By Teng Haidi and Yu Qing King & Wood Mallesons’ Dispute Resolution group
With the Belt and Road initiative likely to drive significant outbound investment by Chinese companies, the ability to enforce foreign arbitral awards in the People’s Republic of China (PRC) will be a key issue for these companies and their Belt and Road counterparties.
In 1987, the PRC ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). On 10 April 1987, the Supreme People’s Court of China (Supreme People’s Court) issued the Notice of the Supreme People’s Court on Implementing the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Acceded to by China (Supreme Court Notice) and stated relevant issues regarding the enforcement of foreign arbitral awards according to the New York Convention.
However, the Supreme Court Notice contains only five articles which set out the principal rules according to the New York Convention. As of today, the Supreme Court Notice has not been amended. Due to the lack of detailed explanation and case precedents, an applicant seeking to enforce a foreign arbitral award in the PRC should have regard to the issues set out below.
What types of arbitral award are enforceable?
- Arbitral awards made in the territory of another contracting state;[1]and
- Arbitral awards arising out of legal relationships, whether contractual or not, which are considered commercial under the national law of China.[2]
What is the process of recognition and enforcement?
An interested party to an arbitral award can apply for recognition and enforcement in the PRC. Recognition and enforcement are two separate procedures. Recognition proceedings will generally be heard by a civil division handling foreign related cases in an intermediate court. If the court recognises an arbitral award, the court will issue a ruling recognising the arbitral award in the PRC. After the arbitral award is recognised, the applicant will need to further apply to the enforcement division of the same court for enforcement. The relevant procedure will be largely the same as for domestic arbitral awards.
The Intermediate People’s Court will have jurisdiction over the enforcement application at the following places:
- If the respondent is a natural person, the place of his or her household registration or the place of his or her residence
- If the respondent is a legal entity, the place of its principal business office
What kind of arbitral awards will not be recognised and enforced?
Article 4 of the Supreme Court Notice and Article 5 of the New York Convention stipulate the circumstances under which PRC courts could refuse the application for recognition and enforcement of a foreign arbitral award. Many circumstances of refusal, such as improper notice of appointment of an arbitrator can be avoided if the arbitration proceedings were properly conducted in a foreign country.
The more problematic issues are these.
1. Arbitrability
Article 5.2.(a) of the New York Convention states that, if the relevant court finds that the subject matter of the dispute is not capable of settlement by arbitration under the laws of the place of recognition and enforcement, then the court may refuse to enforce the award.
Under PRC Arbitration Law, only contractual disputes and other disputes over rights and interests in property between citizens, legal entities and other organisations may be arbitrated. Family and succession disputes, as well as administrative disputes, are specifically prohibited from being settled through arbitration.
2. Public policy
Article 5.2.(b) of the New York Convention states that the recognition or enforcement of the arbitral award may be refused if the relevant court finds that it would be contrary to the public policy of the place of recognition and enforcement.
There is no specific provision under the PRC laws and regulations regarding the definition of “contrary to…public policy”. However, in respect of the arbitral award in TCL Air-conditioner (Zhongshan) Limited v Castel Electronics Pty Ltd,[3] the Supreme People’s Court held that, “the infringement of public interest shall be interpreted as a violation of the basic principle, infringement of the national sovereignty, jeopardizing public security, violation of public policy and other circumstances which will infringe the basic public interest.”
In other cases, the Supreme People’s Court has emphasised that public interest/ policy should be strictly interpreted and limited in its use, and that violation of mandatory rules of the law, administrative rules and departmental regulations does not necessarily comprise violation of public interest.[4] Accordingly, any rejection of recognition and enforcement of an arbitral award by an Intermediate People’s Court is likely to attract significant judicial scrutiny upon review.
Even though the public policy card is often played by respondents to applications for recognition and enforcement, PRC courts are quite cautious when using this Article to refuse enforcement of foreign awards.
In addition, according to Article 2 of the Notice of the Supreme People’s Court on Handling Relevant Issues about Foreign- related Arbitration and Foreign Arbitral Issues by the Supreme People’s Court, [5] if an Intermediate People’s Court decides not to recognise and enforce an award, that Court must submit its decision to the relevant Higher People’s Court for review. If the Higher People’s Court decides to uphold the lower court’s decision not to enforce the award, it must then report its decision to the Supreme People’s Court. The Supreme People’s Court will then review the matter and reply with a final decision. Therefore, generally speaking, the PRC courts would be reluctant in applying the New York Convention to deny recognition and enforcement applications.
Can the respondent challenge the jurisdiction of the enforcing court?
Neither the New York Convention nor the Supreme Court Notice stipulates whether the parties can raise jurisdictional challenges (and/or whether the parties can appeal the result of a jurisdictional challenge) in proceedings for the recognition and enforcement of foreign arbitral award (Recognition and Enforcement Proceedings). There is also no other rule that specifically addresses this issue. Therefore, we need to look to the PRC Civil Procedure Law (Civil Procedure law) for further guidance.
According to the Civil Procedure Law, Recognition and Enforcement Proceedings, as stated in Chapter 27 Judicial Assistance, fall under the category of judicial assistance proceeding. However, pursuant to Article 127, Chapter 12 of the Civil Procedure Law, jurisdictional challenges fall under the category of ordinary procedure at first instance proceeding. Hence, it is arguable that jurisdictional challenges are only applicable to first instance proceedings. However, in practice, PRC courts usually tend to allow the parties to raise jurisdictional challenges in other proceedings as well.
This approach leads to another question: whether the parties can file an appeal on the result of jurisdictional challenges in Recognition and Enforcement Proceedings.
Again, there is no specific law or regulation regarding this issue. However, in TCL Air- conditioner (Zhongshan) Limited v Castel Electronics Pty Ltd, the Supreme People’s Court held that, “according to Article 3, subsection 2 of the Interpretation of the Supreme People’s Court of Several Issues concerning the Enforcement Procedures in the Application of the Civil Procedure Law of the People’s Republic of China,‘the party who is dissatisfied with the ruling may apply for judicial review to the people’s court of higher level’. Therefore, if TCL is dissatisfied with the ruling, it shall apply for judicial review rather than file for appeal”.
Consequently, according to the Supreme People’s Court ruling, in Recognition and Enforcement Proceedings, the parties can raise jurisdictional challenges. However, the parties can only apply for judicial review rather than file an appeal regarding the result of the jurisdictional challenge.
According to PRC laws and regulations, the substantive Recognition and Enforcement Proceeding will not be suspended by judicial review. We have seen some of the provincial high courts, such as Shandong Provincial High Court, follow the Supreme People’s Court’s ruling that respondents to Recognition and Enforcement Proceedings are only allowed to apply for judicial review rather than file for appeal.
However, since the PRC is not a common law jurisdiction, in practice, we have seen cases where PRC courts still allow the parties to appeal the civil order of a jurisdictional challenge, such as Liaoning Provincial High Court.
Can the applicant seek interim relief during the enforcement of foreign arbitral awards?
There is no specific rule regarding asset preservation pending the recognition of an arbitral award under the New York Convention or relevant PRC laws and regulations. In practice, it is difficult to persuade the PRC courts to conduct asset preservation during recognition proceedings. However, asset preservation measures are available once a decision to recognise and enforce an arbitral award has been made and enforcement proceedings have been commenced.
Key takeaways
As more and more foreign entities conduct business with PRC companies, the number of applications for recognition and enforcement of foreign arbitral awards is set to increase.
To avoid difficulties, parties seeking to recognise and enforce foreign arbitral awards in the PRC should consider the location of the relevant assets whilst bearing in mind the potential obstacles associated with asset preservation and the potential grounds for refusing recognition and enforcement. Despite the current difficulties and lack of detailed regulations, it is our view that in time, PRC courts will inevitably become more familiar with such proceedings and, in turn, expect the process to become more efficient.
Note:
1 Supreme Court Notice, Article 1.
2 Supreme Court Notice, Article 2.
3 Min Si Ta Zi No. 46. [2013].
4 See, e.g. Reply to the Request for Instructions on Non- Recognition of No. 07-11 (Tokyo) Arbitral Award of the Japan Commercial Arbitration Association [2010] Min Si Ta Zi No. 32, Reply to Haikou Intermediate People’s Court Regarding the Request for Instructions on Non- Recognition and Non-Enforcement of the Arbitral Award of the Arbitration Institute of the Stockholm Chamber of Commerce [2001] Min Si Ta Zi No. 31; Reply to the case of E.D. & F. Man (Hong Kong) Limited – Application for Recognition and Enforcement of the Arbitration Award of the London Sugar Commission, [2013] Min Si Ta Zi No. 3; Reply to the Request for Instructions Re the Hong Kong Xiang Jin Grain and Oil Food Co., Limited – Application for Enforcement of the Arbitration Award of Hong Kong International Arbitration Center [2003] Min Si Ta Zi No. 9.
5 No. 18 [1995].