Legal transparency has been a major concern for foreign investors who have no idea what happens behind the closing door of the people’s courts in China.  The Supreme Court has recently made an effort to address this concern by putting a few selective civil trials on the air. Yet, people wish to know better about the PRC commercial litigation.

This brochure contains a summary of the law and general requirements in connection with commercial litigation in China, which we hope will be of general use to our clients and professional associates.  While every effort has been made to ensure the accuracy of the information contained in this brochure, it is only a summary of the process and should not be relied upon as a substitute for specific advice in individual cases.

THE LAW

China is a civil law country where Stare decisis (or alternatively judicial decisions) are not part of the law of the land.  The People’s Congresses at all levels and their standing committees form the legislative branch, whilst the administrative bodies at all levels make administrative decrees, rules and regulations to regulate matters within their domain.  Further, the Supreme People’s Court may issue judicial interpretations to construe the law and regulations which are binding upon people’s courts at all levels.

The rudimentary law that governs commercial litigation in China is the Civil Procedure law of the People’s Republic of China (“the Civil Procedure Law”), which took effect on April 9, 1991. The Supreme Court has since issued a number of judicial interpretations and provisions, which have expanded and enriched the Civil Procedure Law.  The latest of these supplemental documents is the Certain Provisions Concerning Reform on Adjudication of Civil and Economic Cases, which was passed by the Adjudication Committee of the Supreme Court on June 19, 1998. 

THE COURTS

There are four tiers of courts, the basic level people’s court (“the Basic Court”), the intermediate people’s court (“the intermediate Court”), the higher people’s court (“the higher court”) and the Supreme People’s Court (“the Supreme Court”). 

The basic courts have the jurisdiction as the courts of the first instance, that is, original jurisdiction, over all civil cases except for such cases over which the intermediate courts, the higher courts or the Supreme Court assume the original jurisdiction pursuant to the Civil Procedure Law.

The intermediate courts have appellate jurisdiction over cases decided by the basic courts, as well as original jurisdiction over the following types of civil cases:

(a) Major cases involving foreign interest;

(b) Cases of major importance in the areas over which the courts exercise jurisdiction; and

(c) Cases under the jurisdiction of intermediate courts as determined by the Supreme Court.
 

A higher court is set up in every province, national autonomous region and municipality directly under the central government.  The higher courts have appellate jurisdiction over cases decided by the intermediate courts, as well as original jurisdiction over the following types of civil cases:

(a) Cases of great significance to the whole nation; and

(b) Cases which the Supreme Court deems should be tried and adjudicated by it.

It should be noted that the standard to determine whether or not a case is “major” is of local nature.  The higher courts would make recommendations to the Supreme Court based on the potential local impact of the particular decision or more often, on the amount in controversy.  The power is vested in the Supreme Court to decide on the competency of the courts at each level. 

To clarify the concept of competent courts, we would illustrate as follows the jurisdictional limits of the people’s courts located in Guangdong Province:

Court                                                                                                    Amount in Controversy

The Basic Courts in each District in Guangzhou                        Under RMB¥5,000,000
Guangzhou Intermediate Courts                                                    RMB¥5,000,000 ~ ¥100,000,000
Guangdong Provincial Higher Court                                              Over RMB¥100,000,000
The Supreme Court of the PRC                                                      By Certiorari

The general rules that govern territorial jurisdiction are the domicile or the place of usual residence of the defendant.  Further, the Civil Procedural Law provides other criteria developed from the principle of minimum contact to determine the territorial jurisdiction of the particular court.  

FORUM SELECTION

The second instance is final and not appealable.  An action initiated at a basic court may be appealed once to the supervising intermediate court of which the decision is final and not appealable to the higher court.  Likewise, an action initiated at an intermediate court or at a higher court may be appealed once to the courts of the next higher level, which are respectively, the higher court and the Supreme Court.  

Despite the enormous size of the country, China has a unitary legal system under which the administration of justice should not be different regardless the forum of adjudication.  Nevertheless, the judges of the higher levels of courts are often perceived to be better trained and less biased against nonresident litigants.

COMMENCEMENT OF AN ACTION

A civil litigation is initiated by a complaint filed by the plaintiff(s) at the competent court.  The court will examine the complaint and decide in seven days whether to place the action on the trial docket and to serve process on defendant(s) or to dismiss the action for failing to state a colourable claim.  An interlocutory application may be lodged with the higher court if the parties object to the court’s decision.

A properly served defendant is required to respond to the compliant by a written answer within 15 days.  Any objection to jurisdiction must be raised within the time limit to answer.  Counterclaims may be lodged throughout the trial prior to conclusion of the court debates.

PROPERTY PRESERVATION ORDERS

Parties and interested parties to an action may apply for property preservation against the defendant, such as, to freeze the bank accounts and to seize the properties of the defendant before or after the complaint is filed.  Where the preservation order is granted before an action is initiated, the applicant must institute the legal proceedings within 30 days or the court must dismiss the order and release the seized property to the defendant.

If the application is wrongfully made, the defendant may recover damages from the applicant for losses arising from the preservation order.  To protect the defendant, the courts often require that the applicant provide some sort of securities by depositing with the court either the Real Estate Certificate of some real property or some cash in a sum equivalent to the value of the seized property from which the defendant may recover damages suffered from the wrongful preservation order.

SERVICE OF PROCESS
 

The service of process is an official act that may be performed solely by the courts (and not by the lawyers) by one of the following three methods:

(a) By mail which should be proven by a returned acknowledgement receipt signed by the recipient, his agent ad litem or one of the adult family members residing with the recipient;

(b) By hand delivery in the presence of the recipient’s employer or the residents’ committees of his neighbourhood as witnesses, should the recipient rejects the service; or

(c) By public notice through designated means or on designated newspapers in case that the recipient is unknown or cannot be located.

In case of service by mail or in person, the date of the receipt as signed by the recipient or by the agent is deemed the date of service.   In case of service by public notice, the service is deemed to be completed 60 days from the issuing date of the public notice.

A foreign party may be served by mail, through the representative office or agents appointed by the party, through diplomatic channel, by a method provided in applicable international treaties and by public notice.  The time limit for overseas service of process is six months. 

BURDEN OF PROOF AND DISCOVERY

Under the Civil Procedure Law, a party to an action must present evidence to support its assertions.  If a party is unable to obtain certain evidence or if the court considers certain evidence to be relevant, the court shall collect and examine the evidence.  No one may refuse to submit evidence as requested by the court.

Despite the court’s power and obligation to collect evidence under the Civil Procedure Law, the general position is that the asserting party bears the ultimate burden of proof and most courts will not play an active role in collecting evidence.

In absence of the Common Law discovery rules covering areas such as interrogatories, requests for production of documents, depositions and compulsory discoveries, the Chinese lawyers have greater difficulties in discovery process.  Further, the concept of “admissible evidence” is not clear, though the Civil Procedure Law requires that all evidentiary documents based on which the court makes a factual finding must be either confirmed by the parties or verified by the court.

Most evidence is presented in the forms of witnesses’ testimonies, original copies of the supporting documents, parties’ statements, experts’ examination report and notes of inquest, etc.  Where there is “genuine difficulty” to produce the original document or object, a reproduction, photograph, copy or excerpt may be admitted, provided that the authenticity of evidence may be verified.

MEDIATION AND TRIAL

 
Except for simple cases where the summary procedures apply, most civil cases are tried by a collegiate bench of three judges.  Any challenge to any judge to hear a particular case may be presented to the court at the beginning of the proceedings and by latest prior to the conclusion of the court debates if the reasons for withdrawal becomes known to the objecting party after the proceedings begin.

There is no clear distinction between the pre-trial and the trial proceedings and both follow the sequence provided in the 1998 Provisions:

(a) The plaintiff’s statements of the facts and claims;

(b) The defendant’s statements of the facts and defence;

(c) The third party’s statements;

(d) The response to the third party’s statements by the Plaintiff or the defendant;

(e) Presiding judge’s summary of disputed issues or focus of judicial discovery;

(f) Presentation of evidence by the parties and cross-examination;

(g) Presentation of evidence by the court and cross-examination;

(h) Judicial examination of documentary evidence and witnesses;

(i) Voluntary mediation under the court’s auspice;

(j) Court debates between the parties;

(k) Judicial inquiry of the parties’ final opinions on the case and their desire to mediate;

(l) Mediated judgment or judgment (which may be rendered at the conclusion of the trial or at a later date).

The court clerk shall record the trial proceedings in writing and have the transcript signed by the judges of the collegial bench, the court clerk and the parties.  The parties or their lawyers should verify their own statements and have the clerical or recording errors be corrected and the missing statements be added to the transcript for preserving the record for the possible appeal.

 
The case may be dismissed if the properly served plaintiff fails to appear before the court without due cause or withdraw from the trial without the court’s permission; A default judgement may be entered in favour of the plaintiff if the properly served defendant fails to appear before the court without due cause or withdraw from the trial without permission.  In case the plaintiff applies for the withdrawal of an action, the decision is vested with the court whether the application may be approved or denied.  In any case, the withdrawing plaintiff will not be able to recover any court fees.  Should the court disallows the withdrawal, the plaintiff is obliged to proceed with the trial or a default judgement may be rendered against it.

APPEALS

The party who objects to a judgement or a ruling of the trial court may appeal to the court of the next higher level within 15 days upon the service of the written judgment or within 10 days upon the service of the ruling.  A written appeal shall be passed to the appellate court by the trial court.

There are no claim or issue preclusion rules under the Civil Procedural Law.   The appellate courts will form a collegiate bench to review both the findings of facts and the application of law by the lower court.  Upon reviewing the trial records, conducting an independent investigation and verifying the factual findings through judicial examination of the witnesses, the appellate courts will decide whether a judgment should be rendered, with or without a hearing, or whether the case should be remanded to the original lower court for amendment or retrial as guided by the higher court.

STATUTE OF LIMITATIONS AND LIMITATION ON TRIAL TIME

The statute of limitation is provided by law based on the nature of the dispute.  In a majority of civil cases, the plaintiff may initiate an action within two years from the date when he knows or should have known that his right has been infringed upon.  However, some cases, such as claims for personal injury damages, sales of nonconforming goods and disputes arising from bills of lading in ocean transportation, etc. are subject to the one-year statute of limitation.

 
The trial of a domestic case pending before the court should be concluded within six months, or subject to approval by the president of the court, within an extended term for additional six months from the date when the case is placed on the trial docket.  As this limitation on the trial time is interpreted to apply solely to domestic cases, a two-year trial backlog has reportedly been caused to the trial of foreign related cases in the intermediate courts of major cities.

ENFORCEMENT OF JUDGMENTS

All trial judgments and appellate judgments will be enforced by the enforcement tribunal of the courts of original jurisdiction where the cases are first tried.

Under the Civil Procedural Law, the local court may be entrusted by another court to enforce the judgment against a local person or property.  However, given the practical concern of local biases, most courts send their enforcement teams to other cities and provinces to enforce exterritorial judgments, one factor contributing to the inflation of the judgment enforcement cost.

COURT FEES AND LEGAL COSTS

The court fees for trial courts and appellate courts are similar in matters involving properties, the calculation of which is based on the value of the subject matter of the litigation, that is, the amount in controversy, as follows:

Amount in Controversy                                       Court Fees

First RMB¥1,000                                                    RMB¥50

Next RMB¥1,000 ~ RMB¥50,000                        RMB¥(50,000 - 1,000)  4% = RMB¥1,960

Next RMB¥50,000 ~ RMB¥100,000                   RMB¥(100,000-50,000) 3% = RMB¥1,500

Next RMB¥100,000 ~ RMB¥200,000                 RMB¥(200,000-100,000)  2% = RMB¥2,000
 

Next RMB¥200,000 ~ RMB¥500,000                 RMB¥(500,000-200,000)  1.5% = RMB¥ 4,500

Next RMB¥500,000 ~ RMB¥1,000,000              RMB¥(1,000,000 - 500,000)  1% = RMB¥5,000

Over RMB¥1,000,000                                            Portion over RMB¥1,000,000*0.5%
 
 
The total court fee is the aggregated sum of above figures up to amount within the specific range.  In another word, the court fees will double for appellate cases.

The court fees for enforcing judgments are calculated as follows:

Amount in Controversy                                  Court Fees

Up to RMB¥10,000                                          RMB¥50
RMB¥10,000 ~ RMB¥500,000                      RMB¥(500,000 - 10,000)  0.5%
Over RMB¥500,000                                         Portion over RMB¥ 500,000  0.1%

The application fees charged by the trial courts for issuing the preservation orders are calculated as follows:

Value of the Properties                                 Application Fees

Under RMB¥1,000                                          RMB¥30
RMB¥1,000 ~ RMB¥100,000                        RMB¥(100,000 - 1,000)  1%
Over RMB¥100,000                                        Portion over RMB¥100,000  0.5%

The service charge of the legal profession is traditionally calculated based on the amount in controversy, which has little connection, if any, to the workload of the attorneys.  The billing practice is under reform and the Interim Measures on Administration of Legal Service Charges issued by the Ministry of Justice on March 3, 1997 is now under examination.