CONSTRUCTION ARBITRATION PODCAST SERIES EPISODE 5: MANAGING CONSTRUCTION ARBITRATION PROCEDURE

We are pleased to share the fifth and final episode in our Construction Arbitration podcast series.

In this episode Craig Tevendale (Partner, UK Head of International Arbitration) is joined by Liz Kantor (Senior Associate, International Arbitration) and Kemi Wood (Associate, Construction & Infrastructure Disputes) to talk about managing the procedure in construction arbitration. They discuss the innovative procedural approaches which have recently been proposed, focusing particularly on the first case management conference, tribunal fact-finding, controlling disclosure and streamlining fact witness and expert witness evidence and also take a look at the important innovations in arbitration technology and how these can help.

This episode can be found on SoundCloud, Spotify and iTunes.

To listen to the full series, which includes an introduction to construction arbitration, a look at the role of experts, the importance of documents and factual witnesses and considerations in case preparation, please click here.

We do hope that you have enjoyed listening to this series.

If you are interested in listening to our other construction and arbitration podcasts, or reading our articles on construction and arbitration, please take a look at our Construction Notes and Arbitration Notes and subscribe to receive notifications of our latest content.

For more information, please contact Craig Tevendale, Partner, Elizabeth Kantor, Senior Associate, Kemi Wood, Associate, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills Contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Elizabeth Kantor
Elizabeth Kantor
Senior Associate
+44 20 7466 2406

Kemi Wood
Kemi Wood
Associate
+44 20 7466 2161

Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

LITIGATION IN MAINLAND CHINA UNDER NEW EVIDENCE RULES: YOUR 50 QUESTIONS – PART 5

The Supreme Court of People’s Republic of China (SPC) formally promulgated the amended version of Several Provisions of the SPC on Evidence for Civil Litigation (New Evidence Rules) on 25 December 2019, which came into effect on 1 May 2020.

There are many highlights in the New Evidence Rules. To provide readers with some guidance from a practitioner’s perspective, we prepared 50 questions which are divided into five sections: (i) overall picture, (ii) routes for evidence production, (iii) witness testimony, (iv) judicial expert opinion and (v) electronic evidence and others. Section one was published on 1 May and can be found here. Section two was published on 8 May and can be found here. Section three was published on 15 May and can be found here. Section four was published on 22 May and can be found here. This blog post focuses on the fifth and last section, i.e., electronic evidence and others.

Section V Electronic Evidence and Others

  1. What is scope of electronic evidence?
  2. How may I present electronic evidence at a hearing?
  3. What are the factors the court may consider when assessing the veracity of electronic evidence?
  4. How may the court assess the veracity of electronic evidence?
  5. Are there any circumstances the court may deem electronic evidence inadmissible?
  6. Are there any circumstances where I am required to provide collaborative evidence in aid of a single item of evidence to prove a fact?
  7. Can I submit new evidence at the appeal stage?
  8. Will the court provide the reasoning for its assessment of evidence in a judgement?
  9. Will the New Evidence Rules only apply to litigations commenced after the effective date?
  10. If a rule in the New Evidence Rules conflicts with a previous rule in the 2015 Judicial Interpretation, which rule shall I follow?
  1. What is scope of electronic evidence?

The New Evidence Rules classifies electronic data into several categories to address the difficulty of applying the general definition of electronic data prescribed in the 2015 Judicial Interpretation to practice.

Electronic data includes (i) information posted on online platforms like webpages, blogs, microblogs; (ii) communication information via network services like text messages, emails, instant messages and communication groups; (iii) information about records like user registration, identity recognition, electronic transaction, communication records, login logs; (iv) files stored in electronic equipment, including documents, pictures, audio, video, digital certificates and computer programs; and (v) other information stored or processed or delivered in the form of electronic data which may prove a fact. Note that provision (v) is a miscellaneous provision intended to adapt to further developments in technology.

  1. How may I present electronic evidence at a hearing?

In general, a party is required to submit the originals of any electronic evidence which may include storage mediums. However, when testing electronic evidence at a hearing or in an evidence exchange meeting, the court may allow flexible ways to present electronic evidence.

A party may present electronic evidence by utilising various multimedia devices according to different types of evidence or in the form of documentary copy with relevant statements on the source of such evidence. For emails, the party needs to provide information about source of a particular email including its sender, receiver and email provider, relationship with the sender and receiver, sending and receiving time and contents. If the other party does not object to its source, the party may then present a copy of the email to test its admissibility. In practice, a party may have email evidence and similar evidence such as webpages notarised before a notary public and then present the notarised copy as evidence to avoid the other party’s objection to source. For text messages in mobile phones, the party adducing them as evidence needs to show the text messages with the mobile phones and further provide a statement on the contents, sender and receiver, sending and receiving times and storage location.

  1. What are the factors the court may consider when assessing the veracity of electronic evidence?

The core issue in practice when assessing electronic evidence is the assessment of its veracity. The New Evidence Rules included a new Article 93 and provided several factors for the court to consider when examining the veracity of electronic evidence.

These factors include (i) the integrity and reliability of the computer system for producing, storing and transmitting electronic data, including its hardware and software (Computer System); (ii) the operation status of the Computer System or any impact on the production, storage and transmission of electronic data if the Computer System was not in normal operation; (iii) the effectiveness of monitoring and verifying measures in the Computer System to correct or avoid errors; (iv) whether the electronic data is stored, transmitted and withdrawn as a whole; or whether the method of storing, transmitting and withdrawing electronic data is reliable; (v) whether the electronic data is produced and stored in normal course of business or transaction; (vi) the eligibility of the persons or entities who store transmit and withdraw the electronic data; and (vii) other factors which may affect the integrity and reliability of the electronic data.

  1. How may the court assess the veracity of electronic evidence?

The court may test factors in question 43 by (i) comparing copy of electronic data with the original available in the storage medium; (ii) checking the statement of the party who produced the electronic data; (iii) checking whether the process and procedure of collecting electronic data complies with prevailing laws; and (iv) checking if there is any possibility of amending, adding or forging contents, etc. Apparently, it is difficult for court to determine veracity merely by these means for technical reasons.

In practice, in addition to the abovementioned methods, the court may consider the electronic evidence as a whole with other admissible evidence and a party’s statement when testing the veracity of electronic data. If necessary, the court may also initiate an inspection or judicial appraisal to aid in verifying electronic data.

  1. Are there any circumstances the court may deem electronic evidence inadmissible?

Yes. The court may deem electronic evidence true and admissible unless sufficiently rebutted by evidence to the contrary, in circumstances where (i) a party submits or controls electronic data against its interests; (ii) the electronic data is provided or confirmed by a neutral third-party platform which records and stores such data like Alibaba, Amazon or JD; (iii) the electronic data is produced in daily and normal process of business or transaction like electronic bank statement and electronic invoice; (iv) the electronic data is kept in an archive management system like the incorporation information of a company at National Enterprise Credit Information Publicity System; or (v) the electronic data is stored, transmitted and withdrawn via agreed methods by parties.

  1. Are there any circumstances where I am required to provide collaborative evidence in aid of a single item of evidence to prove a fact?

Yes. Certain evidence requires collaborative evidence to strengthen its evidential value when proving a fact and the court may not ascertain a fact by merely relying on that evidence alone. The New Evidence Rules reiterates most of old rules in this aspect.

The scope of this type of evidence includes (i) parties’ statements; (ii) witness statements by persons with no or limited capacity, which are not proportionate to their age, intelligence or mental health; (iii) witness statements by witnesses, who have conflicting interests with a party or its attorney; (iv) doubtful audio-visual evidence and electronic evidence; or (v) the copy of a particular piece of evidence could not be verified by an original.

Note there is no requirement on the volumes or types of collaborative evidence. However, a party bearing the burden of proof should satisfy the evidential standard i.e., proving a fact on a balance of probabilities.

  1. Can I submit new evidence at the appeal stage?

Yes. A party may provide “new evidence” at the second instance or appeal stage. Under the old Evidence Rules, “new evidence” in the second instance means (i) evidence discovered after the close of trial in the first instance, or (ii) evidence which the second instance court holds that the first instance court should have investigated and collected upon a party’s application within the stipulated time period.

Note that the New Evidence Rules has deleted the definition of “new evidence”. The SPC explained that this intentional deletion means that there is no limit to the scope of “new evidence” as long as such evidence has not been submitted any the previous procedures. Though there are severe legal penalties for the late submission of evidence, the court generally seems tolerant in accepting the late submission of evidence as long as such evidence is relevant to the basic facts of the case. We consider that without any limitation on the scope of “new evidence”, it is possible the whole litigation process may be delayed for the lack of strict adherence to the time limit for evidence submission.

  1. Will the court provide the reasoning for its assessment of evidence in a judgment?

Yes. The court is required to state the reasons for its ruling on admissibility of evidence, except for evidence on which both parties do not have any disputes.

  1. Will the New Evidence Rules only apply to litigations commenced after the effective date?

The New Evidence Rules took effect on 1 May 2020. From the effective date, all ongoing litigations and new cases shall follow and comply with the New Evidence Rules.

  1. If the New Evidence Rules conflict with a previous rule in the 2015 Judicial Interpretation, which rule shall I follow?

As mentioned in our introductory paragraph, the New Evidence Rules together with Chapter VI of the CPL and Chapter IV of the 2015 Judicial Interpretation have now covered most evidential rules which constitute a major part of litigation practice. Both the New Evidence Rules and the 2015 Judicial Interpretation are subject to and may be limited by the provisions in the CPL. Between these two, if there are conflicting rules on any matter, the New Evidence Rules shall prevail over the 2015 Judicial Interpretation. However, there are some rules in the 2015 Judicial Interpretation that the New Evidence Rules do not include, e.g. allocation of evidential burden. In this regard, the 2015 Judicial Interpretation shall apply.

If you have any questions or would like to discuss any aspect of this post or the series of posts on the New Evidence Rules published since 1 May, please contact:

Cathy Liu
Cathy Liu
Partner, Kewei, Shanghai
+86 21 2322 2158
Helen Tang
Helen Tang
Partner, HSF Shanghai
+86 21 2322 2160
Jean Zhu
Jean Zhu
Counsel, Kewei, Beijing
+86 10 6535 5041
Stella Hu
Stella Hu
Senior Consultant, HSF Beijing
86 10 6535 5017

LITIGATION IN MAINLAND CHINA UNDER NEW EVIDENCE RULES – PART 4

The Supreme Court of People’s Republic of China (SPC) formally promulgated the amended version of Several Provisions of the SPC on Evidence for Civil Litigation (New Evidence Rules) on 25 December 2019, which came into effect on 1 May 2020.

There are many highlights in the New Evidence Rules. To provide readers with some guidance from a practitioner’s perspective, we have prepared 50 questions which are divided into five sections: overall picture, routes for evidence production, witness testimony, judicial expert opinion and electronic evidence and others. Over the course of the next few weeks, we will be publishing a series of blog posts targeting one section at a time. Section one was published on 1 May and can be found here. Section two was published on 8 May and can be found here. Section three was published on 15 May and can be found here. This blog post focuses on the fourth section, i.e., judicial expert opinion.

Section 4: Judicial Expert Opinion

  1. Can I have my own expert?
  2. Is there any difference between my own expert and a judicial expert?
  3. How may a judicial appraisal be initiated?
  4. How will a judicial expert be appointed?
  5. Do I need to pay to an appointed judicial expert?
  6. Do I need to enter into a contract with an appointed judicial expert?
  7. Are there any qualification requirements on judicial experts?
  8. What is the process of a judicial appraisal?
  9. If I disagree with the conclusions made a judicial expert, what shall I do?
  10. Are there any legal consequences if a judicial expert refused to attend hearing or withdraws its expert opinion?

 

  1. Can I have my own expert?

Yes, a party may appoint an expert prior to and during litigation. Particularly, a party may appoint an expert adviser to assist him in cross-examining a judicial expert during a hearing.

  1. Is there any difference between my own expert and a judicial expert?

A party’s expert is different from a judicial expert. A judicial expert is appointed only by the court to carry out a judicial appraisal during litigation. As a result, judicial expert opinion as a prescribed type of evidence under the CPL is different from the opinion by an expert appointed by any of the parties involved.

  1. How may a judicial appraisal be initiated?

The use of judicial expert opinion is strictly controlled and may be initiated only by the court. There are two ways to trigger this initiation. One is where a party makes an application for judicial appraisal within the time period as directed by the court. The other is where the court may initiate it ex officio.

  1. How will a judicial expert be appointed?

If the court approves the party’s application, the court may request for the parties to convene to select a judicial expert and in the event the parties are unable to reach an agreement on the selection, the court may appoint one. If the court directs judicial appraisal ex officio, the court may designate a judicial expert after consulting the parties’ suggestions.

The court is required to establish a panel of experts which lists experts in various fields. The regular practice is to select from the panel by randomly drawing a name in the related field.

  1. Do I need to pay to an appointed judicial expert?

If a party applies for judicial appraisal, that party shall pay the expert fees in advance. There are no clear rules on payment if the court initiates judicial appraisal ex officio. In practice, either the court may ask both sides to pay equally or the court may pay. The losing party may be ruled to bear all or most of the expert fees in the final judgment.

  1. Do I need to enter into a contract with an appointed judicial expert?

Upon appointment of a judicial expert, the court shall issue an entrusting letter to the judicial expert outlining the issues to be covered or specific questions to be addressed, purpose of the appraisal and time limit of submission. If the judicial expert accepts the entrustment, an entrusting contract would be concluded between the judicial expert and the court.

  1. Are there any qualification requirements for the judicial experts?

Judicial experts listed are to be experienced and have the necessary qualifications in their respective fields, namely practice certificates from the relevant authorities or industry associations. There are various categories of judicial experts like forensic clinical expert, forensic pathology expert, trace toxicant expert, trace documentary evidence expert, quantum expert, construction engineers, intellectual property expert and traffic accident identification expert, etc.

  1. What is the process of a judicial appraisal?

The judicial expert shall first sign an undertaking letter declaring that the judicial expert shall act in an objective, impartial and honest manner, attend the hearing if called and assume legal liability for false appraisal.

The court shall call the parties to test the admissibility of the materials to be submitted for appraisal. Without any testing or assessment, no material shall be used as basis for an appraisal. Additionally, the judicial expert may collect evidence, inspect physical evidence and site(s), and question parties and witnesses, if necessary, with the court’s permission.

The judicial expert opinion shall be submitted within the time limit as set by the court. It shall include the name of the entrusting court, scope of service, the entrusting letter, materials relied on, principles and methods adopted, description of the process, appraisal opinion and undertaking.

  1. If I disagree with the conclusions made a judicial expert, what shall I do?

A party may raise objections to the expert opinion in writing within the time limit given by the court. The court may forward the objections to the judicial expert for explanation and supplemental opinion. Should the party still have opposing comments after receiving the judicial expert’s written reply, the court shall require the judicial expert to attend the hearing and notify the opposing party to pay in advance the relevant costs for such attendance. Such costs will be borne by the losing party in the judgment.

The court may also direct the judicial expert to attend the hearing if it finds the expert opinion not sufficiently explicit or has any flaws. In this case, the judicial expert shall pay its own costs so incurred.

During the hearing, the parties may cross-examine the judicial expert with the permission of the court. The court may question both the judicial expert and the parties’ expert advisers from time to time. If the court deems it necessary, the parties’ expert advisers may be required to cross-examine each other on certain issues.

  1. Are there any legal consequences if a judicial expert refused to attend hearing or withdraws its expert opinion?

The New Evidence Rules particularly added some important guiding rules on the behavior of judicial experts. If a judicial expert refuses to testify orally, the judicial expert opinion shall not be treated as basis to ascertain facts in issue and the court may advise related authorities or industry associations to impose administrative penalties on the judicial expert.

In addition, once the judicial expert opinion is adopted by the court, the judicial expert is not allowed to withdraw said opinion without justified reasons. Otherwise the expert shall refund any payments received, face punishment by the court and reasonably compensate the parties’ costs so incurred.

 

Stay tuned for next week’s blog post which will focus on the fifth (and last) section, electronic evidence and others.

If you have any questions or would like to discuss any aspect of this post, please contact:

Cathy Liu
Cathy Liu
Partner, Kewei, Shanghai
+86 21 2322 2158
Helen Tang
Helen Tang
Partner, HSF Shanghai
+86 21 2322 2160
Jean Zhu
Jean Zhu
Counsel, Kewei, Beijing
+86 10 6535 5041
Stella Hu
Stella Hu
Senior Consultant, HSF Beijing
86 10 6535 5017

 

LITIGATION IN MAINLAND CHINA UNDER NEW EVIDENCE RULES – PART 3

The Supreme Court of People’s Republic of China (SPC) formally promulgated the amended version of Several Provisions of the SPC on Evidence for Civil Litigation (New Evidence Rules) on 25 December 2019, which came into effect on 1 May 2020.

There are many highlights in the New Evidence Rules. To provide readers with some guidance from a practitioner’s perspective, we have prepared 50 questions which are divided into five sections: overall picture, routes for evidence production, witness testimony, judicial expert opinion and electronic evidence and others. Over the course of the next few weeks, we will be publishing a series of blog posts targeting one section at a time. Section one was published on 1 May and can be found here. Section two was published on 8 May and can be found here. This blog post focuses on the third section, i.e., witness testimony.

Section 3: Witness Testimony

  1. Can I be a witness in my litigation proceeding?
  2. What will happen if I or my attorney admit any fact against my interests?
  3. If I make inconsistent or false statements, what are legal consequences?
  4. How will the court determine the qualification and competence of a witness?
  5. Can I apply to court for calling a witness?
  6. Must a witness attend the hearing to give oral testimony?
  7. Can attorneys cross-examine a witness?
  8. What is the process of a witness giving evidence in a hearing?
  9. What are the legal consequences if a witness gives false testimony?
  10. Are there any protection measures for a witness?

 

  1. Can I be a witness in my litigation proceeding?

No. The CPL draws a distinction between “parties’ statement” and “witness testimony” and lists these two as different types of evidence. In this respect, the term “witness” does not include parties in the proceeding. This is in contrast with the position under the laws of England and Wales, where in civil proceedings, any person, including the parties to the proceedings, may give oral evidence on facts under oath if competent.

  1. What will happen if I or my attorney admit any fact against my interests?

“Admission” in nature is the disposal of a party’s right in litigation. An admission would relieve the opposing party of its burden to prove the same if a party expressly admits to a fact unfavourable to its position. This is also known as “self-admission”.

The New Evidence Rules provides further rules on “deemed self-admission” and also “attorney’s admission”. If one party neither admits nor denies unfavourable facts advanced by the other party and further maintains the same attitude when is put on enquiry by the judge in the course of litigation, that party would be deemed as to have admitted to those facts.

As for an attorney’s admission, unless the power of attorney expressly excludes the attorney’s power to admit any facts, an attorney’s admission shall be deemed as the party’s self-admission. However, in a scenario where the attorney makes an admission before the party it represents and the party expressly denies that attorney’s admission, the attorney’s admission shall not be deemed as the party’s self-admission. As such, parties may need to consider carefully about the scope of power of attorney when granting such power.

  1. If I make inconsistent or false statements, what are legal consequences?

The principle of good faith is enshrined as one of key principles in the CPL, which includes the essential requirement of “estoppel”. The New Evidence Rules adds four new articles (Articles 63-66) detailing the operation of the principle of “estoppel”. The parties shall provide full and true statements and if the parties provide inconsistent statements, the court shall urge the parties to provide reasons for the inconsistency. The parties also have the obligation to respond to the court’s enquiry and, prior to such response, shall sign and read out an undertaking of true statement.

The court may exercise its power in accordance to the CPL to punish the parties with either a fine or detention should the parties intentionally give false statements to obstruct the hearing of the case. In particular, if the party refuses to comply with these obligations when responding to the court’s enquiry, the court may rule against that party’s interests when ascertaining the fact to be proved and so enquired, if no other evidence may prove that fact.

  1. How will the court determine the qualification and competence of a witness?

Generally, a person who cannot accurately express his meaning or intention cannot be a competent witness. In practice, unless proven otherwise, a person is deemed as a competent witness.

The New Evidence Rules clarifies special conditions on the competence for persons with no or limited civil capacity. Persons with no or limited civil capacity include minors under the age of 18 (excluding those attaining the age of 16 and are capable of self-support by work) and adults with no or limited capacity for civil act. Such persons may state facts which are proportionate to their age, intelligence and mental health. Do note that these special conditions can only be tested after the general test of competency is satisfied.

  1. Can I apply to court for calling a witness?

A party may apply to call a witness before the expiry of the time limit for evidence production in general.

  1. Must a witness attend the hearing to give oral testimony?

The witness must attend the hearing upon receiving the court’s summons. If a witness gives an oral statement with the presence of both parties either at the pre-hearing stage or when the court makes enquiry, this will be deemed as the witness’s oral testimony in the hearing.

However, there are certain exceptions where a witness may testify in writing, via video link or by an audio-visual recording with justified reasons.

  1. Can attorneys cross-examine a witness?

Yes, but they should first obtain the court’s permission. After the witness has given his statement, the court may enquire about any factual points if unclear or in doubt. The parties can then cross-examine the witness with the court’s permission. If the court considers it necessary, the court may direct witnesses to cross-examine one another. It is important to note that a witness may not be allowed to give oral testimony and be cross-examined in the presence of another witness. This further requires that a witness may not watch live broadcast of hearing before giving testimony.

  1. What is the process of a witness giving evidence in a hearing?

The typical process of giving testimony is that the witness first signs and reads out an undertaking for true statement. Note that this is a separate procedural stage conducted before oral testimony is given. This requirement may be waived for witnesses who are persons with no or limited civil capacity. Following the undertaking, the witness will then objectively give a statement of facts of which he has first-hand knowledge. The witness may not use speculative, deductive or commentary wording and may not be allowed to merely read out a prepared written statement.

  1. What are the legal consequences if a witness gives false testimony?

A witness has the obligation give true statements in the hearing.

If a witness is found to have deliberately given false testimony, the court may penalise such witness depending on the extent of the violation either by fine or detention or both. Do note that perjury is a crime in the courts of China which is punishable by either a fine, a jail term of up to 7 years or both.

  1. Are there any protection measures for a witness?

The court may impose a fine or detain any attendee in the proceedings or any other person who prevents a witness from giving testimony by violence, threat, bribe or any other method. If such interference is severe, the interfering person may be found to be criminally liable.

The New Evidence Rules added a new Article 73 to emphasise that the witness shall give his statement consecutively, and any party, attorney or auditors in the public gallery shall not interrupt the witness. The court shall stop any interruption and may exercise its power to reprimand or order any such person to leave the courtroom or impose a fine or detention on that person. Moreover, at the cross-examination stage, if any enquiry put to the witness is unrelated to facts to be proved or is made in a threatening tone, insult or with improper leading, the court shall stop the cross-examination and may impose penalties corresponding with the specific violation.

Stay tuned for next week’s blog post which will focus on the fourth section, judicial expert opinion.

If you have any questions or would like to discuss any aspect of this post, please contact:

Cathy Liu
Cathy Liu
Partner, Kewei, Shanghai
+86 21 2322 2158
Helen Tang
Helen Tang
Partner, HSF Shanghai
+86 21 2322 2160
Jean Zhu
Jean Zhu
Counsel, Kewei, Beijing
+86 10 6535 5041
Stella Hu
Stella Hu
Senior Consultant, HSF Beijing
86 10 6535 5017

LITIGATION IN MAINLAND CHINA UNDER NEW EVIDENCE RULES – PART 2

The Supreme Court of People’s Republic of China (SPC) formally promulgated the amended version of Several Provisions of the SPC on Evidence for Civil Litigation (New Evidence Rules) on 25 December 2019, which came into effect on 1 May 2020.

There are many highlights in the New Evidence Rules. To provide readers with some guidance from a practitioner’s perspective, we have prepared 50 questions which are divided into five sections: overall picture, routes for evidence production, witness testimony, judicial expert opinion and electronic evidence and others. Over the course of the next few weeks, we will be publishing a series of blog posts targeting one section at a time. Section one was published on 1 May and can be found here. This blog post focuses on the second section, i.e., routes for evidence production.

Section 2: Routes for Evidence Production

  1. Can I apply for the court to investigate and collect evidence for me?
  2. Can the court investigate and collect evidence ex officio?
  3. What are the procedures for the court to investigate and collect evidence?
  4. Can I request my counterparty or a third party to disclose evidence under his/her control?
  5. What are the conditions to apply for an Order for Disclosure?
  6. What are the legal consequences if my counterparty refuses to obey an Order for Disclosure?
  7. Can I apply for evidence preservation to court?
  8. What are the requirements for application for evidence preservation?
  9. What measures may the court take to preserve evidence?
  10. What are the legal consequences if I make a wrongful application for evidence preservation?
  1. Can I apply for the court to investigate and collect evidence for me?

Yes, if in circumstances where the parties and their attorneys are unable to produce evidence for objective reasons. These include circumstances where (i) the evidence is kept by relevant State authorities, and the parties and their attorneys have no right to inspect or have access to it; (ii) the evidence involves State secrets, business secrets or personal privacy; or (iii) any other evidence for which the parties and their attorneys could not produce for objective reasons.

Note that such an application shall be filed during the litigation proceeding and not prior to commencement of litigation.

  1. Can the court investigate and collect evidence ex officio?

If the court deems it necessary, the court may investigate and collect evidence ex officio. However, the court’s discretionary power is limited to prescribed circumstances, which include where (i) the evidence may harm State interests and/or public interest; (ii) evidence relating to identity relationship; (iii) evidence in disputes involving environmental pollution, infringement on vast consumers’ rights and damage to ecological environment and resource protection; (iv) there is a possibility that the parties maliciously conspire to harm the legitimate interests of others; or (v) evidence related to procedural matters like the joining of a third party, suspension, termination or abstention.

  1. What are the procedures for the court to investigate and collect evidence?

The court may direct at least two staff members (judge or court clerk) to jointly carry out the investigation and collection. The court shall make an investigation record detailing (i) the sources of the evidence collected, (ii) the process of investigation, and (iii) the investigators involved. The person and/or entity under investigation and the recorder shall then sign on the investigation record.

In respect of investigating and collecting evidence for conducting judicial appraisal, the New Evidence Rules specifically requires the court to further comply with technical requirements to ensure that the evidence would not be contaminated.

  1. Can I request my counterparty or a third party to disclose evidence under his/her control?

Yes. The regime of Order for Disclosing Evidence under Control of Counter Party (Order for Disclosure) is for the first time detailed with operational rules in the New Evidence Rules.

Though the Order for Disclosure is established for documentary evidence, it is worthy to note that Article 99 of the New Evidence Rules provides that these shall also apply to audio-visual materials and electronic data.

However, the Order for Disclosure only applies to parties in the proceeding and not any third party. That is because the New Evidence Rules are subject to and may be limited by the provisions in the CPL.

  1. What are the conditions to apply for an Order for Disclosure?

The applicant shall describe the name or contents of evidence, elaborate the importance of the facts to be proved, the basis of its belief of the Counter Party’s direct or indirect control and also reasons for requiring the disclosure of such evidence. The applicant shall submit a written application before the expiry of the time limit for evidence production as set by the court.

Note that the scope of evidence which an evidence controller shall disclose is limited. Such evidence includes (i) evidence which has been cited by the evidence controller; (ii) evidence prepared for the interests of the other party (applicant); (iii) evidence to which the other party (applicant) has a legal right to obtain; (iv) account books and original vouchers for book-keeping; or (v) other circumstances where the court finds such evidence shall be disclosed.

It is particularly noted that for evidence within the prescribed scope above which involve State secrets, commercial secrets, personal privacy of parties, or under circumstances where the law stipulates, the evidence controller may also be required to disclose the same but admissibility test shall not be conducted openly.

  1. What are the legal consequences if my counterparty refuses to obey an Order for Disclosure?

If the evidence controller refuses to disclose evidence as ordered without justified reasons, the court may deem the fact to be proved as true. If the evidence controller for the purpose of obstructing the applicant from using or relying on evidence, destroys that evidence or causes that evidence to become unusable, the court may penalise the evidence controller with either a fine or detention or both, and most importantly the court may deem the fact to be proved as true. This is to deal with the difficulty in practice where a party would rather be penalised than give out key evidence.

  1. Can I apply for evidence preservation to court?

Yes. There are two different types of evidence preservation at law – evidence preservation by court and by a notary public. A notary public’s function is to witness the process of a party’s own attempt to collect or preserve evidence to increase the credibility of the evidence collected. A court may preserve evidence which is in the possession of the applicant’s counterparty or third parties.

  1. What are the requirements for application for evidence preservation?

The applicant may apply for evidence preservation prior to the commencement of litigation or during litigation. The CPL provides grounds for such application where evidence may be destroyed or become difficult to obtain. For evidence preservation at the pre-action stage, urgency should be further proved.

Do note that during litigation the party shall file the application before the expiry of the time limit for evidence production. The court may request for security from the applicant should preservation cause any loss to the evidence holder.

  1. What measures may the court take to preserve evidence?

The court is authorised to preserve evidence through a range of measures. It can seal, seize, photograph, audio or video record, photocopy or inspect the object, or take witness statements, per the application and other specific circumstances as may be considered as necessary by the court. If there are several measures which could fulfil the purpose of evidence preservation, the court shall select a measure which has the least impact on the interests of the evidence holder.

  1. What are the legal consequences if I make a wrongful application for evidence preservation?

The New Evidence Rules added a new Article 28 to clarify its position on compensation for wrongful preservation. If an applicant is deliberately or grossly negligent in making the application for which the evidence holder suffers property damage, the applicant shall compensate the evidence holder.

Stay tuned for next week’s blog post which will focus on the third section, witness testimony.

If you have any questions or would like to discuss any aspect of this post, please contact

Cathy Liu
Cathy Liu
Partner, Kewei, Shanghai
+86 21 2322 2158
Helen Tang
Helen Tang
Partner, HSF Shanghai
+86 21 2322 2160
Jean Zhu
Jean Zhu
Counsel, Kewei, Beijing
+86 10 6535 5041
Stella Hu
Stella Hu
Senior Consultant, HSF Beijing
86 10 6535 5017

Construction Arbitration Podcast Series Episode 4: Preparing your case

We are pleased to share the fourth episode in our Construction Arbitration podcast series, in which we look at the importance of case preparation, both at the outset of a case and beyond.

In this episode James Doe (Partner, UK Head of Construction & Infrastructure Disputes), Maguelonne de Brugiere (Senior Associate, International Arbitration) and Olivia Liang (Associate, Construction & Infrastructure Disputes) discuss the initial preparation of the case, on-going strategy considerations throughout the life of the arbitration and preparation for the hearing. They cover a wide range of key issues, including evaluating claims and substantiating them, the context of voluminous documentary evidence, multi-party and multi-contract issues, enforcement considerations and advocacy.

You can listen to this episode here.

To listen to the previous episodes covering an introduction to construction arbitration, the role of experts and documents and factual witnesses, please visit the Construction Arbitration podcast series page here.

In the next episode, which is the last in this series, we will discuss the management of construction arbitration procedure.

If you are interested in listening to our other construction and arbitration podcasts, or reading our articles on construction and arbitration, please take a look at our Construction Notes and Arbitration Notes and subscribe to receive notifications of our latest content.

For more information, please contact James Doe, Partner, Maguelonne de Brugiere, Senior Associate, Olivia Liang, Associate, or your usual Herbert Smith Freehills contact.

James Doe
James Doe
Partner
+44 20 7466 2583

Maguelonne de Brugiere
Maguelonne de Brugiere
Senior Associate
+44 20 7466 7488

Olivia Liang
Olivia Liang
Associate
+44 20 7466 7520

 

SECTION 1782 UPDATE: U.S. FOURTH CIRCUIT COURT OF APPEALS HOLDS THAT U.S. DISCOVERY CAN BE USED IN AID OF INTERNATIONAL COMMERCIAL ARBITRATIONS AND SUPREME COURT MAY NOW RESOLVE THE CIRCUIT SPLIT

The U.S. Supreme Court may soon have occasion to decide whether parties involved in international arbitrations outside of the U.S. can rely on 28 USC § 1782, “Assistance to foreign and international tribunals and to litigants before such tribunals,” to seek discovery from entities in the United States.

In October 2019, we noted in this post that the U.S. Courts of Appeals for the Fourth and Seventh Circuits were poised to decide the issue.  In March 2020, the Fourth Circuit Court of Appeals decided in the affirmative—consistent with the decision of the Sixth Circuit in Abdul Latif Jameel Transportation Company v. FedEx Corporation—that parties to an international commercial arbitration (in this case seated in the United Kingdom and constituted under the CIArb rules), are authorized to seek discovery orders under Section 1782.  Boeing and Rolls-Royce, which are resisting the application of Section 1782, are expected to file a petition for certiorari with the U.S. Supreme Court by June this year to challenge the decision of the Fourth Circuit’s Court of Appeals and seek to have the Supreme Court resolve the Circuit split over the application of Section 1782 in the context of international commercial arbitration.

Facts

These cases arose in the context of international arbitration over a 2016 aircraft that caught fire in South Carolina. Rolls-Royce manufactured an engine and installed it on the Boeing 787-9 Dreamliner aircraft. The petitioner, Servotronics, was the manufacturer of a valve used in the engine. Rolls-Royce settled with Boeing and brought an arbitration against Servotronics for an indemnity.

Servotronics petitioned the U.S. district court for the service of subpoenas on three South Carolina residents, all current or former Boeing employees, to give testimony. Two of the employees participated in troubleshooting the aircraft engine that caught fire, and the third employee was the chairperson of the Boeing Incident Review Board that investigated the fire.

In the district court proceedings, In re Servotronics, Inc., No. 2:18-MC-00364-DCN, 2018 WL 5810109 (D.S.C. Nov. 6, 2018), the U.S. District Court for the District of South Carolina held that Section 1782 did not apply to international commercial arbitration as the arbitral tribunal was not a “foreign tribunal” for purposes of § 1782. Servotronics appealed to the Fourth Circuit Court of Appeals.

Key arguments on appeal

Before the Fourth Circuit Court of Appeals, Servotronics argued, citing the U.S. Supreme Court’s decision of Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004): first, that an arbitral tribunal is a “foreign tribunal” within the scope of the definition in Section 1782; and second, that Section 1782(a) does not require that a tribunal be public, state-sponsored, or governmental.

Rolls Royce and Boeing argued that granting such a Section 1782(a) order would broaden the procedural scope of arbitration and make available in foreign arbitrations the full discovery process available under the Federal Rules of Civil Procedure. This would inject extraordinary delay and costs into arbitrations, thereby defeating their purpose and undermining the parties’ bargained-for method of dispute resolution.

The decision

On 30 March 2020, the Fourth Circuit Court of Appeals decided that the arbitral tribunal seated in the U.K. and operating under the CIArb rules, met the Section 1782 definition of a “foreign tribunal” and fell within the definition of “entities acting with the authority of the State”.

Providing the foundation for its decision, the Court affirmed Section 1782’s “long-term — over 150-year — policy of Congress to facilitate cooperation with foreign countries”, and this policy’s intent “to contribute to the orderly resolution of disputes both in the United States and abroad, elevating the importance of the rule of law and encouraging a spirit of comity between foreign countries and the United States.

First, referring to the changes to Section 1782 adopted in 1964, in which the words “in any judicial proceeding pending in any court in a foreign country” were replaced with the phrase “in a proceeding in a foreign or international tribunal”, the Court found that Section 1782 covered “all foreign and international tribunals”.  In support of this finding, the Court also described the enactment of the Federal Arbitration Act (“FAA”) as an endorsement of arbitration as a favoured alternative to litigation.

Second, noting the similarities of the English  Arbitration Act of 1996 to the FAA, the Court of Appeals concluded that under English law, arbitration was clearly a product of “government-conferred authority”. The Court observed that the English Act provides even more governmental regulation and oversight than does the FAA. Citing Sections 23(1), 9, 12, 15, 16, 24, 37, 38, 42, 43, 45, 66, 67-69 of the English Act, the Court concluded that, “even to a greater degree than arbitrations in the United States,” English-seated arbitrations are “sanctioned, regulated, and overseen by the government and its courts”.

In response to concerns that applying Section 1782 to international commercial arbitration would broaden access to information, inflate costs and undermine the benefits of arbitral efficiency, the Court was satisfied that this would not be the case. Striking a balance, the Court noted that the authority of U.S. district courts is relatively limited—Section 1782 does not authorize full discovery, a term absent from Section 1782. The statute only authorizes a U.S. district court to function “effectively as a surrogate” for a foreign tribunal to take statements and receive testimony and documents or other materials intended “for use” in the proceeding before the tribunal.  Viewed in this light, therefore, the District Court would function no differently than the tribunal itself.

Finally, the Court noted that the Supreme Court in Intel had rejected the notion that a Section 1782(a) applicant would have to show that United States law would allow discovery in domestic litigation analogous to the foreign proceeding. Indeed, Section 1782 could possibly apply in proceedings with no comparator  in U.S. domestic litigation.  Thus, any geographical expansion in the scope of a foreign tribunal’s authority under Section 1782 was the result of a purposeful legislative decision to authorize U.S. district courts to provide assistance to foreign tribunals as a matter of public policy.

Conclusion

As we mentioned above, the Seventh Circuit is currently considering a similar appeal arising from the same aircraft fire. In a separate matter, as we mentioned in our previous post, the Second Circuit has before it a similar appeal regarding the definition of  “entities acting with the authority of the State”. It remains to be seen whether the U.S. Supreme Court will issue a definitive ruling on the interpretation of Section 1782 in the context of international commercial arbitration, resolving the split among the Circuits.

For more information, please contact Christian Leathley, Partner, Amal Bouchenaki, Partner, Liang-Ying Tan, Associate, Christine Sim, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812

Amal Bouchenaki
Amal Bouchenaki
Partner
+1 917 542 7859

Liang-Ying Tan
Liang-Ying Tan
Associate
+1 917 542 7831

Christine Sim
Christine Sim
Associate
+1 917 542 7853

 

LITIGATION IN MAINLAND CHINA UNDER NEW EVIDENCE RULES: YOUR 50 QUESTIONS

The Supreme Court of People’s Republic of China (SPC) formally promulgated the amended version of Several Provisions of the SPC on Evidence for Civil Litigation (New Evidence Rules) on 25 December 2019, which came into effect on 1 May 2020. The New Evidence Rules together with Chapter VI of the Civil Procedure Law of the People’s Republic of China (amended in 2017) (CPL) and Chapter IV of the Interpretations of the SPC on Application of the CPL (issued in 2015) (2015 Judicial Interpretation) have now covered most evidential rules which constitute a major part of litigation practice.

The New Evidence Rules with 100 articles maintain the structure of the old Evidence Rules covering six aspects including “parties’ statements”, “court’s investigation, collection and preservation of evidence”, “time limit for producing evidence and evidence exchange”, “examination and cross-examination”, “evidence verification” and “miscellaneous”. However, the New Evidence Rules also reflects the development of litigation practice in past years and addresses the resolution of disputes arising out of the use of modern technology.

There are many highlights in the New Evidence Rules. To provide readers with some guidance from a practitioner’s perspective, we have prepared 50 questions which are divided into five sections: overall picture, routes for evidence production, witness testimony, judicial expert opinion and electronic evidence and others.

Over the course of the next few weeks, we will be publishing a series of blog posts targeting one section at a time. This blog post focuses on the first section, i.e., the overall picture.

Section I Overall Picture

  1. What forms of evidence would a Chinese court accept?
  2. Are there any formality requirements for evidence produced outside Mainland China?
  3. What are the routes available for me to produce evidence?
  4. How is the burden of proof allocated between parties?
  5. What standards am I to satisfy when bearing the burden of proof?
  6. Are there any facts that I am relieved of proving?
  7. When shall I submit evidence to court?
  8. When will parties present evidence and determine its admissibility before court?
  9. What is the process of assessing evidence?
  10. How does a Chinese court give weight to each evidence?

 

  1. What forms of evidence would a Chinese court accept?

The CPL sets out eight types of evidence, namely parties’ statements, documentary evidence, physical evidence, audio-visual materials, electronic data/evidence, witness testimony, judicial expert opinion and inspection record.

  1. Are there any formality requirements for evidence produced outside Mainland China?

The New Evidence Rules has relaxed formality requirements that were mandatory in the past. For evidence produced abroad, if it is documentary evidence by officials or authorities, such evidence shall be notarised by a local notary public or shall comply with the certification requirements in bilateral treaties if applicable. However, if it is evidence related to identity, such evidence shall be notarised by a local notary public and legalised by the Chinese embassy in that country, or shall comply with the certification requirements in bilateral treaties if applicable. If it is evidence to prove contractual relationship or other facts between parties, there are no longer strict formality requirements and the veracity of such evidence could be examined the same way as evidence produced within mainland China through examination and cross-examination.

The position on formality requirements for evidence produced in Hong Kong, Macau and Taiwan remains the same whereby such evidence is to be attested before an attestation officer (Hong Kong and Macau) or notarised before a local notary public (Taiwan).

  1. What are the routes available for me to produce evidence?

In general, a party may collect and produce evidence on its own. The court may provide support upon application on certain conditions, which include ordering the other party to disclose evidence under that party’s control; exercising its power to investigate and collect evidence, or ordering for evidence preservation. Moreover, the court may also investigate and collect evidence ex officio in prescribed circumstances.

  1. How is the burden of proof allocated between parties?

A party shall submit evidence to prove facts that it relies on to establish claims and rebuts the counterparty’s counterclaims or defence. By default, a party who contends the existence of a legal relationship shall have the onus to prove. If the other party contends any variation, termination or hinderance, it shall prove basic facts of that contention. However, some special laws may reverse the default allocation of burden of proof. For example, in a tortious case for environmental pollution, the polluter shall assume the burden to prove that it should not be liable for the victim’s damages, its liability could be mitigated, or there is no causal link between its conduct and the victim’s damages.

The New Evidence Rules deleted the old rules about granting a court with the power to allocate the burden of proof between parties based on principles of fairness and good faith in consideration of parties’ capability to produce evidence. This provides certainty in the allocation of burden of proof.

  1. What standards am I to satisfy when bearing the burden of proof?

The general rule is that the party bearing the burden of proof has to prove the existence of facts on a balance of probabilities (more likely than not). The New Evidence Rules added new rules to enhance and lower this general standard in exceptional scenarios. For facts regarding fraud, coercion and malicious collusion or oral wills and gifts, the party has to prove beyond a reasonable doubt that such facts exist. For facts supporting procedural applications like preservations (interim measures) and recusal, the court may deem such facts exist if the party proves them as more probably than not.

  1. Are there any facts that I am relieved of proving?

Natural or universal rules stand without proof.

Parties do not need to prove facts that are widely known to all, induced by law, induced by a known fact based on daily-life experience and ascertained in a binding arbitral award, unless sufficiently rebutted by evidence to the contrary. Further, parties are relieved from proving basic facts ascertained in a binding court judgment and notarised by a notary public, unless the same has been sufficiently overturned by contrary evidence. It is interesting to note that the old rules give facts ascertained in a binding arbitral award the same probative value as ascertained in a binding judgment yet the New Evidence Rules lowers the value of facts ascertained in a binding arbitral award.

  1. When shall I submit evidence to court?

The claimant and the defendant shall submit evidential materials to meet the necessary conditions for filing either a claim or counterclaim. At the pre-hearing stage, the court may set a time period for producing evidence, which shall not be less than 15 days for the first instance and 10 days for the second instance. Alternatively, the parties themselves may agree on a time period to produce evidence which may be subject to the court’s approval. Parties are allowed to apply for a time extension for evidence production if there exists objective obstacle. However, whether to grant such extension is at the court’s discretion. The court may also give further time to submit rebuttal evidence if it deems necessary.

Note if a party submits evidence beyond the time limit, the court may require that party to provide reasons for the delay. If that party fails to do so or the court considers those reasons unjustified, the court may refuse to accept evidence, or accept evidence but reprimand that party or impose fines on that party or both.

  1. When will parties present evidence and determine its admissibility before court?

Normally, the court may convene a pre-hearing meeting called “evidence exchange meeting” for parties to present evidence and submit examination opinion on the veracity, legality and relevance of evidence. For complicated cases with significant amounts of evidence, there may be two or three “evidence exchange meetings” before the hearing. By contrast, for straightforward cases with limited evidence, parties may test the admissibility of that evidence directly during the hearing.

  1. What is the process of assessing evidence?

The typical process would be for one party, usually the claimant, to present its evidence and test the veracity, legality and relevance of the evidence of the opposing party. If there was evidence investigated and collected by the court, the assessment of such evidence would follow after the completion of the same for the parties’ evidence. The court may first need to explain the process of investigation and collection and status of these evidence to parties.

  1. How does a Chinese court give weight to each evidence?

The court assesses all the evidence and the evidential chain comprehensively, and examines the relevance of each piece of evidence. As for each individual piece of evidence, the court considers various factors in giving evidential weight like veracity, relevance, source, form and whether there exists any conflicting interest between the evidential holder or provider or witness and any of the parties involved.

Stay tuned for next week’s blog post which will focus on the second section, the routes for evidence production.

If you have any questions or would like to discuss any aspect of this post, please contact

Cathy Liu
Cathy Liu
Partner, Kewei, Shanghai
+86 21 2322 2158

Helen Tang
Helen Tang
Partner, HSF Shanghai
+86 21 2322 2160

Jean Zhu
Jean Zhu
Counsel, Kewei, Beijing
+86 10 6535 5041

Stella Hu
Stella Hu
Senior Consultant, HSF Beijing
86 10 6535 5017

 

 

ENGLISH COURT OF APPEAL ORDERS NON-PARTY TO GIVE EVIDENCE IN SUPPORT OF NEW YORK-SEATED ARBITRATION

In a recent judgment, the English Court of Appeal determined that English courts do indeed have jurisdiction under s44(2)(a) of the English Arbitration Act (“the Act”) to issue an order compelling a non-party to an arbitration agreement to give evidence in support of arbitration proceedings seated both inside and outside England and Wales. In A and B v C, D and E [2020] EWCA Civ 409 (“the Court of Appeal Decision”), the Court of Appeal deviated from a line of first instance decisions which had held that the English courts did not have the power to make orders against non-parties under s44. Having considered the facts of the case, the Court of Appeal held that it would exercise its discretion and grant the order. Accordingly, the Court of Appeal overturned the High Court decision (“the First Instance Decision”), which we had previously written about here.

Background

C and another party applied to the Commercial Court to compel the third defendant, E (a non-party to the New York seated arbitration), to give evidence in England on certain bonus payments. It remained an issue in the underlying arbitration whether these were deductible from the amounts claimed by C and another party in the underlying arbitration. E was involved in the negotiations regarding these bonus payments. The arbitral tribunal in New York delayed the closing of the evidentiary phase of the arbitration to enable this appeal to be heard and judgment to be given.

The First Instance Decision

In the First Instance Decision, the court acknowledged that the wording of s44 of the Act might suggest that s44(2)(a) could apply to give the court the power to issue an order compelling a non-party to give evidence in support of a foreign seated arbitration. However, given the decisions in earlier cases on s44, this was not a simple question.

The Commercial Court referred extensively to the decisions in Cruz City Mauritius Holdings v Unitech Limited [2014] EWHC 3704 (Comm) (“Cruz City”) and DTEK Trading SA v Morozov [2017] EWHC 1704 (Comm) (“DTEK”). In light of these authorities, the Court determined that s44(2)(a) was confined to parties to the arbitration agreement. This was due to the following reasons:

  • s44 was stated to be subject to contrary agreement between the parties;
  • a number of other subsections pointed towards an intra-parties interpretation of s44 as a whole (such as subsections (4), (5), (6), and (7));
  • if Parliament had intended to permit the court to make third party orders in support of arbitrations around the world, it would have expressly said so in the Act; and
  • a difference in treatment between different subsections of s44 was unattractive without a difference in language.

Permission was given to appeal the decision to the Court of Appeal.

The Court of Appeal Decision

Overruling the First Instance Decision, the Court of Appeal unanimously found that English courts do have jurisdiction under s44(2)(a) to compel a non-party to give evidence in support of an arbitration. Lord Justice Males, who had decided Cruz City, issued a concurring opinion to explain his decision.

This decision was based on the following considerations:

  1. S44(1) must be read alongside s2(3) and s82(2):

The Court of Appeal considered that s44(1) of the Act must be read alongside s2(3) and s82(2) of the Act. When read with these provisions, it was clear that the English courts have the same powers in relation to foreign-seated arbitrations as they would in relation to civil proceedings before the High Court or a County Court.

  1. The meaning of “witnesses”:

The Court held that the phrase “the taking of evidence of witnesses” in s44(2)(a) was broad enough linguistically to include all witnesses, and not just those who were parties to the arbitration. As the Act distinguished between witnesses and the parties in other sections when necessary, if Parliament had intended any different definition of witnesses in s44(2)(a), confining the term to parties only, it would have made this clear. The Court observed that it would be rare for a witness to also themselves be a party to the arbitration.

  1. Powers of the court in relation to English court proceedings:

The key question was what powers the court had in relation to non-parties in English court proceedings. It was clear that the English courts had the power to compel non-parties to give evidence by deposition under the Civil Procedure Rules (“CPR”) 34.8. While the Court acknowledged that this would create the “somewhat anomalous” situation that an English court can give an order requiring a deposition in support of a foreign arbitration, when this would not be possible in support of foreign court proceedings, the Court decided that this did not justify interpreting s44(2)(a) as applying only to parties to the arbitration.

  1. The relevance of other s44 subsections:

The various other subsections of s44 did not point against interpreting s44(2)(a) as applying to non-parties. The opening words of s44(1) and s44(4) were better understood as “gateways”, which needed to be satisfied before the court could exercise its discretion. Once the threshold was met, the court had the same powers regarding the taking of evidence of witnesses as it would in English court proceedings. The Court further observed that while the Respondents noted that third parties would not be able to appeal (given the limitation in s44(7)), this issue was “more apparent than real”. In practice, a first instance judge is likely to grant permission to appeal, and in any event this issue was not enough to justify interpreting s44(2)(a) so that it did not apply to non-parties.

  1. Practical use of the power to order a deposition was irrelevant:

The Court of Appeal rejected the Respondents’ argument that the power to order a deposition in civil litigation proceedings was rarely used in practice and only in limited circumstances. There was no reason to justify interpreting CPR 34.8 narrowly such that it only applied when a witness was unable to attend trial. There was in fact no reason why the court should not have the power to order the deposition of a witness in support of a domestic arbitration, for example in circumstances in which a reluctant witness was unwell or about to travel abroad, but the arbitrators were unavailable to hear the evidence at that time.

  1. The Respondents’ interpretation of s44(2)(a) would give the sub-section “little or no content”:

The Court rejected the Respondents’ narrow interpretation of s44(2)(a) on the grounds that it would mean the sub-section had “no or little content”. It was clear from previous authority that the section could not apply to inwards letters of request from arbitral tribunals. While it could apply to outward letters of request to a foreign court in support of an arbitration seated within England and Wales, it was hard to see how this would ever be useful in respect of a foreign-seated arbitration.

  1. It was not relevant that different subsections of s44(2) might fall to be treated differently:

Any apparent inconsistency could be explained on the basis of different language in each subsection. The Court of Appeal was content to leave the decisions in Cruz City and DTEK on their respective subsections to stand until any future appeal on either subsection.

  1. The reasoning of the decision in Commerce and Industry Insurance was compelling:

Finally, the Court of Appeal was persuaded by the earlier case of Commerce and Industry Insurance v Certain Underwriters at Lloyd’s [2002] 1 WLR 1323. This first instance decision directly dealt with the issue and held that an English court could issue an order in support of a foreign-seated arbitration to compel a witness who was a non-party to give evidence (although in this earlier case, the court had decided not to exercise its discretion to make the relevant order). The Court of Appeal cited the section of this judgment that considered it relevant that the arbitrators in New York had the power under s7 of the United States Federal Arbitration Act to subpoena witnesses to give deposition evidence in the form of oral testimony.

The Court of Appeal reiterated that in order to justify the court granting an order of this kind, the applicant must satisfy the relevant test. This requires the applicant to provide an explanation of the nature of the proceedings, identify the issues on which the witness was to give evidence, give reasons why the witness would be able to give evidence on these issues, and justify why the evidence is necessary for the just determination of the dispute.

In relation to the foreign-seated arbitral tribunal, the Court of Appeal noted that unless the parties are agreed, the party seeking the witness evidence will need the permission of the tribunal under s44(4) in order to make an application. In addition, the court always has a discretion under s44 whether to make the  order sought. In the case of a foreign arbitration, the court also has a specific discretion under s2(3) not to make an order if the court considers it inappropriate. In the circumstances of the case, the Court found that it was appropriate to make the order.

Comment

The decision of the Court of Appeal has provided some much-needed clarity on whether English courts have the power to issue orders under s44(2)(a) compelling a non-party witness to give evidence in support of arbitrations. This case has also provided useful guidance about the circumstances in which the courts will exercise their discretion and grant this type of order.

Whilst the decision has not overruled the earlier authorities of Cruz Shipping and DTEK, it is likely that some arbitration users will in future seek other types of orders against third parties in support of arbitrations under s44 of the Act.

For more information, please contact Nicholas Peacock, Partner, Rebecca Warder, Professional Support Lawyer, Aseel Barghuthi, Associate, Christine Sim, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803

Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

Aseel Barghuthi
Aseel Barghuthi
Associate
+1 917 542 7859

Christine Sim
Christine Sim
Associate
+1 917 542 7853

HONG KONG: COURT MAKES WINDING UP ORDER WHERE DEBTOR UNABLE TO PROVE BONA FIDE DISPUTE ON SUBSTANTIAL GROUNDS

The Hong Kong Court of First Instance has declined to prioritise an arbitration agreement where a debtor intended to dispute the existence of a debt without proving there was a bona fide dispute on substantial grounds.

Dayang (HK) Marine Shipping Co., Ltd v. Asia Master Logistics Ltd [2020] HKCFI 311; HCCW 14/2019

Background

The parties entered into a charterparty on 25 October 2018 by which Asia Master chartered a vessel M.V. “Aoli 5” from Dayang.

The Fixture Note obliged the owner to guarantee that the vessel be watertight and that all fitted gear be workable and in good condition throughout the charter period. It provided for the cost and duration of the hire, with disputes to be resolved by arbitration in Hong Kong under English law. Finally, it applied the New York Produce Exchange 93.

This was the substantive hearing of Dayang’s winding up petition based on the unpaid debt of US$360,919.76, which was originally dated 11 January 2019 then amended on 11 April 2019. Asia Master did not deny the existence of the debt but raised a counterclaim in relation to an alleged breach of Dayang’s obligations as per the Fixture Note and submitted that the dispute should be resolved by arbitration. On 22 February 2019, Asia Master’s counsel sent a letter to Dayang to state its preparedness to settle the dispute by arbitration.

In making its decision, the Court examined the nature of the dispute and any public policy implications.

Whether the debt was disputed in good faith and on substantial grounds

Deputy High Court Judge William Wong SC first observed that the breaches of obligations, for which Asia Master claimed Dayang should take responsibility, remained under investigation. Asia Master was unable to give particulars as to the duration of the alleged delay, the extent of the loss, and whether the counterclaim would exceed (and therefore extinguish) the debt. The Court held it was insufficient for Asia Master merely to state that Dayang ought to bear some responsibility when resisting its petition for winding up based on undisputed debts. The crux of the dispute was held to be whether Asia Master had a bona fide counterclaim on substantial grounds.

The Court accepted Dayang’s argument that, where the entire debt is not disputed (exceeding HK$10,000), it becomes irrelevant whether or not arbitral proceedings commence and the Court must exercise its discretion to wind up the respondent. Where a debtor challenges a petition on the grounds of a genuine and serious counterclaim, which is greater than or equal to the debt, the burden of proof shifts and the debtor must prove the claim is genuine, serious, and of substance. The Court noted similarities with the test for deciding whether a debt is disputed in good faith and on substantial grounds, citing Re Sinom (Hong Kong) Ltd I [2009] 5 HKLRD 487 and Re Alpha Building Construction Ltd, unreported, HCCW 283/2014.

The Court found that the lack of precise factual evidence to substantiate Asia Master’s counterclaim was problematic and indicated a prima facie lack of dispute to the debt. Where the underlying contract contains an arbitration clause that covers any dispute relating to the debt, the Court asked: i) is the Court obliged to stay or dismiss the winding up proceedings in favour of arbitration; and if not, ii) should the Court exercise its discretion to do so?

As to the first question, it is established in Hong Kong law that section 20 of the Arbitration Ordinance, which requires the Court to stay its proceedings if there is a valid arbitration agreement, applies only to actions and not to petitions for winding up.

The Court also held that question of its discretion to stay or dismiss a winding up petition was similarly uncontroversial. The Court pointed to section 180(1) of the Companies (Winding Up and Miscellaneous Provisions Ordinance) (Cap. 32). The Court studied two distinct approaches to show how this discretion should be exercised in a principled manner.

The “Salford-Lasmos Approach”

Asia Master relied on the principles in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 and Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449. It contended that a winding up petition should generally be dismissed where:

  • the contract underlying a debt contains an arbitration clause that covers any dispute relating to the debt;
  • the company takes the steps required by the clause to commence the mandatory dispute resolution process; and
  • the company files an affirmation in accordance with r.32 of the Commission (Winding Up) Rules (Cap. 32H. Sub. Leg.).

However, the judge held that this principle was not engaged as no notice of arbitration had been sent. Consequently, the arbitration proceedings had not been ‘commenced’.

The “Traditional Approach”

The judge noted that the differences between the “Traditional” and “Salford-Lasmos” approaches  were:

  • under the “Traditional Approach”, there cannot be a dispute if it is shown that A is obviously right and B is obviously wrong. B must show a bona fide dispute on substantial grounds; mere assertions will not suffice;
  • under the “Salford-Lasmos Approach”, all B has to do is simply deny A is right. There is no requirement for B to show a bona fide dispute on substantial grounds.

The “Contractual Justification”

Both the Salford and Lasmos judgments acknowledge the importance of protecting the parties’ freedom of contract. Specifically, the courts must protect the parties’ freedom to refer disputes to arbitration. However, the extent to which one’s contractual rights or obligations are (or ought to be) protected by the Court must depend upon the scope of those rights and obligations. This is a matter for contractual interpretation. The analytical starting point should therefore be to construe the agreement to arbitrate.

In the Court’s view, an arbitration clause imposes an obligation to have disputes that fall within its scope determined, or resolved, by arbitration. It also prevents any party from seeking to have such disputes determined or resolved in any other forum.

The Court went on to ask whether presenting a winding up petition to the Companies Courts amounts, per se, to a breach of an agreement to resolve disputes by arbitration. In the Court’s view, “the short answer…is unequivocally ‘no’… [T]he presentation of a winding up petition does not come within the scope of an agreement to arbitrate”.

Ultimately, the Court adopted the “Traditional Approach”.

Winding up as a discretionary remedy

The judgment asserts that there are no strong reasons to put an unprecedented fetter on the Court’s otherwise flexible discretion to make a winding-up order. The judge held:

  • the conditions presented in the “Salford-Lasmos Approach” are antithetical to the nature of discretion and represent an unprecedented fetter on the Court’s discretion; and
  • the inflexibility of this approach may prejudice the interests of creditors because it can compel the creditor to establish the existence of a debt by an action. This would then deprive it of all tangible remedies where the assets of the debtor have been dissipated by the time the action for debt has been completed by arbitration.

The Court referred to several authorities to demonstrate its discretion to allow winding up petitions, even where the debtor is able to prove a bona fide dispute on substantial grounds.

Public policy concerns: ousting the creditor’s right to wind up

While the judge observed that are no public policy objections to the “Salford-Lasmos Approach”, he maintained that its real issue is the impact on the Court’s discretion to make winding up orders rather than its effect on the petitioner’s “right” to petition to wind up.

Decision

The Court made a winding up order against Asia Master, finding:

  1. to dispute the existence of a debt a debtor must show there is a bona fide dispute on substantial grounds; it cannot merely deny the debt. This test applies regardless of whether or not the debt has arisen from a contract incorporating an arbitration clause;
  2. the Court must exercise discretion irrespective of whether there is an arbitration agreement;
  3. commencing arbitration proceedings is not sufficient proof of the existence of a bona fide dispute on substantial grounds, but may constitute relevant evidence of such dispute; and
  4. where a creditor petitions a winding up order on a debt where there is a bona fide dispute based on substantial grounds, it risks being liable to pay the debtor’s costs on an indemnity basis (and the tort of malicious prosecution).

Comment

Recent developments in relation to the issue of winding up petitions with respect to the existence of arbitration clauses / arbitration proceedings between the petitioner and the debtor have seen the Courts shift from the “Traditional Approach” (which is referred to by the Court in paragraph 57 of the judgment as being the need for the debtor to show “a bona fide dispute on substantial grounds” in order to persuade the court to stay or dismiss a winding up petition) to the “Salford-Lasmos Approach” (“Lasmos Approach” previously discussed here) and then back to a more moderate approach in the case But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 (previously discussed here).  In light of such developments, it is notable that the Court in Dayang relied primarily on the “Traditional Approach” in deciding in favour of the creditor.

The Court also considered the “Salford-Lasmos Approach”.  The Court commented that even if the “Salford-Lasmos Approach” was applicable, it would still have held in favour of the creditor because the debtor did not, in failing to timely commence arbitration proceedings, hold a genuine intention to dispute the debt.

It is also notable that the Court spent more than three-quarters of this judgment in an analytical discourse over the recent developments in this area.  As noted by the Court at paragraph 135, “the Singaporean authorities have not been altogether successful in navigating a middle-ground between the Traditional Approach and the Salford-Lasmos Approach.  I suspect that similar problems would more or less arise if the same is attempted in Hong Kong”.  The Court was, therefore unable to come to a clear conclusion.  Nevertheless, the Court, in spending much time on dissecting the matter, has shown a clear intention to resolve this common issue.  Therefore, it is reasonable to expect that further developments in this area will be forthcoming.

 

Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029
Simon Chapman
Simon Chapman
Partner, Hong Kong
+852 2101 4217
May Tai
May Tai
Managing Partner, Greater China
+852 2101 4031
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales) / Professional Support Lawyer, Hong Kong
+852 2101 4214
Philip Lis
Philip Lis
Senior Associate, Hong Kong
+852 2101 4212
Jacob Sin
Jacob Sin
Associate, Hong Kong
+852 2101 4230