Over the past three decades China has become a significant player in the global market. Chinese companies are active sellers and purchasers of goods and services, investors in overseas projects, and contractors for infrastructure development, among other things. Foreign companies have established a local presence in China, whether as a hub for manufacturing, servicing the local market, or an investment in local resources. Many of the contracts underlying these transactions include agreements to arbitrate disputes.
The parties’ preference for arbitration is often premised on a number of benefits, including the confidentiality of the proceedings, neutrality of arbitrators, and finality of the award. Perhaps the most important benefit of arbitral awards is the ease of enforcement. Unlike foreign court judgments, which are difficult to enforce absent a treaty between the forum and the enforcement country, arbitral awards are enforceable globally, including in China and 155 other countries, pursuant to the New York Convention.
If enforcement is a key reason for selecting arbitration in China-related contracts, the question then becomes, in practice, are foreign arbitral awards rendered off-shore being enforced in China?
We decided to undertake our own review of publicly reported cases involving applications to enforce foreign arbitral awards rendered off-shore in China. We wanted to know, among other things, the overall enforcement rate of foreign arbitral awards, how likely a foreign arbitral award is to be enforced, the extent to which enforcement rates may vary by region, the average time it takes to enforce a foreign arbitral award, and the most likely reason a PRC court may be inclined to deny enforcement of a foreign arbitral award.
Summary of our findings
Our review of publicly available cases demonstrates an overall average enforcement rate of just under 70%, with enforcement rates substantially improving in recent years. Enforcement trends appear to vary by region, with courts in some provinces demonstrating an increased willingness over courts in other regions to enforce foreign arbitral awards. The average time for a PRC court to decide whether to enforce a foreign arbitral award is just under one year. This does not include however the time for or likelihood of collecting amounts due once an order for enforcement has been issued. Procedural deficiencies such as failure to comply with the arbitral procedure are the most common reasons for denying enforcement. Violation of public policy was only cited once as a basis to deny enforcement.
We reviewed 100 orders by PRC courts on applications to recognize and enforce foreign arbitral awards. These orders span from 1994 to 2015. For the purpose of our review, we considered awards issued in Hong Kong, Macau, and Taiwan as foreign awards, though our research did not reveal any publicly reported orders on applications to enforce awards issued in Macau or Taiwan.
Our research is limited to publicly available data on applications for recognition and enforcement which resulted in a PRC court order. Historically, PRC court orders were not publicly available unless specifically designated for publication, often in furtherance of a policy objective. More recently, this has changed. In 2014, the Supreme People’s Court (SPC) implemented a regulation requiring court judgments to be published. However, the regulation allows courts to withhold publication if doing so would be “inappropriate”. The extent to which courts have withheld publication of orders on enforcement of foreign arbitral awards on the basis that these matters are confidential and publication would be inappropriate is unknown. We expect not all orders on enforcement have been published post-2014.
Our research does not include applications which were voluntarily withdrawn because, for example, the parties settled or it became apparent there were insufficient assets for enforcement. Nor does it include applications that are pending but have not resulted in a court order due to lower court review, higher court reporting, or judicial inaction, by way of example. This information is not publicly available.
More significantly, our research does not include data on actual enforcement – i.e., the amount of the award ultimately recovered. In China, recognition and enforcement of a foreign arbitral award includes two phases. First, the prevailing party must apply to the lower court for an order to recognize and enforce the award, which gives the award the equivalent status of a court judgment. If an order in favor of recognition and enforcement is issued, the case is transferred to the enforcement division of that court for collection of amounts due pursuant to the award. Publicly available information concerning the second phase is limited and is thus beyond the scope of our review. When we discuss “enforcement” in this article, we are only addressing the first phase of the proceedings – i.e., applications to recognize and enforce foreign arbitral awards.
Finally, in two of the orders we reviewed, the result was unclear. These two orders have been removed from our analysis. Thus, our analysis is based on 98 court orders on applications to recognize and enforce foreign arbitral awards.
Results of our review
Of the 98 applications to enforce foreign arbitral awards in China that we reviewed, 67 were successful, resulting in an overall average enforcement rate of 68%.
Despite a lower than expected overall average, the number of applications and the average enforcement rate increased substantially over time. From 1994 to 2004, a total of 20 applications were accepted, resulting in an average enforcement rate of just over 37%. From 2005 to 2015, these numbers increased substantially. Over this period, a total of 78 applications were filed, resulting in an average enforcement rate of 68%. These gains were largely garnered in the last five years, with applications from 2011 to 2015 accounting for 46 of the 78 applications and an average enforcement rate of 86.4%.
Annual enforcement trends are summarized in Table 1 below. These numbers are likely reflective of increased reporting and an increased preference or willingness to arbitrate offshore, among other things, in recent years.
Table 1 – Enforcement rates by year
Click here to view the table.
Enforcement rates by region. In terms of enforcement by region, Shanghai has the highest enforcement rate in China, with an average enforcement rate of 100%. All six publicly reported orders by Shanghai courts were in favor of enforcement.
A number of other provinces share 100% average enforcement rates, with each reporting only one order on enforcement. These provinces include Dezhou, Hainan, Hebei, Heilongjiang, Ningxia, Shanxi, Sichuan, and Xiamen provinces.
Other provinces with average enforcement rates above the overall country average of 68% include Hubei (85.71%), Fujian (80%), Guangdong (78.57%), and Liaoning (75%) provinces.
Provinces with average enforcement rates less than the overall country average include Shandong (66.67%), Anhui (66.67%), Zhejiang (62.5%), Beijing (55.56%), Henan (50%), Tianjin (42.86%), and Jiangsu (40%) provinces.
Enforcement rates by province are summarized in Table 2 below.
Click here to view the table.
Table 2 - Enforcement Rates by Province
When looking at enforcement rates by city, Tier 1 cities generally had higher enforcement rates than lower tier cities. In Tier 1 cities including Beijing, Shanghai, and Guangzhou, the enforcement rate was just over 76%. By comparison, enforcement rates in Tier 2 and Tier 3 and lower cities were approximately 69% and 62% respectively, as shown in Table 3 below.
Table 3 – Enforcement rates by city
|Tier 1 cities||Applications||Enforced||Rate|
|Beijing, Shanghai, Guangzhou||21||16||76.19%|
|Tier 2 cities||Applications||Enforced||Rate|
|Chengdu, Chongqing, Dalian, Dongguan, Fuzhou, Haikou, Hangzhou, Harbin, Hefei, Jinan, Kunming, Nanjing, Ningbo, Qingdao, Shenyang, Shijiazhuang, Suzhou, Tianjin, Wuhan, Wuxi, Xiamen, Xian, Zhengzhou||51||35||68.63%|
|Tier 3 and lower cities||Applications||Enforced||Rate|
|Binzhou, Chaozhou, Dandong, Dezhou, Huzhou, Jiangmen, Jinmen, Nantong, Quanzhou, Rizhao, Shaoguan, Shaoxing, Shizuishan, Xiaogan, Xinxiang, Yangjiang, Yantai, Zhanjiang, Zhenjiang, Zhongshan||26||16||61.54%|
We also looked to see if more experienced courts would be more likely to enforce foreign arbitral awards. We did not see a direct correlation with experience and enforcement rates. Half of the most experienced provinces had enforcement rates below the overall country average, as shown in Table 4 below.
Table 4 - Top ten experienced provinces
Enforcement rates when higher court reporting is sought. In China, if a lower court is inclined to deny enforcement, it must report to the higher court and ultimately to the SPC if the higher court is likewise inclined to deny enforcement.
Of the 98 cases we reviewed, reporting to the SPC was sought in 39 cases. This means lower courts were initially inclined to decline enforcement when reviewing nearly 40% of the applications presented to them. Of the 39 applications on which the SPC was consulted, the SPC directed the lower court to enforce the award on 16 occasions, resulting in an average enforcement rate of 41% when SPC review was sought.
In 14 of the 98 cases we reviewed, we were unable to determine if higher court reporting was sought. These cases are excluded from the above analysis.
Average time for an order on enforcement. We also considered the average time for a court to issue a final order on an application for enforcement of a foreign arbitral award. We were only able to determine conclusive timing in 29 of the 98 cases we reviewed. Based on these 29 cases, it took an average of just under one year, 331 days, for the court to issue a final order on enforcement.
Of these 29 cases, 25 applications were successful. The average time for an order on these applications was 281 days.
Of the four applications that were not successful, the average time for a final order increased more than twofold to 590 days. This increase may be due to higher court reporting, though we are unable to confirm if higher court reporting was sought in these cases. The increase may also be indicative of the court’s reluctance to issue an order declining enforcement. Though not addressed in this article, anecdotal experience indicates that the amount in contention, the parties involved, and the nature of the case may delay the time for an order on an application for enforcement.
We can only confirm that higher court reporting was sought in two of the 29 cases where the time for an order on enforcement can be determined. One case involved a 2014 application on which a final order was issued in just 113 days. The other case involved a 2007 application that endured 590 days before a final order was issued. In both cases, the applications were ultimately successful.
Enforcement rates by institution. Our review extended to enforcement rates of awards issued by institutional and ad hoc arbitral tribunals. Institutions with the highest enforcement rates were the London Maritime Arbitrators Association, the Arbitral Tribunal of the Hamburg Commodity Exchange, and the International Arbitral Court of the Russian Federation Chamber of Commerce and Industry, with 100% enforcement rates (four of four, three of three, and three of three enforced, respectively).
A number of other institutions had enforcement rates of 100%, but these rates resulted from one application for recognition and enforcement in each case. These include the Grain and Free Trade Association, the International Arbitral Court of the Belarusian Chamber of Commerce and Industry, the International Federation of Oils, Seeds and Fats Association, the Sugar Association of London, the Singapore Commodity Exchange, the Swiss Chamber of Commerce Association for Arbitration and Mediation, and the United States Association of Food Industries.
Unsurprisingly, arbitral institutions often selected in China-related contracts had high enforcement rates. Five of the six, or 83% of, applications to enforce awards issued by the Singapore International Arbitral Center were successful. The Hong Kong International Arbitral Centre and the International Chamber of Commerce Court of Arbitration had identical enforcement rates. Seven of the nine, or 78% of, applications to enforce awards issued by each institution were successful.
We were surprised by the data on foreign ad hoc awards, which accounted for 18% of the cases we reviewed. Of the 18 applications to enforce foreign ad hoc awards, 10, or 56%, were successful. This demonstrates that while domestic ad hoc arbitration is not permitted in China, foreign ad hoc awards are enforceable in China.
Further, based on available data, enforcement of foreign ad hoc awards did not appear to be delayed. Of the 18 cases involving foreign ad hoc awards, conclusive timing could be determined in six cases. In these six cases, the average time for a final order on enforcement was 178 days, compared to the overall average of 331 days. All six were ultimately enforced.
Reasons for non-enforcement. We also reviewed the reasons that PRC courts have cited when they are inclined to decline enforcement of a foreign arbitral award. Of the 98 cases we reviewed, 31, or 33%, of the applications for enforcement were unsuccessful.
Legal framework for enforcement
In China, foreign arbitral awards are enforceable pursuant to the New York Convention. Under Article V(1) of the New York Convention, a PRC court may, at the request of the losing party, deny enforcement if:
- the parties to the arbitration agreement lacked capacity or the arbitration agreement is invalid;
- the losing party was not given proper notice of an arbitrator appointment or the arbitral proceedings or was otherwise unable to present its case;
- the award deals with matters not contemplated by or falling within, or beyond the scope of, the terms of the submission to arbitration;
- the arbitral tribunal was not formed or the arbitration was not conducted in accordance with the parties’ agreement or, failing such agreement, the law of the seat of the arbitration; or
- the award has not yet become binding or has been set aside or suspended by the courts of or under the laws of the seat of the arbitration.
In addition, under Article V(2) of the New York Convention, a PRC court may, on its own volition, deny enforcement if:
- the subject matter of the dispute is not capable of settlement by arbitration under PRC law; or
- recognition or enforcement of the award would be contrary to PRC public policy.
As noted, our analysis includes Hong Kong arbitral awards. Hong Kong awards are enforcement pursuant to an arrangement between the governments of Hong Kong and Mainland China. The bases to decline enforcement under the arrangement are consistent with the bases to decline enforcement under the New York Convention. Accordingly, our analysis below cites generally to the New York Convention.
Legal bases cited for denying enforcement
The most often cited reasons for denying enforcement were (i) lack of a valid arbitral agreement and (ii) failing to form the tribunal or conduct the arbitration in accordance with the parties’ agreement or the law of the seat of the arbitration. These reasons were each cited in eight, or 24%, of the 31 cases where applications were denied (for a total of 16 or 48%).
The third most cited reason for denying enforcement was the losing party’s failure to receive proper notice of an arbitrator appointment or the arbitral proceedings or inability to present its case, which accounted for six, or 18%, of the denied applications for enforcement.
In two cases, enforcement was denied because the award dealt with matters not contemplated by or falling within, or beyond the scope of, the terms of the submission to arbitration.
In addition to Article V of the New York Convention, PRC courts looked to other provisions of the New York Convention and PRC law when declining enforcement. These include:
- failure to authenticate the arbitral agreement or notarize and consularize application documents;
- failure to apply for enforcement within the limitation period;
- failure to demonstrate the respondent or its property is located in China; and
- replacement of the arbitration agreement with an agreement in favor of PRC courts.
These findings are summarized in the table below.
Table 5 – Reasons cited for non-enforcement of foreign arbitral awards
|Reason for non-enforcement||Legal basis cited||Number of cases||Percent of total|
|Invalid arbitral agreement||New York Convention, Article V(1)(a)||8||23.53%|
|Formation of the arbitral tribunal or arbitral procedure not in accordance with the parties’ agreement or the law of the seat of the arbitration||New York Convention, Article V(1)(d); Arrangement, Article 7(1)(4)||8||23.53%|
|Lack of proper notice of an arbitrator appointment or the arbitral proceedings or inability to present case||New York Convention, V(1)(b)||6||17.65%|
|Failure to authenticate arbitration agreement or notarize and consularize application documents||New York Convention, Articles 2, IV(1)(a), and IV(2); Provisions of the SPC on Evidence in Civil Procedure, Article 11||3||8.82%|
|Failure to apply for enforcement within the limitation period||PRC Civil Procedure Law (1991), Article 219||3||8.82%|
|Award deals with matters not contemplated by or falling within, or beyond the scope of, the terms of the submission to arbitration||New York Convention, Article V(1)(c)||2||5.88%|
|Failure to demonstrate the respondent or property belonging to the respondent is located in China||New York Convention, Article 1; PRC Civil Procedure Law (1991), Articles 108(2) and 207||2||5.88%|
|Enforcement would violate public policy||New York Convention, Article V(2)(b)||1||2.94%|
|Parties superseded the arbitration agreement with an agreement in favor of PRC courts||New York Convention, Articles 1 and 2(3)||1||2.94%|
The increase in the number of foreign arbitral awards being enforced in China is encouraging. Improved enforcement rates may be attributable to better drafted arbitration agreements (only two of the seven applications denied on the basis of an invalid arbitration agreement arose after 2005), a better educated judiciary, and a more predictable and transparent legal system.
It is nonetheless difficult to parse from publicly available data the extent to which local protectionism, corruption, or interference by government authorities potentially impact enforcement. For example, applications that are pending or have ultimately been withdrawn due to judicial inaction are not visible in this data.
Publicly available data also does not reveal the extent to which amounts payable are ultimately collected. Security for enforcement is available once an order in favor of enforcement is issued, but not while an application for enforcement is pending. Thus, asset dissipation during review of an application for enforcement may still be a concern, particularly when seeking to enforce against a small, midsized, or lesser known company.
That said, the PRC government is and has been taking steps to improve enforcement and collection rates. Higher court reporting is intended to thwart non-judicial interference with enforcement. The SPC has also taken the position that only egregious violations of public policy are sufficient to deny enforcement of a foreign arbitral award. Finally, there are now penalties for failing to comply with a PRC court order on enforcement. Companies or individuals who intentionally avoid enforcement will be blacklisted and subject to a number of restrictions, including restricted access to financing and bans on luxury travel and consumption of luxury and other non-basic amenities.
If a PRC court is inclined to deny enforcement, it most likely would do so on procedural grounds. Thus, if enforcement is contemplated in China, it is critical to ensure the arbitral procedure is conducted in accordance with the arbitral rules and procedure agreed by the parties and of the place of the arbitration. It is also critical at the outset to ensure a well-drafted arbitration clause is in place, to further ensure enforcement of a favorable award.