Whether you’re doing business in China or with a Chinese company, the party you are dealing with usually has assets in China. This is true of your suppliers, customers, licensees or joint venture partners. Sometimes, all of their assets are located in China.
Your agreement needs to have an effective method for resolving disputes - one that will allow enforcement against assets located in China. Otherwise, your hard-fought “win” may not get you the money you deserve.
ARBITRATION, NOT LITIGATION
Judgments of foreign courts can be very difficult to enforce in China. This means that litigating disputes outside of China against parties who only have assets in China is often of little practical value where what you seek is money (either for non-payment or compensation for damages).
One alternative, of course, is to choose to litigate your dispute in China. But there are many reasons why companies, especially those based overseas, may not want to litigate their disputes in China.
FOREIGN ARBITRATION AWARDS AND HONG KONG ARBITRATION AWARDS
Arbitration awards, on the other hand, can be enforced with greater ease in China.
Arbitral awards made outside of China or Hong Kong, or arbitral awards made in China pursuant to an international arbitral institution (e.g. an ICC award made in China) are all considered foreign arbitral awards. For these arbitrations, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards applies if the award is made in a country that has acceded to the New York Convention. The New York Convention covers nearly all countries where you might contemplate having any arbitration. One notable exception in the region is Taiwan.
Hong Kong is no longer ‘foreign’ to China and so the New York Convention does not apply to awards rendered in Hong Kong. However, special arrangements have been entered into so that awards made in compliance with Hong Kong’s arbitration laws (ie the Hong Kong Arbitration Ordinance) will be enforced in China similarly to foreign awards pursuant to the New York Convention.
Foreign awards and Hong Kong awards must be enforced in China by the Chinese courts, subject to certain limited exceptions, which are specified in the Convention.
An effective solution, therefore, is to agree that any disputes must be resolved by arbitration outside of mainland China (eg London, Singapore or Hong Kong). You may want to consider having your arbitration administered by an arbitral institution – such as the ICC, LCIA, SIAC or HKIAC – to ensure things run smoothly. We discuss in more detail below arbitrations in China.
ENFORCING FOREIGN ARBITRATION AWARDS IN CHINA – HOW IT WORKS
Where to begin
The competent court for enforcement of a foreign arbitral award is the Intermediate Court of the region where the assets are located.
To initiate an application for enforcement, you must:
- file an application for enforcement;
- provide a copy of the arbitration agreement (eg the contract which contains the arbitration clause) including a notarized translation of the agreement; and
- provide the arbitration award, including a notarized Chinese translation of the award.
Foreign arbitral awards must be submitted to a Chinese court for enforcement within 2 years of the award being issued.
Enforcement typically takes about six months from the lodging of the application to enforcement against assets.
Grounds for refusal of enforcement
The New York Convention specifies the grounds for refusing to enforce an award. The specified grounds are aimed at unfair arbitrations, such as where one party did not receive proper notice of the arbitration or where the arbitrators were not appointed according to the agreed procedure. Enforcement will also be refused where there was no valid agreement to arbitrate.
The grounds do not include the arbitrator or arbitrators deciding questions of fact or law incorrectly. A party cannot resist enforcement on the basis that, in its opinion, the arbitrator or arbitrators found the wrong facts or misunderstood or misapplied the law.
Although the Convention leaves it up to courts to finally decide whether or not to enforce, in China, if one of the specified grounds exists, the award will not be enforced.
If at first you don’t succeed . . .
China has implemented a pre-reporting system to encourage Intermediate Courts to enforce foreign arbitral awards. If the Intermediate Court considers that enforcement should be refused, it is required to report this to the High Court in the local province. If the High Court reviews that decision and agrees that recognition should be refused, it is required to report that decision to the Supreme Court for review. Given this, Chinese lower courts are typically cautious to refuse to recognise a foreign arbitral award.
ARBITRATING IN CHINA – FOREIGN-RELATED AWARDS
All arbitrations seated in China must either be administered by a foreign arbitral institution or a domestic Chinese arbitral institution. As already noted, where an arbitration is held in China but administered by a foreign arbitral institution, the award is considered a foreign award and enforced as such.
If your agreement provides for arbitration in mainland China under a Chinese arbitral institution, such as CIETAC, BAC or SAC, the award will be considered a “foreign-related award” if:
- one or both of the parties is a non-Chinese party; or
- the nature or subject matter of the legal relationship is most closely connected with a foreign jurisdiction.
Foreign-related awards are enforced as domestic Chinese awards. This is a quicker and simpler process because there is no need to have the award “recognised” under the New York Convention.
ENFORCING DOMESTIC CHINESE ARBITRATION AWARDS
Often, foreign companies operate in China through local Chinese subsidiaries. Unless the agreements between these local Chinese subsidiaries with other Chinese companies are most closely connected with places outside China, arbitrations under these agreements will be domestic arbitrations.
Historically, there has been greater scope for Chinese courts to refuse enforcement of a domestic Chinese award than there is in respect of foreign or foreign-related arbitral awards. For example, in some circumstances, the Chinese courts were entitled to review the merits of a domestic arbitral award.
Since the introduction of a new law on 1 January 2013, Chinese Courts can only conduct a procedural review of a domestic award and cannot review its merits. The Courts’ application of the revised law is yet to be seen, however, we expect it will significantly decrease the scope of Court review of domestic awards.
If you have agreed to arbitration in China – whether it is a foreign-related arbitration or a purely domestic arbitration - and the language of the arbitration has not been specified in your arbitration agreement, the language will be Mandarin (even if both parties have English language capability and the relevant documents are in English). In order to avoid this, your arbitration clauses should specify that the language of any arbitration will be English.
Chinese courts will not grant asset preservation measures for the enforcement of foreign or even domestic awards. If there is a real danger that the party you are dealing with might dissipate its assets in China to avoid having to pay an award, you should consider opting for any arbitration to be administered by a domestic arbitration institution in China. Chinese courts are often willing to make asset preservation orders at the outset or during arbitration in China (whether domestic or foreign-related) or litigation proceedings. The risk of asset dissipation can be significant when dealing with small trading companies in China.
ENFORCING COURT JUDGMENTS
The Chinese courts seldom enforce foreign judgments. In theory, foreign judgments can be enforced in China where there is either: (i) a recognition treaty between the two nations; or (ii) reciprocity in enforcement of judgments between the two nations.
In some instances, a treaty will only provide for recognition and enforcement of particular judgments. For example, the Agreement on the Reciprocal Encouragement and Protection of Investments between Australia and China, only provides for judgments of each country, to be recognised and enforced where they involve “investors” or “investments” of the other country. Chinese courts do not typically enforce judgments of Australian courts outside of this treaty.
Think carefully when choosing the dispute resolution process that will apply when dealing with companies with assets in China.
China’s record of enforcing foreign arbitral awards made in New York Convention countries (including Hong Kong) is broadly in line with international practice. Choosing arbitration outside of China, in a New York Convention country, is generally a sound choice. Another option is arbitrating in China using a foreign arbitral institution because those awards are treated the same as foreign arbitral awards.
Where asset preservation is a real concern, you should consider arbitrating in China using a Chinese arbitral institution. Whether this is the best method depends on the nature of the transaction, the parties involved and the risk of asset dissipation. If any arbitration is seated in China:
- choose a well-recognised arbitral institution (e.g. CIETAC, BAC, SAC);
- aim to have the ability to appoint one or more arbitrators from outside of China; and
- nominate the language of the arbitration (otherwise it will be Mandarin).
Finally, once an arbitral award has been rendered, you will need the help of Chinese-qualified lawyers experienced in enforcing awards to prepare translations and notarisations of the relevant documents.