By Denning Jin King & Wood Mallesons’ IP Litigation Group
With the China (Shanghai) Pilot Free Trade Zone Arbitration Rules that came into effect on May 1, 2014 (“FTZ Arbitration Rules”), the Shanghai International Arbitration Center (“SHIAC”) adopts practices of the most renowned international arbitration institutions, and follows trends and developments in international commercial arbitration. The FTZ Arbitration Rules do not only apply to cases related to the China (Shanghai) Free Trade Zone (“FTZ”), they may also apply to cases where parties have agreed to apply the FTZ Arbitration Rules, regardless of the nature of the dispute.
Three days after the effectiveness date of the FTZ Arbitration Rules, the Shanghai No. 2 Intermediate People’s Court released guidelines (the “Guidelines”) setting out the rules on judicial intervention and assistance in arbitration cases applying the FTZ Arbitration Rules. The Guidelines show the Court’s liberal attitude towards the FTZ Arbitration Rules through various provisions:
(i) It accelerates court proceedings in rendering decisions on interim measures and enforcing interim measures;
(ii) It sets specific time limits on the issuance of the ruling on the validity of an arbitration agreement and the application for revocation of an arbitral award;
(iii) It sets detailed judicial review standards on the application of newly adopted rules in the FTZ Arbitration Rules. This includes rules on: the open panel of arbitrators, consolidation of arbitration, joinder of third parties, award ex aequo et bono, expedited procedure, and rules of evidence;
(iv) It facilitates enforcement of arbitral awards and adopts stringent measures against individuals and companies refusing to enforce the award.
This article examines in detail the provisions on interim measures and the rules of evidence under the FTZ Arbitration Rules as well as the Guidelines, and the flexibility and convenience they may bring to arbitrating parties, especially multinational companies.
Interim measures are designed to safeguard parties from serious injuries arising from delays in the litigation or arbitration process as these delays can prejudice one party, sometimes irreparably. Classic examples include: dissipation of assets, destruction of evidence and disclosure of proprietary information or misuse of intellectual property. Interim measures may take many different forms, and new forms may be crafted by the courts or set out in legislation. A typical classification is as follows: (1) measures relating to the attendance of witnesses; (2) measures relating to preservation of evidence; (3) measures relating to documentary disclosure; (4) measures aimed at preserving the status quo; and (4) measures aimed at relief in respect of parallel proceedings. Though there used to be significant limitations on the power of arbitral tribunals to order interim relief, interim measures can nowadays be ordered by national courts as well as by arbitral tribunals in developed legal systems.
The FTZ Arbitration Rules contain a complete chapter on interim measures, consisting of seven articles, while the SHIAC Arbitration Rules only have one article on preservation measures. The FTZ Arbitration Rules follow international practice and the trend in international commercial arbitration by expanding the types of interim measures and decision making authorities.
Article 18 of the FTZ Arbitration Rules explicitly lists three types of interim measures, namely: (1) preservation of assets; (2) preservation of evidence; and (3) requesting and/or prohibiting a party to perform. Article 18 distinguishes from the provisions of PRC Arbitration Law and rules of other domestic arbitration institutions, by adding ‘requesting and/or prohibiting a party to perform’ as type of interim measure. The newly added measure can be a powerful weapon as it helps to preserve the status quo and thus to mitigate or even avoid irreparable injuries to a party. Previously, both the PRC Civil Procedure Law and the PRC Arbitration Law provided for asset preservation and evidence preservation as the only two types of interim measures in the litigation and arbitration process. With the newly amended PRC Civil Procedure Law that came into effect on January 1, 2013, courts may order specific performance or injunction upon a party’s application before initiation of a lawsuit while the PRC Arbitration Law remains unchanged, leaving discrepancies on available interim measures between the litigation and arbitration process.
In terms of decision making authorities, arbitral tribunals are allowed to make orders on interim measures, while previously, only the competent court was allowed to make the orders. In addition, upon parties’ application, an emergency arbitral tribunal may be constituted to order urgent interim relief.
The above provisions, however, should be applied to the extent as permitted by the relevant laws and regulations of the state where the interim measures will be enforced. This brings an interesting question, i.e., if the interim relief is to be enforced in China before the amendment of the PRC Arbitration Law, is the competent court empowered to request and/or prohibit a party to perform a specific act? As the PRC Civil Procedure Law mandates the courts to carry out such an injunctive interim measure or a specific performance interim measure, we expect an arbitral tribunal or emergency tribunal to make such an order, and the competent PRC court to enforce the tribunal’s order.
Multinational companies have explored the injunction measures provided by the PRC Civil Procedure Law in PRC court cases to protect their rights in IP-related cases. It is reported that the Shanghai No. 1 Intermediate People’s Court has rendered two pre-litigation injunction orders in trade secret misappropriation cases in accordance with the newly amended PRC Civil Procedure Law. In both cases, multinational companies acted as applicant to apply for an order against their employees’ disclosure, use and permission for others’ use of the applicant’s trade secrets. With regard to arbitration, multinational companies with an intention to apply for pre-arbitration orders on specific performance or injunction should examine in advance whether such measures are allowed by the laws of the country where the measures should be enforced.
With the above said, we think the FTZ Arbitration Rules create an opportunity for domestic arbitration institutions to accumulate experiences with regard to granting interim measures in the international arbitration practice. Also, the FTZ Arbitration Rules are expected to pave the way for evolution and reconciliation of the PRC Civil Procedure Law and the PRC Arbitration Law.
Regarding interim measures under the FTZ Arbitration Rules, the Guidelines speed up the procedure on the issuance and enforcement of interim relief and set out detailed requirements on cash bonds and credit guarantees.
Rules of Evidence
Regarding the rules of evidence, the FTZ Arbitration Rules are distinguished from commonly used evidence rules in the litigation and arbitration procedures in China in that they allow parties to enjoy substantial autonomy and grant broad discretion to arbitral tribunals. With regard to the parties’ substantial autonomy, Article 44(4) provides that where parties have agreed on rules relating to evidence, the agreement between the parties shall prevail except where such agreement is inoperative. Article 53(4) empowers the tribunal to issue procedural directions and lists of questions, to hold pre-hearing meetings and preliminary hearings, to produce terms of reference, and to make arrangements on exchange and/or examination of evidence. Articles 45 and 46 further allow the tribunal to undertake investigations and collect evidence as well as consult with experts. The Guidelines acknowledge the tribunal’s discretion subject to the requirements under the FTZ Arbitration Rules and PRC law.
Multinational companies agree to arbitrate, among other things, with a view to obtain fair and neutral procedures which are flexible, efficient and capable of being tailored to the needs of their particular disputes, without reference to formalities and technicalities of evidence rules applicable in national courts. Unfortunately, in arbitration procedures administered by major arbitration institutions in China, arbitral tribunals cannot avoid the influences from the rigid evidence rules adopted by PRC courts. These influences mainly include the rules on burden of proof and formalities of evidence.
- Burden of proof and adverse inference
As a default rule under PRC law, each party bears the burden of providing evidence to support its arguments. In lack of a discovery procedure, it is very difficult if not impossible to acquire evidence unfavorable to the counterparty from the counterparty. In this context, PRC law allows judges to draw adverse inference and to adopt a party’s claim that evidence exists where the party demonstrates that its counterparty is in possession of evidence, but refuses to provide it without good cause, and where the party claims that such evidence is unfavorable to the counterparty who is in possession of the evidence. In judicial practice, however, courts often stick to the default rule and are reluctant to adopt the rule of adverse inference.
- Requirements on formalities of evidence
PRC laws impose stringent requirements on the formalities of evidence for civil cases before the court. These requirements sometimes create a great burden on the parties and even hinder the parties from providing certain key evidence. Some of these requirements are as follows:
(i) For documentary evidence, an original document is almost always required. If no original could be provided, the piece of evidence alone cannot be used as a proof of facts. Thus, if a dispute involves a complex business transaction, it is required that the parties have to collect and bring to the hearing all the originals of each single contract, order, bank slip and invoice to prove the whole transaction.
(ii) If a piece of evidence is formed outside the Chinese territory, it is required to notarize the evidence by a notary public and authenticate the evidence by the Chinese embassy or consulate located in the country where it is formed. It often takes months to complete the whole notarization and authentication procedure in a foreign country. As a notary public only witnesses the existence of a document and assumes no responsibility for its contents, it is purely a formality requirement and in practice adds weight to the parties.
(iii) For evidence in electronic form, e.g. emails, webpages, it is a common practice for parties to notarize every piece of them. Without this formality, courts are likely to reject the admission of it into evidence. If the electronic evidence is of high volume, the notarization is considered time and cost consuming to the parties.
In exercise of the autonomy and discretion granted by the FTZ Arbitration Rules, multinational companies could tailor a set of evidence rules according to their objectives and needs or may consider or adopt into their arbitration internationally-accepted procedural guidelines or rules for international commercial arbitration. The IBA Rules on the Taking of Evidence (the “IBA Rules”) are a leading example of those rules. The IBA Rules are drafted by an IBA task force consisting of leading international arbitration practitioners, and contain significant provisions concerning evidence-taking with a view to bridge the differences between traditional common and civil law procedures and to provide an efficient and economical set of rules to be used in international commercial arbitration.
With regard to the burden of proof and adverse inference, Article 3 of the 2010 version of the IBA Rules sets out the principle that each party shall introduce documents available to it and on which it wants to rely as evidence. If the documents are in the possession of one party but regarded as evidence by the other party, the arbitral tribunal has the competence to determine whether the party in possession of the documents should produce them upon the other party’s request. In absence of either party’s request, the arbitral tribunal may order a party to produce the documents if the tribunal deems appropriate. If a party fails to comply with a procedural order of an arbitral tribunal concerning the production of documents, the arbitral tribunal may infer from this failure that the content of the document would be adverse to the interests of that party. To prevent a broad “fishing expedition” while permitting parties to request documents relevant and material to the case, the article also sets out requirements on the contents of a request to produce evidence. The requirements are designed to have the request specifically describe the documents being sought.
With regard to formalities of evidence, the IBA Rules do not require notarization and authentication of evidence and allow copies of documents as evidence. If a party believes that the copy does not fully conform to the original document, it may ask the arbitral tribunal to require the production of that original from the other party. With regard to electronic documents, the default form for their production is the form most convenient or economical to the producing party that is reasonably usable by the recipient.
The FTZ Arbitration Rules and the Guidelines create more room for multinational companies to apply for interim measures and to adopt evidence rules their counsels may be more familiar with. The new developments with regard to interim measures and evidence rules may encourage multinational companies to more frequently use the FTZ Arbitration Rules, which may in turn stimulate the innovation of rules of other Chinese arbitration institutions and the PRC Arbitration Law.
 For an English translation, please see http://www.shiac.org/English/ResourcesDetail.aspx?tid=39&aid=657&zt=3
 SHIAC Arbitration Rules, Article 18.
 FTZ Arbitration Rules, Article 20.
 FTZ Arbitration Rules, Articles 18, 19 and 20.