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17 Mar 2016

New Rules by Beijing No. 4 Intermediate Court on Judicial Bonds

In judicial practice, it is common for a plaintiff in litigation (or claimant in an arbitration) to apply to request the court to take certain preservation measures over the property, such as sealing, freezing or sequestering, of the opposing party before or during a lawsuit or an arbitration case. The purpose of such preservation is to maintain the status quo of the relevant property, ensuring that the court judgment (or arbitral award) can eventually be enforced. According to relevant regulations and judicial practice, an applicant for preservation is normally required to provide security to the court, so that in the event that the preservation was wrongfully applied, the other party may obtain compensation for any losses incurred.

A practical issue which typically confronts applicants for preservation is how to provide security sufficient to satisfy the court at a minimal cost. The traditional method for providing security is to deposit with the court cash or property which has equal value with the property being preserved. However, this way obviously burdens the applicant’s cash flow and affects the normal use of the property provided. 

Recently, the Beijing No. 4 Intermediate People’s Court published the Provisions on Accepting Judicial Bonds as Security for Property Preservation in Civil and Commercial Cases (Provisions), which for the first time expressly set forth Judicial Bonds as a more economical alternative solution, recognizing the acceptability of a bond issued by an insurance company in such court. In practice, some Beijing insurance companies have already begun to offer Judicial Bonds as a common service.

The underlying principle behind Judicial Bonds is that if there is an error in the preservation, the insurance company will compensate the affected party for its related losses based on the terms of an insurance contract. In practice, the general process for providing such security includes: (1) the applicant for preservation signs an insurance contract with a qualified insurance company; (2) the insurance company issues the bond and submits relevant materials to the court; and (3) the court reviews the bond, insurance contract and relevant materials to determine whether the bond provides sufficient security.

Pursuant to the Provisions, a Judicial Bond applies both before and during a lawsuit (or an arbitration case), being reviewed and handled by the case-filing and trial chamber of the court, respectively. It should be noted that a court will review securities on a case by case basis, focusing on the insurance company’s qualifications, the insurance coverage and period, and the methods for fulfilling insurance obligations, in order to confirm that the security meets the requirements of such case. In certain circumstances, a court will only accept a Judicial Bond provided together with other forms of security. 

The Provisions reflect a trend to recognize Judicial Bonds in PRC courts. In fact, since 2013, courts in Yunnan, Guangxi, Tianjin, Zhejiang, Shanghai and some other provinces have started to gradually accept Judicial Bonds. Statistics show that through the end of 2015 more than 700 courts in China have accepted Judicial Bonds. In 2015, DaHui also successfully persuaded a court in Tianjin to accept a Judicial Bond as security in its representation of a Danish company in a high-profile litigation. 

The Beijing No. 4 Intermediate People’s Court specifically focuses on foreign-related (including Hong Kong, Macau and Taiwan) cases and special commercial cases. It remains to be seen whether the Provisions will promote the use of Judicial Bonds in commercial disputes. 

Please feel free to contact us if you have any questions regarding the use of Judicial Bonds and property preservation in disputes.

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