Cong., Pres. Order No. 56; promulgated 31 October 2006, effective 1 January 2007).
33 Criminal Law, Article 191.
34 Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trial of Money Laundering and Other Criminal Cases (Sup. People's Ct., Fa Shi  No. 15; promulgated 4 November 2009, effective 11 November 2009).
35 Enterprise Bankruptcy Law of the People's Republic of China (Standing Comm. Nat'l People's Cong., Pres. Order No. 54; promulgated 27 August 2006, effective 1 June 2007).
36 id., Article 31.
37 id., Article 32.
38 id., Article 33.
39 Criminal Law, Article 162.
40 Contract Law, Article 57.
41 Arbitration Law of the People's Republic of China, Article 58 (as revised and adopted by Standing Comm. Nat'l People's Cong., Pres. Order No. 76; promulgated 1 September 2017, effective 1 January 2018).
42 Civil Procedure Law, Article 237.
43 Civil Procedure Law, Article 274; Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Article V.1.(a), 10 June 1959, 330 U.N.T.S. 3.
44 Interpretations of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China, Article 106, (Sup. People's Ct., Fa Shi  No.5; promulgated 30 January 2015, effective 4 February 2015).
45 Criminal Procedure Law, Article 52.
46 id., Article 153.
47 Attorneys Law of the People's Republic of China (2017 Revision), Article 38 (as revised and adopted by Standing Comm. Nat'l People's Cong., Pres. Order No. 76; promulgated 1 September 2017, effective 1 January 2018).
48 Interpretation I of the Supreme People's Court on Several Issues Concerning Application of the Law of the People's Republic of China on Application of Laws to Foreign-related Civil Relationships, Article 1 (Sup. People's Ct., Fa Shi  No. 24; promulgated 28 December 2012, effective 7 January 2013) 2013 Sup. People's Ct. Gaz. 8.
49 Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships, Article 44 (Standing Comm. Nat'l People's Cong., Pres. Order No. 36; promulgated 28 October 2010, effective 1 April 2011).
50 id., Article 41.
51 e.g., United Nations Convention on Contracts for the International Sale of Goods, 11 April 1980, 1489 U.N.T.S. 3.
52 Civil Procedure Law, Article 277.
53 Hague Conference on Private International Law, Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, 18 March 1970.
54 Law of the People's Republic of China on International Judicial Assistance in Criminal Matters, Article 4 (Standing Comm. Nat'l People's Cong., Pres. Order No. 13; promulgated and effective 26 October 2018).
55 Hague Conference on Private International Law, Convention on Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters, 1 February 1971.
56 Civil Procedure Law, Article 281.
57 The recognition and enforcement of divorce judgments rendered by a foreign court is subject to the Provisions of the Supreme People's Court on the Issues Concerning the Procedures for PRC Citizens to Apply for the Recognition of Divorce Judgments by Foreign Courts. In practice, Chinese courts have recognised many foreign divorce judgments.
58 Civil Procedure Law, Article 282.