2023 Annual Review of Dispute Resolution in China

Chunhui Harry Fang, Xinyu Li, Xiaoxiao Gao, Daji Duan of Jingtian & Gongcheng Law Firm discuss major legislative and judicial developments in 2023 with respect to civil and commercial dispute resolution in China

Departing from the relatively smooth pathway in the pandemic era, China legislation and arbitration entities navigated through intensive landscape in 2023. The most significant legislative shift was amendments to the Company Law in the substantive law sector. Remarkable changes also occurred procedurally in judicial and arbitral branches concerning Civil Procedure Law and CIETAC Arbitration Rules. Together with other newly amended laws, regulations and rules, which have taken or will take effect in 2024, they will enforce immediate impact on dispute resolution practice and manifest more of themselves in the years to come.

Passed on December 29, 2023, and effective on July 1, 2024, the amended Company Law has significantly transformed and involve more than one-quarter of the legislative provisions. In a nutshell, the changes significantly shortened the time limit to five years for capital contribution (after company establishment), a simpler realizable mechanism for acceleration of capital contribution and more specifically define fiduciary and diligent duties of directors, supervisors, and senior executives of companies.

Highlights of the amendments include:

1. the adoption of a five-year paid-in capital period, which is conducive to the protection of the company’s creditors, but may trigger a wave of capital reductions and cancellations of registered companies, leading to potential disputes among the company, shareholders and creditors;

   
   

2. establishing the mechanism of accelerated expiry of shareholders’ capital contributions that aims to resolve the problem of shareholders taking advantage of the limited liability protection and the registered capital subscription benefit to evade debt;

   
   

3. clarifying the responsibilities of the transferor and transferee for defective capital contribution;

   
   

4. expanding the scope of shareholders’ right to know and constructing the Shareholders’ Dual Representative Litigation System; and

   
   

5. entitling other shareholders to request for repurchase in case of abuse of rights by controlling shareholders.

First published in 1993, the Company Law has played an important role in the four decades long of economic prosperity in China. The striving company ecology has benefited from the Law’s prioritization of economic growth; however, it has also attracted cumulating criticism from creditors and minor shareholders who have raised dissatisfaction against the capital or corporate governance systems. Any flexibility that one can take advantage of within the confines of the systems seems to be visibly narrower. While the amendments will potentially reform the landscape of litigation/arbitration under the amended Company Law, the effect will not be felt until half way through 2024.

Passed on September 1, 2023, the new Civil Procedure Law became effective on January 1, 2024. This was the fifth amendment of the law and the uniqueness of these amendments focus on foreign-related civil procedure. Against the backdrop of constant stresses on maintaining the openness of China by the central government, the amendments proved to be timely.

The amendments to the Civil Procedure Law focus on the system of foreign-related civil litigation. It expands the jurisdiction of Chinese courts presiding over foreign-related civil cases and further improves the rules on service abroad. There are also new provisions on parallel proceedings and facilitating service of foreign related judicial documents

SPC Interpretation on Several Issues Concerning the Application of the «PRC Law on the Application of Laws to Foreign-related Civil Relationships» (2) [最高人民法院关于适用若干问题的解释（二）]

The SPC has held that courts must not leave the responsibility to ascertain foreign law ex officio to litigation parties. Only in very limited circumstances may a court determine that  foreign law is unascertainable and PRC laws are to be applied to trial a case. Reasoning must be provided to explain why the foreign law cannot be identified. In cases where a party provides foreign law to the court, the party must “submit the specific provisions of the law of the foreign country and explain the way of access, effectiveness, and relevance to the dispute in the case, among others”. If the foreign law is case law, the full text of the case must be submitted.

On May 23, 2023, the SPC published the Interpretation on the Application of Contract Law General Provisions of the Civil Code (《最高人民法院关于适用合同编通则若干问题的解释》). Reliance on the SPC’s Interpretations of Contract Law had been a long-standing practice for dispute resolution practitioners. Since the Contract Law (before it was integrated into Civil Code) was first published in 1999, the SPC had promulgated two interpretations on the application of Contract Law, namely Interpretation I and Interpretation II. The two interpretations, however, became obsolete right after the codification of Civil Law in 2020.

With the new Interpretation published, a major vacuum has been filled. The SPC started drafting the new Interpretation as early as in first half of 2020 and it has taken more than three years to finalize the Interpretation. The new Interpretation integrates both Interpretation I and II with cumulative practical judicial expertise.

The new Interpretation formally restores certainty and predictability for legal practice of contract dispute resolution.

On December 11, 2023, the newly amended Patent Law Implementation Regulations were published. In summary, these are the highlights of the provisions:

• Stipulations on restoration of priority rights.

  
  

• Secrecy review: decision up to 6 months.

  
  

• Good faith application: application not filed in good faith and not based on actual inventive activities is a ground of rejection or invalidation.

  
  

• Partial design: a combination of dotted and solid lines may be used for partial designs.

  
  

• Adaptation to the requirements of artificial intelligence development.

On November 27, 2023, the first AI-produced image copyright infringement case was decided in the first instance, with the Beijing Internet Court holding that the image in question, which utilized AI technology in its creation, had originality and could be recognized as a work that is protected by the copyright law.

On November 28, 2023, a decision on a global royalty fee of an SEP (standard essential patent) was delivered by Chongqing First Intermediate People’s Court for the first time. In its decision, the court confirmed FRAND (fair, reasonable and non-discriminatory) licensing rates for Nokia’s 2G, 3G, 4G, and 5G SEPs (50:40:5:5), setting per handset royalties that were far below those found on Nokia’s website. The decision also set different licensing fees in China and other less developed jurisdictions than in more developed countries.

2023 marked the 15th anniversary of the implementation of the Anti-Monopoly Law. The State Administration for Market Regulation (SAMR) officially issued four corollary regulations, namely:

1. Provisions on Prohibiting Monopoly Agreements

   
   

2. Provisions on Prohibiting Abuse of Dominant Market Positions

   
   

3. Provisions on the Examination of Concentrations of Undertakings, and

   
   

4. Provisions to Stop Acts of Abusing Administrative Power for the Purpose of Eliminating or Limiting Competition.

Judicially, in a groundbreaking decision, the Beijing High Court awarded Rmb100 million in damages to JingDong, from its competitor T-mall and other Alibaba affiliates, for abuse of dominant market position to implement exclusive dealing. JingDong filed the lawsuit in 2015 and this was the first instance decision.

As parts of its continuous efforts to implement Environmental Protection Law, the SPC promulgated three regulations and interpretations concerning environmental cases:

1. Interpretation of the Supreme People’s Court of Several Issues concerning the Application of Law in the Trial of Cases Involving Disputes over Liability for Ecological and Environmental Torts

   
   

2. Several Provisions of the Supreme People’s Court on Evidence in Civil Actions for Ecological and Environmental Torts

   
   

3. Several Provisions of the Supreme People’s Court on the Participation of People’s Assessors with Expertise in the Trial of Cases involving Environmental Resource

According to CIETAC’s (China International Economic and Trade Arbitration Commission)

Annual Report on China International Commercial Arbitration, published in September 2023, there are 227 arbitration bodies in China; those arbitration bodies heard 475,173 cases with a disputed monitory amount of Rmb986 billion in the last 12 months. The data sheds light on CIETAC, as well as other bodies’ ambition to drive their services to higher levels.

On January 1, 2024, the CIETAC Arbitration Rules came into force and underwent significant revisions. The revisions illustrate intention towards reducing the cost of arbitration for parties involved, improving the efficiency of arbitration, granting more autonomy to the parties and increasing the flexibility of arbitration rules in the arbitration process.

Third-party funding. Any funded party is requested to disclose to the CIETAC Arbitration Court the existence of the third-party funding arrangement, the financial interest therein, the name and address of the third-party funder, and other relevant information. The tribunal may consider the existence of third-party funding and the parties’ compliance with the disclosure requirement when deciding on arbitration costs or any other fees.

Interim measures. New rules further expand the scope to include courts outside of the Chinese Mainland to send interim measures. It also offers the option of sending applications for interim measures to a competent court in advance of the service of the notice of arbitration.

Early dismissal. Following the UNCITL’s (United Nations Commission on International Trade Law) 2023 newly adopted guidance on early dismissal and preliminary determination, CIETAC also introduced rules on early dismissal. A party may request the early dismissal where the claim or counterclaim is manifestly without legal merits or beyond the jurisdiction of the tribunal.

Jurisdiction. When an objection to an arbitration agreement or the jurisdiction of the tribunal is raised, the power to determine jurisdiction must be delegated to the tribunal after its constitution.

Multi-contracts arbitration. To improve efficiency and save on costs for parties when dealing with two or more contracts, the new rules include a scenario where the contracts involve related subject matters. This is in addition to previous rules accommodating multiple contracts consisting of a principal contract and its ancillary contract(s), disputes involving the same parties, as well as legal relationships of the same nature, or disputes arising out of the same transaction or the same series of transactions to be resolved in one case.

Pre-Negotiation. Where it is agreed in the arbitration agreement that negotiation or mediation must be conducted before arbitration, the claimant may apply for arbitration after conducting negotiation or mediation. However, failure to negotiate or mediate must neither prevent the claimant from applying for arbitration nor prevent the Arbitration Court from accepting the case, unless the applicable law to the arbitral proceedings or the arbitration agreement expressly provides otherwise.

Application of Guidelines on Evidence. Unless otherwise agreed by the parties, the arbitral tribunal may decide to apply in whole or in part, the CIETAC Guidelines on Evidence (“Guidelines on Evidence”) to hear the case. Article 7 of the Guidelines bears similar stipulations, although with limitations, as the discovery procedure under the common law system may facilitate better and more effective evidencing practices.

Certain trends can be observed in China’s 2023 legislative, as well as judicial activities. Facing the trajectory of anti-globalization and protectionism, China, can be seen as an advocate of globalization and is still actively adapting its legal system to international practice and accommodating more foreign-related matters. Different development status between countries may be factored monetarily into a court decision, especially regarding IP licensing fees, under the court’s consideration of fairness. On the other hand, in the wake of the real estate crisis and the uphill battle of economic pressure, the government is calling for more emphasis on promoting fair competence among market entities, and more discipline on businesses. Environmental protection has been and will still be a steady theme considering the commitment and achievement the Chinese government has made towards curbing carbon dioxide emission.

The major 2023 legislative and judicial activities aim to enforce immediate impacts on dispute resolution practices and keep evolving in the years to come.