Keys to the enforcement of foreign arbitration awards in mainland China
China has been building up and improving its legal regime for recognition and enforcement of foreign awards since the nation joined the New York Convention in the 1980’s. In this article we give an overview on the key issues regarding the enforcement of foreign awards in this jurisdiction, taking into account the recent developments and opening-up reforms.
With more and more foreign companies establishing economic ties with Chinese companies, we have seen an increase of cases involving the recognition and enforcement of foreign arbitration awards in China. Based on the recent Chinese judicial practice in this area and our past experience, it is important for the parties who try to enforce the foreign arbitration awards in China to bear in mind the following key issues, which we discuss below.
1. Legal framework
Since China’s accession to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) in 1987, the New York Convention has been the primary legal ground for the parties to enforce foreign arbitration awards in China. Following arbitration awards may be submitted before Chinese courts for recognition and enforcement as foreign arbitration awards:
- Arbitration awards made within the territory of another member; and
- Arbitration awards on disputes over contractual or non-contractual commercial legal relationships according to the Chinese laws. It includes a wide range of commercial disputes, but does not include investor-State disputes.
The New York Convention is not applicable to the arbitration awards made in Hong Kong, Macau and Taiwan since those regions are part of China. Notwithstanding the above, there are similar bilateral arrangements established between mainland China and those jurisdictions. In addition to that, in case the foreign awards are made in a country that is not a member state to the New York Convention, the court will proceed the recognition and enforcement application based on the principle of reciprocity, thus the outcome would be in great uncertainty.
Another aspect worth noticing is that, there are certain areas in China where foreign arbitration institutions are permitted to set up local administrative offices and there has been a court decision confirming the arbitration award made in China by a foreign institution shall be deemed as foreign arbitration award. However, as the Chinese laws are still not fully adapted to the above new opening-up reforms, there is no express guidance on how to enforce the arbitration awards made by the Chinese offices of the international arbitration institutions. Therefore, in current stage a party should be very cautious in carrying out a mainland China-seated arbitration proceedings administered by a foreign arbitration institution.
2. Recognition and enforcement proceedings
A party to the arbitration award may apply for recognition (or exequatur) and enforcement of the award in front of a competent Chinese court. Recognition and enforcement are two separate proceedings under the Chinese laws. In practice, the foreign related civil case division of an intermediate people’s court will be responsible to review the recognition application. In case the court decides to recognize the foreign arbitration award, the applicant will have to further apply for enforcement of such foreign award before the enforcement division of the same court. In practice, the courts in different regions may, following their own practice, deviate from the above steps. For example, some courts may decide on the recognition and enforcement of the foreign award in a single proceeding. In the meantime, courts also have different understandings on whether recognition is necessary for awards made in Hong Kong.
In case a court inclines to reject the recognition application, it has to internally escalate the case to the high people’s court in the jurisdiction. In the event that the high people’s court concur such opinion, it has to further escalate the case to the Supreme People’s Court (SPC) for final review. The above procedural arrangement has in fact made the courts very cautious in rejecting the recognition and enforcement applications since such decision would be subject to strict review from their higher courts.
The intermediate people’s court at the place of residence or property of the person subject to enforcement shall have jurisdiction over the application for recognition and enforcement. In addition, SPC rules issued recently also stipulate that if a foreign arbitration award is related to a case heard by a people’s court, and the domicile of the respondent and the location of the respondent’s property are not located in mainland China, if the applicant applies for recognition of the foreign arbitration award, the court which hears the related case shall have the jurisdiction.
The statutory time limit for filing the application for recognition and enforcement of foreign arbitration awards is two years. Specifically, the time limit shall be counted from the expiration of the time limit for performance of the award or, in the absence of such time limit, from the day after the award is served to the party.
There is generally no statutory time limit for the courts to render the ruling on the recognition and enforcement application. Based on our recent experience, the average time for the courts to rule on the recognition of foreign awards are 6-8 months. However, in case the court has to escalate the case to a higher court for review, the time would be significantly longer than the average standard.
3. Refusal grounds
For New York Convention awards, the refusal grounds are set out in Article 5 of the New York Convention. Similar refusal grounds for Hong Kong, Macau and Taiwan awards can also be found in the relevant bilateral arrangements with those regions. Most of the causes of refusal may be avoided by strictly abiding by the arbitration procedures. However, taking into account the previous cases, here are the issues worth noticing:
Parties and arbitration agreement
The legal capacity of the parties and the existence of the arbitration agreement are also prerequisites for the recognition and enforcement of foreign arbitration awards. In a previous case, when a party applied for recognition and enforcement, it was discovered that the Chinese company involved in the arbitration award did not actually exist, which led to the Chinese court ruling that the arbitration award could not be enforced. This is particularly an issue in China since foreign parties are sometimes unfamiliar with the Chinese legal environment and language, which made it difficult for them to perform effective check on the identity of their counterparty in China. It would be advisable to take a cautious approach to review and confirm the legal status of the Chinese party.
Another refusal ground we often see in the Chinese courts’ ruling is that the arbitration agreement is found not actually established or the parties have never agreed to solve their dispute through arbitration. In the recent court decisions, it has been made very clear that the courts shall have the final say on the effectiveness of the arbitration agreement, including the existence of arbitration agreement. For such purpose, the parties applying for recognition and enforcement are also require to provide the original or certified copy of the written arbitration agreement. In practice, the most common refusal ground is that the arbitration agreement is not specific enough or the arbitration agreement has not covered all the parties, which is a common mistake in case there are multiple legal documents between different parties.
Article 5.2.(a) of the New York Convention stipulates that if the relevant court finds that the dispute cannot be resolved by arbitration under the law of the place of recognition and enforcement, the court may refuse to enforce the award.
According to the Chinese law, only contract disputes and other property rights disputes between citizens, legal persons and other organizations that are equal subjects can be arbitrated. In particular, Chinese law prohibits the use of arbitration to resolve family and inheritance disputes and administrative disputes. Furthermore, in a recent judgment, the SPC confirmed for the first time that monopoly disputes are not arbitrable. In such case, it was ruled that disputes between parties to a distribution contract that violated China’s Anti-monopoly Law can only be resolved by the courts.
Article 5.2.(b) of the New York Convention stated that if the relevant court finds that the recognition and enforcement of an arbitral award would violate the public policy of the place of recognition and enforcement, it can refuse recognition and enforcement.
There is no specific definition of “public policy” under the Chinese laws and regulations. Therefore, the respondent often invokes public policy defenses to take advantage of this ambiguity under the Chinese law. However, the courts are more and more inclined to strictly interpret public policy in practice in order to restrict the application of such refusal ground. For example, SPC has stated that violations of mandatory provisions of laws, administrative regulations, and departmental rules do not necessarily constitute violations of public interests. Violations of public policies should be understood as violations of basic principles of the law, violation of national sovereignty, endangering social public security, violations of good customs and the fundamental social public interest. It is worth noting that if a court has already passed an effective judgment or ruling to determine the jurisdiction over a certain dispute, it will not tolerate a foreign arbitration award that directly conflicts with it, and will likely consider that the recognition and enforcement of the award constitutes a violation of Chinese public policy.
4. Interim measures
Another issue that needs to be noted in recognition and enforcement of foreign arbitration awards in China is that, in practice, it is unlikely to obtain the support of the court for applications for interim measures during the recognition and enforcement proceedings. This is because neither the New York Convention nor relevant Chinese laws and regulations have provided clear ground on interim measures during the proceedings. However, once a ruling is made to recognize and enforce the foreign award, the party will be able to apply the interim measures (mainly property preservation) before the court. As an exception, based on an announcement of SPC on March 18, 2021, the parties of Hong Kong awards may apply to the courts for the interim measures (including property preservation and injunction) before or after the acceptance of the application for enforcement of the awards.
In the meantime, also due to the lack of clear legal basis, a party is usually unable to enforce interim measures in China during the arbitration proceedings. As an exception, the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region took effect on October 1, 2019, allowing parties to Hong Kong-seated arbitration proceedings to apply for interim measures before the courts in mainland China. According to the information currently available to us, as of February 10, 2020, at least 5 applications for property preservation have been approved by the courts in the mainland China, and the total value of assets seized by the courts reached nearly CNY 1.7 billion. Considering the importance of property preservation to the subsequent enforcement of arbitration awards, this arrangement undoubtedly brings competitive advantages to Hong Kong arbitration.
Before choosing to resolve disputes with parties from China through international arbitration, consideration should be given to the feasibility of seeking recognition and enforcement of foreign arbitration awards in China. In particular, it is advisable to keep in mind the potential obstacles related to interim measures and the possible reasons for Chinese courts to refuse the recognition and enforcement application. It is also important to review the legal status of the Chinese parties and to have a carefully drafted arbitration agreement or arbitration clause to further ensure that the foreign award will be enforced.