Legal Analysis of Chinese Court Seizes Property for Foreign Arbitration
Author of this article: Partner Zhang of Shandong Win & Win Co. Law Firm
This article was first published on China Foreign Commercial and Maritime Trial Direction.
Abstract: if a dispute arises between an overseas party and a domestic party, it shall be submitted to an overseas arbitration institution for arbitration, and the arbitration award shall be binding on both parties. In case of disputes between the two parties, in order to prevent the domestic party from transferring the concealed property, which leads to the inability of enforcement of the ruling, the overseas party often applies to the Chinese court for property preservation measures. In judicial practice, different courts do not agree on whether to allow property preservation in overseas arbitration cases. Whether property preservation measures can be adopted in overseas arbitration and what are the relevant laws and regulations will be analyzed in this paper.
Key words: overseas arbitration, maritime claims, property preservation
1、 Basic Case
In 2012, the applicant, a company in Hongkong, filed an application for property preservation before litigation with the Qingdao maritime court on the ground that the respondent, a company in Shandong, was in arrears with the ship rent, requested the court to freeze the bank deposits of the respondent or seal up and detain other equivalent properties. The applicant provided guarantee to Qingdao Maritime Court, which considered that the applicant’s application complied with relevant laws and regulations, permitted the applicant to apply for property preservation before litigation, and seals up the bank account and company equity of the respondent.
I was the respondent’s attorney, raised an objection according to law. I considered that in this case, the two parties agreed to London arbitration. Before the overseas arbitration, the applicant requested the Chinese court to preserve the bank account and real estate (instead of “ship, cargo on board, fuel oil and materials on board”) property, without any legal basis. Therefore, in this case, the Court seized the bank deposit and real estate wrongly.
2、 Relevant Laws And Regulations
（1） Civil procedure law of the people’s republic of china.
See article 93 of the chapter “property preservation and advance execution” of the civil procedure law before the amendment, which stipulates that “if the interested parties fail to apply for property preservation immediately due to the emergency of the situation, which will cause irreparable damage to their legitimate rights and interests, they may apply to the court for property preservation measures before prosecution…… if the applicant does not bring a suit within 15 days after the court taking preservation measures, the court shall terminate the property preservation. ” “Before prosecution” and ” does not bring a suit within 15 days ” can be seen that the civil procedure law only gives the parties the right of property preservation in domestic litigation.
See Article 101 of Chapter 9 “preservation” of the revised civil procedure law on August 31, 2012, which stipulates that “if the interested parties fail to apply for preservation immediately due to emergency, which will cause irreparable damage to their legitimate rights and interests, they can apply to the court where the property to be preserved, the domicile of the respondent or the court with jurisdiction over the case before filing a lawsuit or applying for arbitration to take protective measures. The applicant shall provide guarantee. If it does not provide guarantee, it shall rule to reject the application. ” Therefore, the new civil procedure law added “before applying for arbitration”. This chapter aims at domestic litigation or arbitration, which can apply to the court for preservation before litigation or arbitration, which is an innovation and progress.
Chapter 26 “arbitration” of Part IV “special provisions on civil procedure involving foreign elements” of the civil procedure law stipulates that “if a party applies for preservation, the foreign-related arbitration institution of the people’s Republic of China shall submit the application of the party to the Intermediate People’s Court of the place where the respondent has his domicile or where his property is located for adjudication.” Firstly, it is clearly the foreign arbitration institution of the people’s Republic of China, such as China International Economic and Trade Arbitration Commission, China Maritime Arbitration Commission, etc. However, it does not provide for the rights of overseas arbitration institutions, such as the arbitration court of the International Chamber of Commerce and the arbitration court of the Stockholm Chamber of Commerce in Sweden. Secondly, the application of the parties shall be submitted by the arbitration institution of the people’s Republic of China, which indicates that the arbitration institution has accepted the application for arbitration, so it should be in the arbitration, not before the arbitration. Therefore, the parties have no right to apply for property preservation before the foreign arbitration.
Therefore, for foreign-related arbitration cases, only the foreign-related arbitration institutions in China can submit an application to the Intermediate People’s Court in arbitration, and the intermediate people’s court will determine whether to accept or not. China’s civil procedure law does not stipulate that the overseas arbitration institutions have the right to submit the parties’ application for preservation to the intermediate people’s court. As a party to an overseas arbitration, it has no right to directly submit an application for preservation to the intermediate people’s court. Civil procedure law is a procedural law, and there is no theory that no prohibition means permission. The court must have legal basis for taking relevant property preservation measures.
（2） Interpretation of several issues in the law of maritime procedure and the law of maritime procedure.
Article 12 of the Maritime Procedure Law stipulates that “maritime claim preservation refers to the compulsory measures taken by the maritime court against the property of the requested party in accordance with the application of the maritime claimant to ensure the realization of its maritime claim.” Article 13 “before a lawsuit is filed, the party applying for maritime preservation shall file an application with the maritime court of the place where the property to be preserved is located.”
According to the civil procedure law, “cases that make the judgment difficult to execute or cause other damages to the parties”, the purpose of property preservation of the Maritime Procedure Law and the civil procedure law is the same, that is to ensure that the parties’ future judgments can be realized. However, the maritime litigation law specifically limits that “maritime claims” do not include claims of common civil and commercial. Maritime claims include claims in maritime tort disputes, maritime contracts and other disputes.
Article 18 of the “Supreme Court’s Interpretation On Several Issues Concerning The Application Of The Maritime Procedure Law” stipulates that “the property of the requested party as stipulated in Article 12 of the Maritime Procedure Law includes the ship, the cargo on board, the fuel oil for the ship and the materials for the ship. The provisions of the Civil Procedure Law on property preservation shall apply to the preservation of maritime claims for other property. ” The law of maritime procedure is a special procedure law, which only stipulates the maritime matters involved and the scope of preservation, which is limited to ships, cargo on board, fuel oil and materials for ships. This is because the preservation time of maritime claims is urgent, and the property related to the ship moves quickly. If measures cannot be taken quickly, it is likely to cause the ship to escape and the cargo to be transferred, which makes the parties unable to effectively use the property preservation measures, and ultimately leads to irreparable economic losses. For not ship related articles, if the creditors requests to apply for property preservation, it should be carried out in accordance with the provisions of the civil procedure law.
Article 21 of the Interpretation of Several Issues in the Maritime Procedure Law, “the provisions of Article 14 of the Maritime Procedure Law shall apply to the application for maritime claims preservation before litigation or arbitration. If a foreign court has accepted a relevant maritime case or a relevant dispute has been submitted to arbitration, but the property involved in the case is within the territory of the people’s Republic of China, and the party applies to the maritime court where the property is located for maritime preservation, the maritime court shall accept the application. ” We can see that, firstly, property preservation measures can be taken before litigation or arbitration in China. Secondly, “relevant maritime cases have been accepted by foreign courts”, “relevant disputes have been submitted to arbitration”, “but the property involved in the case”. From these keywords, we can infer that the arbitration here should be “overseas arbitration” and the arbitration procedure is “arbitration”. Thirdly, when the parties have the right to apply directly to the maritime court for maritime claim preservation, there is no need to submit it to the court through an arbitration institution. Therefore, in overseas arbitration, the parties may directly apply to the maritime court for maritime preservation of the ship, cargo on board, fuel oil and materials.
（3）Arbitration law of the people’s republic of china
Article 28 “if one party may make the award impossible or difficult to implement due to the actions of the other party or for other reasons, it may apply for property preservation. When a party applies for property preservation, the arbitration commission shall submit the party’s application to the people’s court in accordance with the relevant provisions of the civil procedure law. ” Therefore, this chapter is about non foreign arbitration. The parties submit the application for property preservation to the arbitration commission, which then submits it to the court. In the special provisions of foreign-related arbitration, Article 68 “if a party to the foreign-related arbitration applies for evidence preservation, the foreign-related arbitration commission shall submit the party’s application to the Intermediate People’s Court in the place where the evidence is located”. This article stipulates that the Arbitration Commission of China’s foreign-related arbitration may preserve the evidence in the arbitration, which needs to be submitted to the Intermediate People’s Court. It is not stipulated in the Arbitration Law whether overseas arbitration can apply for property preservation.
（4） Convention on the recognition and enforcement of foreign arbitral awards
In overseas arbitration, the arbitral tribunal takes compulsory measures in the form of orders and prohibitions. Can the “award” be enforced in China?
In China, property preservation belongs to compulsory judicial act, which belongs to procedural law. Whether property preservation is allowed, who will apply and who will review is a procedural matter. According to the Civil Procedure Law of China, it is up to the court to decide whether to allow or not. Therefore, even if the similar “property preservation” award issued by the overseas arbitration institution, it also needs to be reviewed by the Chinese court.
（5）British arbitration act 1996
Article 44 of the British Arbitration Law of 1996 stipulates that unless otherwise agreed by the parties, the court has the right to issue an order on property preservation (Paragraphs 1 and 2). If the case is urgent, “one of urgency”, the court may, on the application of the party or the who may become the party, if necessary, “necessity”, adopt “preserving evidence or assets” for evidence preservation or property preservation (paragraph 3). However, if the case is not urgent, “not of urgency”, the court can only take measures of preservation upon the application of one party (by notifying the other party and the arbitral tribunal) and with the permission of the arbitral tribunal, or with the consent of other parties (para. 4). From this article, we can see that the British arbitration law recognizes property preservation before arbitration, provided that the case is urgent and necessary. This is consistent with the provisions of the Civil Procedure Law of China to adopt property preservation in case of emergency.
But in the case of overseas arbitration, how is British law regulated? We see the previous introduction to the British Arbitration Act, the scope of application of Article 2 of the general principles…… (3) Even if the place of arbitration is outside England and Wales or Northern Ireland, or if no place of arbitration has been selected or determined, the powers conferred by the following articles shall apply. (b) Article 44 (court’s power to support the enforcement of arbitration proceedings) “property preservation”. However, the court may refuse to exercise the aforesaid power if the fact that the place of arbitration or the place to be selected or determined may be located outside England and Wales or Northern Ireland makes it inappropriate for the court to exercise the aforesaid power.
Therefore, according to the British Arbitration Law, if it involves arbitration cases abroad, the court can adopt property preservation in principle. However, if the British court considers it inappropriate to adopt property preservation, the British court has the right to disagree. Whether property preservation is appropriate or not, the British court needs to review relevant materials and consider the comprehensive situation of the case, which can leave enough space for the British court.
3、 Theoretical Basis
（1）Overseas arbitration takes a long time and is tedious.
Since the two parties have agreed to be arbitrated by an overseas arbitration institution, they should expect that the settlement of disputes will take a long time and the procedures will be complex. In Chinese court property preservation, “the time limit for the people’s court to freeze the bank deposits and other funds of the person subjected to execution shall not exceed six months, and the time limit for sealing up or seizing the movable property shall not exceed one year.” If the applicant applies for an extension of the time limit, the court shall, before the expiration of the time limit for sealing up, detaining or freezing, go through the formalities of sealing up, detaining or freezing for a further period not exceeding one-half of the time limit prescribed in the preceding paragraph. ” Sealing up bank accounts directly affects the normal operation of the parties concerned and the normal flow of the company’s funds. However, in overseas arbitration, both parties are not in one place and the service time is long. The arbitration tribunal can not issue the award as soon as the domestic court, and the rights and obligations of both parties are in a state of uncertainty for a long time. This kind of seizure will bring serious adverse effects to the party under seizure. Moreover, the time limit for the Chinese court to seal up is also limited, which leads to the need for the parties to continuously apply for the renewal of the account, causing a lot of extra work for the court.
With the exception of preservation of maritime claims, if the respondent fails to provide guarantee at the expiration of the period of arrest of the ship or cargo on board, and the ship or cargo on board is not suitable for further arrest, the maritime claimant may, after bringing a lawsuit or applying for arbitration, apply to the maritime court which has seized the ship or cargo on board for auction of the ship. The court may sell by auction according to the application of the parties and retain the auction money. Therefore, in overseas arbitration, the parties may directly apply to the maritime court for maritime preservation of the ship, cargo on board, fuel oil and materials.
（2） The procedure is complex and has high-risk.
In China, with regard to property preservation, courts generally need to conduct preliminary examination of cases. Article 100 of the Civil Procedure Law, “cases that make the judgment difficult to execute or cause other damages to the parties”, we can analyze and draw the following conclusions: Firstly, the precondition of “the judgment difficult to execute” is the cases that are favorable to the applicant and win the judgment. The court needs to make a preliminary judgment on the case based on the law, the facts and the evidence materials of the case; Secondly, “causing other damages to the parties” refers to that if the case is not sealed up and preserved in time, the property in the case is likely to be lost, causing losses to the parties. In China’s judicial practice, the court usually requires the applicant to provide case materials, and approves property preservation after preliminary examination.
In the case of overseas arbitration, when the parties submit the relevant evidence, the foreign evidence must be notarized and certified according to the Evidence Rules of China. The court needs to examine it carefully. The court also did not know the situation of the parties abroad. In the property preservation, the risk is relatively high. If the preservation is wrong, the applicant needs to compensate the respondent for the loss. If the guarantee provided by the applicant is invalid or insufficient, resulting in the inability to compensate the respondent for the loss, the court shall bear the corresponding legal liability. When the court reviews the qualification of the main body of the overseas company and the basic situation of the case, it usually reviews it from the form, which does not guarantee the correctness of the entity. In fact, whether the result of overseas arbitration is winning or losing can not be judged according to Chinese law. In overseas arbitration, it often depends on the free evaluation of the individual of the overseas arbitrators, which has nothing to do with Chinese law. Therefore, the outcome of the case is unpredictable.
（3）It is not conducive to the development of domestic enterprises.
Domestic parties who agree to arbitrate abroad usually have greater economic strength, or provide performance guarantee, or are unlikely to fail to perform the award. In case of disputes between the two parties, the overseas parties directly apply to the Chinese court to seal up the accounts, real estate and equity of the domestic parties, which directly affects the reputation and operation of the domestic enterprises. However, few domestic enterprises ask foreign courts to preserve the property of foreign enterprises. Firstly, domestic enterprises valued peace for long and are unwilling to solve problems through complex judicial procedures, and also consider the high costs of overseas courts and lawyer fee. Secondly, many overseas companies actually registered in Hong Kong, the British Virgin Islands and other offshore companies, which have no property, even if applying for preservation and usually has no effect. Thirdly, even if the domestic party applies for preservation, it is also very difficult.
（4）Guarantee judicial sovereignty and promote the development of Chinese foreign arbitration institutions.
The purpose of property preservation is to ensure the realization of the court’s judgment, to prevent the court’s long trial time, the parties’ transfer of assets, resulting in the court’s judgment can not be realized, the court’s credibility is reduced, and to ensure the judicial authority. Similarly, in order to ensure the healthy development of Chinese foreign-related arbitration institutions, promote the parties’ willingness to submit to Chinese foreign-related arbitration institutions for arbitration, and ensure the harmonious development of society, it can be stipulated that the court can take preservation measures before and during China’s foreign-related arbitration.
However, in foreign arbitration, if the court is also allowed to take protective measures, then Chinese foreign arbitration institutions will not enjoy the advantages. Similarly, now we found that many foreign parties stipulated their jurisdiction as arbitration in Hong Kong, Singapore and London, it means they did not recognize Chinese foreign-related arbitration institutions and were unwilling to submit to China’s foreign-related arbitration institutions. This is not conducive to the healthy development of foreign arbitration institutions in China. In the international trend of striving for jurisdiction, we should also give priority to promote the development of Chinese foreign-related arbitration in order to train a group of arbitrators with foreign experience and make Chinese arbitration have world influence, including that Chinese foreign-related arbitration institutions can adopt property preservation before and during arbitration through courts.
（5）According to the Maritime Procedure Law, the preservation of maritime claims in foreign-related arbitration is special:
Article 29 of the Maritime Procedure Law: ” if the respondent fails to provide guarantee at the expiration of the period of arrest of the ship or cargo on board, and the ship or cargo on board is not suitable for further arrest, the maritime claimant may, after bringing a lawsuit or applying for arbitration, apply to the maritime court which has seized the ship or cargo on board for auction of the ship. ” Article 47, “at the end of the period of arrest of the goods on board, the respondent fails to provide guarantee and the goods are not suitable for further arrest, the maritime claimant may, after bringing a lawsuit or applying for arbitration, apply to the maritime court which has seized the goods on board for auction of the goods. “
Ships are removable, and they move around the world. In order to develop Chinese shipping industry, if Chinese maritime court does not accept maritime claims preservation in overseas arbitration, the parties must apply to other countries. If it is accepted, the maritime court can take compulsory measures to arrest the ship, then all parties must come to the Chinese maritime court to solve the problem, so as to expand the jurisdiction of the maritime court. However, such as sealing up accounts, equity and real estate, which are not within the scope of maritime claims preservation, the court should not agree.
(6) In judicial practice, the maritime court shall not allow the application for pre-litigation property preservation such as sealing up the account before the overseas arbitration.
In Ningbo Maritime Court (2010) YHFWBZ No. 7 (November 10, 2010), China Chartering Co., Ltd. (the “applicant for preservation”) holds that Qingshan Holding Group Co., Ltd. (the “respondent” in this case) as the performance guarantor of voyage charter party involved in the case shall bear the guarantee liability according to the letter of guarantee. China Chartering Co., Ltd. will apply for arbitration in Hong Kong in the near future. Considering the high arbitration cost in Hong Kong and in order to ensure the realization of the arbitration award in the future, China chartering Co., Ltd. applied to Ningbo Maritime Court to freeze the bank deposit of Qingshan Holding Group Co., Ltd. of 2 million yuan.
After examination, Ningbo Maritime Court held that: “the performance guarantee letter between China Chartering Co., Ltd. and Qingshan Holding Group Co., Ltd. stipulates that any dispute arising from or related to the guarantee shall be submitted to arbitration in Hongkong. China Chartering Co., Ltd. requires to preservation application of 2 million yuan of bank deposit of Qingshan Holding Group Co., Ltd., which is inconsistent with the law and application is rejected. According to the Civil Procedure Law of the People’s Republic of China, the application for pre litigation property preservation of China Chartering Co., Ltd. is not allowed. “
In order to ensure the legitimate interests of enterprises within the territory of China, safeguard Chinese judicial sovereignty, expand the jurisdiction of Chinese courts over foreign affairs, and promote the development of Chinese foreign-related arbitration institutions, when maritime claims preservation is involved in overseas arbitration, the maritime court may seal up the ship, cargo, etc. according to the application of the parties, but shall not seal other properties. As for the property preservation of non-maritime claims, before and during overseas arbitration, there is no legal basis for the court to take property preservation measures, so there shall be no preservation.
 Arbitration Act 1996, UK.
 Wu Shengshun: Application For Pre Litigation Property Preservation Of China Chartering Co., Ltd. http://www.nbhsfy.cn/info_bg.jsp?aid=20347, 2011-06-07.
 Qiao Xin, Duan Li: Dialectics And Reconstruction Of The Decision-Making Organization Of Arbitration Property Preservation http://www.chinalawedu.com/news/18500/189/2005/4/ma76680441524500240896_166633.htm, 2005-4-25