In dealing with PRC related insurance disputes, one question is often raised by Chinese court or arbitration institute: what is the insurance agent or the insurance broker? The relationship between the insurance agent, broker, insurer, policyholder, insured and beneficiary always confused the judge and arbitrator. This article will elaborate the concept, function, difference of these two parties in the framework of PRC insurance law.

Definition and Characteristics of the Insurance Agent and the Insurance Broker under the PRC Law

i. Definition and Characteristics of the Insurance Agent

Article 117 of the PRC Insurance Law stipulates that “an insurance agent means an entity or individual that has been authorized by an insurer to conduct insurance business on its behalf within the scope authorized by the insurer and collects commissions from the insurer. Insurance agencies include professional insurance agencies specializing in the insurance agency business and agencies concurrently engaged in insurance business.”

Article 2 of the Provisions on the Supervision of Insurance Agents stipulates: “For the purpose of these Provisions, ‘insurance agents’ refer to institutions or individuals that are entrusted by and receive commissions from insurance companies to handle insurance business on behalf of the insurance companies within the scope authorized by the insurance companies, including professional insurance agencies, agencies concurrently engaged in insurance business and individual insurance business.”

Based on the above definition and relevant provisions under the PRC laws, insurance agents under the PRC laws have the following characteristics:

Firstly, an insurance agent shall conduct insurance agency activities on behalf of the insurer. The tasks of an insurance agent include to sell insurance products and collect insurance premiums on behalf of the insurer, to conduct damage survey and claim settlement for the relevant insurance business in accordance with the authorization of the insurance company, etc.. The legal effect of the representation made by the insurance agent in the name of the insurer (principal) shall be directly assumed by the insurer.

Secondly, an insurance agent shall conduct insurance activities within the scope authorized by the insurers. In accordance with Paragraph 2, Article 127 of the PRC Insurance Law, if an insurance agent without authorization, beyond authorization, or whose authorization has expired enters into a contract on behalf of the insurer, and the policyholder has a reasonable reason to believe that the insurance agent has authorization, such agency act of the insurance agent shall be valid. The insurer may pursue the responsibility of the insurance agent who exceeds his authority according to the law, but until then, the insurer must still perform and bear the corresponding contractual obligations according to the contract.

Thirdly, the legal consequences of an insurance agent’s agency activities are borne by the insurer. The expression of intent received or made in the name of the insurer has direct legal effect on the insurer. This is embodied in the following aspects:

(a) Information about the subject matter of the insurance that is known to the insurance agent shall be deemed to be known to the insurer. After the insured has informed the insurance agent of the circumstances relating to the subject matter of the insurance, even if the insurance agent fails to convey or accurately convey the information to the insurer, the insurer shall not later claim the cancellation of the insurance contract or deny the insurance liability on the grounds that the insured has violated the obligation of truthful notification. The information known by agent could be deemed as the input information of insurer.

(b) If an insurance agent gives an incorrect explanation or answer as to whether a matter is material enough to influence the insurer’s decision whether to agree to underwrite the insurance or to increase the premium rate, the insurer may not later claim cancellation of the insurance contract on the grounds that the policyholder failed to fulfill its duty to inform of the aforementioned matter.

(c) After the insured has paid the premium to the insurance agent, the premium is legally deemed to have been received by the insurer even if the insurance agent has not yet forwarded it to the insurer or does not want to forward it to the insurer.

(d) In practice, there are often cases where the insurance agent fills in the proposal form instead of the insured. If the insurance agent fails to accurately record the insured’s information, or if the insurance agent intentionally makes a wrong record in order to obtain commission, the insurer cannot claim exemption from insurance liability on this ground unless the insured knows or should know that the aforementioned circumstances exist.

Fourth, individuals can act as insurance agents. But now in practice, all individual agents should register within the insurance agency company, and we hope individuals can practise business by themselves in the future.

ii. Definition And Characteristics of the Insurance Broker

Article 118 of the PRC Insurance Law stipulates that “An insurance broker is an entity that, based on the interests of the insurance applicant, provides intermediary services between the applicant and the insurer for the conclusion of an insurance contract and receives a commission therefore in accordance with the law.”

Article 2 of the Provisions on the Supervision of Insurance Brokers provides that: “Insurance brokers as used in these Provisions refer to institutions that provide intermediary services for the conclusion of insurance contracts between the policyholder and the insurance company based on the interests of the policyholder, and collect commissions according to law, including insurance brokerage companies and their branches.”

Based on the above definition and relevant regulations under the PRC laws, an insurance broker under the PRC laws has the following characteristics:

Firstly, the insurance broker works for the benefit of the policyholder. The task of an insurance broker is to provide the policyholder with the conditions for the conclusion of an insurance contract or to act as an introducer for the conclusion of an insurance contract. Providing the conditions for the conclusion of an insurance contract means that the insurance broker creates the opportunity for the conclusion of an insurance contract by finding a suitable insurer or type of insurance for the policyholder in accordance with the policyholder’s instructions.

Secondlyly, a percentage of the premiums collected by the insurer is taken as a commission for the insurance broker. For certain specific engagements (such as making insurance claims), the insured normally pays the insurance broker a mutually agreed remuneration. But generally speaking, Chinese policyholders seldom pay any service fee to broker.

Thirdly, an insurance broker’s range of business is wide. It is not limited to the insurance selling process, but involves participation in negotiations with the insurer during concluding the insurance contract, assistance with making insurance claims, insurance products consulting, risk management consulting, among others.

Fourthly, an insurance broker can only be an institution, not an individual.

iii. Differences Between The Two Insurance Intermediaries

Comparing the concepts of an insurance agent and an insurance broker under PRC law, the main differences between the two intermediaries are as follows:

(a) Different forms of organization. Insurance agents can exist as companies or individuals (in practice, now China regulator only permit agency companies to process agency business), while insurance brokers can only exist as “limited liability companies” or “joint stock companies”.

(b) Different legal status. An insurance agent is the agent of the insurer, and represents the interests of the insurance company by introducing insurance coverage and underwriting business for the latter; an insurance broker is the agent of the policyholder, insured and beneficiary (currently, there are different opinions in judicial practice; some courts consider it as intermediary services, while other courts deem it as the agent of the policyholder, insured and beneficiary).

(c) Different functions. The main functions of an insurance agent are to promote insurance products for insurance companies, collect premiums, and act as an agent for loss investigation and claim settlement of relevant insurance business according to the authorization of insurance companies, etc. The main functions of an insurance broker are to conduct insurance business consultation and solicitation, risk management and arrangement, market inquiry and quotation, loss claim and recovery, etc.

(d) Different ways of payment of commission. The insurance agent receives the commission directly from the insurer; the insurance broker normally accepts the insured’s commission to handle the insurance procedures, and receive the brokerage commission from the insurance company as agreed with the insurance company. But in PRC practice, both agent and broker receive their commission or fee from insurer, and this phenomenon confused outsiders sometimes.

In summary, an insurance agent is usually “taking the product to the customer”, while an insurance broker is generally “selecting the product for the customer.”

Reasons for Distinguishing theInsurance Agent and the Insurance Broker under the PRC Law

There may be several underlying reasons for distinguishing the insurance agent and the insurance broker under the PRC Law:

Firstly, following the established tradition of civil law systems may be one of the reasons. Insurance laws in Taiwan area and Germany both make a distinction between the concepts of insurance agent and insurance broker.

Secondly, another reason may be for the purpose of maintaining the balance of contracting and performance capacity between the parties to the insurance contract. While the insurer expands its business capacity through the participation of the third party — the insurance agent, in order not to cause further negative impact on the insured who are already in a disadvantaged position, the legislator urgently needs to introduce another kind of subject opposite to the insurance agent, expecting this kind of intermediary to use their insurance expertise to provide some kind of support to the insured, so as to correct the imbalance of interests between the parties to the insurance contract.  

Thirdly, it is a natural product of the development of the insurance market. On the one hand, the insurer needs the help of an intermediary to promote its own insurance products. Therefore the insurance agents on behalf of the insurance company emerged. On the other hand, as the insurance market continues to develop, insurance products become more abundant and the demand for insurance continues to increase. The insurance applicants need to use the power of insurance professionals to help them find the most favourable and appropriate insurance products, so insurance brokers representing the interests of policyholders emerge. As a result, two distinct roles have emerged.

Judgment Criteria for the Distinction between Insurance Broker and Insurance Agent in PRC judicial practice

The criteria for the People’s Court to determine whether an insurance intermediary constitutes an insurance agent or an insurance broker mainly include whether a corresponding written contract has been signed, the organizational form of the party, the characteristics of the past transaction pattern, the payment method of commission, etc., which ultimately often requires a specific analysis in conjunction with the circumstances of each case. For example:

The Zhejiang High People’s Court in Case (2020) Zhejiang Civil Final 1291 found that “Chen Xiao and He Xinyun, as individual persons, met the requirements of the Insurance Law regarding the subject of insurance agents. According to the facts identified, the business model of Chen Xiao and He Xinyun applying for insurance business from PICC Taizhou Branch in the form of WeChat group already existed before the insurance business involved in the case, and PICC Taizhou Branch did not review the identity and authority of Chen Xiao and He Xinyun in each business, but directly conducted quotation and information entry for the insurance business submitted by Chen Xiao and He Xinyun. According to Xu’s statement, PICC Taizhou Branch may pay commissions to Chen Xiao and He Xinyun for the successful business. In this case, although there was no written commission contract between Chen Xiao, He Xinyun and PICC Taizhou Branch, the insured He Hong completed the insurance and payment directly to them, and PICC Taizhou Branch also approved the establishment of the employer’s liability insurance contract with He Hong afterwards, which is the recognition of the legal effect of the behavior of Chen Xiao and He Xinyun by PICC Taizhou Branch. In summary, Chen Xiao and He Xinyun should be found to be the insurance agents of PICC Taizhou Branch and not the insurance brokers of He Hong.”

The Weihai Intermediate People’s Court in Case (2021) Lu 10 Min Final 1603 found that “the business scope of Xinshan Insurance Agency Company mainly includes the agent sales of insurance products, etc., and at the same time, combined with the description of the witness Qiao, the company is to obtain the sales channels of insurance products provided by different insurance companies, and then sign on behalf of individuals or enterprises who have the intention to purchase insurance product, so it should be regarded as the insurance agent. Although there are relevant inquiries in the inquiry list set by Huatai, the agent of the insurance company did not actually make inquiries to the policyholder, and the consequences of the act cannot be attributed to the policyholder, but should be borne by the insurer, i.e. Huatai.”

In summary, there is a distinction between the concepts of insurance agent and insurance broker under PRC law, and this distinction will have a direct impact on the policyholder’s obligation to truthfully disclose the relevant information to the insurer, the specific performance of the insurer’s obligation to indicate and explain the exclusion clause, and the implementation of the principle of prudent underwriting by insurance companies, among others.

I. Purposes for setting up a non-insurance subsidiary

An obvious fact for foreign insurers is that they are not allowed to conduct insurance business within the territory of China (excluding jurisdiction as Hong Kong, Macau and Taiwan for the purpose of this article), nor can their Chinese non-insurance subsidiaries which do not possess any insurance licenses. Additionally, the establishment of a Chinese insurance company will be subject to strict review and must be approved by the Chinese insurance regulator (i.e. the Chinese Banking and Insurance Regulatory Commission).

However we observed that more and more foreign insurers (esp. reinsurers) are setting up or exploring the opportunity to set up non-insurance subsidiaries in China. Why is that? Based on our experience, the following may offer stimuli for foreign insurers to take such steps:

First, some foreign reinsurers often need a Chinese subsidiary to provide technical support for their  business when conducting reinsurance cooperation with Chinese direct insurance companies. Specifically, these subsidiaries will be responsible for bordereau reconciliation, statement of account verification, actuarial analysis, verifying claims information, etc.

Second, some foreign insurers view their non-licensed subsidiaries as  platforms for providing value-added services to Chinese insurance clients (i.e. policyholders, insureds).

Last but not least, allowing their Chinese subsidiaries to assist in processing data related to insurance business physically in China to some extent eliminates the need for data outbound transfer procedures while the data outbound transfer is highly regulated by the Chinese authority.

Additionally, for achieving the above purposes, having a representative office in China may not be an appropriate alternative compared to the subsidiary, in that the scope of business of the representative office is strictly limited to non-profiting activities.

Since establishing a Chinese non-insurance subsidiary seems a good attempt for a foreign insurer, the next question which this article aims to explore is: How to set up a non-insurance subsidiary in China and what should such company pay attention to during its business operation.

II.  Procedures for the set-up of a non-insurance subsidiary

Generally, as a foreign invested company, the establishment procedures of a non-insurance subsidiary mainly involve the registration procedure of the local Administration for Market Regulation (“AMR procedure”), and the foreign investment information reporting procedure of the Ministry of Commerce (“MOFCOM procedure”).

For the AMR procedure, the procedures for foreign-invested enterprises and domestic enterprises are quite similar and convenient, but the following aspects need to be noted:

a. The company name. Some foreign insurance groups have trade names associated with geographical locations, which carry profound brand cultural influence and international recognition. Therefore, they hope that their non-insurance subsidiaries in China can also use such unified trade names. However the use of such trade names in China may not be feasible——according to Article 11 of the Administrative Provisions on the Registration of Enterprise Names, an enterprise name shall not adopt the name of any foreign country (region), or any abbreviation or special title thereof. In practice, some cities in China have adopted online systems for preliminary check of company names. It is suggested that foreign insurers check whether the proposed names for their subsidiaries can be adopted on these systems before formally submitting application materials to the local AMR.

b. The business scope. As a foreign invested company, there are some fields which are not open to them (e.g. internet-based news services, online publishing services), and some fields in which foreign insurers need to satisfy more conditions compared to domestic companies (e.g. the proportion of foreign investment in value-added telecommunications services (except for e-commerce, domestic multi-party communications, store-and-forward, and call center services) shall not exceed 50%). While the general consulting business which the non-insurance subsidiaries normally intend to conduct would not involve such “negative list”, it is suggested that foreign insurers make detailed plans for the business scope of their subsidiaries during the establishment procedure, to avoid touching the areas on the negative list.

c. The registered capital. While banks, asset management companies, insurance companies and other financial institutions normally are subject to requirements as paid-up capital and minimum capital, there is no such requirement on a non-insurance subsidiary which mainly conducts consulting business. However it is common practice for such companies to have a registered capital of RMB1million to 1.5million. Foreign insurers may consult local AMRs to check if there is any local requirement on registered capital that need to obey.

The currency of the capital is another issue. According to relevant Chinese laws, foreign investors are allowed to use freely convertible foreign currency as the registered capital. Where the currency of the registered capital of a non-insurance subsidiary changes, an application for amendment of its registered particulars should be filed with the local AMR.

For the MOFCOM procedure, according to Article 9 of the Measures for Reporting of Information on Foreign Investments, a foreign investor shall submit the initial report on foreign investment information through the enterprise registration system when it applies for the registration of the foreign-invested enterprise. Therefore, the non-insurance subsidiary needs to file such initial report during the establishment process.

III. Main issues on the operation of the non-insurance subsidiary

As discussed above, Chinese non-insurance subsidiaries mainly provide technical support related to insurance business to foreign insurers or other insurance related clients. Therefore, the Chinese insurance regulation is one thing they can not ignore. While only insurance companies and other insurance organizations (e.g. insurance agents, insurance brokers, etc.) established in accordance with the Insurance Law of China are permitted to conduct insurance business in China, there is no clear definition of “insurance business” by law. Furthermore, related sanction cases in this regard are also limited from public information, which makes the boundary between assisting and conducting insurance business remain unexplicit.

In practice, underwriting, policy issuance, premium collection, claims payment are deemed as typical insurance business, thus non-insurance subsidiaries are strictly prohibited from conducting such activities. For other activities that do not appear to belong to the typical insurance business mentioned above, analysis needs to be conducted on a case-by-case basis. Based on our experience, the bottom line would be refraining from making any decision on insurance activities, where such decisions should be ultimately made by insurance institutions.

Besides, marketing and fee collection are two sensitive areas for non-insurance subsidiaries during their business operation. At the level of promotion or marketing, the non-insurance subsidiary should not use marketing terms as insurance intermediary or conduct marketing activities under such names, in order to avoid misleading the public or partners into believing that it is an insurance institution. In terms of fee collection, the non-insurance subsidiary may collect service fees but not in the name of commissions which is exclusive to insurance intermediaries. Furthermore, the service fee may be calculated such as per solution, per solution package or on working hours basis. On the contrary, it should not be calculated in proportion to insurance premiums, or in connection with the success of the insurance transactions.

IV. In summary

Although the negative impact of the current global economic situation cannot be avoided, many people still believe that the InsurTech market will continue to empower the traditional insurance industry to cope with constantly changing market challenges, which means the role of non-insurance subsidiaries will become increasingly important for the insurers. As setting up Chinese non-insurance subsidiaries has become a trend to facilitate their business in China, foreign insurers also need to get prepared because in practice, many problems may occur in the process of establishing non-insurance subsidiaries in China; Even after the establishment of the company, it is still necessary to pay attention that the business carried out cannot enter the minefield of insurance business.

  1. Regulatory Framework
    • When it comes to overseas investment, Chinese enterprises are required to comply with the rules of the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) governing overseas investment, however, insurance companies which are subject to separate industry regulation shall also comply with the rules of the China Banking and Insurance Regulatory Commission (“CBIRC”, previously known as China Insurance Regulatory Commission or “CIRC”).
    • In general, the regulatory framework for overseas investment of insurance companies in the People’s Republic of China (“the PRC”, for the purpose of this article, excluding jurisdictions as Hong Kong SAR, Macao SAR and Taiwan) mainly consists of the following three regulations: the Interim Measures for the Administration of Overseas Investment of Insurance Funds (2007) (“Interim Measures”), the Implementation Rules for the Interim Measures for the Administration of Overseas Investment of Insurance Funds (2012) (“Implementation Rules”) and the Notice on Adjustment of Relevant Policies for Overseas Investment of Insurance Funds (2015), which have undergone significant changes in the qualification conditions of insurance companies as investors, investable varieties, investment ratios and investable countries and regions compared with the Interim Measures for the Administration of Overseas Application of Insurance Foreign Exchange Funds promulgated in 2004.
    • In August 2014, the CIRC issued the Several Opinions on Accelerating the Development of Modern Insurance Service Industry (“New Ten Rules”), proposing to improve the efficiency of insurance assets allocation, support insurance companies to “go abroad”, and expand the scope of overseas investment correspondingly.
    • From the 2019 Full Picture Report on Overseas Investment by Insurance Institutions released by the Insurance Asset Management Association, it can be observed that as of the end of 2019, the balance of overseas investment of PRC insurance companies was about 470 billion yuan, equivalent to about 70 billion dollars, accounting for 2.75% of the total assets of the insurance industry at the end of the last quarter of 2019. Currently, the proportion of overseas investments is capped at 15% of total assets last quarter, which means there is plenty of room for future growth in overseas investments of PRC insurance companies.
    • However, not all overseas varieties can be invested by PRC insurance companies.  Similar to domestic investment, PRC insurance companies are also faced with compliance complexities such as allocating assets and sifting overseas varieties. Therefore, this article aims to discuss the investable varieties for overseas investment of PRC insurance companies under the regulatory framework of the CBIRC, which are mainly subject to asset category restrictions and regional restrictions.
  2. Asset Category Restrictions
    • The 2019 Full Picture Report on Overseas Investment by Insurance Institutions released by the Insurance Asset Management Association indicates that in terms of asset allocation, insurance institutions’ overseas investments were mainly in equity assets, supplemented by monetary market assets, fixed-income assets, real estate, among other categories.
    • According to Article 31 of the Interim Measures and Articles 11 and 12 of the Implementation Rules, the types of assets for overseas investments include monetary market, fixed-income, equity, real estate, equity investment funds, securities investment funds and REITs.
    • It is worth noting that in addition to classifying the types of assets for overseas investment, the regulator has also specifically listed the investable varieties under various types of assets, such list is not limited to Article 31 of the Interim Measures and Articles 11 and 12 of the Implementation Rules, but also involves the regulation on classification of investment assets, which is named the Notice of China Insurance Regulatory Commission on Strengthening and Improving Regulation of Insurance Proceeds Investment Ratios (2014), its appendix “Investable Products under Major Categories of Assets” has also explicitly listed investable varieties for overseas investments.
    • In practice, in terms of investments of insurance companies, CBIRC adopts an “allowlist” mechanism, in other words, insurance companies are only allowed to invest in those products expressly permitted by the CBIRC. However, given the wide range and the evolving characteristic of financial products under various types of assets as well as the fact that some overseas financial products do not have exact counterparts in the PRC market, thus, uncertainty exists as to whether certain financial products fall within the investable category.
    • To our knowledge, such uncertainty is particularly common in monetary market and fixed-income products. For instance, certificates of deposit are not expressly permitted by the CBIRC and there is no clear definition of certificates of deposit under PRC laws and regulations, therefore, PRC insurance companies may have some concerns when considering whether to invest in certificates of deposit. This may need a case-by-case assessment.
    • When encountering such issues, considering that there may be differences in financial products with the same name issued in different countries and regions, we suggest starting with the terms and conditions of financial products to analyse whether the characteristics of the product are in line with the definition of investable varieties under PRC laws and regulations and seeking further support from law firms where the financial product is issued if necessary.
  3. Regional Restrictions
    • Annex I of the Implementation Rules list 46 countries and regions in which PRC insurance companies are permitted to invest, consisting of developed markets and emerging markets. As for the regulatory practice, according to Supervision Letters issued by the CIRC in February 2018, two life insurance companies and one insurance asset management company were required to rectify their unlawful overseas investments within one month due to violation of the regional restrictions on overseas investment.
    • For different categories of assets, the Implementation Rules set out the following restrictions on investable regions:
    • If the type of the proposed investment falls into monetary market, fixed-income and equity assets, then the aforementioned assets must be issued or circulated in the financial markets in the countries or regions listed in Annex 1. Furthermore, when it comes to convertible bonds, stocks and depository receipts, they must be listed for trading on the main broad of the stock exchange of the countries or regions listed in Annex 1.
    • If insurance companies intend to invest directly in the equity of an unlisted enterprise, such unlisted enterprise must be located in the countries or regions listed in Annex 1.
    • If insurance companies intend to invest directly in overseas real estate, such real estate must be located in the core areas of the major cities in the developed markets listed in Annex I.
    • If insurance companies intend to invest in overseas securities investment fund, the securities investment fund itself must be approved or registered by the security regulatory authority of the country or region listed in Annex I. Moreover, the underlying assets of the securities investment fund must also be issued or circulated in the financial market of the country or region listed in Annex I.
    • If insurance companies intend to invest in overseas equity fund, they can be exempted from the regional restrictions, provided that the portfolio companies of the equity investment fund are at the growth or maturity stage or with a high acquisition value.
    • If insurance companies intend to invest in overseas REITs, such REITs must be listed on the stock exchange of the countries or regions listed in Annex 1.
  4. Conclusion
    • For PRC insurance companies, “going abroad” is an inevitable trend, however, as discussed above, the regulator has set restrictions on both varieties and regions for overseas investments, which requires PRC insurance companies to assess prudently before making overseas investments so as to avoid compliance risks on the one hand, and also requires PRC insurance companies to allocate assets reasonably and diversify investment risks to obtain stable investment returns on the other.

.INTRODUCTION

Over the past decade, China’s insurance industry has grown rapidly and held the second-largest premium market share worldwide for many years, contributing steadily to the global insurance market. In 2022, despite the repeated impact of the pandemic and the turbulent capital markets, China’s insurance industry has been put to the test and has seen new developments with the introduction of various favorable policies, such as the start of pension insurance and green insurance and the continued “popularity” of D&O liability insurance.

Based on data released by China Banking and Insurance Regulatory Commission (CBIRC) on its official website on 11 January 2023, as of November 2022, the insurance companies’ original insurance premium income reached 635 billion USD with an increase of 4.95% year-on-year; the claims and benefits paid out were 192 billion USD with a decrease of 0.60% year-on-year; the total assets of the insurance industry reached 3.9 trillion USD; the net assets of the insurance industry reached 398 billion USD.

Ⅱ.THE LAUNCH OF THE PERSONAL PENSION SYSTEM

As China’s ageing process accelerates, new countermeasures to address the issue of elderly support are being introduced. 2022 is the starting year for the development of China’s personal pension system. In April, the General Office of the State Council released The Opinions on Promoting the Development of Personal Pensions, announcing for the first time a complete institutional framework. Subsequently, the State Administration of Taxation, the CBIRC and other government agencies have issued supporting pilot rules to aid the personal pension system from the perspective of personal tax incentives and pension insurance products.

For example, the CBIRC issued The Notice on the Launch of Pilot Commercial Pension Business of Pension Insurance Companies in December, allowing four pension insurance companies to launch pilot business in ten provinces (cities), including Beijing, where pension insurance companies can provide one-stop services such as account management, pension planning, fund management and risk management to their clients.

In the meantime, the insurance industry has an inherent advantage in the personal pension track. Insurance funds have the characteristics of large scale, long term and stability. Insurance companies usually manage the incremental funds generated by pension products through their asset management subsidiaries. The insurance asset management companies can overcome market volatility to a certain extent and achieve investment returns in terms of liability-side demand and absolute returns, which are well compatible with the features of long-term funds like pensions. Therefore, insurance asset management products are an indispensable support for improving the personal pension financial system.

 Ⅲ.THE DEVELOPMENT OF GREEN INSURANCE

In 2022, the CBIRC issued The Guidelines on Green Finance for the Banking and Insurance Industry and The Notice on the Statistical System of Green Insurance Business, defining “green insurance” for the first time at the institutional level. It requires the insurance institutions to focus on Environmental, Social, and Governance (ESG) risks in the areas of organizational management, system building, internal control management and information disclosure. Moreover, insurance institutions should use the results of ESG assessment as an important basis for cost management and investment decisions, and apply differential rates according to the risk profile of their clients.

While green insurance in China is still in the primary stage of development from the current perspective, along with the implementation of China’s green development concept and the “double carbon” target, green insurance will have a unique opportunity for development.

Ⅳ. CONTINUED POPULARITY OF D&O LIABILITY INSURANCE

In the past three years, D&O liability insurance in the A-share market continues to be popular. According to the incomplete statistics from a China Securities Journal reporter, a total of 337 A-share listed companies announced the purchase of D&O liability insurance in 2022, and the number of insured companies rose 36% year-on-year.

The high increase in the insured rate is partly due to the representative litigation system created by the revised PRC Securities Law, which opened the door to A-share securities class actions and significantly increased the litigation risk for A-share listed companies and their directors and officers. The judicial practice of class action litigations such as the Kangmei Pharmaceuticals case, Luckin Coffee case, the Feilo Acoustics case and the Huifeng Joint Stock case, has taken the liability risks of directors and officers to reality.

On the other hand, as the regulatory authorities continue to increase their efforts to investigate and punish information disclosure irregularities, In the first 11 months of 2022, 56 listed companies have been investigated by the China Securities Regulatory Commission (CSRC) for alleged information disclosure violations, a number that is 65% higher than the same period last year. Furthermore, the revised PRC Securities Law also strengthens the regulatory constraints on the “controlling minority” by expanding the scope of people who have disclosure obligations and strengthening the directors’ and officers’ disclosure obligations. There has been a steep increase in civil litigation cases involving misrepresentation or illegal information disclosure, and there is a positive correlation between litigation risk and demand for D&O liability insurance.

In addition, the number of A-share D&O liability insurance claims and potential claims has increased noticeably in 2022. Given the long-tail nature of D&O liability insurance claims, it is expected that more potential claims may be converted into actual claims in 2023. With the rise in litigation risk faced by listed companies and the increase in D&O liability insurance claims, the increase in D&O liability insurance premiums is an inevitable trend.

In the meantime, due to Covid-19 pandemic and geopolitical turmoil, Chinese insurance market also felt the unprecedented pressure during the past year, and those factors brought more insurance disputes, in the sectors such as business interruption insurance, credit and warranty insurance, profession liability insurance, even co-insurance and reinsurance.

Ⅴ. Conclusion

Generally speaking, Chinese insurance market and regulation are undergoing the tremendous changes. With the slackening of China’s epidemic prevention policy and the recovery of the national economy at the end of 2022, it is anticipated that China’s insurance and legal service market will face more opportunities and challenges in 2023.

Reinsurance contracts, like insurance contracts, follow the doctrine of utmost good faith. Since the reinsurance contract is a contract concluded between commercial entities such as insurance companies, who are endowed with professional insurance knowledge and insurance business experience, it is generally not easy to generate reinsurance disputes. Even when there are disputes, they are often settled by negotiation between insurance companies in order to maintain commercial cooperation. However, with the rapid development of the Chinese reinsurance industry, various types of complex disputes have arisen in recent years. Accompanied by the economic downturn caused by the superposition of various factors including the spread of COVID-19, insurance companies no longer seem to be willing to settle reinsurance contract disputes through amicable negotiation. In China, reinsurance contract disputes are increasingly on display to the public and industry players.

The most influential reinsurance contract dispute in China’s insurance market was the facultative reinsurance dispute between two insurance companies concerning the SK Hynix conflagration case from 2014 to 2015. Due to the huge discrepancies between the parties with regard to the issue of whether the reinsurance contract was concluded, this case promoted the former China Insurance Regulatory Commission (CIRC) to issue regulatory guidelines and standards on facultative reinsurance and treaty reinsurance in the market. In general, compared to the European and American insurance markets, China’s insurance market, especially the reinsurance market, is relatively new and thus has few classic reinsurance dispute cases publicly available on China Judgments Online, a website publishing effective judgments in China. Of course, one possible reason is that some reinsurance contract disputes are resolved confidentially through arbitration. In 2020, however, one of the eight typical financial cases involving foreign affairs published by the Shanghai Financial Court was related to an application for confirmation of the validity of an arbitration agreement between two insurance companies, which was the first time the Chinese court interpreted the “Incorporated Clauses on jurisdiction” in the reinsurance contract.

The main facts of the case were that on 1 May 2009, Company A, as the insurer, issued an Open Contract of Inland Transportation Cargo Insurance (Water and Overland) with policy No. 09SH002 (SHA) to the insured (the “Open Contract”). Article 10 of the Open Contract stipulates that if any dispute arises between the Assurer and the Assured, both parties should resolve disputes through negotiation. If the dispute cannot be settled through negotiation, either party or both parties can apply for arbitration at the China Maritime Arbitration Commission (CMAC) Shanghai Sub-Commission in accordance with its Arbitration Rules. Company A subsequently issued Policy No. PB0215011416 to the insured, which stipulates that to cover the declaration under the Open Contract No. 09SH002 (SHA) from 0:00 on 1 May 2015 to 24:00 on 31 May 2015 and that the conveyance, port of departure, port of destination, insured interest and other special terms and conditions are as per the provisions of the Open Contract. If any dispute between the Company and the insured, the parties shall resolve it through negotiation. If it cannot be resolved through negotiation, both parties can apply for arbitration at the CMAC Shanghai Sub-Commission in accordance with its Arbitration Rules.

On August 13, 2015, Company B, as the reinsurer, and Company A, as the insurer, entered into a reinsurance slip with policy No. SH00150075, which stipulates that the interest, period of insurance, sum insured, premium, jurisdiction, etc. are as per the original policy (No. PB0215011416). After performing its indemnity obligations to the insured, Company A applied for arbitration with the CMAC Shanghai Sub-Commission on July 17, 2019, requesting that Company B perform its indemnity obligation as the reinsurer. Company B thereafter applied with the Shanghai Financial Court in China for a declaration that there was no arbitration clause in the reinsurance contract entered between Company A and B on August 13, 2015. Company B alleged that no arbitration clause was agreed upon in the reinsurance contract with Company A, and the arbitration clause cited by Company A was an arbitration clause under the Open Contract between Company A and its insured, which was not binding on Company B. Company A argued that the reinsurance contract signed between Company A and Company B expressly agreed that the jurisdiction would be following the original policy, and the arbitration clause was clearly stipulated in the original policy between Company A and the insured. Before the execution of the reinsurance contract involved, Company A provided the original policy to Company B, and Company B was also willing to be bound by the arbitration clause, therefore, the arbitration clause in the original policy was binding on Company B.

Shanghai Financial Court held that whether the original policy agreed in the reinsurance contract referred to policy No. PB0215011416 or the Open Contract No. 09SH002 (SHA), both of which contained an arbitration clause. The parties’ intention to arbitrate, arbitration matters and the institution for arbitration are clearly stated and legally valid. The reinsurance contract listed “Jurisdiction” and interest, period of insurance, etc. separately, and stipulated that these items are as per the original policy. Company A and Company B had discrepancies in the meaning of the term “Jurisdiction”. Both parties are foreign insurance companies and the contract was drafted in English. In the event of a dispute between the parties over the meaning of “Jurisdiction”, it should be interpreted in accordance with the common understanding of the term. In English, “Jurisdiction” does not only refer to the jurisdiction of the court specifically, but it can also be referred to litigation, arbitration and other dispute resolution methods. In this case, there is no agreement on the jurisdiction of a court in the original policy. From the purpose of the clause in the reinsurance policy, it can also be concluded that the parties’ intention is to incorporate the arbitration agreement into the reinsurance policy. The expression of intent to incorporate the arbitration clause into the reinsurance contract between Company A and Company B is clear and legally binding on both parties. Ultimately, the Shanghai Financial Court ruled to reject the application of Company B.

In the late 19th and early 20th centuries, non-professional insurers would refer to the insurance policy with the same subject matter and risks to underwrite policies. These contracts are written in typical terms such as “as per the same rates, terms and interests …”. The English courts interpreted that the subsequent policy is conditional on the original policy, i.e., the policy containing such clause maintains the same terms as the original policy. In the reinsurance market, it is common for a facultative reinsurance contract to use the term “as original” to keep its consistency with the original policy. The majority view is that the expression “as original” makes the terms of the original policy incorporated into the reinsurance contract, thus making the reinsurance contract consistent with the original policy in terms of subject matter, risks covered, insurance period, liability, exclusion of liability, etc., resulting in the legal effect of “back to back cover”.

“As original” clauses are more commonly found in proportional facultative reinsurance contracts, especially quota share reinsurance. Since the contracts of facultative reinsurance are very simple, the court can only interpret the reinsurance contract in the same way as the original insurance contract through the clause “as original”. In the case of non-proportional reinsurance treaties, the original insurer and the reinsurer usually reach a reinsurance contract before two parties agree to cede certain types of business. Reinsurance treaties are often well-drafted and differ significantly from the terms of the original insurance contract, usually without the application of “as original” clause or “back to back cover” presumptions.

Where a reinsurance contract contains the term “as original”, it is highly controversial which specific provisions of the original insurance contract can be incorporated into the reinsurance contract and bind reinsurers. For example, the often-disputed clauses include the warranty clause, insurance period clause, claims clause, choice of law or dispute resolution clause, etc.

In England, there is a judicial view that a clause should be tested from a practical point of view as to whether it can or should be incorporated into the reinsurance contract, i.e., each term of the original insurance contract should be placed in the context of reinsurance contract to consider its practicality. For example, the insured in the original insurance contract is analogous to the reinsured in the reinsurance contract, and the insurer is analogous to the reinsurer in the reinsurance contract. In this way, the court test whether the incorporation of a clause is reasonable and practical. A majority of the English courts would consider the commercial purpose of reinsurance (especially the proportional facultative reinsurance contracts) and apply the presumption of “back to back cover” as far as possible to incorporate the terms of the original insurance contract into the reinsurance contract. The judges believe that the purpose of reinsurance is to spread the risk for the original insurer, so the terms of the reinsurance contract and the original insurance contract should be consistent as far as possible in terms of their business purposes. The reinsurer, in consideration of the reinsurance premium received, should bear the same risks and liabilities as the original insurer, which is also a reflection of the principle of “follow the fortunes” in the reinsurance business. However, it is generally believed that the incorporated clause shall not contradict the express terms in the reinsurance contract, no matter whether such contradiction is literal or substantive.

The above-mentioned typical case published by the Shanghai Financial Court is the first time that a Chinese court interpreted the incorporated clause of a reinsurance contract. In this case, the scope of “as original” agreed in the reinsurance contract included interest, insurance period, sum insured, insurance premium and jurisdiction. Although there was a dispute between the parties as to whether the term “jurisdiction” specifically referred to litigation (rather than arbitration), the Shanghai Financial Court, by applying the semantic and teleological interpretation, defined the term “jurisdiction” in the English contract and found that the arbitration clause was clearly and specifically incorporated into the reinsurance agreement, taking into account the fact that the incorporation of the arbitration clause was a specific and not a general agreement. 

However, if the scope of the “as original” clause stipulated in the reinsurance contract is not as specific as the one in the above case, it may be more controversial whether the jurisdiction clause in the original insurance contract can be incorporated into the reinsurance contract. It is usually believed that the jurisdiction clause in the original insurance contract cannot be incorporated into the reinsurance contract, because whether the terms of the original insurance contract can be incorporated into the reinsurance contract depends crucially on whether there is a close connection with the risks connecting the two contracts. Generally speaking, the jurisdiction clause is not closely related to the risks covered. EU law considers that jurisdiction clauses are auxiliary clauses to the substantive clauses of the contract and that the expression of incorporation can only express the incorporation of clauses linked to the subject matter of the contract and does not have the legal effect of incorporating auxiliary clauses. In the absence of a specific expression, the court has no right to infer that the parties have expressly agreed on the incorporation of the auxiliary clauses.

If the jurisdiction clause of the original insurance contract cannot be incorporated into the reinsurance contract, it is highly likely that the dispute over the original insurance contract and the dispute over the reinsurance contract will be heard by two different dispute resolution institutions. For example, one will be tried by the court and the other will be arbitrated by an arbitration institution. If the parties of a reinsurance contract have disputes over the extent of liability of the reinsurance contract and go to a court or arbitration institution, it will be inevitable that the panel or tribunal will review the content, terms, scope of liability and performance of the original insurance contract. If there was a prior final and binding judgment or arbitral award with respect to the original insurance contract, such review is relatively straightforward. However, if the parties to the original insurance contract have no dispute and there is no prior judgment or arbitral award, it is very likely for the court or arbitration institution hearing the reinsurance dispute to go beyond its jurisdiction and review the original insurance contract which does not fall within its jurisdiction. Chinese arbitration institutions are particularly cautious about such issue and try not to “cross the red line”. This situation is also likely to occur where the jurisdiction clauses in the reinsurance contract and the original insurance contract are explicitly contradictory.

If the reinsurance contract is unclear as to jurisdiction and the jurisdiction clause of the original insurance contract is not incorporated into the reinsurance contract, then how to determine the court of jurisdiction of the reinsurance contract under the frame of PRC law? According to Article 24 of the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as the “Civil Procedure Law”), a lawsuit brought on an insurance contract dispute shall be under the jurisdiction of the people’s court where the defendant is domiciled or where the object of insurance is located. According to the research on the cases published by Chinese courts, most courts hold that the subject matter of the reinsurance contract is the risks ceded from the original policy, instead of physical properties and related interests, There is no object under the reinsurance contract, which makes the place where the object of insurance is located inapplicable. The court of jurisdiction of the reinsurance contract can only be determined in accordance with the place where the defendant is domiciled.

It can be concluded from the above-mentioned cases that: first, the Chinese courts consider a reinsurance contract a type of insurance contract, and the general jurisdictional provisions of law on insurance contracts can also be applied in the context of reinsurance contracts; second, the Chinese courts hold that the reinsurance contract has subject matter, but there is no “object” under the Civil Procedure Law, thus, only the court of the defendant’s domicile can have jurisdiction.

It is also noteworthy that Article 24 of the Civil Procedure Law only provides jurisdiction rules for domestic disputes. If the insurance/reinsurance contract dispute is a foreign-related case, such as one or more parties are foreign entities or the business is underwritten outside China (reinsurance contracts usually have foreign-related elements), Chinese courts also hold different views on whether the provisions of Article 24 of the Civil Procedure Law should be applied, or the provisions of Article 272[1], Chapter 4 “Special Provisions on Foreign-Related Civil Procedures” of the Civil Procedure Law should be applied.

This article only draws on the interpretation of the Chinese courts in relation to the incorporation of the jurisdiction clause. The incorporation of substantive clauses of the original insurance contract will be even more complicated in practice. From the point of view of a legal practitioner, it is suggested that the parties to the reinsurance contracts should at least make an unambiguous agreement on the jurisdiction and choice of law, and also make an enumerated agreement on the scope of “as original” clause to avoid unnecessary disputes and reduce the cost of dispute resolution for all parties as far as possible.


    [1]Article 272 of the Civil Procedure Law of the People’s Republic: Where an action is instituted against a defendant which has no domicile within the territory of the People’s Republic of China for a contract dispute or any other property right or interest dispute, if the contract is signed or performed within the territory of the People’s Republic of China, the subject matter of the action is located within the territory of the People’s Republic of China, the defendant has any impoundable property within the territory of the People’s Republic of China, or the defendant has any representative office within the territory of the People’s Republic of China, the people’s court at the place where the contract is signed or performed, where the subject matter of the action is located, where the impoundable property is located, where the tort occurs or where the domicile of the representative office is located may have jurisdiction over the action.

    Preamble

    On November 18, 2022, the Supreme People’s Court of the People’s Republic of China (the “SPC”) published an announcement soliciting public comments on the draft of Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Monopoly-related Civil Dispute Cases (the “Draft”). Compared with the Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (the “2012 Interpretation”) issued by the SPC in 2012, which is the first judicial interpretation on China’s antitrust law, the Draft encompasses 52 articles and provides much more detailed interpretations on lots of procedural and substantive matters involved in antitrust civil litigation. When the Draft is formally adopted and comes into effect in the future, the 2012 Interpretation will be voided.

    The key changes in the Draft can be divided into four categories: (1) provisions introduced or amended for being in alignment with the amendment to the Anti-monopoly Law of the People’s Republic of China (the “AML”) in 2022; (2) provisions reflecting the judicial opinions held by the people’s court in the antitrust jurisprudence; (3) provisions drawing on the provisions issued by China’s antitrust law enforcement authority; (4) provisions with groundbreaking content to some extent. The Draft includes responses to multiple complex and controversial issues in judicial practice. This article intends to introduce the key changes in the Draft with two parts, the procedural matters (Part I: Changes to Procedural Matters) and the substantive matters (Part II: Changes to Substantive Matters).

    Brief regarding the changes to substantive matters: Articles 16 to 19, Articles 20 to 29, and Articles 30 to 43 of the Draft separately set out the provisions on the definition of the relevant market, the determination of monopoly agreement, and the determination of abuse of dominance, which include specified provisions on key issues in the fields of platform economy and intellectual property. In addition, the Draft introduces detailed provisions on civil liability from Articles 44 to 50.

    1. Specifying the methods of defining the relevant market in monopoly civil dispute case.

    Articles 17 to 19 of the Draft provide on how to define the relevant market in monopoly civil dispute case, and the provisions drawing on the content of the Guidelines on the Definition of Relevant Market issued by the Anti-monopoly Commission of the State Council and the Anti-monopoly Guidelines of the Anti-monopoly Commission of the State Council in the Field of Platform Economy (the “Guideline for Platform Economy”). The key provisions include the following:

    Paragraph 1 of Article 17 of the Draft provides: “When defining the relevant product market and the relevant geographic market in which the undertaking compete with each other with respect to specific products or services (hereinafter collectively referred to as the “Products”) during a certain period, the people’s court may, on the basis of the specific products directly involved in the alleged monopolistic conduct, conduct a demand substitution analysis from the perspective of the demanders; if the competitive constraint caused by supply substitution on undertakings is similar to that of demand substitution, the people’s court may also conduct a supply substitution analysis from the perspective of the suppliers.” This article clarifies the principle and basic method of defining the relevant market in a monopoly civil dispute case, i.e., a demand substitution analysis and/or supply substitution analysis may be conducted on the specific products directly involved in the alleged monopolistic conduct.

    Paragraph 2 of Article 17 of the Draft provides: “The people’s court may adopt the analysis method of the hypothetical monopolist test when defining the relevant product market and the relevant geographic market, and generally choose the hypothetical monopolist test method of price rising; and if the competition between undertakings is mainly shown in terms of quality, diversity, innovation and other non-price competition, the hypothetical monopolist test method of quality declining and cost rising may be adopted.” This article provides for different hypothetical monopolist test methods based on whether the competition between undertakings concerned is mainly shown in terms of price.

    Before the issuance of the Draft, the people’s courts have already applied the hypothetical monopolist test (the “HMT”) in the context of non-price competition. For example, In Qihoo v. Tencent, the SPC held that the HMT, as a kind of analysis method to define the relevant market, is generally applicable, but the choice of HMT method needs to be determined on a case-by-case basis. In the fields where product differentiation is very obvious, and quality, service, innovation, consumer experience, and other non-price competition have become the important methods of competition, it is inappropriate to adopt the test of “small but significant and non-transitory increase in price” (the “SSNIP”). Under such circumstances, alternative methods of HMT shall be adopted, such as the test of “small but significant non-transitory decrease in quality” (the “SSNDQ”).

    2. Introducing provisions on the determination of competitive relationship and the theory of “Single Economic Entity”.

    (1) Specifying how to determine the competitive relationship between undertakings.

    Article 17 of the Anti-monopoly Law of the People’s Republic of China (the “AML”) sets forth the provisions regarding horizontal monopoly agreement, that is, the undertakings with competitive relationship reaching an agreement, decision or other concerted practice to exclude or restrict competition. Therefore, to determine whether undertakings have reached or implemented a horizontal monopoly agreement, the first thing is to determine whether they have a “competitive relationship”. For undertakings with no “competitive relationship”, even if the agreement reached by them may have the effect of excluding or restricting competition, it shall not fall within the scope of horizontal monopoly agreements prohibited by Article 17 of the AML.

    Paragraph 1 of Article 21 of the Draft provides: “Undertakings with a competitive relationship as provided for in Article 17 of the Anti-monopoly Law refer to two or more actual or potential undertakings that are at the same stage of production and operation, provide products with close substitution relationship, make independent business decisions, and assume legal liability.”

    This new provision of the Draft specifies how the people’s courts determine the competitive relationship between undertakings. Actually, before the issuance of the Draft, the people’s courts have already adopted the above methods and principles in precedents. For example, in Shanghai Huaming v. Wuhan Taipu, the SPC held that, the competitive relationship under the Anti-monopoly Law is defined as two or more undertakings at the same operation stage of production or distribution of products, that provide substitutable products or have a realistic possibility of entering into the same relevant market. (Note: For a detailed introduction, please see, Why Settlement Agreements in Patent Litigation were Deemed as Monopoly Agreements? — — Analysis Of the Judgement and Criteria for Determining Monopoly Agreement by the Supreme People’s Court)

    (2) Introducing the theory of “Single Economic Entity”.

    Paragraph 2 of Article 21 of the Draft provides: “Two or more undertakings that shall be deemed as a single economic entity do not constitute an undertaking with a competitive relationship as mentioned in the preceding paragraph. To make a judgment, the people’s court shall take into account the specific situation and consider factors such as whether the undertaking has control over other undertakings concerned or can exert a decisive influence on them, whether such two or more undertakings are controlled by the same third party or have decisive influence thereon.”

    This is the first time that the SPC explicitly indicates that the theory of “Single Economic Entity” can be applied to determine whether undertakings have a competitive relationship in an anti-monopoly dispute case. The Draft does not specify how to identify “control” or “decisive influence”, but based on the anti-monopoly law enforcement practice, especially in the merger control review cases, the determining factors are not limited to the factors for the identification of control under the company law, the security law or the financial audit regulation. All of the relevant factors such as the equity structure, the appointment of senior management, and the control of business and financial arrangements may be identified as determining factors of “control” or “decisive influence”.

    For example, in the penalty decision against three calcium gluconate active pharmaceutical ingredient (“API”) suppliers — Shandong Kanghui Medicine (“Kanghui”), Weifang Puyunhui Pharmaceutical (“Puyunhui”) and Weifang Taiyangshen Pharmaceutical (“Taiyangshen”) — for abuse of dominance imposed by the State Administration for Market Regulation (the “SAMR”) on 9 April 2020, the SAMR identified a de facto controlling relationship among the three API suppliers even if they have no equity relationship, with each registered as an independent legal entity. The SAMR held that both Puyunhui and Taiyangshen were controlled by Kanghui and carried out their business under the instructions of Kanghui: (1) Kanghui regarded Puyunhui and Taiyangshen as its departments and coordinated relevant matters through work contact forms; (2) when Kanghui took the inventory of API products, the inventories of Puyunhui and Taiyangshen were also counted; (3) Kanghui carried out its business by sending instructions to Puyunhui and Taiyangshen and exerted a full control of the transactions of API products distributed by Puyunhui and Taiyangshen.

    Where two or more undertakings are deemed as a single economic entity, it may not only affect the judgment on whether the agreement reached by them constitutes a horizontal monopoly agreement, but also affect the judgment on whether they have dominant position in the relevant market considering that their market share will be aggregated as that of one single economic entity. For example, in the above-mentioned penalty decision against the three API suppliers, when the SAMR determined the dominance of the three API, their market share in the relevant market were aggregated as a single economic entity.

    3. Amending the provisions on the determination of monopoly agreement.

    (1) Specifying the determining factors of “other concerted practices”.

    Article 16 of the AML provides: “For the purposes of this Law, monopoly agreement refers to agreement, decision or other concerted practice that excludes or restricts competition.” According to Article 5 of the Interim Provisions on Prohibition of Monopoly Agreements (the “Provisions on Monopoly Agreements”) issued by the SAMR, “… other concerted practice refers to a practice carried out by undertakings in the absence of a definite agreement or decision between undertakings which nevertheless has been coordinated in substance.”

    Paragraph 1 of Article 20 of the Draft provides: “The people’s court shall consider the following factors when determining other concerted practice under Article 16 of the AML: (1) whether there is consistency or relative consistency in the market conducts of undertakings; (2) whether there has been communication or exchange of information between undertakings; (3) market structure, competition status, market changes and other situations in the relevant market; and (4) whether the undertakings can provide reasonable explanations on the consistency or relative consistency of their conducts.” Paragraphs 2 and 3 of Article 20 of the Draft introduce the provisions on the burden of proof. (Note: For more details, please see, Part I: Changes to Procedural Matters)

    The factors for determining “other concerted conducts” listed in the Draft are basically the same as the provisions in Article 6 of the Provisions on Monopoly Agreements. Actually, before the issuance of the Draft, the people’s courts have already determined whether the defendants have carried out “other concerted conduct” based on the above-mentioned factors in precedents. For example, in Li Bingquan v. Xiang Pin Tang, the SPC determined whether the five defendants had carried out “other concerted conduct” from the following aspects: (1) the purchase records submitted by the plaintiff could prove that the five defendants had sold the same water product at the same price; (2) a preliminary assumption that the undertakings concerned had exchanged information or intentions could not be made only based on the fact that the similarity of prices of the same water product in the limited area; (3) the plaintiff failed to provide evidence regarding the market structure, competition status, market change and other circumstance of the relevant market. Considering the factors such as the similarity of the water product concerned, the limited area where the undertakings concerned sold the products, the transparency of product price, and the limited number of undertakings, the SPC determined that the existing evidence submitted by the plaintiff is insufficient to exclude the possibility of independent pricing by the five defendants.

    (2) Specifying how to determine whether the vertical monopoly agreements have the effect of excluding or restricting competition.

    Paragraph 1 of Article 18 of the AML provides: “Conclusion of any of the following monopoly agreements between undertakings and their trading counterparts is prohibited: (1) fixing the price of products for resale to a third party; (2) restricting the minimum price of products for resale to a third party; and (3) any other monopoly agreement as determined by the anti-monopoly law enforcement authority of the State Council.” In practice, the first two monopoly agreements are generally referred to as “Price-related Vertical Monopoly Agreements” or “Resale Price Maintenance Agreements” (the “RPM agreement”), while the third circumstance is generally referred to as “Non-price Vertical Monopoly Agreements”.

    The amendment to the AML adds a new provision as Paragraph 2 on the determination of the RPM agreement: “An agreement specified in Item (1) or (2) of the preceding Paragraph shall not be prohibited if the undertakings concerned can prove that such agreements do not have effects of excluding or restricting competition.” Based on the amendment to the AML, the undertakings can argue that the agreement with the content specified either in Item (1) or Item (2) of Paragraph 1 of Article 18 of the AML does not constitute the RPM agreement prohibited by the AML if they can prove that such agreement does not have effects of excluding or restricting competition.

    Article 26 of the Draft provides: “When reviewing and determining whether an alleged monopolistic conduct has the effect of excluding or restricting competition in accordance with Paragraph 1 of Article 18 of the Anti-monopoly Law, the people’s court may comprehensively consider the following factors: (1) whether the defendant has significant market power in the relevant market; (2) whether the agreement has adverse competition effects such as raising the entry barrier to market, hindering more efficient distributors or distribution models, or restricting inter-brand competition; and (3) whether the agreement has favorable competition effects such as preventing free-riding, promoting inter-brand or intra-brand competition, safeguarding brand image, improving pre-sale or after-sale service levels, or promoting innovation. Where the defendant has significant market power in the relevant market, the favorable competition effects that can be proved by the documented evidence are insufficient to outweigh the adverse competition effects, the people’s court shall rule that the agreement has the effect of excluding or restricting competition.”

    This provision specifies how to determine whether the vertical monopoly agreements have the effect of excluding or restricting competition. The theoretical bases of the determining factors such as preventing free-riding and the promotion of inter-brand competition are the same as those set out in the Anti-monopoly Guidelines of the Anti-monopoly Commission of the State Council for the Automobile Industry (the “Guideline for Automobile Industry”).

    (3) Circumstances where the people’s court may preliminarily determine that the agreement concerned does not constitute a vertical monopoly agreement.

    Article 27 of the Draft provides: “If the defendant can prove any of the following circumstances, the people’s court may preliminarily determine that agreement concerned does not constitute a monopoly agreement stipulated in Paragraph 1 of Article 18 of the Anti-monopoly Law: (1) the transaction counterparty of the agreement is an agent of the undertaking, and does not bear any substantive commercial or operational risks; (2) the defendant’s market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council; or (3) the agreement is implemented within a reasonable period to incentivize the transaction counterparty to promote new products.”

    In addition to specifying the application of the “Safe Harbor” rule in vertical monopoly agreement disputes (Note: For more details, please see, Part I: Changes to Procedural Matters), the Draft also involves two other circumstances where the people’s court may preliminarily determine that the relevant agreement does not constitute a vertical monopoly agreement. These circumstances are also included in the Guideline for Automobile Industry. Specifically, Part (2) of Article 6 of the Guideline for Automobile Industry lists the common situations where undertakings in the automobile industry may apply for exemption of resale price restrictions on a case-by-case basis pursuant to the AML, including:

    • Short-term restrictions on sub-sale price of new energy vehicles. In order to conserve energy, protect the environment and avoid “service free rider”, the short-term fixing of sub-sale price and specifying the minimum sub-sale price of new energy vehicles are necessary for encouraging the dealers to strive to promote the new energy products, make greater sales efforts, and expand the market demands for the new products, which may promote the successful release of new products into the market and give the consumers more choices.
    • Sub-sale price restrictions in sales by a dealer that only plays the role of an intermediary party. Sale by a dealer that only plays the role of an intermediary party refers to the sales where the auto supplier and a particular third party or a particular end customer directly agree on the sales price, and only have the dealer to complete the vehicle delivery, funds collection, invoice issuing or other parts of selling steps. In such transactions, the dealer assists in completing the transaction by playing the role of the intermediary party only, different from the dealer in the general sense.

    Article 18 of the AML stipulates that the vertical monopoly agreement is a monopoly agreement concluded between the undertaking and its counterparty, but it does not provide for the definition of the “counterparty”. In practice, vertical monopoly agreements are usually concluded either between the manufacturer and the wholesaler/retailer or the wholesaler and the retailer. Item (1) of Article 27 of the Draft specifies that the people’s courts may preliminarily determine that the agreement concerned does not constitute a vertical monopolistic agreement if the counterparty is an agent and does not bear any substantive commercial or operational risks. In determining whether the counterparty shall be deemed such an agent, the key considerations may include whether the counterparty is responsible for the costs of the supply of goods, the storage of goods, the damages caused to third parties, and certain investments for selling the goods.

    (4) Introducing provision on the determination of the organizer and facilitator of monopoly agreement, and the joint and several liability borne by them.

    The amendment to the AML introduces new provision under Article 19 stating that “An undertaking shall not organize other undertakings to reach a monopoly agreement or provide substantive assistance for other undertakings to reach a monopoly agreement.” In addition to the provisions on horizontal monopoly agreements (i.e., monopoly agreements concluded between competitive undertakings) and vertical monopoly agreements (i.e., monopoly agreements concluded between undertaking and its trading counterparty), the amendment introduces the above provisions on circumstance theoretically referred to as “Hub and Spoke Conspiracy”. In addition, the amendment to AML keeps the provisions on the prohibition against the industry associations from organizing undertakings to conduct monopolistic conducts.

    Paragraph 1 and 2 of Article 28 of the Draft introduces provisions that the plaintiff has the rights to claim that the undertaking or organization of undertakings which conduct organization or provide substantive assistance for other undertakings to conclude or implement a monopoly agreement bear the joint and several liability for the damages caused by the monopoly agreement concerned. Paragraph 3 and 4 of Article 28 of the Draft separately provides how to determine “organize other undertakings to reach a monopoly agreement” and “provide substantive assistance for other undertakings to reach a monopoly agreement” stipulated in Article 19 of the AML.

    According to Paragraph 3 and 4 of Article 28 of the Draft, (1) “organize” refers to conducts such as forming, leading, planning, manipulating, directing and initiating that play a decisive or dominant role in concluding or implementing a monopoly agreement; (2) “provide substantive assistance” refer to conducts such as guiding the occurrence of illegal intent, providing convenience, serving as an information channel and assisting in imposing punishments, which play a direct and important role in promoting the conclusion or implementation of a monopoly agreement. The Provisions on Prohibition of Monopoly Agreements (Draft for Comments) published by the SAMR on June 27, 2022, also sets forth provisions on how to determine “organize” and “provide substantive assistance”. The key factors and theoretical basis of the provisions under this document are basically the same as that of the Draft, but this document has not been formally adopted either.

    4. Amending the provisions on the determination of market dominance and abuse of dominance.

    (1) Introducing provision on the determination of market dominance which includes rebutting the assumption of collective dominance.

    The Draft introduces provisions on the determination of market dominance of the undertakings concerned in monopoly dispute cases under Article 30, Article 32, Article 34, Article 35 and Article 36. The provisions are basically consistent with the relevant content of the Interim Provisions on the Prohibition of Abuse of Dominant Market Position (the “Provisions on Abuse of Dominant Market Position”), the Provisions of the State Administration for Market Regulation on the Prohibition of Abuse of Intellectual Property Rights to Exclude or Eliminate Competition (the “Provisions on the Abuse of Intellectual Property Rights”) and the Guideline for Platform Economy and the opinions formed in administrative enforcement. These new and amended provisions reflect the connection between administrative enforcement and judicial practice. Limited to the length of this article, we will not elaborate on this section, but only introduce the provisions on rebutting the assumption of collective dominance.

    Article 36 of the Draft provides: “Where the people’s court presumes that two or more undertakings collectively have dominant market position in accordance with Item (2) and (3) of Paragraph 1 of Article 24 of the Anti-monopoly Law, such presumption may be rebutted if the undertaking has evidence to prove either of the following circumstances: (1) there is substantial competition between such two or more undertakings; or (2) such two or more undertakings, as a whole, are subject to effective competitive constraints from other undertakings in the relevant market.” These are detailed interpretations of the provisions under Paragraph 3 of Article 24 of the AML, which stipulates that “Where an undertaking presumed to hold a dominant market position is able to provide evidence that it does not hold such a dominant market position, it shall not be deemed to hold the dominant market position.” Although “substantial competition” and “effective competitive constraints” are yet to be further clarified by the people’s court, the opinions held by the people’s court in precedents can be used for reference.

    In Ma Lijie v. China Mobile Communications Group Henan, the SPC for the first time mentioned the factors and standards for determining the collective market dominance. The SPC held that “Based on the common sense regarding the market operation, if multiple undertakings in the relevant market adopt different behaviors in respect of the same business, this is usually a normal result of market competition among the undertakings, and thus it is unnecessary to consider determining the collective market dominance. Therefore, only when multiple undertakings in the relevant market adopt the same behaviors in respect of the same business which reflects the consistency of behavior, it is necessary to consider determining the collective market dominance. For this reason, to determine whether multiple undertakings have formed a collective market dominance, in addition to examination of their market shares, factors such as the consistency of their behaviors also need be considered.”

    (2) Introducing provision on the determination of abuse of dominance.

    The Draft introduces provisions on the determination of abuse of dominance conducted by the undertakings concerned in monopoly dispute case under Article 37 to 43. The provisions draw on the content of with the relevant content of the Provisions on Abuse of Dominant Market Position, the Guideline for Platform Economy, the Provisions on the Abuse of Intellectual Property Rights, the Anti-Monopoly Guidelines of the Anti-Monopoly Commission of the State Council in the Field of Intellectual Property Rights (the “Guideline for Intellectual Property Rights”), and the opinions formed in administrative enforcement. These new and amended provisions reflect the connection between administrative enforcement and judicial practice. Limited to the length of this article, we will not elaborate on this section.

    5. Introducing provisions on the key issues in the field of platform economy.

    The Draft provides specified provisions on the key issues in the field of platform economy which draw on the content of the Guideline for Platform Economy, and the opinions formed in administrative enforcement. In addition, the Draft introduces reference provisions to the relevant provisions of the E-commerce Law of the People’s Republic of China (the “E-commerce Law”). Limited to the length of the article, we will not elaborate on this section of the content, but only introduce the provisions on the Most-Favored-Nation Clause and interconnection issues in the field of platform economy.

    (1) Introducing provisions on Most-Favored-Nation Clause.

    Article 24 of the Draft provides: “Where the agreement between an undertaking operating internet platform and an undertaking using the internet platform requires that the undertaking using the internet platform provides the same or more preferential transaction conditions on the internet platform as other transaction channels, the people’s court may, according to the plaintiff’s claims and the specific circumstances of the case, handle the case as follows: (1) where there is a competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with Article 17 of the Anti-monopoly Law; (2) where there is no competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with Article 18 of the Anti-monopoly Law; (3) where the plaintiff claims that the undertaking operating internet platform abuses the dominant market position, the people’s court shall review the case in accordance with Article 22 of the Anti-monopoly Law and Article 22 of the E-commerce Law; and (4) where the plaintiff claims that the undertaking operating internet platform violates Article 35 of the E-commerce Law, the people’s court shall review the case in accordance with the provision of this article.”

    The above new provisions of the Draft set forth how to determine whether the Most-Favored-Nation Clause (the “MFN Clause”) in the field of platform economy constitutes illegal monopolistic conduct. MFN Clause is originally a term used in international economic trade which means the “best available terms”. With the development of the digital economy, the MFN Clause has been used more widely in digital publishing, e-commerce, online travel, online insurance and other sectors. On the one hand, the MFN Clause helps to reduce transaction costs and buyer risks, but on the other hand, it may also have a foreclosure effect and facilitate the collusion between undertakings. Therefore, the MFN Clause falls under the scope of antitrust regulations in lots of key antitrust jurisdictions such as the United States and the European Union. Before the issuance of the Draft, Paragraph 2 of Article 7 of the Guideline for Platform Economy also set forth provisions on the MFN Clause: “If an undertaking operating internet platform requires the undertaking using the internet platform to provide the platform with transaction conditions equal to or more favorable than those provided to other competitive platforms in terms of price, quantity, or other aspects of the product, it may constitute a monopoly agreement or abuse of the dominant market position.”

    So far, China’s antitrust enforcement authorities and people’s courts have not determined whether the MFN Clause constitutes monopolistic conduct in any published precedents. In the penalty decision against Eastman (China) for abuse of dominance imposed by the Shanghai Administration for Market Regulation (the “Shanghai AMR”), the Shanghai AMR identified that the MFN Clause concerned as a method to impose transaction restriction but did not mention whether the MFN Clause itself constituted monopolistic conduct.

    According to the above new provisions of the Draft and the relevant provisions of the E-commerce Law, when determining whether the MFN Clause in the field of platform economy constitute illegal monopolistic conduct, the people’s court shall, according to the plaintiff’s claims and the specific circumstances of case, conduct the following analysis methods:

    • Based on whether there is a competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with the relevant provisions on horizontal monopoly agreements or vertical monopoly agreements under the Anti-monopoly Law.
    • If the plaintiff claims that the undertaking operating internet platform abuses its market dominance, the people’s court shall review the case in accordance with the relevant provisions on the abuse of dominance under the Anti-monopoly Law, and also Article 22 of the E-commerce Law which provides that “The E-commerce undertaking which owns market dominance due to its technical advantages, number of users, ability to control related industries, and other undertakings’ dependence on such E-commerce undertaking in terms of transactions, it is not allowed to abuse its market dominance to exclude or restrict competition.”
    • If the plaintiff claims that the undertaking operating internet platform violates Article 35 of the E-commerce Law which provides that “The undertaking operating E-commerce platform shall not use the service agreement, transaction rules, technology or other means to impose unreasonable restrictions or conditions on the transactions, the transaction price and transactions with other undertakings of the undertakings who use the platform, or to charge unreasonable fees from the undertakings using the platform”, the people’s court shall review the case in accordance with the provision of this article.

    (2) Introducing provisions on interconnection issues in the field of platform economy.

    In recent years, China’s authority has been greatly promoting the interconnection between the platforms due to its importance for the development of national economy and the protection of consumer welfare. The Provisions on Abuse of Dominant Market Position and the Guideline for Platform Economy stipulate that refusing other undertakings to use essential facilities may constitute abuse of dominance and provide the considerations for determining essential facilities.

    The Draft also set forth provisions regarding the interconnection between the platforms, which provides that the refusal to make one’s products, platforms or software systems compatible, and the refusal to share one’s technologies, data or platform interface may be deemed as monopolistic conducts. Paragraph 2 of Article 39 of the Draft provides: “Where an undertaking having a market dominance refuses to make its products, platforms or software systems, etc. compatible with other certain products, platforms or software systems, etc. provided by other undertakings without justified reasons, or refuses to share its technologies, data or platform interface, the people’s court may comprehensively consider the following factors and make the determination in accordance with Item (3) of Paragraph 1 of Article 22 of the Anti-monopoly Law: (1) the economic, technical and legal feasibility of the undertaking to implement compatibility or share its technologies, data or platform interface; (2) the substitutability of the products, platforms or software systems and the reconstruction costs of platforms or software systems; (3) the degree of dependence of other undertakings on the products, platforms or software systems of the undertaking concerned to carry out effective competition in the upstream market or downstream market; (4) the impact of refusal of compatibility or sharing on the innovation and introduction of new products; (5) whether refusal of compatibility or sharing substantially excludes or restricts the effective competition in the relevant market; and (6) the impact of implementation of compatibility or sharing on the business activities, legitimate rights and interests of the undertaking concerned.”

    6. Introducing provisions on the key issues in the field of intellectual property.

    The Draft provides specified provisions on the key issues in the field of intellectual property which draw on the content of the Provisions on the Abuse of Intellectual Property Rights, the Guideline for Intellectual Property Rights, and the opinions formed in administrative enforcement. Limited to the length of the article, we will not elaborate on this section of the content, but only introduce the provisions on the Reverse Payment Agreements.

    Article 23 of the Draft provides: “Where the agreement reached and implemented by the drug patent right holder and the generic drug applicant meets all the following conditions, the people’s court may preliminarily determine that it constitutes a monopoly agreement as provided in Article 17 of the Anti-monopoly Law: (1) the drug patent right holder gives or promises to give the generic drug applicant a large amount of benefits compensation in monetary or other forms; and (2) the generic drug applicant promises not to challenge the validity of the patent right of the generic drug or delay to enter the relevant market of the generic drug. Where there is evidence that the benefits compensation referred to in the preceding paragraph is only made up for the cost of resolving the dispute relating to the patent of the generic drug or there are other legitimate reasons, the people’s court may determine that it does not constitute a monopoly agreement as provided in Article 17 of the Anti-monopoly Law.”

    The above-mentioned provision specifies how to determine whether the Reverse Payment Agreements, also known as the “Pay-for-delay Agreements”, constitute illegal monopolistic conducts in judicial practice. Prior to the insurance of the Draft, people’s courts have clarified in precedents that the Reverse Payment Agreements may have the effect of excluding or restricting competition and constitute the monopoly agreement regulated by the AML.

    On December 17, 2021, the SPC ruled on the application for withdrawal of appeal in AstraZeneca v. Jiangsu Aosaikang Pharmaceutical and for the first time made a preliminary antitrust review on the “reverse payment agreement of pharmaceutical patents”. In the process of reviewing the withdrawal of the appeal application, the SPC found that the settlement agreement in question was in line with the appearance of a “reverse payment agreement of pharmaceutical patents”, i.e. the drug patent right holder promises to compensate the generic applicant for direct or indirect benefits (including disguised compensation such as reducing the generic applicant’s non-benefits), and the generic applicant promises not to challenge the validity of the drug-related patent rights or delay entering the market of the patented drug. The applicant promises not to challenge the validity of the patent right of the drug or delay the entry into the market of the patented drug. The SPC pointed out that such agreements may have the effect of excluding or restricting competition and thus constitute the monopoly agreement prohibited by the AML. In this case, the SPC specified the method of conducting an antitrust review on the “reverse payment agreement of pharmaceutical patents”: by comparing the actual situation where the agreement was signed and fulfilled with the hypothetical situation where the agreement was not signed or fulfilled, the people’s court may focus on the possibility that drug-related patent rights are invalid due to the request for invalidation where the generic drug applicant does not withdraw that, and then, based on this possibility, analyze whether and to what extent relevant agreement causes harm to competition on the relevant market.

    7. Specifying that plaintiff may bring lawsuit against the undertaking who benefits from the administrative monopolistic conducts.

    Article 4 of the Draft provides: “Where the plaintiff files a civil lawsuit with a people’s court in accordance with the Anti-monopoly Law against the undertaking that benefits from the suspected abuse of administrative power to exclude or restrict competition by an administrative authority or an organization authorized by laws or regulations to administer public affairs, and requests the undertaking to bear civil liability, if the administrative conduct concerned has been legally identified as the abuse of administrative power to exclude or restrict competition, the people’s court shall accept the case.”

    Chapter V of the AML sets forth the provisions on the conduct of abuse of administrative power to exclude or restrict competition (“administrative monopolistic conduct”), and Paragraph 1 of Article 61 of the AML provides that “Where administrative authorities and organizations authorized by laws and regulations to administer public affairs abuse their administrative powers to exclude or restrict competition, the superior authorities shall order them to make corrections; the directly liable persons in charge and other directly liable persons shall be punished.” However, the above provisions do not clarify whether an undertaking benefiting from an administrative monopolistic conduct (e.g., where the administrative authorities abuse their administrative power to request all the entities to buy the relevant products from certain undertaking) shall be held liable for any liabilities.

    According to Article 4 of the Draft, where there is effective ruling that the administrative conduct concerned constitute an abuse of administrative power to exclude or restrict competition, the plaintiff may file a lawsuit against the undertakings who have benefited from the administrative monopolistic conduct. It remains to be further clarified in relevant regulations and judicial practices regarding how to determine the civil liability of the undertaking who benefit from the administrative monopolistic conduct.

    8. Specifying that the people’s court may request the defendant to conduct certain acts to restore the market competition status.

    Article 44 of Paragraph 2 of the Draft provides: “Where ruling that the defendant ceases the alleged monopolistic conduct is not sufficient to eliminate the effect of excluding or restricting competition, the people’s court may, based on the plaintiff’s claims and the specific circumstances of the case, order the defendant to take the legal liabilities of making specific acts to restore competition.”

    According to the above provisions, in addition to legal liabilities such as compensating the plaintiff for the economic damages, if the defendant is found to have conducted illegal monopolistic conducts, the people’s court may rule that the defendant needs to take certain actions to restore competition, which will improve the effectiveness of judicial remedies. According to China’s antitrust law enforcement practice, we understand that the conducts ordered by the people’s court to restore competition in judicial practice may include terminating the exclusive agreement, terminating the additional unreasonable transaction conditions, terminating the discriminative transaction clauses, and guaranteeing the supply of products to the downstream enterprises, etc.

    9. Specifying how to calculate the damages suffered by the plaintiff from the alleged monopolistic conduct.

    Article 45 and 47 of the Draft introduce provisions on how to calculate the damages suffered by the plaintiff from the alleged monopolistic conduct, the main contents of which are as follows:

    Firstly, the damages suffered by the plaintiff due to the alleged monopolistic conduct include direct damages and reduced acquirable benefits. The following factors may be referred to in determining the damages suffered by the plaintiff due to the alleged monopolistic conduct: (1) product prices, operating costs, profits, market shares, etc. in the relevant market before, after and in the course of implementation of the alleged monopolistic conduct; (2) product prices, operating costs, profits, etc. in comparable markets that are not affected by the monopolistic conduct; (3) product prices, operating costs, profits, market shares, etc. of comparable undertakings that are not affected by the monopolistic conduct; and (4) other factors that can reasonably prove the damages suffered by the plaintiff due to the alleged monopolistic conduct.

    Secondly, if the defendant can prove that the plaintiff has transferred all or part of the damages to others, the people’s court may deduct the transferred damages when determining the amount of compensation. The newly added provisions of Paragraph 4 of Article 45 of the Draft are based on the “Passing-on” theory for the compensation in anti-monopoly civil dispute, that is, a circumstance where an undertaking suffering from monopolistic conducts transfers its damage to other entities. Based on the anti-monopoly practices and theories, a buyer (e.g., being forced to purchase a product at an unfairly high price) suffering damages from monopolistic conducts can “pass on” the damages to its downstream undertakings or consumers by resale of the products, raising prices or other means. In such a case, if such a buyer brings an action to claim against the undertaking who conducts the monopolistic conducts, the damages already passed on to other undertakings shall be deducted from compensation claimed for by the buyer. As for the “passed on” damages, the downstream undertakings or consumers may file a lawsuit against the monopolistic conducts concerned claiming for compensation.

    Third, where the plaintiff has evidence to prove that the alleged monopolistic conduct has caused damages to it, but the amount is difficult to be determined, the people’s court may determine a reasonable compensation amount based on the plaintiff’s claim and evidence, and taking into account the nature, extent, duration and benefits obtained of the alleged monopolistic conduct. It is often very difficult to determine what specific effect of excluding or restricting competition is caused by monopolistic conducts on the relevant market (for example, what proportion of rise in the price of the products is due to the monopolistic conducts). In light of that, the Draft provides that if the plaintiff has proved that it has suffered from the alleged monopolistic conduct, the people’s court may determine a reasonable compensation amount based on the specific circumstances.

    Fourth, where multiple alleged monopolistic conducts are combined with each other and cause indivisible overall damages to the plaintiff in the same relevant market, the people’s court shall take into account the overall damages when determining the damages. Where multiple alleged monopolistic conducts are independent from each other and cause damages to the plaintiff in different relevant markets, the people’s court may take into account such conducts separately when determining the damages.

    10. The participants of a horizontal monopoly agreement are not entitled to claim for damages caused by that but can still claim for compensation of “reasonable expenses spent for the investigation and stopping of monopolistic conduct”.

    Article 48 of the Draft provides: “Where an undertaking of a horizontal monopoly agreement files a claim against the other undertakings who have reached or implemented the agreement for compensation of damages incurred during the period of participating in the agreement in accordance with Article 60 of the Anti-monopoly Law, the people’s court shall not uphold the claim.”

    The provisions added here in the Draft set forth the opinion held by people’s court in judicial practice, that is, the participants of horizontal monopoly agreement are not entitled to claim for damages caused by the implementation of such agreement. However, it should be noted that, according to the opinion held by people’s court in precedents, participants of horizontal monopoly agreement can still claim for the damages of the reasonable expenses for investigating and stopping the monopolistic conduct. For example, in Shanghai Huaming v. Wuhan Taipu, the SPC rejected the appellant’s claim for economic damages but upheld the appellant’s claim for compensation of reasonable expenses incurred due to bring the lawsuit. In this case, the SPC held that upholding the reasonable expenses claimed for by the plaintiff for bringing the lawsuit against horizontal monopoly agreement are conducive to disclosing and stopping monopolistic conduct, which shall be taken into consideration. (Note: For a detailed introduction, please see, Why Settlement Agreements in Patent Litigation were Deemed as Monopoly Agreements? — — Analysis Of the Judgement and Criteria for Determining Monopoly Agreement by the Supreme People’s Court)

    *Thanks Liu YAN and Yuanyuan LIU for their contributions in this article.

    [1]Case Number: (2013) Min San Zhong Zi No.4
    [2] Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.
    [3]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.
    [4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1977.
    [5]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 388.
    [6][1]Case Number: (2013) Min San Zhong Zi No.4
    [2] Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.
    [3]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.
    [4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1977.
    [5]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 388.
    [6]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.

    Preamble

    On November 18, 2022, the Supreme People’s Court of the People’s Republic of China (the “SPC”) published an announcement soliciting public comments on the draft of Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Monopoly-related Civil Dispute Cases (the “Draft”). Compared with the Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (the “2012 Interpretation”) issued by the SPC in 2012, which is the first judicial interpretation on China’s antitrust law, the Draft encompasses 52 articles and provides much more detailed interpretations on lots of procedural and substantive matters involved in antitrust civil litigation. When the Draft is formally adopted and comes into effect in the future, the 2012 Interpretation will be voided.

    The key changes in the Draft can be divided into four categories: (1) provisions introduced or amended for being in alignment with the amendment to the Anti-monopoly Law of the People’s Republic of China (the “AML”) in 2022; (2) provisions reflecting the judicial opinions held by the people’s court in the antitrust jurisprudence; (3) provisions drawing on the provisions issued by China’s antitrust law enforcement authority; (4) provisions with groundbreaking content to some extent. The Draft includes responses to multiple complex and controversial issues in judicial practice. This article intends to introduce the key changes in the Draft with two parts, the procedural matters (Part I: Changes to Procedural Matters) and the substantive matters (Part II: Changes to Substantive Matters).

    Brief regarding the changes to procedural matters: Articles 1 to 15 of the Draft address the procedural matters which mainly include the clarification that the arbitration agreement cannot be deemed the natural basis for excluding the jurisdiction of the people’s courts over monopoly civil disputes, the issues regarding the jurisdiction of the people’s courts over monopoly civil disputes, and the relationship between administrative enforcement and private litigation. In addition, the Draft introduces provisions on the parties’ burden of proof on the substantive issues.

    1. Clarifying that arbitration clause cannot automatically exclude the statute jurisdiction of the people’s courts over monopoly civil disputes.

    Article 3 of the Draft provides: “Where a plaintiff files a civil lawsuit with a people’s court pursuant to the Anti-monopoly Law, and the defendant raises an objection citing the existence of a contractual relationship and an arbitration agreement between parties, this shall not affect the acceptance of a monopoly civil dispute case by the people’s court. However, where the people’s court determines that the case is not a monopoly civil dispute case after acceptance, the people’s court may rule on rejection on this case pursuant to the law.”

    The arbitrability of monopoly civil dispute has been a controversial topic in China for a long time. Neither the AML nor the Arbitration Law of the People’s Republic of China provides clear provisions on this issue, and the SPC has held different opinions on this issue in judicial practice. Article 3 of the Draft clarifies that the arbitration clause shall not affect the acceptance of a monopoly civil dispute case by a people’s court, even if that case arises from a contractual dispute which contains arbitration clause; and if the people’s court finds that it is not a monopoly civil dispute case after acceptance, the people’s court can dismiss the case accordingly. After the people’s court dismisses the case, the parties can resolve their disputes pursuant to the arbitration clause.

    In multiple precedents (for example, Beijing Longsheng. v. Honeywe), the SPC ruled that arbitration clause could not be deemed the natural basis for excluding the jurisdiction of the people’s courts over monopoly civil disputes. The SPC held that in cases where the identification and handling of monopolistic conduct go beyond the rights and obligations relationship between the relevant parties, the content of such disputes and the object of trial are far beyond the scope of the agreed arbitration clauses. Therefore, the people’s courts have the statute jurisdiction over the case even if there are valid arbitration clauses.

    Based on case research accessible to the public, only in one precedent, Shanxi Changlin v. Shell, did the SPC rule that the monopoly civil dispute should be governed by the valid arbitration clauses agreed by the parties and thus dismissed the case. However, according to a 19 September ruling posted on 15 November by the SPC, the SPC decided to review this case due to the protest lodged by the Supreme People’s Procuratorate (the “SPP”). According to the ruling posted by the SPC, the SPP concluded that this case falls under the circumstances specified in the sixth item of Article 207 of the Civil Procedure Law of the People’s Republic of China (the “Civil Procedure Law”) — which provides that a people’s court should retry a case if there is a mistake in the application of laws in the original ruling or adjudication — and lodged the protest. There is possibility that the original ruling on Shanxi Changlin v. Shell will be invalid if the people’s court rules that there are mistakes in the application of laws, thus solving the inconsistency of judicial opinions in precedents.

    2. Further strengthening the centralized jurisdiction of people’s courts as the court of first instance over monopoly civil disputes.

    Article 5 of the Draft provides: “The intellectual property court or the intermediate people’s court designated by the Supreme People’s Court shall have jurisdiction over civil monopoly dispute cases as the court of first instance.”

    In light of the complexity of monopoly civil disputes, China’s judicial system has been strengthening the centralized jurisdiction over monopoly civil disputes, which includes having certain courts of first instance to exercise the jurisdiction. Since 2017, the National People’s Congress has successively decided to establish intellectual property courts in Beijing, Shanghai, Guangzhou, and Hainan, and the SPC has subsequently agreed to establish intellectual property tribunals inside the intermediate people’s courts in Chengdu, Nanjing, Suzhou and other more than twenty cities. The intellectual property courts/tribunals have cross-regional centralized jurisdiction over the monopoly civil dispute cases as the court of first instance.

    The 2012 Interpretation, after the revision in 2020, provides that there are three kinds of people’s court as the court of first instance: 1) the intellectual property court; 2) the intermediate people’s court designated by the SPC; 3) the intermediate people’s court of a city where the people’s government of a province, autonomous region, or municipality directly under the Central Government is located or a city under separate state planning.

    The Draft deletes the third kind of people’s courts and provides that only the first two kinds of people’s court have the jurisdiction over civil monopoly dispute cases as the court of first instance: 1) the intellectual property court; 2) the intermediate people’s court designated by the SPC, further strengthening the centralized jurisdiction over monopoly civil disputes. It is foreseeable that if the above changes are officially adopted, more intellectual property tribunals or intellectual property courts will be established in China to exercise centralized jurisdiction over monopoly civil disputes.

    3. Introducing provision on the territorial jurisdiction of the people’s courts over the monopolistic conducts that occurred outside the territory of China.

    Article 7 of the Draft provides: “Where a monopolistic conduct occurred outside the territory of the People’s Republic of China has the effect of excluding or restricting domestic market competition, and a party concerned files a civil lawsuit in accordance with the Anti-Monopoly Law against the defendant who has no domicile within the territory of the People’s Republic of China, the lawsuit shall fall under the jurisdiction of the people’s court at the place where the domestic market competition is directly and materially affected and the result occurs; if it is difficult to determine the place where the result occurs, the lawsuit shall fall under the jurisdiction of the people’s court at the place that has other appropriate connection with the dispute or at the domicile of the plaintiff.”

    Before the release of the Draft, the SPC has already determined in multiple precedents, especially in precedents involving the licensing of standard essential patents (the “SEP”), that where a party files a lawsuit in China for damages suffered from the monopolistic conduct occurred outside the territory of China, the place where the alleged monopolistic conduct has the effect of excluding or restricting competition within the territory of China can be a connecting point for the determination of the jurisdiction over the case.

    • For example, in TCL v. Ericsson, the SPC held that in light of the special features of the SEP licensing market, the relevant negotiations and disputes in foreign jurisdictions might directly, substantively, and significantly exclude or restrict TCL Shenzhen’s participation in the market competition within the territory of China, and the domicile of TCL Shenzhen, namely Shenzhen, Guangdong Province, can be regarded as the place where the infringement results occurred, and therefore, Guangdong Shenzhen Intermediate People’s Court has jurisdiction over this case.

    4. Amending the provisions on opinions of professional institutions/experts on specialized issues.

    Article 12 of the Draft amends the provisions of the 2012 Interpretation on opinions of professional institutions/experts on specialized issues, mainly including the following aspects:

    Paragraph 1 of Article 12 of the Draft provides: “The parties may apply to the people’s court for one or two persons who have the relevant expertise in the fields involved, economics and other fields to attend the court trial and explain the specialized issues relating to the case”, which provides for a detailed interpretation on “have the relevant expertise” in the 2012 Interpretation. In light of the characteristics of monopoly disputes, this article specifies that the professional institutions/experts mainly refer to the experts in the relevant market and economists.

    Paragraph 2 of Article 12 of the Draft provides: “… the professional institution or experts may be determined by the parties through negotiation; if no agreement is reached, the people’s court shall make the designation …” and deletes “upon the consent of the people’s court” in the 2012 Interpretation, specifying the principle that the parties are free to choose experts and carry on the responsibilities on their own.

    Paragraph 3 of Article 12 of the Draft provides: “Where a party entrusts of its own accord the relevant professional institution or experts to provide market research or economic analysis opinions with respect to specialized issues of the case, and such opinions lack of reliable facts, data or other necessary basic information, or lack of reliable analysis methods, or the evidence or reasons provided by the other party are sufficient to rebut such opinions, the people’s court shall not accept such opinions.” Although expert opinions have been frequently used in monopoly civil litigation, there are no explicit provisions on the examination standard of such opinions. This article indicates that the people’s courts shall adopt a stricter examination standard where a party entrusts of its own accord the relevant professional institution or experts to provide opinions; it also explains that the people’s court’s examination standards on opinions of professional institutions/experts include reliable facts, data, basic information, and methods of analysis.

    5. Clarifying the relationship between public and private enforcement.

    After being revised in 2022, Article 11 of the AML provides: “The State shall improve the anti-monopoly regulatory system, strengthen anti-monopoly regulatory power, enhance regulatory capacity and the modernization level of regulatory system, strengthen the public and private enforcement of Anti-monopoly Law, hear monopoly cases in a lawful, fair and efficient manner, improve the mechanism for connecting administrative enforcement with the judicial practice, and maintain the fair competition order.” On 17 November 2022, the SPC held a press conference of the judicial practice regarding anti-monopoly and anti-unfair competition, with a focus on the need to “continue to strengthen communication and cooperation with administrative enforcement departments”. There are multiple articles in the Draft clarifying the relationship between public and private enforcement.

    Article 11 of the Draft provides: “Where a determination decision made by an anti-monopoly law enforcement authority on monopolistic conduct is not subject to administrative litigation within the statutory period or has been confirmed by an effective ruling of the people’s court, the plaintiff who claims for the constitution of such monopolistic conduct in the relevant civil monopoly dispute case does not bear the burden of proof regarding that, unless there is sufficient evidence to the contrary. Where necessary, the people’s court may require the anti-monopoly law enforcement authority who has made the determination decision to provide an explanation on the relevant information.” This article clarifies that the antitrust administrative decision can be used as evidence in private litigation, which reduces the plaintiff’s burden of proof and litigation costs, and thus will to some extent encourage relevant entities to file following-on civil actions after the anti-monopoly law enforcement authority makes the administrative decision.

    Article 14 of the Draft provides: “If an anti-monopoly law enforcement authority is investigating an alleged monopolistic conduct, the people’s court may, depending on the circumstances of the case, rule to suspend the trial proceed of this case.” It should be noted that, different from the circumstances stipulated in Article 153 of the Civil Procedure Law where the people’s court “shall” rule to suspend the trial proceed, this article provides that the people’s court “may” rule to suspend the trial proceed, meaning that the people’s court has the discretion to make the decision based on the circumstances of the case, and the ongoing anti-monopoly administrative investigation does not necessarily trigger a suspension of the trial proceed of relevant case.

    Pursuant to the provisions of AML, the competitor, the upstream/downstream undertaking, the end consumer and other relevant entities who claim for the damages due to monopolistic acts have the right to file a lawsuit to the people’s court, requesting the undertaking who conduct monopolistic acts to bear civil liability. However, in practice, it is often difficult for the plaintiff to provide sufficient evidence to prove either the constitution of monopolistic conduct or the damages suffered from that. To improve the possibility of being effectively remedied, it is common for a claimant to consider filing a report with the anti-monopoly law enforcement authority while filing a lawsuit with the people’s court on the monopolistic conduct concerned at the same time. Based on Article 14 of the Draft, under the circumstance where an anti-monopoly administrative investigation and a civil lawsuit proceed concurrently, the people’s court may use its discretion to determine whether suspending the trial proceed.

    Article 15 of the Draft provides: “When hearing a civil dispute case, if the people’s court finds that relevant conduct of a party is suspected of violating the Anti-monopoly Law, or deems that the alleged monopolistic conduct is in violation of the Anti-monopoly Law which may be subject to administrative penalty, and the anti-monopoly law enforcement authority has not initiated an investigation, the people’s court may forward the clues of the suspected illegal conduct to the anti-monopoly law enforcement authority.” This new provision strengthens the connection between public and private enforcement, and the trial of monopoly litigation will become a more important channel for the AML enforcement authority to obtain clues of illegal monopolistic conducts.

    6. Amending the provisions on the parties’ burden of proof regarding multiple issues.

    Articles 16 to 19, Articles 20 to 29, and Articles 30 to 43 of the Draft separately set out the provisions on the definition of the relevant market, the determination of monopoly agreement, and the determination of abuse of dominance. With respect to the burden of proof regarding these issues, on the basis of the principle of “the burden of proof lies with the party asserting a proposition” in civil litigation, the Draft provides detailed provisions as follows:

    (1) Differentiated provisions on the plaintiff’s burden of proof for market definition depending on the type of alleged monopolistic conduct.

    Article 16 of the Draft differentiates provisions on the party’s burden of proof for market definition depending on the type of alleged monopolistic conduct.

    Alleged monopolistic conductPlaintiff’s burden of proof for market definition
    Abuse of dominanceWhere the plaintiff claims that the party alleged to have engaged in monopolistic conduct has significant market power or dominant market position on the ground of its market share in the relevant market, the plaintiff shall define the relevant market and provide evidence or reasons.
    Horizontal monopoly agreements listed in Items (1) to (5) of Article 17 of the AML.Vertical monopoly agreements listed in Items (1) and (2) of Article 18 of the AMLThe plaintiff has no burden of proof for the definition of the relevant market.
    ExceptionsIf the evidence provided by the plaintiff is sufficient to directly prove that the undertaking has significant market power, the undertakings alleged for abusing dominance has the market dominant position, or the alleged monopolistic conduct has the effect of excluding or restricting competition, the plaintiff will no longer bear the burden of proof for the definition of the relevant market.

    These new provisions of the Draft reflect the judicial opinions held by the people’s court on the burden of proof for market definition in different kinds of monopoly disputes. The below cases can be taken as examples:

    • In Art Kindergarten v. Liujiayi Kindergarten, the SPC held that “as the horizontal monopoly agreements listed in Paragraph 1 of Article 13 of the AML generally have the obvious effect of excluding or restricting competition, and the harmful consequences are generally relatively serious among various types of monopolistic conduct, and it is generally not necessary to clearly and precisely define the relevant market in determining whether the undertakings have reached and implemented the horizontal monopoly agreements listed in Paragraph 1 of Article 13 of the AML.”
    • In Qihoo v. Tencent, the SPC held that “even if the relevant market is not clearly defined, the direct evidence of excluding or restricting competition can be used to analyze the market position of the defendant and the influence of the alleged monopolistic conduct on the market. Therefore, it is not necessary to explicitly and clearly define the relevant market in every case involving abuse of dominant market position.”

    (2) Burden of proof on the determination of monopoly agreement.

    a  For the determination of “other concerted practices”, the plaintiff only bears the burden of proof for some but not all of the determining factors.

    Article 16 of the AML provides: “For the purposes of this Law, monopoly agreement refers to agreement, decision or other concerted practice that excludes or restricts competition.” According to Article 5 of the Interim Provisions on Prohibition of Monopoly Agreements (the “Provisions on Monopoly Agreements”) issued by the State Administration for Market Regulation (the “SAMR”), “… other concerted practice refers to the practice carried out by undertakings in the absence of a definite agreement or decision between undertakings which nevertheless has been coordinated in substance.”

    Paragraph 1 of Article 20 of the Draft provides: “The people’s court shall consider the following factors when determining other concerted practice under Article 16 of the AML: (1) whether there is consistency or relative consistency in the market conducts of undertakings; (2) whether there has been communication or exchange of information between undertakings; (3) market structure, competition status, market changes and other situations in the relevant market; and (4) whether the undertakings can provide reasonable explanations on the consistency or relative consistency of their conducts.

    According to the provisions on burden of proof set forth in Paragraph 2 and 3 of Article 20 of the Draft, after the plaintiff has provided preliminary evidence proving the two items either of Item (1) and (2) or Item (1) and (3) of Paragraph 1, the burden of proof shall be shifted to the defendant, and the defendant bears the burden of proof for the reasonable explanation on the consistency or relative consistency of relevant conducts (i.e., Item (4) of Paragraph 1). It should be noted that, although it is generally not necessary to clearly and precisely define the relevant market when determining whether undertakings have reached horizontal monopoly agreements, since Item (3) of Paragraph 1 involves “market structure, competition status, market changes and other situations in the relevant market”, where the plaintiff claims that the defendant has carried out “other concerted practice” based on the Item (1) and (3) of Paragraph 1, the plaintiff may need to bear the burden of proof on definition of the relevant market.

    Compared with the monopoly agreement reached in the form of an agreement or decision, “other concerted practice” is highly concealed which makes it highly difficult for the plaintiff to provide sufficient evidence on the determination of such conduct. Therefore, compared with other kinds of monopoly agreement, a lower standard of evidence is adopted for the determination of the concerted practice. In Li Bingquan v. Xiang Pin Tang, the SPC clarified for the first time that the plaintiff only needs to provide preliminary evidence for the first three factors in consideration of “other concerted practice” which include “first, whether the market conducts of the undertakings are coordinated and consistent; second, whether there has been communication or exchange of information between the undertakings; third, the market structure, competition status, market changes and other situations in the relevant market.” The above new provision in the Draft further clarifies and reduces the plaintiff’s burden of proof for “other concerted practice”.

    b New provisions introduced on the burden of proof for vertical monopoly agreements in alignment with the amendment to the AML.

    Paragraph 1 of Article 18 of the AML provides: “Conclusion of any of the following monopoly agreements between undertakings and their trading counterparts is prohibited: (1) fixing the price of products for resale to a third party; (2) restricting the minimum price of products for resale to a third party; and (3) any other monopoly agreement as determined by the anti-monopoly law enforcement authority of the State Council.” In practice, the first two monopoly agreements are generally referred to as “Price-related Vertical Monopoly Agreements” or “Resale Price Maintenance Agreements” (the “RPM agreement”), while the third circumstance is generally referred to as “Non-price Vertical Monopoly Agreements”. The amendment to the AML adds new provision as Paragraph 2 of Article 18 on the determination of the RPM agreement: “An agreement specified in Item (1) or (2) of the preceding Paragraph shall not be prohibited if the undertakings concerned can prove that such agreements do not have effects of excluding or restricting competition.

    Before the issuance of the amendment to the AML, the anti-monopoly law enforcement authority adopted the principle of per se illegal to identify the RPM agreement, which means if the undertakings concerned reach or implement an agreement with the content specified either in Item (1) or Item (2) of Paragraph 1 of Article 18 of the AML, the authority may directly determine that such agreement constitute the RPM agreement prohibited by the AML, without the need to prove that it has an effect of excluding or restricting competition. After the amendment to the AML came into effect, the undertakings can argue that the RPM agreement concerned does not constitute the RPM agreement prohibited by the AML if they can prove that such agreement does not have effects of excluding or restricting competition.

    Paragraph 1 and 2 of Article 25 of the Draft provide: “Where the alleged monopolistic conduct is a monopoly agreement as listed in Item (1) or (2) of Paragraph 1 of Article 18 of the Anti-monopoly Law, the defendant shall bear the burden of proof that such agreement does not have an effect of excluding or restricting competition. Where the alleged monopolistic conduct is a monopoly agreement as provided in Item (3) of Paragraph 1 of Article 18 of the Anti-monopoly Law, the plaintiff shall bear the burden of proof that such agreement has the effect of excluding or restricting competition.” These new provisions clarify the burden of proof for vertical monopoly agreements in alignment with the amendment to the AML.

    New provisions introduced on defendant’s burden of proof where it claims for the application of “Safe Harbor” rule in alignment with the amendment to the AML.

    The amendment to the AML provides new provision as Paragraph 3 of Article 18: “If the undertaking is able to prove that its market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council, the agreement shall not be prohibited.” This provision establishes the “Safe Harbor” rule for vertical monopoly agreements based on market share and other conditions. The Provisions on Prohibition of Monopoly Agreements (Draft for Comments) published by the SAMR on June 27, 2022, stipulates the conditions for the application of the “Safe Harbor” rule, but this document has not been formally adopted yet and thus there is still no valid provisions regarding the conditions for the application of the “Safe Harbor” rule yet.

    Paragraph 3 of Article 25 of the Draft provides: “Where the alleged monopolistic conduct is a monopoly agreement stipulated in Paragraph 1 of Article 18 of the Anti-monopoly Law, and the defendant can prove that its market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council, the plaintiff shall bear the burden of proof that the alleged agreement has the effect of excluding or restricting competition.” Item (2) of Article 27 of the Draft provides: “If the defendant can prove any of the following circumstances, the people’s court may preliminarily determine that the agreement concerned does not constitute a monopoly agreement stipulated in Paragraph 1 of Article 18 of the Anti-monopoly Law: … (2) the defendant’s market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council.”

    These new provisions of the Draft clarify for the party’s burden of proof for the application of the “Safe Harbor” rule in alignment with the amendment to the AML: after the defendant provides evidence that its market share in the relevant market is lower than the standard, and it also satisfies the other conditions, the burden of proof shifts to the plaintiff; the plaintiff needs to provide evidence that the alleged agreement has the effect of excluding or restricting competition to rebut the defendant’s claim.

    New provisions introduced on defendant’s burden of proof where it claims for the application of exemption rule.

    Article 20 of the AML establishes the exemption rule for monopoly agreements under statutory circumstances. Article 29 of the Draft provides: “Where the party alleged to have engaged in monopolistic conduct defends itself according to Items (1) to (5) of Paragraph 1 of Article 20 of the AML, it shall provide evidence to prove the following facts: (1) the alleged monopoly agreement is necessary to achieve relevant purposes or effects; (2) the alleged monopoly agreement can achieve relevant purposes or effects; (3) the alleged monopoly agreement will not seriously restrict competition in the relevant market; and (4) consumers can share the benefits arising therefrom.”

    This article of the Draft specifies the defendant’s burden of proof in applying the exemption rule for monopoly agreements, and the four elements provided for in the Draft are basically consistent with the provisions in the Provisions on Monopoly Agreements and the standards adopted by anti-monopoly law enforcement authority in practice.

    (3) Introducing provision on the defendant’s burden of proof to rebut the assumption of collective dominance.

    Article 24 of the AML lists the circumstances where undertakings can be presumed to have a dominant market position based on its market shares, and Item (2) and (3) of Paragraph 1 of Article 24 stipulate the circumstances where two or more undertakings collectively hold the dominant market position. Paragraph 3 of Article 24 of the AML provides: “Where an undertaking presumed to hold a dominant market position is able to provide evidence that it does not hold such a dominant market position, it shall not be deemed to hold the dominant market position.”

    Article 36 of the Draft provides: “Where the people’s court presumes that two or more undertakings collectively have dominant market position in accordance with Item (2) and (3) of Paragraph 1 of Article 24 of the Anti-monopoly Law, such presumption may be rebutted if the undertaking has evidence to prove either of the following circumstances: (1) there is substantial competition between such two or more undertakings; or (2) such two or more undertakings, as a whole, are subject to effective competitive constraints from other undertakings in the relevant market.”

    According to the above-mentioned provisions, where the plaintiff provides evidence to prove that the defendant’s market share meets the standard for the presumption of collective dominance, the burden of proof shifts to the defendant. The defendant may rebut the presumption of collective dominance by providing evidence that there is substantial competition between two or more undertakings concerned, or that two or more undertakings concerned, as a whole, are subject to effective competitive constraints from other undertakings in the relevant market. (Note: For more details, please see, Part II: Changes to Substantive Matters)

    7. Other novel and amended provisions on procedural matters.

    (1) The same plaintiff shall file lawsuit as one case for the same alleged monopolistic conduct.

    Article 10 of the Draft provides: “The same plaintiff shall file in one lawsuit for the same alleged monopolistic conduct. Where more than one lawsuit is filed to split the same alleged monopolistic conduct based on factors such as the geographical region of impact, duration, circumstance of implementation and scope of damage without justified reasons, the people’s court shall only hear the case which is accepted first and shall not accept the other cases; where the people’s court has accepted the other cases, the people’s court shall rule on rejection of that.”

    The same monopolistic conduct may have effects in different geographical regions (for example, selling products at an unfairly high price in multiple provinces), may last for different periods (for example, there are interruptions in the implementation period of the same conduct), may have been implemented in different circumstances (for example, reaching the same RPM agreement with the same distributor in online platforms and physical stores), and may have a broad scope of damage (for example, the undertakings may not only be deprived of the right to choose other platforms but also punished by the same “choose one” rule).

    If the plaintiff splits up the same alleged monopolistic conduct and files a number of lawsuits separately, it will not only waste judicial resources but also may constitute duplicate lawsuits. Therefore, the Draft provides that the same plaintiff shall file in one lawsuit for the same alleged monopolistic conduct. However, it should be noted that if the plaintiff files a lawsuit against the defendant on different monopolistic conducts, it does not apply for this article, but for such cases, the people’s court may decide to conduct a joint trial if the relevant provisions apply.

    (2) New provisions introduced on the civil public interest litigation in alignment with the amendment to the AML.

    Article 13 of the Draft provides: “Where the monopolistic conduct of undertaking damages social and public interest, the people’s procuratorate at or above the level of city with subordinate districts may file a public interest civil lawsuit with the people’s courts, and the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Procuratorial Public Interest Litigation Cases shall apply. However, where there are special provisions on the jurisdiction of civil monopoly disputes under this interpretation, such special provisions shall apply.”

    The amendment to the AML provides in Paragraph 1 of Article 60 that where the monopolistic conduct of undertaking damages social and public interest, the people’s procuratorate at or above the level of city with subordinate districts may file a public interest civil lawsuit with the people’s courts, thereby clarifying for the first time the application of civil public interest litigation in anti-monopoly cases at the legalization level. The Draft introduces Article 13 to keep in alignment with the amendment to the AML. With the introduction of provisions on the anti-monopoly procuratorial public interest litigation, there are likely to be more and more anti-monopoly procuratorial public interest litigation cases in the near future, especially in the fields closely related to the people’s livelihood such as platform economy, public utilities and medicine. (Note: For a detailed introduction, please see, Prosecutorial Civil Public Interest Litigation of Antitrust Case under the New China’s Anti-monopoly Law)

    (3) Clarifying how the AML applies before and after the amendment took effect.

    Article 51 of the Draft provides: “When hearing monopoly civil cases, the people’s court shall apply the laws effective at the time when the alleged monopolistic conduct takes place. Where the alleged monopolistic conduct occurred before the implementation of the Decision of the Standing Committee of the National People’s Congress on the Revision of the Anti-monopoly Law of the People’s Republic of China and continues after the implementation of that, the revised Anti-monopoly Law shall apply.”

    *Thanks LiuYANand Yuanyuan LIU for their contributions in this article.

    [1] Case Number: (2022) Zui Gao Fa Zhi Min Zhong No. 1276.
    [2]Case Number: (2019) Zui Gao Fa Min Shen No.6242, (2019) Jing Min Jie Zhong No.44.
    [3]Case Number: (2019) Zui Gao Fa Zhi Min Zhi Zhong No. 32.
    [4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 2253.
    [5]Case Number: (2013) Min San Zhong Zi No.4
    [6]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.

    Welcome to Our Yearend Antitrust Practice Review

    Standing at the beginning point of the new year, we take the opportunity to deliberate  and reflect on the last twelve months. 2022 has been an extremely busy and productive year for AnJie Broad Antitrust Team. Together, we have accomplished several milestones and have much to be proud of. Whilst against a challenging macro-economic and geopolitical backdrop, we are pleased to highlight the significant accomplishments and encouraging momentums the team has achieved.

    Merger Control

    In 2022, China’s antitrust authority SAMR has conditionally approved 5 deals in total; they are Siltronic/GWC, Xilinx/AMD, Coherent/II-IV, Avinex/Eastern Air Logistics and Asiana/Korean Air. Among these 5 cases, the team had deep participation in 4 of them. In Siltronic/GWC and Asiana/Korean Air, the team, as the filing party’s counsel, successfully secured  clearance from SAMR for the clients.

    Antitrust Private Litigation

    With the revised Anti-Monopoly Law (2022) specifically advocating the enhancement of antitrust judicial practice, the team also observed the increasing number of antitrust private actions being lodged before Chinese courts. In 2022, the team represented the parties in 16 antitrust private litigations. Among them, 2 have been closed with the second instance judgment being handed down within the year; 14 cases are still pending, in which 6 were appealed to the Supreme People’s Court and 8 are still under the first instance trial. As to the cause of action, abuse of market dominance accounts for the majority in cases the team handled in 2022, 14 out of 16; and the remaining 2 were related to horizontal monopoly agreements. Echoing the global enforcement trend against digital economy, 4 cases the team represented in the year were against Chinese internet giants. Notably, the case Huaming v. Taipu (Docket No.:(2021) Zui Gao Fa Zhi Min Zhong No.1298) was selected as Top Ten Typical Antitrust Cases by the Supreme People’s Court. Generally speaking, PRC courts handle around 40 antitrust private litigation annually. In 2022, the antitrust litigations handled by the team involve the intermediate people’s courts and high people’s courts in Beijing, Shanghai, Harbin, Huhhot, Changchun, Yinchuan, Ningbo and Wuhan, as well as the Supreme People’s Court. The team has also been assisting a domestic company with responding to an US antitrust class action in 2022.  

    Government Investigation

    We have been continuously and diligently assisting clients with responding to the antitrust authority in 6 antitrust investigations in 2022, 4 of which were commenced before 2022. Among them, 3 investigations were against horizontal monopoly agreements, 1 against abuse of dominant market position, and 1 against price resale maintenance (RPM). The cases that the team defended in the year extended to automobile, public utility, construction, electronics and manufacturing. One investigation was initiated after the revised Anti-Monopoly Law entered into force, thereby several novel and challenging issues were touched for the first time, such as application of new law or old law, how to apply the “rule of reason” in RPM pursuant to the new law, and how to apply the “safe harbor” before supplementary rules are released.

    Government Support

    In 2022, the team has been actively contributing to support the antitrust authority’s work. Specifically, in the Calcium gluconate case, the ever first antitrust administrative litigation solely against SAMR up to date, the team represented SAMR before Beijing Higher People’s Court in the first instance trial. In several investigation initiated by a provincial antitrust regulator, the team provided comprehensive legal advice. The team’s partner Dr. Zhan Hao was engaged by Beijing AMR and Shandong AMR as the antitrust expert of their pools; another partner of the team Ms. Song Ying was also engaged by Beijing AMR as the supporting antitrust expert.

    Competition Compliance

    As China has been actively advocating the competition compliance, strengthening the approach of pre-regulation, we observed that a growing number of businesses attached more importance to the establishment and improvement of its competition compliance system. In the year, the team spared no effort to back companies in conducting the competition compliance due diligence review, drafting competition compliance manuals, implanting compliance requirements into the business workflow, devising compliance toolkits, conducting mock dawn raids, delivering competition compliance trainings and providing other compliance assistance. The team’s competition compliance work in the year covered diverse sectors, to name a few, e-commence, consumer goods, new energy, oil & gas, food, pharmaceuticals, insurance, automobile, aviation, public utility and etc.

    Publications

    In 2022, the team continues to be industrious in contributing to various Chinese and global publications in the competition law field, with the intention to spread and share the practical experience and observations as much as possible. For instance, we were invited to contribute the China Chapter of Dominance and Monopolies, Legal 500 Comparative Guide on Competition Litigation, Lexology GTDT Market Intelligence Merger Control, Global Legal Insights: Merger Control and Global Legal Insights: Cartel. The team also delivered its comprehensive analytical articles on the Amended Anti-Monopoly Law and the draft Antitrust Judicial Interpretations for consultation, in the first hours after they were released. For years, the team has been operating an academic and professional e-publication platform through a WeChat Official Account (see the QR code below), through which to release the freshest competition law news, enforcement decisions, judicial judgements or academic and practitioner articles on a daily basis. By the end of 2022, this platform has around 8000 followers in total.

    Awards and Accolades

    Leading organizations in China and abroad continued to widely recognize the team in Antitrust/Competition field in 2022, which include but not limited to the following: Chambers & Partners and LegalBand rated the team’s partner Dr. Zhan Hao as “Band one PRC Antitrust/Competition Lawyer”. Who’s Who Legal and LegalBand awarded Dr. Zhan as “leading PRC antitrust lawyer”. China Intellectual Property Forum rated Dr. Zhan as “Top 10 Renowned Antitrust Lawyer”. Another partner of the team Ms. Song Ying was also recommended as the leading PRC antitrust lawyer by Chambers& Partners, Who’s Who Legal and LegalBand in 2022. Other partners have also won multiple awards. In the 2022 list of Global Recommended Firms and Lawyers in Competition Law published by Global Competition Review (GCR), the firm once again was recognized as a “Highly Recommended Law Firm.” Notably, Dr. Zhan was honored by ICC Competition Commission as the “China ambassador” to bridge the competition law communication and exchange between China and the world. In 2022, Beijing Digital Economy and Digital Governance Rule of Law Research Association was set up. Because of our forward-looking research on antitrust in the digital economy, Dr. Zhan Hao was elected as the Vice President.

    Acknowledgements

    Together we continued to focus on the work of creating meaningful value to our clients and the whole competition law society in 2022. We are proud of our valued team members and hope each of them takes a moment to reflect on what we’ve accomplished – without their hard work, none of it would be possible. We would be remiss if we didn’t recognize our partners in other countries as well. Our close collaboration with our counterparts in other jurisdictions such as the US, EU, South Korea, Japan, UK and Canada, allows us to provide full-fledged high-quality service to our clients operating globally. We would also like to extend this opportunity to thank our clients, antitrust regulators, judges, scholars and lawyer fellows in the competition law field. Working with each of you bestows us the opportunity to learn more and become better. Looking ahead to 2023, AnJie Broad Antitrust Team will continue to dedicate to providing the first-tire antitrust legal services to our clients, and we will bear the persistent commitment of sharing and spreading our practical experience and contributing to the whole competition community. As always, thank you for your always support and look forward to seeing you again in the promising 2023.

    I. Introduction

    When referring to insurance, the first term that comes up with one’s mind is likely to be insurers, which are mostly known to operate insurance businesses. Nowadays, with the growth of the insurance industry, other entities also emerge such as insurance agents, brokers, and loss adjustors. These entities play different roles to prosper the industry in many ways, for example, to provide more value-added services to their clients and to ensure the smooth process of insurance. Among them, an entity called Third Party Administrator abbreviated as “TPA” is picking up steam, especially in the health insurance field. Currently, there is not yet a unified definition of TPA in a worldwide manner as they conduct various functions and are subject to dissimilar regulatory requirements under different jurisdictions. However, in most cases, TPAs are known to help insurers “collect and process information during the process of insurance, underwriting, and claims, and improves their risk management and control capabilities[1]”. It is commonly recognized that insurers are outsourcing some of their activities to TPAs, because of the TPA’s expertise in certain fields.

    In China, along with the expansion of the insurance market in these years, more insurance entities, including insurers and reinsurers, would like to develop their cooperation with TPAs. In this case, it is anticipated that more TPAs will be founded in the future, with their products and services expected to be more diversified and abundant. As increasing aspects are covered by the TPA with its multiple business models, a concern arises about whether it may step into the restrictive area from the perspective of insurance regulations. Therefore, this article aims to explore the possible connection between TPA’s business scope and insurance activities under the legal and regulatory framework of the People’s Republic of China (“the PRC”, for the purpose of this article, excluding jurisdictions as Hong Kong SAR, Macao SAR, and Taiwan).

    II. Insurance Activities under the PRC Law

    In the PRC, the insurance industry, as a significant financial sector, is heavily regulated and supervised where not only laws apply, but also several regulations, mainly promulgated by the China Banking and Insurance Regulatory Commission (“CBIRC”, previously known as China Insurance Regulatory Commission or “CIRC”) as the primary regulator. These laws and regulations aim to comprehensively cover legal and compliance issues in the insurance industry. Specifically in the view of insurance activities, according to Article 6 of the Insurance Law of the People’s Republic of China (“Insurance Law”):

    “Insurance business must be conducted by insurance companies established in accordance with this Law and other insurance entities as stipulated in laws or administrative regulations. No other entity or individual may operate insurance business”. [2]

    As the fundamental source of law in this regard, the Insurance Law sets a principle that only insurance entities established and approved in accordance with relevant laws and regulations are eligible to conduct insurance business in the PRC. Nevertheless, the law does not further elaborate a definitive concept of the insurance business. In practice, concretely speaking, activities such as underwriting, policy issuance, premium collection, claims assessment, and claims payment are generally deemed as typical insurance businesses.

    As for the regulatory perspective, specifically to insurance intermediary activities, for the insurance broker as an example, Article 36 of the Provisions on the Regulation of Insurance Brokers provides:

    “An insurance broker may engage in all or part of the following activities: (1) designing insurance plans for policyholders, selecting insurance companies, and handling insurance purchase procedure; (2) assisting the insureds or beneficiaries in claims; (3) reinsurance brokerage business; (4) providing clients with disaster or loss prevention or risk evaluation, risk management consulting services; and (5) other insurance broker-related businesses prescribed by the China Insurance Regulatory Commission.”[3]

    As for insurance agents, it distinguishes between professional and sideline agents. Article 41 of the Provisions on the Regulation of Insurance Agents states:

    “A professional insurance agency may engage in all or part of the following businesses: (1) sales of insurance products as an agency; (2) collection of insurance premiums as an agency; (3) loss investigation and claims settlement of insurance-related services as an agency; and (4) other relevant businesses as prescribed by the insurance regulator under the State Council.”[4]

    Its Article 42 continues as “A sideline insurance agency may engage in the businesses prescribed in (1) and (2) of Article 41 hereof as well as other businesses approved by the insurance regulator under the State Council.”[5]

    In terms of loss adjustors, Article 43 of the Regulations on Insurance Loss Adjustors provides:

    “A loss adjustor may operate all or part of the following business: (1) pre-underwriting and post-underwriting inspection, valuation, and risk assessment on the subject of insurance or the insureds; (2) post-claim survey, inspection, loss assessment, and claims settlement of the subject of insurance and disposition of their residual value; (3) risk management consulting; and (4) other business as provided for by the CIRC.”[6]

    Furthermore, in the Circular Concerning Banning the Illegal Insurance Institutions and Illegal Insurance Activities issued by the CIRC on July 30, 2008, illegal insurance activities include an unapproved entity conducting “activities in which fees are collected from the public in the name other than insurance premiums, but the obligations promised to be performed include liability of insurance benefits payment or other similar liabilities”. Also, illegal insurance intermediary activities include an unapproved entity to “provide intermediary services for the purpose of facilitating the conclusion of an insurance contract between policyholders and insurers with service fee charged”. As for the regulatory practice, according to the sanction issued by CBIRC’s Beijing Bureau on December 29, 2021, because of illegal conducting insurance intermediary activities, a technology company’s profit was confiscated and fined 2,127,000 yuan, and the relevant illegal activities were banned. [7]The sanction was issued in accordance with Article 159 of the Insurance Law. [8]

    As can be seen above, the insurance business is strictly regulated by laws and regulations, with the CBIRC as the regulator supervising the insurance industry. Only certain licensed entities are allowed to operate insurance businesses and doing so without a required license or approval could result in sanctions in accordance with applicable laws and regulations.

    III. TPA’s Business and Insurance Activities

    As TPAs mainly serve insurance entities, their business is tightly connected to insurance activities. Among those, healthcare management service seems as one of the most popular TPA activities, where the TPA provides healthcare management services such as healthcare service provider network, physical examination, online treatment, health consultation, medicine delivery, and other related services to the insureds or applicants of health insurance. On this matter, according to the Circular of the General Office of the China Banking and Insurance Regulatory Commission on Standardizing the Health Management Services of Insurance Companies issued by the CBIRC on September 6, 2022, “For healthcare management services [9]that cannot be carried out by themselves, insurance companies may cooperate with health management service providers, medical institutions, rehabilitation service providers and nursing service providers to enrich healthcare management service and meet the diversified and personalized health needs of customers.”[10] In this case, the regulator recognizes TPA’s participation in health management and considers it as the important supplement to insurers’ healthcare management related to health insurance.

    Furthermore, in practice, in providing healthcare management services and others, many TPAs are not satisfied to only offer value-added services but would like to deeply contribute to insurance product development, policy management, underwriting, claims, reporting, etc. for improving their competitiveness and value by maximizing their involvement in above activities. For instance, in claims processing, some TPAs authorized by the insurance company would decide whether to pay compensation in accordance with policy terms, conditions, and liability exclusions; or in policy management, some TPAs would communicate with policyholders on inquiries raised related to policy execution and servicing, and issue certificates of insurance by themselves. Although those could be general practices worldwide, it would trigger compliance issues as they may step into insurance activities in the PRC as stated above. Taking policy conclusion as an example, Article 13 of the Insurance Law stipulates as “An insurance contract shall be concluded when a policyholder applies for insurance and the insurer agrees to underwrite the insurance. The insurer shall issue an insurance policy or other insurance certificate to the policyholder in a timely manner.” Hence, by law, only insurers are entitled to issue an insurance policy or certificate of insurance and TPAs are not eligible for this activity.  

    Here, since TPAs dedicate to enriching their products to provide multiple services, it is hard to analyze each service in detail. Moreover, as the boundary between TPA business and insurance activities is not explicit from the perspective of law, and there are only a handful of sanction cases observed at this moment, it would be difficult to make a clear conclusion on this matter. However, general advice for TPAs lies in refraining from making any decision on insurance-related activities, where such decisions should be ultimately made by licensed insurance entities. It means TPA’s insurance-related business should only stay on the advisory or supporting level. Furthermore, TPAs should also refuse to directly engage in typical insurance activities such as concluding policies, collecting premiums, or issuing benefits.

    IV. Conclusion

    With more global TPAs expanding their business to the PRC and arising of domestic TPAs, attention should be paid to their operating compliance. As the insurance industry is heavily regulated by PRC laws and regulations and strictly supervised by the regulator, unlicensed status does not release the TPA’s compliance obligations, particularly on its business activities aspect. In fact, although TPAs may wish to promote their involvement in the insurance sector, they should also constrain themselves with the boundary of the insurance activities, as wrongfully stepping into such field would lead to sanctions.

    [1]VHS, “Understand the health insurance TPA track, from service outsourcers to industry innovation drivers” https://www.vhsinsurtech.com/news/shownews.php?id=489&lang=en.
    [2]Insurance Law of the People’s Republic of China, entered into force on April 24, 2015, Article 6.
    [3]Provisions on the Regulation of Insurance Brokers, adopted on February 1, 2018, entered into force on May 1, 2018, Article 36.
    [4]Provisions on the Regulation of Insurance Agents, adopted on November 12, 2020, entered into force on January 1, 2021, Article 41.
    [5]Ibid, Article 42.
    [6]Provisions on the Regulation of Insurance Loss Adjustors, adopted on February 1, 2018, entered into force on May 1, 2018, Article 43.
    [7]Jing Yin Bao Jian Fa Jue Zi, No. [2021] 43.
    [8]Insurance Law, Article 159, “any acts establishing professional insurance agents and insurance brokers, or illegally engaging in the insurance agency business or brokerage business without obtaining the insurance agency business permit or insurance brokerage business permit in breach of this Law shall be banned by the insurance supervision authority, confiscating the illegal proceeds and imposing a fine of one to five times legal proceeds; where there is no illegal proceeds or the illegal proceeds is less than 50,000 yuan, a fine ranging from 50,000 yuan to 300,000 yuan shall be imposed.”
    [9]Circular of the General Office of the China Banking and Insurance Regulatory Commission on Standardizing the Health Management Services of Insurance Companies, Yin Bao Jian Ban Fa No. [2020] 83, Article 1, “The healthcare management services provided by insurance companies refer to the monitoring, analysing and evaluating of customers’ health and intervening in the factors endangering customers’ health to control the occurrence and development of diseases and maintain a healthy status, including health physical examination, health consultation, health promotion, disease prevention, chronic disease management, medical service, and rehabilitation care.”
    [10]Circular of the General Office of the

    I. Introduction

    With international trade flows boosting, international commercial arbitration is becoming increasingly accepted among parties as an efficient means of resolving international economic and trade disputes, due to its confidentiality, flexibility, speed and enforceability. In the event of non-compliance with an arbitral award by the losing party, it is critical for the winning party to be able to enforce the award against the losing party in accordance with relevant governing law.

    There are widespread concerns among the disputed parties on whether the arbitral awards issued outside China can be effectively enforced through Chinese courts. The concerns are mostly due to the lack of knowledge of the Chinese legal system and its practice. This article will provide an overview of the procedure for enforcing foreign arbitral awards under the Chinese legal scheme. It will also briefly touch on the potential grounds for Chinese courts declining to enforce foreign arbitral awards.

    Ⅱ.LegalScheme for Recognition and Enforcement in China

    The legal framework governing recognizing and enforcing foreign arbitral awards in China is three-tiered, namely, international treaties or agreements signed by China, legislation passed by the National People’s Congress (NPC) and its Standing Committee, and the Opinions or Notices issued by the Supreme People’s Court of China (SPC).

    • New York Convention

    In 1958, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) was signed at the United Nations Conference. There are over 150 contracting states to the New York Convention which provides conditions for contracting states to recognize and enforce foreign arbitral awards. It officially came into force in China on 22 April 1987.

    China made two reservations when joining the New York Convention. One is that the Convention applies only to the recognition and enforcement of awards made in the territory of another contracting State. It is known as “reciprocity reservation”. The other one is that the Convention is to be made only to the differences arising out of legal relationships, whether contractual or not, that are considered “commercial” under national law. It is known as “commercial matters reservation”.

    • The Civil Procedure Law

    The Civil Procedure Law of PRC sets down the principles for the recognition and enforcement of foreign arbitral awards within China’s civil procedural legal system. Article 290 of the Civil Procedure Law stipulates that where an arbitral award of a foreign arbitration institution needs recognition and enforcement by Chinese courts, the parties involved should apply directly to an Intermediate People’s Court at the location of the respondent’s residence or the location of the respondent’s properties. The court would handle the matter under international treaties (i.e. New York Convention) concluded by China or under the principle of reciprocity. Once granted after review and examination by a Chinese court, the enforcement shall be executed under the procedure stipulated in the Civil Procedure Law.

    • Notices issued by SPC

    To facilitate the implementation of the New York Convention in China, SPC issued a Notice on Enforcement of the Convention on the Recognition and Enforcement of Foreign Arbitrational Awards in 1987 (the “1987 Notice”), which clarifies the rules applicable to the New York Convention including jurisdiction, filing deadlines, standards of review for recognition and enforcement, etc.

    To further clarify the rules on recognizing and enforcing foreign arbitrational awards, a Notice on Relevant Issues of the People’s Court Dealing with Foreign Arbitration was issued by SPC in 1995 and was further revised in 2008 (the “2008 Notice”). It clarifies the circumstances under which Chinese courts may refuse to recognize or enforce foreign arbitral awards. Additionally, it also strengthens the supervision of local courts on recognizing and enforcing foreign arbitral awards by establishing an internal reporting system. Under this reporting system, when an intermediate court is inclined to refuse to recognize or enforce a foreign arbitral award, it is required to report to the People’s High Court (appellate court) for further review. If the People’s High Court has the same inclination, the case has to be submitted to SPC for final review and examination before a refusal of the application can be issued. From this Notice, we can conclude that the attitude of Chinese courts is still dominated by ruling in favour of recognition and enforcement of foreign arbitral awards.

    Ⅲ.Recognition and Enforcement Procedure

    The party to an arbitral award can file the application with an Intermediate People’s Court that has jurisdiction. If the respondent is a natural person, the party seeking recognition and enforcement shall apply with the Intermediate People’s Court of the place where the respondent is domiciled in China. If the respondent is a legal entity, the application shall be filed with the Intermediate People’s Court in the location where the principal place of business of such legal entity is situated. Alternatively, the application can be filed with the Intermediate People’s Court of the place in which the respondent’s property is located.

    Technically speaking, recognition and enforcement are two separate proceedings that can be dealt with by the same court. In practice, the recognition proceedings are heard by the Civil Division of the Intermediate People’s Court which manages cross-border legal issues. Upon a successful application for recognition, the Enforcement Division of that court will handle the enforcement procedure thereafter.

    Pursuant to Article 4 of New York Convention, the applying party should supply the Chinese court with the authenticated award (or certified copy), the original agreement that includes the arbitral clause or an arbitration agreement (or certified copy). If the said award or agreement is not made in Chinese, the applying party shall provide a translation of these documents. The translation shall be certified by an official or sworn translator or by a diplomatic or consular agent.

    Regarding the time limit for the application, pursuant to Civil Procedure Law[1] and the Interpretation on Civil Procedure Law[2] issued by SPC, the application shall be submitted within two years, calculated from the last day of the performance period specified in the arbitral award. If the award did not contain any performance period, the party should be given a reasonable period to perform. Thus, it would be more reasonable to calculate from the second day of service of the arbitral award on the party, rather than from the date of issuing the arbitral award[3].

    It is worth noticing that there have been cases in practice where enforcement applications have been dismissed outright for exceeding the application deadline. Therefore, it is recommended that the successful party in the arbitration takes the initiative to apply for recognition and enforcement of the award as soon as it becomes available, leaving the losing party little time to create obstacles for the enforcement.

    IV.Property Preservation Measure During Recognition and Enforcement Procedures

    As a temporary measure taken by the Chinese courts in civil disputes, the function of property preservation is to guarantee the effective enforcement of judgments by freezing and seizing the assets of the respondent before the final decision/judgment is delivered, to prevent the respondent from transferring its assets during the proceedings.

    Even though property preservation is a common method utilized in civil litigation in China, it remains controversial whether the courts should grant this interim measure in recognition and enforcement of foreign arbitral awards proceedings. Neither New York Convention nor domestic laws or notices issued by SPC has provided clear guidance on this issue. Due to the blankness of international and domestic laws on this issue, some courts have rejected the property preservation application with the view that such an application lacks legal grounds[4]. Nevertheless, there are cases where the courts have granted property preservation applications in recognition and enforcement of foreign arbitral awards proceedings, taking into account the original design intention of the property preservation system.[5]

    In practice, different courts may make different rulings and it is a case-by-case situation. We anticipate direct guidance will be provided through legislation at the domestic level to resolve the dilemma.

    V.Grounds of Denial: Conditions Affecting Enforcement

    Article 4 of the 1987 Notice and Article 5 of the New York Convention set out the following circumstances in which the courts may refuse an application for recognition and enforcement of a foreign arbitral award:

    First, the arbitration agreement or clause is entered into by a person with limited capacity or is void under the applicable laws. Second, there are violations of due process in arbitral proceedings. For example, the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was unable to present his case for reasons not attributable to that party. Third, the dispute settled by the award was exceeding arbitral authority. If the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, the court may refuse to recognize or enforce the award. Fourth, the improper composition of the arbitral tribunal would result in a denial of recognition or enforcement of an arbitral award. Fifth, the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which that award was made. Sixth, recognition and enforcement of an arbitral award may be refused if the subject matter over which the two parties disagree is not capable of settlement by arbitration under the law of China.  For example, disputes arising from marriage, adoption, and guardianship are expressly excluded from arbitration by the Arbitration Law in China. Seventh, the application shall be refused if the recognition or enforcement of the award would be contrary to the public policy in China.

    The first five circumstances will only be examined by the courts upon the request of a party. However, the last two circumstances (arbitrability and public policy) are reviewable by the Chinese courts ex officio.

    Unlike litigation proceedings, when hearing cases of application for recognition and enforcement of foreign arbitral awards, the Chinese courts only examine procedure issues, i.e. whether there is a valid arbitration agreement or clause, whether there are any procedural violations, whether it violates PRC public policy, etc. The Chinese court will not review substantive issues, such as the rights and obligations of the parties. Ensuring the legality of the signed arbitration agreement or clause and the procedure of the arbitration proceedings is therefore crucial to the recognition and enforcement of foreign arbitral awards in China.

    VI.Conclusion

    Based on our research from the judgement database, there are 243 cases involving recognizing and enforcing foreign arbitral awards from 2001 to 2022, of which only 43 cases resulted in the refusal of recognition or enforcement. The case results yielded show that the refusal is mainly due to procedural defects, with the largest case number involving ineffectual arbitration agreements or procedure defects. The less frequently invoked ground is the violation of public policy.

    In recent years, the courts in China have adhered to the strict application principle in refusing to recognize and enforce foreign arbitral awards to create an “arbitration-friendly” environment. It is foreseeable that the judicial environment in China will become more and more favourable to the development of arbitration under the influence of a series of initiatives to support the development of arbitration in China, especially by SPC.

     


    [1] Article 246

    [2] Article 545

    [3] As per the explanation provided by SPC in the Response to the Application for Recognition and Enforcement of Arbitral Award by McCaw Nepton Limited

    [4] See Korea Line Corporation v. HNA Group Co., Ltd. (2016) Xiong 72 Xie Wai Ren No.1

    [5] See OUELIPPO HEALTH CARE LIMITED v. LIN Gaoshen (2019) Hu 01Xie Wai Ren No.5