LI Jilong (Anjie Broad Law Firm (Xiamen Office))

LI Xianglong（China University of Political Science and Law）

In 2010, the Supreme People’s Court of the People’s Republic of China (the “SPC”) issued the Provisions of the Supreme People’s Court on Case Guidance (the “Provisions”). The Provisions are widely considered to establish a unique case guidance system in China, under which courts at all levels should refer to the selected guiding cases when adjudicating the similar issues.

On the last working day of 2022, and “on the eve” of a revised Chinese Arbitration Law, the SPC released its 36th batch of six guiding cases. Unprecedentedly, all of the six guiding cases are related to the judicial review of arbitration cases. This article highlights the backgrounds and key holdings of Guiding Cases 196, 197 and 198 (the first three of the six guiding cases,which focus on several pivotal issues related to the arbitration agreement) and seeks to explain the significance behind these court decisions.

Guiding Case 196: The Doctrine of Separability of Arbitration Agreement.

In Guiding Case 196 (Yunyu Co. Ltd. v. Shenzhen Zhongyuancheng Commercial Investment Holdings Co. Ltd.), the First International Commercial Court of the Supreme People’s Court (the “FICC”) was faced with an arbitration respondent’s application to confirm the non-existence of an arbitration agreement on the ground that the whole contract that contained the arbitration agreement was in the process of negotiation and never signed between the Plaintiff and the Defendant.

The FICC first affirmed its jurisdiction to review this issue. It confirmed that the issue of determining the existence of an arbitration agreement falls within the scope of assessing the validity of an arbitration agreement, which is a cause of action pursuant to Article 20 of Arbitration Law of the People’s Republic of China.

The FICC then carefully examined the parties’ negotiation history, particularly as it relates to the arbitration clause. The judges noted that in the first draft contract (“Draft Contract I”) sent by the Plaintiff, the arbitration clause listed the Beijing Arbitration Commission (“BAC”) as the arbitration institution. However, after receiving Draft Contract I from the Plaintiff, the Defendant replied to the Plaintiff and suggested changing the arbitration institution from BAC to the Shenzhen Court of International Arbitration (“SCIA”). Afterwards, the Plaintiff adopted SCIA as the arbitration institution in the revised draft contract (“Draft Contract II”) and sent the copy back to Defendant. Subsequently, the Defendant had Draft Contract II sealed and delivered back to the Plaintiff. The parties then engaged in further negotiations regarding other clauses in the contract, but the arbitration clause remained unchanged.

Based on the above conduct surrounding the negotiation of the arbitration clause, the judges held that, as far as the arbitration clause was concerned, the Plaintiff’s sending of the Draft Contract II should be regarded as an offer made by the Plaintiff in accordance with the PRC Contract Law and that the Defendant’s subsequent sealing of the Draft Contract II should be regarded as an acceptance of the arbitration clause. As a result, the judges ruled that the arbitration clause had already been concluded at the time the sealed Draft Contract II was delivered to the Plaintiff even though other clauses in the contract did not come into effect because the contract had not been signed.

In sum, Guiding Case 196, which was heard by a panel of five SPC judges, presents an opportunity for the court to meticulously apply the doctrine of separability in determining the status of the arbitration clause where the main contract has arguably not yet been concluded.

It is noteworthy that in DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd [2022] EWCA Civ 1555 the High Court of Justice of England and Wales reached a different conclusion facing a similar issue.  The different conclusions reached by the courts likely primarily stem from the factual differences between the English case and Guiding Case 196. In the English case, it is difficult to trace any substantial negotiations or discussions regarding the arbitration clause that were separate from negotiations of the main contract. In contrast, in Guiding Case 196, because such negotiations were quite distinct, the FICC engaged in a fact-intensive inquiry into whether the parties had a meeting of minds with respect to the arbitration clause. Therefore, it is understandable that the two cases reached opposite conclusions about the existence of the arbitration clause where the main contract was not concluded.

Guiding Case 197: Challenging the Arbitration Agreement in “the First Hearing at the Arbitration Tribunal

The issue in Guiding Case 197 (Shenzhen Shizhenggongying Investment Holdings Co. Ltd v. Shenzhen Municipal Transport Bureau) relates to Article 20(2) of the Arbitration Law of the PRC, which provides that “[a] doubt as to the effectiveness of the arbitration agreement, should be raised before the first hearing at the arbitration tribunal.”

In Guiding Case 197, the arbitration claimant did not raise any jurisdictional challenge—either before the arbitration tribunal or in the court—before the first hearing in the arbitration proceeding. After the arbitral award was issued, Claimant resisted enforcement in Shenzhen Intermediate People’s Court (“Shenzhen Intermediate Court”). The Shenzhen Intermediate Court neither refused to enforce the award nor dismissed Claimant’s application; instead, the court found it appropriate for the arbitration tribunal to make a new award and remanded the award in whole for re-arbitration according to Article 61 of the Arbitration Law of the PRC.

In the re-arbitration, Claimant, for the first time, raised a new challenge over the validity of the arbitration agreement in the Shenzhen Intermediate Court. The challenge was dismissed by the Shenzhen Intermediate Court, which dismissal was affirmed by the Shenzhen High Court. The Shenzhen High Court held that even though the underlying case went to re-arbitration, insofar as the two arbitrations relate to the same dispute, the Claimant remained bound by its conduct during the first arbitration. Claimant’s failure to challenge jurisdiction in the first arbitration thus constitutes a waiver of its right to challenge under Article 20(2) of the Arbitration Law; and the Claimant cannot have a second bite at the cherry in the re-arbitration process. The Shenzhen High Court opinion was selected as Guiding Case 197.

The Shenzhen High Court’s opinion was also in line with ensuring the efficiency of the arbitration process. If parties facing the same dispute, without newly discovered material evidence or facts, were to be entitled to challenge the validity of the arbitration agreement, it may cause undue delay in the arbitration process, and may also run afoul of the principle of res judicata. This case serves as a reminder for the parties to proactively exercise their legal rights as failure to do so may constitute a waiver even in a re-arbitration proceeding.

Guiding Case 198: Privity of the Arbitration Agreement in Construction Arbitration

Guiding Case 198 (Industrial and Commercial Bank of China Limited, Yueyang Branch v. Liu Youliang) concerns the privity of the arbitration agreement in the context of arbitration of construction work disputes. Relevant parties involved in a construction arbitration generally include the employer, the contractor, and the subcontractor(s) (or actual constructor(s)).The contractor typically signs contracts with the employer and the subcontractor(s) respectively. As such, there is generally no contractual privity between the employer and the sub-contractor(s).

In 2004, in order to protect the legitimate interests of the subcontractors (mostly migrant workers), specifically with regard to their wages, the SPC issued The Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law for the Trial of Cases of Dispute over Contracts on Undertaking Construction Projects (the “2004 Interpretation”). Article 26 of the 2004 Interpretation grants the subcontractor the right to break the contract privity and to directly file a lawsuit against the employer when the employer failed to make payment of construction project costs owed to the contractor.Though controversial, this particular provision was never abrogated and remains included in the latest SPC Interpretation issued in 2020 as Article 43.

A thorny issue raised by this provision is whether the employer may rightfully contend—as many do—that the subcontractor is subject to any arbitration clause established between the employer and the contractor, as the subcontractor has in effect, substituted the contractor’s rights. Prior to the issuance of Guiding Case 198, Chinese courts were divided on this issue. In Zhongjiao Second Highway Engineering Co. Ltd v. Fu Yang[①] and Qinghai Senkeyanhua IndustryCo. Ltd v. Xiong Daohan, Chongqing Jianan Constrcution Co. Ltd[②] the SPC opined that the right granted to a subcontractor under Article 26 of the 2004 Interpretation should be defined as a subrogation right under civil law; and that a subcontractor is accordingly bound by any arbitration clause that was originally agreed upon between the contractor and the employer. However in RongSheng(BengBu) Properties Co. Ltd v. HeFei Huaxing Construction Installation Co. Ltd[③] and Cheng Jingnan v. Nantonghaizhou Construction, Nantong Branch Co. Ltd[④] the SPC and the Anhui High Court held that, insofar as Article 26 of the 2004 Interpretation is a special arrangement designed to address the issue of outstanding wages for migrant workers in a particular era and social context, the assertion of rights by the subcontractor against the employer should not be interpreted as a succession of the contractor’s rights and that, accordingly, the subcontractor should not be bound by the arbitration clause between the contractor and the employer.

Guiding Case 198 adopts the latter view. Yueyang Intermediate People’s Court, in the opinion that was selected as Guiding Case 198, expressly held that there was no “succession” of the contractual arbitration clause from the contractor to the subcontractor. Article 26 of the 2004 Interpretation only grants the subcontractor a sui generis right to initiate a lawsuit against the employer but does not serve as a legal basis to extend the scope or effect of the arbitration clause between the employer and the contractor to the subcontractor.

This author is of the view that Guiding Case 198 does not firmly shut the door to a contention that the subcontractor could, in certain circumstances, be bound by an arbitration agreement between the employer and the contractor. For example, in circumstances where the subcontractor has taken on the de facto role of the contractor and has performed the contractor’s duties and obligations during the construction process, or where the contractor-subcontractor contract clearly stipulates that its performance shall be subject to the employer-contractor contract, and the subcontractor is aware of the existence of the arbitration clause in the employer-contractor contract, then the subcontractor may arguably rely on or be bound by the arbitration clause. Such circumstances should still be diligently examined on a case-by-case basis.

These three guiding cases shed light on Chinese courts’ instance on three significant while controversial issues related to arbitration agreement. Meanwhile, with the substantial revision of the Chinese Arbitration Law, the future arbitration practice in this regime is worth expecting.

Note: The views expressed in the article are the authors’ own and do not represent the views of others.

[①] 最⾼⼈民法院（2013）民提字第148号

[②] 最⾼⼈民法院（2015）民⼀终字第170号

[③] 最高人民法院(2014)民申字第1575号

[④] 安徽省高级人民法院（2020）皖民终1334号

By Jia WAN

In a recent case published by Beijing Financial Court (the “BFC”), which was represented by AnJie Broad and classified as one of the typical financial cases for the year of 2022, the BFC pierced the veil of “co-insurance”, and confirmed that reinsurance legal relationship was established between two insurers.

The dispute arose out of the “co-insurance agreement” entered by PICC and China Life where the two insurance companies had disagreement as to the amount that PICC should pay after China Life, as the leading insurer, paid the insurance indemnities to the insured. Despite that the two insurers entered into a co-insurance agreement, the BFC pierced the veil of the “co-insurance agreement”, and held that the actual legal relationship formed between the two insurers is reinsurance instead of co-insurance.

In this case, the BFC distinguished the difference between co-insurance and reinsurance under the regime of PRC insurance law from the following aspects:

First, in terms of contractual parties, the parties to co-insurance agreement are policyholder and co-insurers, while the parties to reinsurance agreement are both insurers.   

Second, in terms of contractual relationships, under co-insurance the contractual relationship is established between the policyholder and each co-insurer, while under the reinsurance, there is no direct contractual relationship between the policyholder and the reinsurer.

Third, in terms of insurance premium collection, under the co-insurance, policyholder submits its request for insurance with multiple co-insurers, and each co-insurer assumes the insurance liability and collect the insurance premium respectively. While under reinsurance, the cedant pays the reinsurance premium to the reinsurer after collecting the insurance premium from the policyholder. The reinsurer does not directly collect any premium from the policyholder. 

Lastly, in terms of liability assumption, co-insurance is a type of insurance where more than two insurance companies cover the same subject matter, assume the same insurance liability for the same insurance period with the same limit of liability by using the same insurance contract, which is a horizontal assumption of liability among the co-insurers. In a reinsurance contract, the reinsurer underwrites the liability and risk under the original insurance contract. The cedant transfers part of the liability and risk of the original insurance contract to the reinsurer through reinsurance agreement, which is a vertical assumption of liability.

By applying the above criteria in the case at bar, the BFC eventually concluded that the legal relationship formed between PICC and China Life is reinsurance instead co-insurance.

Apparently, unlike reinsurance which is clearly defined by Article 28 of the PRC Insurance Law, the concept of co-insurance is not defined by law and is rarely found in other sources in China. The above analysis made by the BFC provides a standard interpretation of co-insurance from the judicial perspective, which also echos the Notice on Strengthening the Management of Property Insurance Co-insurance Business published by China Insurance Regulatory Commission, which provides that “[a] standardized co-insurance business should meet the following requirements: 1) the insured agrees to have multiple insurers to underwrite the risk; 2) the co-insurers jointly issues the policy, or the leading insurer issues the policy accompanied by a co-insurance agreement; 3) the commission charged by the leading insurer from other co-insurers should be significantly different from the average level of reinsurance commission.” This Notice provides an important source for the BFC when discerning the difference between reinsurance and co-insurance.

In the recent 20 years, reinsurance has been introduced to China and plays an important role in the financial sector. With the development of reinsurance in China, there are more and more disputes arising out of the reinsurance business and even co-insurance business. The significance of this case published by the BFC lies in its accurate distinguishment between the co-insurance and reinsurance. The court probed into the true intentions between the parties and held that reinsurance legal relationship was found notwithstanding that the parties entered into an ostensible “co-insurance” agreement.

In this case, the BFC further confirmed the principal of utmost of good faith and “follow the fortunes” in reinsurance. It is also worth mentioning that it is one of the rare cases in PRC judicial practice that the principal of “follow the fortunes” in reinsurance was recognized by a PRC court. The principal of “follow the fortunes” has been written in the PRC regulations or guidance in insurance industry, or usually is incorporated as a clause into the reinsurance agreement. However, it is uncommon for a PRC court to recognize the principal of “follow the fortunes” without the express agreement between the parties.

This case is also a good reminder for insurance companies that they should pay more attention to the agreements to be entered and be more careful to follow the standard requirements both written in PRC Insurance Law and industry regulations before the agreements are concluded.

Jia WAN | Partner

Email：wanjia@anjielaw.com

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Language：Chinese,English

Practice Areas：Dispute Resolution, General Corporate and Commercial, Asset Management, Cross-border Investment & M&A

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By Jia WAN, Dongqing LIU

Introduction

International sanctions, imposed by governments and international organizations, are a powerful tool used to influence and punish countries, entities or individuals. The international sanctions may be imposed for various reasons, such as human rights violations, nuclear proliferation, or terrorism. The economic sectors are the primary target by these sanctions, including the insurance industry. This article explores the legal complexities surrounding the interaction between international sanctions and insurance policies, examining examples to shed light on the challenges and potential solutions for affected parties.

Challenges and issues

When a country or entity becomes subject to international sanctions, its economic activities are severely restricted, including its ability to conduct financial transactions and engage in international trade. These restrictions can create significant challenges for insurers and insureds if the insurance policies involve sanctioned territories or sanctioned entities/individuals. Key aspects of this complex issue include:

1. Underwriting and Coverage Restrictions

The first legal issue arises from the inability of the (re)insurers to provide insurance policies in sanctioned territories. Sanction measures can limit the ability of (re)insurers to underwrite risks or provide coverage for certain types of risk. For example, sanctions against Iran have restricted the ability of insurers to provide coverage for oil tankers sailing to and from Iran, resulting in a shortage of available insurance coverage and increased costs for shippers. Another example would be the sanctions packages imposed by the European Union (EU) and UK against Russia and Russian entities. These sanctions include, among other things, the closure of UK and EU airspace to Russian-operated aircraft and the prohibition to provide insurance or reinsurance services to Russian entities or for use in Russia.

With the above sanctions in place, insurers have to assess whether they can underwrite the risks in sanctioned territories at all or assess the impact of the sanctions on existing policies and decide whether they could continue providing coverage. For instance, Aviation policies normally include the AVN 111 Sanctions and Embargo Clause which provides “if, by virtue of any law or regulation …applicable to an Insurer… providing coverage to the Insured is or would be unlawful because it breaches an embargo or sanction, that Insurer shall provide no coverage…“If an insured event occurs under the Aviation policies which involve Russia, the (re)insurers might have a defence against providing coverage by virtue of AVN111 Sanctions and Embargo Clause.

It is crucial for insurers to gain a comprehensive understanding of these sanction programs to ensure informed decision-making on underwriting and compliance. For policyholders or insured parties, a thorough review of policy terms is imperative, especially those that may encompass exclusions associated with sanctions. Understanding the scope and implications of such exclusions is of paramount importance to ensure full awareness of the limitations inherent in the policy.

2. Claims Processing and Payment

The impact of sanctions on claims processing and payment within the insurance industry is significant. Sanctions often lead to policy exclusions that can result in claim denials for activities involving sanctioned entities or jurisdictions. Additionally, restrictions on funds movement, currency limitations, and the operational burden of compliance measures can lead to delays in claim settlements. Insurers must navigate these legal and logistical challenges while fulfilling their obligations to policyholders and insureds.

If the relevant insurance policies contain Sanctions Limitation and Exclusion Clause, the insurer might seek to rely on this clause to delay claims process or even decline insurance payment. The implementation of this exclusion clause should be conducted on a case-specific basis, involving a thorough assessment of the exclusion clause’s validity and the legal interpretation of its language within the framework of the relevant jurisdiction.

3. Regulatory Compliance

Insurers must ensure compliance with international sanction laws to avoid legal repercussions. Failing to adhere to sanction regulations could lead to severe penalties. According to the data published on the official website of the U.S. Office of Foreign Assets Control (OFAC), a total of sixteen U.S. entities were reported to have infringed upon OFAC sanctions programs in 2022, resulting in fines totalling approximately 42 million USD. The figures for 2023 indicate that nine U.S. entities faced claims of violating OFAC sanctions programs, with aggregate fines amounting to approximately 556 million USD. 

Considering the non-compliance risks, insurers bear a critical responsibility to meticulously adhere to international sanctions laws to safeguard against potential legal ramifications. Any failure to diligently comply with sanctions regulations exposes insurers to the risk of significant penalties.

Conclusion

The intersection of international sanctions and insurance policies creates a complex legal landscape, impacting policy validity, coverage, claims processing, and regulatory compliance. As geopolitical tensions continue to evolve, insurers and insureds must remain vigilant, understanding the implications of sanctions on their operations and seeking legal counsel to navigate these challenges. The lessons from previous cases underscore the necessity for proactive measures to mitigate potential risks and ensure a smooth resolution of disputes in this intricate area of law.

A recent ruling rendered by Beijing Higher People’s Court of China, on granting the enforcement of the arbitral awards, has attracted much attention and discussion of the competition law circle. Specifically, this remarkable judicial decision suggests that Chinese courts will not consider the fact of ongoing merger review procedure when determining whether to grant the enforcement of arbitral awards. Also, a very special fact involved in this case is, the key role, Simcere Pharmaceutical Group Limited (“Simcere”), filed a voluntary concentration notification in spite that the filing threshold is not reached, instead of under the mandatory filing obligation. Details of this case together with the views of the parties and the courts on the antitrust aspect, are worthy of further ponderation.

Key Fact of the Case

To simply put, a Hong Kong company, Burich Limited (“Burich”), has dishonestly committed to sell 65% equities it holds in Beijing Tobishi Pharmaceutical Co.,Ltd (“Tobishi”), simultaneously to two purchasers in 2016 and 2017 respectively, Jiangxi Puyuan Health Industry Co., Ltd.(“Puyuan”) and Simcere. As Burich failed to fulfill its contractual obligation to deliver the equities, Simcere filed an arbitration application to Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center, “SHIAC”), which supported the arbitration claims of Sincere on ordering Burich to deliver the concerned shares. Afterwards, Simcere applied to Beijing First Intermediate People’s Court to enforce the award, and during the proceeding Puyuan raised the objection as the third party. Beijng First Intermediate People’s Court rejected Puyuan’s objection and adjudicated to enforce the arbitral award. Puyuan then appealed to Beijing Higher People’s Court, which maintained the first instance ruling in the end.

The Parties’ Views on Antitrust Factor

When objecting the enforcement of arbitral award, there is one key ground that Puyuan put forward is related to the Anti-Monopoly Law of China. Puyuan asserted, enforcing the arbitral award, is virtually helping Simecre circumvent China’s merger control regulation. This is because when the merger filing obligation is triggered, the equity transfer should not be implemented before obtaining SAMR’s antitrust approval. However, Simcere did not submit the antitrust filing to and obtain the approval from SAMR yet, when Simcere applied the arbitral award enforcement to the court and even when the court implemented the enforcement. As a matter of fact, SAMR officially put on Simcere’s filing on record on November 23, 2022. Puyuan alleged that granting the enforcement will violate the mandatory provision of the Anti-Monopoly Law, to the effect of violating public interests. Consequently, Puyuan maintained that the court should reject the enforcement application of Simcere.

In response to Puyuan’s allegations, Simcere stressed that the equity acquisition of Tobishi by Simcere does not reach the filing threshold; as such, Simcere does not have the filing obligation but filed with SAMR only on a voluntary basis. In such a circumstance, the enforcement of arbitral award will not violate public interests. In addition, Simcere emphasized that the suspected antitrust violation does not in any way fall into the scope of rejecting enforcement of arbitral award in the judicial review pursuant to relevant laws.

The Court’s Stance

Beijng First Intermediate People’s Court in the first instance decided to reject Puyuan’s objection and supported Simcere’s enforcement application. The first instance court elaborated, where the third party applies to not enforce the arbitral award, it should meet three procedural conditions and four substantive conditions simultaneously. The procedural conditions include: (1) there exists evidence proving the arbitration is malicious or fake with infringement of the third party’s interests; (2) the enforcement has not been completed yet; and (3) the objection should be raised within 30 days after being or should be aware that the court adopts enforcement measures. The substantive conditions contain: (1) the third party is the subject of concerned rights or interests; (2) the rights or interests claimed by the third party are legitimate and genuine; (3) there is a fictitious legal relationship between the arbitration parties and the facts of the case are fabricated; and (4) there are partial or total errors in the main text of the arbitration award or the arbitration mediation agreement in handling the civil rights and obligations of the parties, which damages the legitimate interests of the third party. Considering the grounds that Puyuan relied on in its objection, the antitrust ground included, do not make the above-mentioned conditions be met, the first instance court declined Puyuan’s objection.

In the appeal procedure, interestingly, Puyuan applied to stay the proceeding until SAMR renders its merger review decision. Beijing Higher People’s court rejected Puyuan’s application again, on the reason that the merger review procedure and civil enforcement proceeding do not restrict each other, thereby there is no need to stay the instance proceeding. The appellate court in the end maintained the first instance ruling by recognizing the reasons illustrated in the first instance adjudication. Notably, the appellate court further pointed, the arbitration award involved in the case only has legal effect between its parties and cannot be legally binding on third parties. The fulfillment or enforcement of the obligations determined by the award does not affect the substantive rights enjoyed by the third party. It is the legal duty of the enforcement court to implement the content of the effective award through the enforcement procedure, but the enforcement court does not guarantee that the applicant for enforcement can permanently retain the enforcement benefits they have obtained. The rejection of the third party’s application for not enforcing the arbitration award in this case does not prevent them from filing a lawsuit against the relevant civil subject in accordance with the law.

Key Takeaways and Comments

Obviously, the ongoing SAMR merger review will not stop the enforcement of the arbitral awards. However, where gun-jumping is found by SAMR, SAMR theoretically has the discretion to still slap the violating party with penalties, because there is no exemption clause for the enforcement of arbitral awards. Assuming the extreme situation occurs, namely if SAMR finds competition concerns in its review, SAMR may also order the party to give back the shares it acquired through the enforcement of awards for restitution on top of the monetary fine. As the appellate court stressed in this case, the enforcement court does not guarantee that the applicant for enforcement can permanently retain the enforcement benefits they have obtained.

Of course, the favorable fact in the instant case is, assuming Simcere’s allegation is tenable, the filing was made on a voluntary basis because the equity acquisition does not reach the filing threshold. In this scenario, Simcere in principle will not receive a fine. Nonetheless, the disadvantages fact is Simcere is not an insignificant market play, but rather enjoys the dominant market position in certain active pharmaceutical ingredients (API) market. Particularly, Simcere has been fined by SAMR in 2021 due to engaged in abusing the dominant market position to refuse to supply.

Consequently, before applying for the enforcement of arbitral awards, companies are highly recommended to make a thorough and cautious assessment on the merger filing obligation in China, especially for those having a high market share in some markets, and then to decide whether to apply the enforcement and the appropriate application timing.