China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

Overview - The previous version of the Rules in effect was the 1999 version, which was adopted by the IBA Council on June 1, 1999, and replaced the 1983 IBA Supplementary Rules Governing the Presentation and Reception of Evidence in International Commercial Arbitration. Noting the wide acceptance of the Rules in the international arbitration community and the need for reflecting the latest developments in international arbitration, the IBA initiated a review process in 2008. The revised version of the Rules was developed by the members of IBA Rules of Evidence Review Subcommittee, assisted by members of the 1999 Working Party.

Purpose - The Rules were issued to provide a fair and efficient process for the taking of evidence in international arbitration. The Rules provide mechanisms for the presentation of documents, witnesses of fact and expert witnesses, inspections, as well as the conduct of evidentiary hearings. The Rules are designed to be used in conjunction with, and adopted together with, institutional, ad hoc or other rules or procedures governing international arbitrations. They reflect procedures in use in many different legal systems and may be particularly useful when the parties come from different legal cultures.

Revisions - The 2010 revision to the Rules is a full-scale one, through which the Rules, whilst maintaining those fundamental characters, refined some important terms and / or mechanisms, including without limitation:

• Definition of “Document”: compared with the definition in the 1999 version, the updated one is more “open”, saying “Document means a writing, communication, picture, drawing, program or data of any kind, whether recorded or maintained on paper or by electronic, audio, visual or any other means.”
• Definition of “Evidentiary Hearing”: similar to the situation with “Document”, the updated one here enriches the methods that can be adopted in evidentiary hearing in international arbitration, saying “Evidentiary Hearing means any hearing, whether or not held on consecutive days, at which the Arbitral Tribunal, whether in person, by teleconference, videoconference or other method, receives oral or other evidence.”
• Definition of “Request to Produce”: unlike the above two terms, the updated one here overwrites the idea in the previous one, saying “Request to Produce means a written request by a Party that another Party produce Documents.” The 1999 version defines it as “a request by a Party for a procedural order by which the Arbitral Tribunal would direct another Party to produce documents.” Obviously, the arbitral tribunal’s role in the stage of request to produce becomes less active under the 2010 version.
• “Consultation on Evidentiary Issues”: this term entitles a new Article 2 that is created in the 2010 version of the Rules. As is explained in paragraph one of this article, under this “consultation” mechanism the arbitral tribunal “shall consult the Parties at the earliest appropriate time in the proceedings and invite them to consult each other with a view to agreeing on an efficient, economical and fair process for the taking of evidence.”
• Content of a “Request to Produce”: corresponding to the definition of this term mentioned above, in Article 3 of the 2010 version, the respective rule is supplemented as for the situation where Documents in electronic form is required, saying “.... in the case of Documents in electronic form, the requesting Party may , or the Arbitral Tribunal may order that it shall be required to identify specific files, search terms, individuals or other means of searching for such Documents in an efficient and economical manner.
• “Good faith”: some may consider that this “good faith” rule is so established in almost every single jurisdiction that it is unnecessary here in the Rules. However, it is mentioned twice in the 2010 version, interestingly at the beginning and the ending thereof: (i) in paragraph 3 of the Preamble, it says “The taking of evidence shall be conducted on the principles that each Party shall act in good faith and be entitled to know, reasonably in advance of any Evidentiary Hearing or any fact or merits determination, the evidence on which the other Parties rely.” (ii) in paragraph 7 of Article 9, it says “If the Arbitral Tribunal determines that a Party has failed to conduct itself in good faith in the taking of evidence, the Arbitral Tribunal may, in addition to any other measures available under these Rules, take such failure into account in its assignment of the costs of the arbitration, including costs arising out of or in connection with the taking of evidence.”

* Ms. Ye, head of the firm's international dispute resolution practice, was privileged to participate in the review process of the Rules as a member of the IBA Rules of Evidence Review Subcommittee, and sincerely congratulates the IBA on this momentous move.
 

In the first instance judgment, the court found that no contract existed regarding the derivative transaction between the parties and dismissed all claims made by the Bank. The Bank appealed that decision to the Shanghai Intermediate People's Court. The Court of Appeal rendered its final judgment at the end of 2009. In that judgment, the Court of Appeal found that the parties had not entered into a contract, but held that the Company was liable for the non-conclusion of such a contract and was required to bear fifty percent of the Bank's losses pursuant to the principle of culpa in contrahendo under Article 42 of the PRC Contract Law. The implications of the case for future similar disputes are as follows:

In financial derivative transactions, what type of contract should be signed between a financial institution and a company?

One of the most significant points of argument in this case was whether the parties had entered into any contract regarding the financial derivative transaction.

The Court of Appeal found that no such contract was formed. In its judgment, the Court of Appeal expressed the following opinions on this point:

(1) Both parties to the transaction should execute a single standardized agreement; and

(2) On March 11, 2009 the People's Bank of China ("PBOC") released its Announcement No.4 of 2009 (the "PBOC Announcement No.4") announcing the introduction of the Master Agreement of Financial Derivative Transaction in the PRC Inter-bank Market (the "NAFMII Master Agreement") after which market participants in China must execute the NAFMII Master Agreement for derivative transactions entered into after the issuance of PBOC Announcement No. 4. If a financial derivative contract was executed prior to March 11, 2009, as was the case here, the parties can continue to perform their obligations in accordance with the documents filed with the relevant authorities by the bank.

Is it compulsory for a financial institution to execute the NAFMII Master Agreement in a financial derivative transaction, no matter whether it is a RMB or non-RMB transaction, when the counter party is a non financial company?

PBOC Announcement No.4 provides that when trading financial derivatives, market participants must execute the NAFMII Master Agreement designated and published by China's National Association of Financial Market Institutional Investors ("NAFMII").

According to NAFMII, it is unclear whether "market participants" include financial institutions and non-financial institutions as PBOC's Announcement No. 4 does not define this term. The market participant in a specific transaction is decided on a case by case basis according to PBOC's regulations in respect of the different types of financial derivative products (each product is, in effect, subject to a separate regulation).

For RMB derivative transactions, the current and generally accepted practice of NAFMII is to include both financial and non-financial institutions as market participants. Therefore, the NAFMII Master Agreement should always be adopted in RMB derivative transactions, whether the transaction is between financial institutions or between a financial institution and a non-financial institution.

For foreign exchange ("FX") derivative transactions, only financial institutions are allowed to access the China Foreign Exchange Trading System ("CFETS"). According to NAFMII, this implies that financial institutions are the only market participants in FX derivative transactions. In other words, companies and other non-financial institutions are excluded from the market participants in FX derivative transactions. Therefore, NAFMII believes that a financial institution and a non-financial institution do not have to execute the NAFMII Master Agreement when carrying out a FX derivative transaction since a non-financial institution is not regarded as the "market participant" in such a transaction.

However, Neither PBOC nor NAFMII has issued any official document addressing whether the NAFMII Master Agreement must be adopted in financial derivatives transactions between a financial institution and a non-financial institution (including RMB derivatives transactions and FX derivatives transactions). Therefore, this issue remains a question and requires further clarification by the relevant authorities.

Will there be any legal risk if financial institutions fail to adopt the form of contract submitted to or filed with the authority?

In China, financial institutions are required to file the form of the master agreement of their financial derivative services with the competent financial regulatory authority. But a financial institution's noncompliance with the administrative rules will not lead to the invalidation of a contract under the PRC Contract Law. The general understanding is that whether the contract is subsequently filed with the regulatory authority as required or whether the filed form of contract is adopted should have no impact on the effectiveness of the contract. However, according to the Court of Appeal's judgment, financial institutions may be subject to legal risks where they fail to adopt the form of the master agreement submitted to or filed with the authority. The court did not establish that master agreements would be invalid if financial institutions executed them in a form different from that filed with the authority. Yet, financial institutions would bear a heavier burden of proof to prove that there is an effective and binding contract between the parties with respect to the specific transaction.

This decision indicates that Chinese courts are making efforts to understand the characteristics of derivative transactions and to establish their rules regarding what issues they should focus on when hearing disputes arising from such transactions. It shows the importance for financial institutions to pay attention to 1) communication with the authorities such as PBOC and China Banking Regulatory Committee, 2) all of the applicable regulatory requirements, including those concerning the form of documents, authorization, risk disclosure and other compliance requirements, and 3) ongoing communication with the client, evidenced in writing, regarding the details of a specific transaction.
 

In a 15 year products liability dispute (Hubei Gezhouba Sanlian Industrial Co. Ltd.  vs. Robinson Helicopter Company Inc.), the Central District of California found that the plaintiffs were entitled to the issuance of a domestic (U.S.) judgment in the amount of the PRC judgment with interest. This judgment was originally made in the PRC and recognized in the U.S. marking a landmark in recognition of judgments from China abroad. The case stemmed from a helicopter accident (March of 1994) which was the result of production defects of that particular type of helicopter (R-44).

With respect to foreign money judgments, the general principles of comity and recognition of foreign awards have been codified in the U.S. as the Uniform Foreign Money Judgments Recognition Act (“UFM-JRA”), which has been adopted by the majority of U.S. states. "Foreign money judgments" under the UFM-JRA refers to any judgment granting or denying recovery of a sum of money rendered in a jurisdiction outside the U.S. and its territories.  In states adopting the UFM-JRA, such as in California and codified in the California Code of Civil Procedure, a foreign judgment is subject to a limited scope inquiry prior to a determination as to whether it is entitled to be recognized. A defendant challenging recognition of a foreign judgment may not retry issues of liability or damages, but rather is limited to due process-type defenses enumerated in the statute.
 

Legal Requirements Under UFM-JRA
 

A. Mandatory Conditions

Other than a final, conclusive foreign judgment, the three mandatory requirements for recognition of a foreign judgment are all due process-type considerations:
(1) the foreign court must have rendered its judgment under a system that provides impartial tribunals or procedures compatible with the requirements of due process; (
(2) the foreign court must have had personal jurisdiction over the defendant; and
(3) the foreign court must have had subject matter jurisdiction over the controversy.
 

B. Discretionary Conditions
The discretionary factors a court may consider include:
(1) The Defendant Received Sufficient Notice of the Proceedings
(2) The Judgment Was Not Obtained by Fraud
(3) The Judgment Is Not Repugnant to the Enforcing Court’s Public Policy
(4) The Judgment Is Not in Conflict with Another Final and Conclusive Judgment
(5) The Judgment Is Not Inconsistent with an ADR Agreement Between the Parties
(6) Where Jurisdiction Is Based on Personal Service Alone, the Foreign Tribunal Was Not a Seriously Inconvenient Forum
(7) Does the Foreign Court Reciprocally Recognize Judgments From the U.S.?
 

In the Sanlian case, the district court found that service was proper, the PRC judgment was final, conclusive, and enforceable under the laws of the PRC and involved the recovery of a sum of money. As California's UFM-JRA applied and no exceptions to recognition were presented, the plaintiffs were entitled to a domestic judgment.

Because the principles governing recognition of foreign judgments in the U.S. are relatively uniform without regard to the nation where the judgment originated, however, one can look to authority under the UFM-JRA pertaining to recognition of judgments entered in any country for guidance of equal weight in assessing whether a judgment from China will be granted recognition and enforcement under any given set of facts.

While cases under the UFM-JRA abound, cases specifically addressing recognition of foreign judgments entered in China are still relatively few. Based on developments in the legal system in China, and especially in the People’s Republic of China, over the past two decades, it is increasingly likely that a U.S. court evaluating whether to recognize a judgment entered in China would conclude that the system of justice in China comports with traditional western notions of due process, and thus that element would likely not to be a bar to recognition in a U.S. court. If the Chinese judgment otherwise meets the due-process type requirements of the UFM-JRA, there is nothing unique about judgments from China that should interfere with their recognition and enforcement in any U.S. court under the same analysis as a judgment entered in England or Canada, as demonstrated in the Sanlian case.

Article 148, paragraph, 2 of the Company Law establishes that “directors, supervisors and senior managers shall not take advantage of their position to take bribes or other illegal income, and they shall not speculate with the company’s assets.” Article 91 of the Meeting Minutes of the Second National Forum on Foreign-Related, Commercial Maritime Trials (Fafa [2005] No. 26), issued by the Supreme People Court on December 16, 2005, provides that “the people’s courts will accept petitions from foreign invested companies attempting to retrieve a company seal from a natural person, legal person, or other entity.” Therefore, based on Article 148 of the Company Law and the published meeting minutes, a company can take legal action against a removed legal representative to have the company seal returned to the company.

However, in practice, this remedy is hard to implement. When a company files a lawsuit to seek the return of the company seal, the indictment must be stamped with the company seal. If the company seal is not available, then the court will accept the legal representative's signature on the petition, but the legal representative that signs the petition must be the legal representative list on the company's business license. When the person illegally holding the company seal is the company's removed legal representative, and the company has not filed the application to change its registered legal representative, the terminated legal representative will remain the legal representative on the company's business license. In a situation where the preceding legal representative is the defendant, he or she will clearly be unwilling to execute a petition against him or herself to return the company seal. Although the Supreme People's Court has confirmed a company can effectively change its legal representative even if it does not file a change in legal representative with the SAIC or its local branch office, the new representative must still provide the court his or her identification and company authorization stamped with the company seal to be able to act in the company's name. Therefore, the company has several procedural problems it must overcome if it wants to file a lawsuit to retrieve the company seal in its own name.

When a company has trouble retrieving the company seal from a removed legal representative, another potential option is to report the lost company seal to the police. Although the public security bureau (“PSB”) in each city and province has its own requirements for reporting a lost company seal, all PSBs require a company to state how the seal was lost or stolen, and publish an announcement about the loss in a designated newspaper for prescribed period of time. Once the announcement has been published for long enough, the new legal representative may bring an original copy of the company's business license to SAIC or its branch office, and apply to make a new company seal and file related registrations. However, there are two roadblocks to using this technique. First, a company cannot get a new company seal, unless, the new seal registration is completed by the legal representative listed on the company’s business license with the approval of PSB. Second, the question of when a company’s seal should be considered “lost” or “stolen” is a subjective question. Therefore, many PSBs tend not to approve a company's request to replace a lost seal. However, some PSBs will consider a terminated legal representative's continued possession of a company seal to be an acceptable exception to the requirements, and they will approve the company’s application for a new company seal after the company provides a detailed explanation about why it cannot follow the proper procedure.

The company seal, as the symbol of power of the company, is critical for obtaining corporate control. However, regaining the seal from a displaced and uncooperative executive is a time-consuming and oftentimes difficult undertaking. Foreign investors should take care to regain possession of the seal prior to replacing management if at all possible.
 

I. PRC law does not protect confidential information between an attorney and a client as privileged

The concept of "attorney-client privilege" does not exist under PRC law. In other words, confidential communications between an attorney and a client are not privileged or protected.

Article 33 of the PRC Lawyer's Law(1) ("Lawyer's Law") provides that attorneys must protect the confidentiality of their clients' private information, and if they are aware of any of their clients' trade secrets they must also protect them. Furthermore, this article requires attorneys to protect all of the state secrets they discover while working with clients.

At face value, an attorney is only accountable for protecting these two very specific items. However, the scope of this protection is up to interpretation because there is no clear definition of exactly what private information entails. Yet, the more important point is the fact that this article does not exempt attorneys from being forced to disclose this information in a judicial action. Therefore, a court can order an attorney to testify about a client's private information or trade secrets in a judicial proceeding.

Article 70 of the PRC Civil Procedure Law ("Civil Procedure Law") establishes that an attorney has a duty to testify about a client's private information in court by stating that anyone (organizations or individuals) that knows any facts that are relevant to a case must provide those facts in court. Yet, Articles 66 and 120 of the Civil Procedure Law do provide a client with trade secrets some protection because these articles allow a case that involves trade secrets or a client's private information to be held in a closed-door courtroom when a party requests that the proceeding not be held in public. The said provisions of theCivil Procedure Law create the basis for lawyers to be compelled to testify on a client's confidential information, and these laws prevail over any ethical duty of a lawyer to protect a client's information under attorney-client privilege. Furthermore, a lawyer cannot refuse to testify based on the fact that a client may request the information be discussed in a closed-door courtroom. A closed-door courtroom is only available for use in a case if a client requests one, and even if a client does request a closed-door courtroom, the request does not relieve his or her lawyer of the obligation to disclose the confidential information to the court.

On the contrary, Article 45 Section 1 Subparagraph 3 of the Lawyer's Law states that if an attorney conceals facts, or threatens or solicits others to conceal facts from a court, the court may revoke that attorney's bar license. Furthermore, depending on the kind of information that is concealed from the court the attorney could be subject to criminal liability.

Overall, prior to the 1996 Lawyer's Law, an attorney had no legal duty to protect the information a client provided. Even after this law was put in place, if the information an attorney is aware of is important to a litigation, he or she can still be forced to disclose it in court. Furthermore, if an attorney does not provide this important information, he or she can be held criminally or administratively liable for not disclosing the information to the court.

PRC law does not protect any legal document and correspondence that is marked "confidential and privilege." This fact shows that attorneys and their clients are not exempt from disclosing information that would otherwise be protected by attorney-client privilege outside of the PRC.

II. PRC law does not protect the attorney-client privilege of foreign lawyers practicing under foreign laws in China

Under Chinese law, all parties with the knowledge necessary to decide a case are obligated to provide that information in court, and confidential communication between attorneys and clients is not exempt from this disclosure in court. International conflict of law principles establish that a court with jurisdiction over a case will establish the procedural rules for the case. Therefore, in China, foreign lawyers must comply with the Civil Procedure Law and the Lawyer's Law, and they must testify in PRC courts about the evidence they have knowledge of.

Article 3 of the Administrative Rules for the Representative Offices of Foreign Law Firms establishes that foreign law firms and their attorneys must follow the PRC's laws, rules, and regulations. Furthermore, Article 3 requires foreign attorneys in foreign law firms to strictly comply with the PRC's rules for lawyers' professional ethics and practice. Furthermore, foreign law firms and their attorneys must not jeopardize China's national security and public interest when they provide their legal services in China. This provision indicates that, under PRC law, the rights and obligations of foreign attorneys working in China are the same as the rights and obligations of Chinese lawyers.

For the said reasons, foreign lawyers cannot be exempt from testifying in Chinese court based on a claim of attorney-client privilege under non-Chinese laws.

III. The 2008 amendments to the 1996 Lawyer's Law reinforces the protection of confidential information between an attorney and a client

The 1996 Lawyer's Law was amended on October 28, 2007, these amendments came into effect on June 1, 2008 ("Amended Lawyer's Law"). Specifically, the amendments to the law increased the protection afforded attorney-client confidential communication.

Article 38 of the Amended Lawyer's Law states provides that attorneys must protect the confidentiality of their clients' private information, and if they are aware of any of their clients' trade secrets they must also protect them. Furthermore, this article obligates attorneys to protect the state secrets they discover while working with a client. Moreover, if a client requests that the attorney keep certain information confidential, even though it would otherwise not be confidential, the attorney has the duty to keep this information confidential. However, if the information that the client requests be kept secret involves a criminal activity, which is, has, or will be committed, then the attorney must disclose this information to PRC authorities. Finally, if a client's activities would jeopardize national and public security, or if a client's actions could cause someone serious personal or property damage, then a lawyer must inform government authorities of those activities.

Article 49 Section 4 of the Amended Lawyer's Law eliminates a lawyer's duty to reveal all material facts of a case. Thus, an attorney may conceal a client's confidential information from a court when he or she is litigating a case. Before these amendments to the Lawyer's Law attorneys had the duty to present all of the facts of a case, and if they did not reveal everything they knew about a case they could be held liable for concealing that information.

The Amended Lawyer's Law has strengthened client confidentiality requirements. However, the Amended Lawyer's Law does not expressly establish that lawyers may refuse to give testimony in court based on attorney-client privilege, or the information that should be used as evidence because it is protected by "attorney-client privilege." The amendments indicate that the Amended Lawyer's Law is taking steps towards establishing the basic concept of attorney-client privilege in the PRC. These efforts can be seen by the fact that the Law clearly establishes that attorneys must keep confidential information secret, and attorneys must also keep any additional information that clients request them to keep secret, even if, the information the client requests be kept secret would not otherwise be considered confidential. Furthermore, eliminating the possibility that an attorney could face liability for keeping facts from a court shows that there are items parties can keep from the PRC's courts, which in some cases may be attorney-client confidential communication. These changes to the Lawyer's Law show that the PRC's government is becoming more receptive to the concept of attorney-client privilege, and that the government is likely to change Chinese law in more ways that will move China toward accepting the concept of attorney-client privilege.

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