When is it appropriate for the courts in the People’s Republic of China to refuse enforcement of an arbitration award on the grounds that to do so would be contrary to the public interest? This question was addressed recently in Wicor Holding AG v Taizhou Haopu Investment Co., Ltd (Taizhou IPC Commercial and Arbitration Review No. 00004, 2 June 2016), in which the Taizhou Intermediate People's Court of Jiang Province ('Taizhou IPC') refused to recognise and enforce an International Chamber of Commerce ('ICC') award as it determined that to do so would be contrary to the public interest. This article sets out the facts of the case and explores enforcement of arbitral awards in China generally, and discusses whether the Taizhou judgment is consistent with previous case law.

Regime for enforcement of arbitration awards in China

China ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) ('New York Convention') in 1987, subject to reciprocity and commercial reservations, so that awards will be enforced in China under the New York Convention if they are made in another contracting state and arise from a contractual or non-contractual legal relationship which is considered commercial under Chinese law.

Recognition and enforcement in China of Hong Kong awards are subject to the regime set out in the Supreme People's Court Arrangement in respect of Mutual Enforcement of Arbitral Awards by the Mainland and the Hong Kong Special Administrative Region effective on 1 February 2000 ('Hong Kong Arrangement'). This was the relevant enforcement law in the Wicor case.

The Chinese courts have taken steps to facilitate effective enforcement of international commercial arbitration, including giving the Intermediate People's Court ('IPC') jurisdiction over the enforcement of foreign arbitral awards, unlike domestic awards which are enforced by the lower courts which may be less familiar with the regime favouring arbitration awards. Additionally, a prior reporting system has been established, which requires the IPC to report to and request approval from the Provincial Higher People's Court ('HPC') if it anticipates finding an arbitration agreement to be invalid, or if it anticipates denying recognition and enforcement of a foreign arbitral award. If the HPC agrees with that view, it must further report to and request approval from the Supreme People's Court ('SPC'). No final ruling can be given without the approval of the SPC.

Whilst the system can prolong enforcement actions in China, it is designed to maximise the enforcement of foreign arbitral awards. Justice Hongyu Shen of the SPC addressed the International Bar Association Conference on 4 March 2016, during which she noted that since China acceded to the New York Convention there had been fewer than 30 cases in which the Chinese courts had denied recognition and enforcement of a foreign arbitral award. In a study conducted in 2015 by King & Wood Mallesons, 98 applications to enforce foreign arbitral awards in China were reviewed. Of those, there was an average overall enforcement rate of 68%. More significantly, in 39 of those cases, the IPC and HPC had reported to the SPC seeking approval to refuse enforcement. The SPC directed the lower court to enforce the awards in 16 of those 39 cases, demonstrating that the prior reporting system is effective in encouraging enforcement of international arbitration awards.

The Taizhou Judgment

Taizhou Haopu Investment Limited ('Haopu') entered into a joint venture agreement with a Swiss investor, Wicor Holding A.G. ('Wicor'). The joint venture agreement contained a dispute resolution clause which provided for disputes to be arbitrated in accordance with ICC rules (the 'arbitration agreement'), but without designating the ICC as the administering institution. The provision set out that if arbitration was initiated by one party, the other party had the right to choose the seat of the arbitration.

There are three relevant judgments in relation to the joint venture.

1. Taizhou Haopu Investment Co Ltd v Wicor Holding AG (the "2012 Judgment")

In July 2011, Haopu (the Chinese company) brought an action before the Taizhou IPC claiming that Wicor (the foreign company) had breached the joint venture agreement. For present purposes, the significant aspect of the court's decision is in relation to the validity of the arbitration agreement.

Arbitration law in China is governed by the Arbitration Law of the People's Republic of China, Article 16 of which requires arbitration agreements to designate an arbitration commission. Ad hoc arbitration, i.e., arbitration that is not administered by a recognised arbitration institution, is not recognised under the Chinese arbitration law. As the clause in the joint venture agreement in this case did not specify an arbitration institute, leaving this to the choice of the party against whom the arbitration was brought, the Taizhou IPC considered that the arbitration agreement failed to comply with Article 16. Both the Jiangsu HPC and the SPC confirmed their agreement to this decision, and the arbitration agreement was declared invalid.

The arbitration agreement predated the adoption of the 2012 ICC Rules, article 6(2) of which provides that "by agreeing to arbitration under the Rules, the parties have accepted that the arbitration shall be administered by the [ICC] Court." The 1998 ICC Rules, which applied in this case, did not include such a provision. The court's decision would perhaps now be different, as an agreement to arbitrate under the 2012 ICC Rules only requires the parties to explicitly specify an arbitration institute in the event the arbitration is to be administered by an arbitration institute other than the ICC Court.

2. Wicor Arbitration

In November 2011, Wicor brought an arbitration claim against Haopu in respect of a different dispute under the joint venture agreement. Haopu did not nominate a seat for the arbitration and the ICC tribunal decided upon Hong Kong as the seat of the arbitration. The arbitral tribunal confirmed the validity of the arbitration clause in an award in November 2012. A final award on the merits of the case was made in July 2014 against Haopu and a supplementary award was made in November 2014.

3. Wicor Holding AG v Taizhou Haopu Investment Co., Ltd

Wicor applied to the Taizhou IPC for recognition and enforcement of the awards in the Wicor Arbitration in December 2014. Haopu objected to the application, submitting that enforcement would undermine the 2012 Judgment and would therefore be contrary to the social public interest of China.

Article 7 of the Hong Kong Arrangement allows Chinese courts to refuse enforcement of a Hong Kong arbitral award if enforcement is contrary to the "social and public interests" of China. Article V 2 (b) of the New York Convention contains an equivalent provision, allowing recognition and enforcement to be refused if it is contrary to the "public policy" of the country in which it is sought.

The Taizhou IPC noted that the Hong Kong arbitral awards had been made on the basis that the arbitration agreement was valid. The 2012 Judgment preceded the arbitral awards and declared the same arbitration agreement to be invalid as a matter of Chinese law. The Taizhou IPC therefore considered that it should deny enforcement in the social public interest as permitted by Article 7 of the Hong Kong Arrangement. This decision was reported to, and approved by, both the HPC and SPC under the Prior Reporting System explained below.

Chinese Cases on the Public Interest

It is uncommon for enforcement to be denied in China on the grounds of the public interest. Prior to Wicor, the SPC had only allowed an application of the social and public interest ground in relation to one foreign award, in Hemofarm DD (Serbia) v MAG Intertrade Holding DD (Serbia), Suram Media Ltd. (Liechtenstein) and others, Jinan Intermediate People's Court of Shandong Province, 27 June 2008. In Hemofarm, a Chinese investor (Yongning) had entered into a contract with Hemofarm in relation to a joint venture (the 'JV') established by them. Following a dispute, Yongning initiated proceedings against the JV before the Jinan IPC. The IPC ruled that an arbitration clause contained in the contract between Yongning and Hemofarm did not apply to the dispute because the JV was not a party to the contract. Yongning succeeded in its claim, and a judgment was awarded by the IPC against the JV. Hemofarm later raised ICC arbitration proceedings, claiming that the IPC judgment had rendered the JV unable to operate and that Yongning had breached the JV contract by bringing the IPC litigation. The arbitral tribunal awarded Hemofarm damages for lost investments and costs, which they then sought to enforce in the Jinan IPC. The IPC, with the approval of the HPC and SPC, denied recognition and enforcement under two provisions of the New York Convention: (1) Article V1(c), which allows refusal of enforcement of an arbitral award which has gone beyond the scope of the submission to arbitration. This provision was held to be applicable in Hemofarm because the arbitration agreement did not envisage arbitration between the parties and the JV itself; and (2) under Article V2(b) (detailed above), since the arbitration decision was contrary to the earlier IPC judgment, the arbitral award infringed upon China's judicial sovereignty and the jurisdiction of the Chinese courts and was contrary to the public policy of China.

The Chinese courts’ approach to this question is a matter of timing. In Wicor and Hemofarm, the IPC’s ruling that the arbitration clause was invalid predated the arbitral tribunals’ awards, and the public policy exception to enforcement was therefore applied. However, in the Reply of the SPC on Castel Electronics Pty Ltd.'s Application for Recognition and Enforcement of Foreign Arbitral Award, [2013] Min Si Ta Zi, No. 46 (10 October 2013), the SPC held that where the arbitration award predated a finding that the arbitration agreement was invalid, the award did not violate China's public policy and should be enforced.

In one other case (US Production Co, Ltd. & Tom Hewlett Co v China Woman Travel Agency TA [1997] No 35), the Chinese courts denied recognition and enforcement of an award on the basis that it was contrary to the social public interest of China. This case will not be discussed in detail as it is a foreign-related award (concerning a Chinese arbitration award against a foreign party), rather than a foreign award being enforced in China under the New York Convention or the Hong Kong Arrangement.

Conclusion

The Chinese courts' enforcement of foreign arbitration awards arising from arbitration agreements which have later been held to be invalid demonstrates the courts' support for arbitration and the parties' intentions. In cases such as Wicor, where it is clear that the parties had intended that disputes would be resolved by arbitration, the agreement was deemed invalid on a technicality. It is encouraging for advocates of international arbitration that the Chinese courts appear to be placing more significance on the parties' intentions.

The Wicor judgment is consistent with the approach taken by the Chinese courts in previous cases. It has provided an increased level of certainty that the public policy ground for resisting enforcement will only be invoked in relation to judicial sovereignty where the court has refused to give effect to an arbitration agreement prior to the arbitral award being made.

From a practical point of view, the case is also helpful in showing the importance of carefully drafted arbitration clauses. A clear provision, designating an arbitration institution, would have allowed successful enforcement of the arbitration award.