New jurisdictional regulations for cross-border financial disputes

By Zhang Guanglei and Chen Cheng, Jingtian & Gongcheng
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The Supreme People’s Court (SPC) has released the Regulations on the Jurisdiction of Beijing Financial Court over Cases (Beijing regulations), and subsequently revised the Regulations on the Jurisdiction of Shanghai Financial Court over Cases (Shanghai regulations, together with Beijing as the regulations). The regulations provide for clarity on the jurisdiction of cross-border financial disputes involving domestic investors for the first time.

张光磊, Zhang Guanglei, Partner, Jingtian & Gongcheng
Zhang Guanglei
Partner
Jingtian & Gongcheng

Centralised jurisdiction

Based on the positioning of Shanghai as an international financial centre, and Beijing as the national financial management centre, China has set up financial courts in both cities. On this basis, the cross-regional centralised jurisdiction for cross-border financial disputes of Shanghai and Beijing financial courts has been formed through the enactment of the regulations.

Article 2 of the regulations provides that Beijing and Shanghai financial courts have jurisdiction over litigations brought by domestic investors on the grounds that securities issuance or trading activities, or futures trading activities occurring abroad, have harmed their legitimate rights and interests; and litigations brought by domestic individuals or entities on the grounds that financial products sold, or financial services provided by overseas financial institutions, have harmed their legitimate rights and interests.

As for potential jurisdiction conflicts between these two financial courts caused by the above-mentioned arrangements, the head of Second Civil Division of the SPC has stated that the conflicts can be solved by the rules of articles 35 and 37 of the Civil Procedure Law. The first court that registers the case has jurisdiction over the case, and if a dispute arises between two courts regarding jurisdiction, it can be reported to the SPC for designation of jurisdiction.

Legal basis

Before the introduction of the regulations, although there were very few cases in which Chinese courts have jurisdiction over cross-border financial disputes, there was a legal basis for Chinese courts to govern such disputes at the regulatory level. Chapter 6 of the Provisions on the Trial of Civil Compensation Cases Arising from Misrepresentation in the Securities Market (the misrepresentation compensation provisions) clearly stipulates that the liability of the perpetrators of misrepresentation is “joint tort liability”.

According to articles 28 and 265 of the Civil Procedure Law, and article 24 of the Interpretation of the Civil Procedure Law, infringement disputes where the infringers are located outside of China may be subject to the jurisdiction of the court in the place where the infringement was committed, or where the result occurred, or where the representative office of the infringers is located. Accordingly, for infringement disputes arising from offshore financial activities, even if the domicile of the infringer and the place where the infringing act is committed are located outside China, the Chinese court in the place where the domestic representative office of the infringer is located, or where the victim is located, also has jurisdiction.

In addition, article 2.4 of the Securities Law (revised in 2019) stipulates that: “Securities issuance and trading activities outside the People’s Republic of China, disrupting the order of the market in the People’s Republic of China, and harming the legitimate rights and interests of domestic investors, will be dealt with, and liability will be pursued in accordance with the relevant provisions of this law.” On this basis, the Securities Law, misrepresentation compensation provisions and other normative documents have the effect of extraterritorial application.

The SPC established the jurisdiction of the Beijing and Shanghai financial courts over cross-border financial disputes based on the National People’s Congress (NPC) Standing Committee’s decision. Article 15 of the Organic Law of the People’s Court stipulates that the establishment, organisation, authority, and appointment and removal of judges of specialised people’s courts (including military courts, maritime courts, IP courts and financial courts) are decided by NPC Standing Committee.

Therefore, the NPC Standing Committee issued the Decision on the Setup of Shanghai Financial Court and Decision on the Setup of Beijing Financial Court (the decisions). While setting up financial courts in Beijing and Shanghai, the decisions also specified the general jurisdictions of the Beijing-Shanghai financial courts, and clarified that the SPC might further determine the scope of the jurisdiction over cases. It is in accordance with the decisions that the SPC established the jurisdiction of the Beijing-Shanghai financial courts over cross-border financial disputes.

陈程, Chen Cheng, Associate, Jingtian & Gongcheng
Chen Cheng
Associate
Jingtian & Gongcheng

Issues to observe

In the past decade or so, large amounts of Chinese investors were frequently involved in disputes over liability for misrepresentation by overseas listed companies, including Chinese concept stocks. Since many litigations happened overseas, it was difficult for domestic investors to obtain remedies through litigation.

After the enactment of the regulations, the jurisdiction of Chinese courts has been clarified, providing new legal paths to solve the relevant disputes. In particular, for overseas listed Chinese companies with operating entities and related personnel located in China, if Chinese investors suffer losses due to misrepresentation of overseas listed companies, they can sue in China, and the defendants are not limited to overseas listed companies, but also include other subjects such as domestic operating entities, related managers, and intermediaries who participated in the misrepresentation.

If the infringer is located in China, owns assets or conducts business in China, the Chinese courts will have greater convenience in investigating and obtaining evidence, preserving property and evidence, and enforcing judgments.

From this perspective, domestic litigation is more conducive for the realisation of Chinese investors’ rights than offshore litigation. Certainly, Chinese courts face new challenges in adjudicating such disputes, such as the difficulty of cross-border evidence collection, the co-ordination of parallel litigation in and out of China, the efficiency of service of documents, and the requirements of the form of evidence, which may affect the effectiveness of the case trial, and may also constitute an obstacle for the parties to participate in litigation activities and realise their rights.

Therefore, it is an important step for the Chinese legislature and judiciary to clarify the jurisdiction of Chinese courts over cross-border financial disputes through the regulations. In order to ensure the proper effect, on the basis of the existing general provisions, it is still necessary to formulate specific and detailed rules as soon as possible, taking into account the characteristics of such litigation.

Zhang Guanglei is a partner and Chen Cheng is an associate at Jingtian & Gongcheng. Zhang is also an arbitrator of Hong Kong International Arbitration Centre

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