This article was first published in the International Newsletter of the Israeli Institute of Commercial Arbitration (June 2016), http://tinyurl.com/zkjglt8

Introduction

Since diplomatic relations with China began in 1992, Israeli-Sino trade volume has risen steadily, from US$50 million in 1992 to US$9.9 billion in 2012. Chinese technology powerhouses, such as Alibaba and Baidu, have visited Israel frequently in recent years, looking to purchase Israeli start‑ups and export their technology back to China. Prominent Chinese companies like China Civil Engineering Construction Corporation are being engaged to carry out the tunnel boring works for the Carmel Tunnel in Haifa. Areas of cooperation between Israel and China have extended to almost all areas such as technology, education, arts, tourism, and academia.

With increasing volume of bilateral trade, comes the question of how to resolve disputes. From the point of view of an Israeli company involved in a dispute with a Chinese company, court litigation in Israel is not practical because there is no reciprocal treaty on enforcement of court judgments between Israel and China, which means that enforcement in China of an Israeli judgment is, albeit possible, difficult and uncertain. Court litigation in China is also impractical because (among other reasons) Chinese court proceedings have to be conducted in Chinese and there is (whether justifiable or not) a perceived lack of complete independence of Chinese courts.

Therefore, international arbitration has become the preferred dispute resolution mechanism for Israeli-Sino contracts.

Advantages of Arbitration for Israeli-Sino Contracts

The key advantage of arbitration for Israeli-Sino contracts is the ease of enforcing awards. China and Israel are signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Signatory states are required to enforce awards from 155 other signatory states subject to very narrowly construed exceptions, such as an invalid arbitration agreement or a violation of due process. Accordingly, awards rendered in arbitrations administered by the Israeli Institute of Commercial Arbitration would be enforceable in China through the New York Convention.

There still exist some practical problems in enforcing awards due to perceived local protectionism and the relatively conservative attitude of Chinese courts towards arbitration. However, the enforcement courts’ attitude towards foreign awards has significantly improved in recent years as a result of a more active and supportive policy of the Supreme People’s Court (“SPC”) in general and an internal prior reporting system in particular, which aims at ensuring that enforcement courts adhere to the spirit of the New York Convention. Under that system, when an application to enforce a foreign award has been filed before an Intermediate People’s Court and that court is inclined to refuse enforcement, it must report its finding, for review purposes, to the Higher People’s Court and, if the Higher People’s Court agrees with the finding of the Intermediate People’s Court, it must report its opinion to the SPC for approval. A decision by the Higher People’s Court or the SPC that the award should be enforced is binding on the lower courts.

A second key advantage is the ability to arbitrate disputes in a neutral forum thereby avoiding litigation in each other’s home courts. In those cases in which the contract calls for a sole arbitrator, we generally recommend appointing an arbitrator of neutral nationality in order to avoid any perception of bias. (This is the default position under the rules of some arbitral institutions, including the Hong Kong International Arbitration Centre.)

A third key advantage of arbitration for Israeli-Chinese contracts is that the parties can agree that the arbitration proceedings be conducted in English, so that neither party has to arbitrate in the language of the other party.

Drafting Arbitration Clauses for Arbitration With Chinese Parties

Many arbitration clauses for Sino-foreign contracts provide for arbitration in Hong Kong. Because Hong Kong is a common law jurisdiction and a special administrative region of the PRC, Hong Kong has a unique position in international arbitration. Hong Kong has a strong reputation for upholding the rule of law and offering a fair and neutral forum for resolving disputes. Mainland Chinese parties regard Hong Kong as a culture-friendly venue due to its geographical proximity and shared cultural and language backgrounds. Hong Kong’s judiciary is very supportive of international arbitration, and the Hong Kong arbitration community has a large pool of capable and renowned arbitrators. Importantly, Hong Kong has an excellent track record in respect of enforcement of arbitral awards in Mainland China. We are not aware of any decision in Mainland China in the past five years refusing enforcement of an award made in Hong Kong.

In some circumstances, Israeli parties would have to accept Mainland China as the seat of arbitration. For example, Chinese law requires that contracts that have no non-Chinese element must be governed by Chinese law and that disputes arising from such contracts must be arbitrated in China. Israeli-Sino contracts would normally be outside this restriction, unless an Israeli company contracts with the Chinese counterparty using a wholly owned Chinese special purpose vehicle, popularly known as a Wholly Foreign-Owned Enterprise (WFOE). A WFOE is considered a Chinese domestic entity, and any dispute involving it might be considered a domestic matter if the transaction takes place wholly in China.

In other cases, such as Israeli-Sino contracts in sensitive areas (e.g. exploitation of natural resources within China), contracts must be governed by Chinese law, but may be arbitrated outside China.

If the place of arbitration must be in China, Israeli parties should take note of three points when drafting the arbitration clause.

  1. 18-19Chinese arbitration law does not recognise ad hoc arbitration (for arbitrations seated in China) and requires that arbitrations in China be administered by a Chinese arbitration institution that has been established under the relevant regulations of the Arbitration Law of the PRC. Accordingly, awards rendered in China in ad hoc proceedings or by a foreign arbitration institution are not enforceable in China. The arbitration clause must therefore specify a Chinese arbitration institution to administer the arbitration. While there are numerous arbitration institutions in China, only a few of them have expertise in international arbitrations, such as China International Economic and Trade Arbitration Commission (CIETAC), Shanghai International Arbitration Center (SHIAC), and Shenzhen Court of International Arbitration (SCIA). When our law firm’s non-Chinese clients have to arbitrate in China, we routinely recommend CIETAC, the best known institution.
  2. The choice of arbitration must be clear and unequivocal. Neither party may reserve for itself the option to choose between court litigation and arbitration, as otherwise the arbitration clause would be considered invalid under Chinese law and an award would be liable to be set aside by the Chinese courts.
  3. Chinese parties usually have a preference for three member tribunals because it enables them to appoint one arbitrator who shares their cultural background. Arbitration rules for Chinese arbitration institutions typically include a requirement that arbitrators must be chosen from a panel, or roster of names, maintained by the institution, unless the parties expressly reserve the right to choose arbitrators from outside the panel. It is therefore important that, if the parties agree that there shall be three arbitrators, the arbitration clause specifies that parties have a right to appoint arbitrators from outside the panel, so as not to unduly restrict the pool of suitable and available arbitrators. Moreover, the clause should make clear that the third arbitrator must be of neutral nationality to avoid an unbalanced tribunal in terms of nationality. CIETEC’s panel includes arbitrators who are experienced in common law countries, in particular arbitrators residing in Hong Kong.

Enforcement of Foreign Arbitral Awards in China

When an Israeli company wins an arbitration against a Chinese company, the Israeli company might have to enforce the award against the Chinese party in China. The application process for enforcing an award in China is as follows.

Timing: The Israeli company should apply for recognition and enforcement of the award within two years from the last day of performance specified in the award or two years from the date of the award (if the award does not specify a time for performance).

Court: The Israeli company should file the application with an Intermediate People’s Court where the Chinese party is domiciled or where its assets are located.

Procedure: The Israeli company has to pay (i) an “acceptance fee” (currently around US$ 80) to the court for accepting the application and (ii) an application fee which is calculated based upon the amount in dispute; for example, if the amount of the award to be enforced is US$ 5 million, the application fee is currently around US$ 32,000. Provided that the application meets the formal requirements, the court will docket the application and notify the Chinese respondent. If the respondent wishes to resist enforcement, it has to file a statement of defence within a time limit designated by the court (usually within 15 days from receipt of the notice). The enforcement court must render a decision on enforcement within two months of docketing the application. However, in practice enforcement courts often do not follow this requirement. In our experience, the court may take 3 to 5 months or even longer to make a decision.

Enforcement: Once the court grants enforcement of the award, it will be treated like a Chinese court judgment and enforced in the same way. Enforcement processes could include freezing the Chinese counterparty’s assets or selling them without the need to commence liquidation.

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The number of disputes is usually proportionate to the volume of bilateral trade. With negotiations on a free trade agreement between Israel and China expected to yield a positive outcome, Israeli companies can better protect its rights if they adopt a properly drafted arbitration clause in contracts with Chinese counterparties.