9 July 2019
SOME COMPARISONS CAN BE MADE BETWEEN THE OLD SILK ROAD and China’s modern Belt and Road Initiative (BRI), which has been dubbed “the New Silk Road”. Some interesting comparisons – revealing both similarities and differences – can also be made between the traditional and modern systems of dispute resolution in China. This column examines the impact of China’s new international commercial courts on disputes arising out of the BRI.
China has undertaken a number of significant reforms in recent years to improve the professionalism of its court system and, in particular, to increase the independence of the courts from local governments and local interests.
Despite these reforms and the increasing professionalisation of courts generally, the courts in China still face many challenges. For example, there is still a significant gap between the professionalism of courts in major cities such as Beijing and Shanghai and those in other parts of China, particularly in the rural areas. Another operational challenge, particularly in a country as big as China, is the varying quality of judges in terms of their experience and expertise.
Partly as a result of these challenges, the courts in China have traditionally not been the first choice for commercial dispute resolution, particularly for the purpose of resolving commercial transactions involving foreigners and foreign investors. To date, the overwhelming majority of foreign investment contracts between Chinese parties and foreign parties have chosen arbitration as the mechanism for resolving disputes.
The popularity of what we in common law jurisdictions describe as alternative dispute resolution mechanisms, such as arbitration and mediation, should come as no surprise for those who are familiar with China and its legal system. The origins of the aversion to courts and their proceedings go back a long time before the modern era and reveal some interesting historical parallels.
Throughout China’s imperial past, the consensus in society was that litigation should be avoided at all cost. “Win your lawsuit but lose your money” as the ancient saying is supposed to have said. The lack of confidence in achieving justice within the formal court system was also related to a deep-seated aversion towards ventilating private disputes in public. “Do not wash your dirty linen in public” is an English saying that has an equivalent in Chinese: 家丑不可外扬 (for a discussion about some of these themes, see China Business Law Journalvolume 2 issue 9: Alternative dispute resolution: mediation or conciliation?).
Of course, by contrast with the position in imperial China, the modern Chinese legal system has come a long way. However, there is still an aversion towards resolving disputes through public legal proceedings and a preference for private means such as arbitration or mediation.
Indeed, the use of mediation as a completely informal mechanism for resolving private disputes is a practice in respect of which China has been a world leader. The success of mediation – both as the initial step in formal legal proceedings and also as a mechanism that occurs independently of formal legal proceedings – is something that developed much later in Western jurisdictions and is now a popular mechanism in commercial disputes in the West. Even so, mediation as practised in a Chinese context is often very different from mediation as practised in a Western context. By way of example, Western mediation traditionally adopts the concept of mediator neutrality – in other words, the mediator should be somebody who is independent of and not known to the disputing parties.
By comparison, the Chinese have traditionally preferred to select a mediator who is known to the parties and is therefore trusted by the parties. A corollary of choosing a mediator who is known to, and respected by, the parties is that the mediator will be able to exert influence as necessary in order to encourage the parties to reach a settlement. This very active form of mediation – where the mediator plays an active role in suggesting settlement terms and encouraging the parties to settle – is different from the Western approach where the mediator usually plays a passive role in helping the parties to resolve their dispute.
All of this might serve as interesting points of comparison between China and the West. However, how does this relate to the topic of this column; namely, China’s new International Commercial Court and its role in supporting the BRI?
The establishment of the China International Commercial Court reflects a number of themes I have already mentioned. First, in a modern context, it reflects the desire to professionalise and internationalise China’s court system and to make the system more user-friendly from the perspective of both Chinese and foreign parties. Secondly, it reflects the traditional view that court proceedings or litigation should be seen as part of a combination of mechanisms that include – and in many respects still favour – arbitration and mediation.
In June last year, the Supreme People’s Court released new provisions establishing the China International Commercial Court. Two international commercial courts were in fact established: one in Shenzhen and the other in Xi’an. The preamble to the provisions states that their purpose is “to try international commercial cases fairly and timely in accordance with the law, to protect the lawful rights and interests of Chinese and foreign parties equally, to create a stable, fair, transparent and convenient international business environment based on rule of law and provide services and guarantees for Belt and Road construction.”
One can learn a lot about Chinese law and the Chinese legal system by reading the preamble or introduction to laws and regulations and identifying those issues or themes that laws and regulations emphasize. Of particular significance in the above purpose statement is the focus on fairness, timeliness, transparency and the equal protection of Chinese and foreign parties. Also significant is the specific reference to providing services and guarantees for the BRI.
The provisions followed an important statement by the Supreme People’s Court in 2015, which emphasized the importance of establishing a good rule of law environment for the BRI and many of the themes that I have just identified, including equal protection of Chinese and foreign parties and greater transparency.
The statement also emphasized the importance of strengthening judicial cooperation with foreign courts in areas such as criminal investigations, anti-terrorism measures, smuggling and money laundering – all of which are critical aspects of achieving the objectives of the BRI.
In December last year, following the provisions released by the Supreme People’s Court in June, the Supreme People’s Court issued procedural rules for the China International Commercial Court on a trial basis. Once again, the procedural rules emphasize equal protection of Chinese and foreign parties and refer to the China International Commercial Court as an international commercial dispute resolution mechanism designed to integrate litigation, mediation and arbitration and resolve disputes on a fair, efficient, convenient and low-cost basis.
So, what are some of the key features of the China International Commercial Court?
First, it has broad jurisdiction to hear international commercial cases that have a connection with China. This would include, for example, cases in which one party is a foreign party and the other party is a Chinese party. The term “commercial” is not expressly defined. However, it appears to include contract-based disputes between commercial parties (not including any investor-state cases that involve disputes between an investor and the Chinese government itself).
In this regard, the jurisdiction mirrors that in other international commercial courts, such as the Singapore International Commercial Court (for a discussion about international commercial courts, see China Business Law Journal volume 8 issue 10: International commercial courts). Unlike the situation in China, however, the Singapore International Commercial Court has jurisdiction to hear cases that do not have a connection with Singapore.
Secondly, the rules provide that the judges will be selected and appointed from the Supreme People’s Court who are familiar with international treaties and customs and with international trade and investment practice, and who are able to work in both Chinese and English. In this regard, the China International Commercial Court differs from the Singapore International Commercial Court in that all of the judges are Chinese nationals – as is required by the PRC Judges Law – and no foreign judges have been appointed to the court. The rules provide, however, that the Supreme People’s Court will set up an International Commercial Expert Committee with foreign experts who can act as mediators and also provide advice to the Court on foreign law.
Thirdly, as I mentioned before, the China International Commercial Court is designed to be an international commercial dispute resolution mechanism that integrates litigation, mediation and arbitration and acts as a one-stop dispute resolution mechanism. The rules provide that with the consent of the parties, the Court may refer the case to mediation. In addition, where the parties agree to submit their dispute to arbitration, the Court will support the process by issuing a ruling on the preservation of property and evidence before or after the arbitration process commences.
It is clear that the establishment of the Court reflects a desire of the Chinese to create a credible court for the resolution of international commercial cases, one that has the expertise and experience necessary to hear and decide cases that are governed by foreign law. It also reflects a desire to overcome the challenges traditionally associated with the court system in China, including delay and the lack of experience of Chinese judges. In some respects, the establishment of the Court is symbolic of the hopes that China has for the development and maturity of its court system in general.
China recognizes that effective dispute resolution mechanisms are of critical importance to the success of the BRI. Of course, it is always possible that the parties to contracts entered into as part of the BRI will choose to submit disputes to other courts or to submit any disputes directly to arbitration. However, the establishment of the Court reflects China’s desire to give its own court system a significant role in resolving disputes arising in connection with the BRI. This is certainly the case with large-scale projects involving state-owned enterprises, which are likely to require disputes to be submitted to the China International Commercial Court as a pre-condition to obtaining finance or investment.
As compared with other international commercial courts such as the Singapore International Commercial Court, it is clear that the Chinese version is much more modest in terms of its international nature and the range of cases it can accept. This will inevitably impose constraints on its potential success.
That said, it is interesting to reflect on the extent to which the operation of the Court will accelerate reforms within the local court system in China and drive the internationalisation of China’s legal system generally. This is particularly relevant when one considers the extent to which the BRI has the potential to drive the harmonization of law among the countries that participate in the initiative and also to drive the development and maturity of China’s own legal system.
When one compares the position today with the historical context, it is clear that China is taking steps to overcome the traditional aversion to court litigation and to give its courts a greater role in resolving commercial disputes.
At the same time, it remains the case that China treats court litigation as just one option for dispute resolution alongside mediation and arbitration, and that the traditional emphasis on alternative dispute resolution mechanisms such as mediation and arbitration will continue for the foreseeable future.
The above is based on a presentation delivered by the author at a seminar entitled “The New Silk Road: Perspectives from the East to the West”, held in Warsaw on 11 May 2019 and hosted by the Polish Research Centre for Law and Economy of China, the School of Law and Economy of China at the University of Warsaw and the Harvard Club of Poland.
A former partner of LinklatersShanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.