Parties engaged in or considering arbitration in the Mainland may face difficulties on account of the differences in enforcement and arbitral rules.
While economic growth in Mainland China has attracted foreign investment in recent years, the number of commercial disputes has also increased manifolds. Arbitration remains the preferred way to resolve such disputes, thanks to its efficacy and efficiency, making room for a neutral decision-maker.
Arbitral proceedings are confidential – this can help in protecting the reputation, proprietary information, and the identity of the parties involved. Arbitrators are also specialists who come on board due to their vast experience. As a result, they are in a good position to resolve complex commercial disputes. Commercial arbitration in PRC has its own set of issues that may affect the enforcement of the award or improve the chances of enforcement.
Background
China has a four-tiered court system:
- the Basic People’s Court,
- the Intermediate People’s Court,
- the Higher People’s Court, and
- the Supreme People’s Court (SPC).
The Basic Court has no role to play in international arbitrations.
The Intermediate People’s Court hears challenges to the validity of the arbitral agreements and enforcement of foreign arbitral awards. In the event an Intermediate Court does not enforce a New York Convention arbitral award or a foreign-related arbitral award, such cases must be submitted for a review to the Higher People’s Court. If the Higher People’s Court concurs with the decision passed by the Intermediate Court not to enforce such an award, the case must be submitted to the SPC for review.
This system ensures that PRC complies with its obligations under the New York Convention , and only exceptional cases result in non-enforcement of the award.
1. In case the arbitration is conducted in Mainland China, the enforcement prospects of interim measures are higher
In order to enforce an Hong Kong arbitral award, an application should be filed to the Intermediate People’s Court where the respondent is domiciled or where the property of the respondent is situated. In the case of the jurisdiction of different courts due to domicile and the property being in different places, the application should be made only with one of the courts.
In the event the enforcement is required in both Mainland and Hong Kong, applications should not be filed simultaneously. If the enforcement by the court of one place is not sufficient for satisfying the liabilities, then the applicant may apply to the court of the other place for the balance liabilities.
As per the Arrangement, applications should be made according to the provisions of the Civil Procedural Law of PRC within two years from the expiry of the period that the liabilities must be discharged, or, in the absence of that period, from the effectiveness of the legal instrument.
The respondents or any other interested parties can raise written oppositions to the enforcement. During the enforcement proceedings, a settlement can be reached by the parties, and the court may seize, freeze, transfer, or sell off the assets of the respondent.
2. PRC based ad hoc and UNCITRAL arbitrations are not enforceable in Mainland China
As per the Arbitration Law of PRC, an arbitration agreement or clause is required to designate an arbitration commission. That is why arbitration agreements that stipulate domestic ad hoc arbitrations (including UNCITRAL arbitrations) are usually deemed invalid.
However, the SPC in its Opinions on Providing Judicial Protection for the Construction of Pilot Free Trade Zones issued (the FTZ Opinions) issued in December 2016 stated that:
“two companies registered within the pilot free trade zones, which provides for arbitration in a specified location in mainland China pursuant to specified arbitration rules and by specific arbitrators” can be considered valid – suggesting that ad hoc arbitrations in limited situations between companies registered in Mainland China may be valid in China. However, foreign arbitral awards from ad hoc proceedings are normally recognized as enforceable in Mainland China.
3. The seat of ICC arbitrations should be outside China
ICC arbitrations in Mainland China are not expressly prohibited. However, there is a strong presumption that no foreign arbitration institution can operate within Mainland China(*).
If parties with to have an ICC arbitration with the hearings in Mainland China, it should be specified in the arbitration agreement that the seat of the arbitration is outside mainland China. Hong Kong and Singapore are acceptable options(**).
The parties may otherwise apply the ICC clause created especially for PRC.
In February 2016, a representative office of the ICC was established in the Shanghai Pilot Free Trade Zone (SFTZ). This has been modeled after the Hong Kong International Arbitration Centre and the Singapore International Arbitration Centre. This marked a positive move towards the formal involvement of international arbitral institutions in PRC.
(*) Züblin International GmbH v Wuxi Woke General Engineering Rubber Co,
(**)However, in Duferco SA v Ningbo Arts & Crafts Import & Export Co, the Ningbo Intermediate People’s Court enforced an ICC award with a seat in Beijing. This ruling has limited effected since in this case the judgment debtor was procedurally barred from arguing that the arbitration agreement was void as the objection was not raised prior to the first arbitral hearing.
4. Arbitration outside PRC is not allowed between two PRC legal persons
PRC law does not provide any justification for allowing two PRC legal persons to select a foreign arbitration institution or participate in ad hoc arbitration outside PRC(*). For the sake of clarity, it shall be noted that PRC companies owned by foreign investors fall within the definition of a “PRC legal person”. In other words, arbitration proceedings between two wholly-owned PRC subsidiaries of foreign companies may not take place outside PRC.
This restriction however appears to have been eliminated for companies registered in SFTZ.
(*)See Jiangsu Aerospace Wanyuan Wind Power Co, Ltd. v. LM Wind Power (Tianjin) Co, Ltd.. to understand how domestic parties are prevented from avoiding Chinese courts and jurisprudence.
5. Arbitration awards from Hong Kong are enforceable in Mainland China
Arbitral awards granted in Hong Kong (including ad hoc awards) are accepted and enforceable under a “mutual arrangement” in PRC. However, the arrangement does not extend to non-monetary awards (such as injunctions).
Conclusion
While a non-Chinese party may be tempted to favor arbitration outside of PRC, it is not necessarily a good idea. Careful consideration and anticipation is required when selecting the place and venue of arbitration in sino-foreign contracts.