Computers 3000, Inc. is a California corporation that manufactures personal computers in the United States. It enters into a multi-million dollar contract with Tech Parts, Ltd., a company located and operating in China, to purchase microchips. The contract does not contain any provisions regarding the resolution of disputes between the parties, whether by litigation or alternative dispute resolution. When Tech Parts fails to deliver the microchips, Computers 3000 files a lawsuit against Tech Parts in California for breach of contract. Computers 3000 wins a judgment for damages against Tech Parts, but Tech Parts fails to comply with the judgment. Computers 3000 seeks to have the Chinese courts enforce the judgment in China, but the Chinese courts refuse. As a result, Computers 3000 loses millions of dollars in lost revenue and costs from having to find a replacement supplier.

The above scenario may seem extreme, but some variation of this scenario likely happens more often than many would like. What could Computers 3000 have done differently to prevent or mitigate this loss? Though there are many options available to Computers 3000, one option would have been to include in the contract an international arbitration clause that conforms to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly referred to as the “New York Convention.” The inclusion of such a clause would have required the parties to resolve any disputes through arbitration and allowed Computers 3000 to have a U.S. arbitral award enforced in China.

What is the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards?

On June 10, 1958, the United Nations Conference on International Commercial Arbitration prepared and opened for signature the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The goal of the New York Convention was to adopt a more uniform set of rules on the recognition and enforcement of foreign arbitral awards, and it has since become one of the most successful international treaties to date, with over 147 countries adhering and with enforcement of foreign arbitral awards being granted in over 90% of cases. Prior to the New York Convention, a company would be out of luck if it won an arbitral award in one country but sought enforcement in another country where the assets were actually located, as many courts were unwilling or even unable to legally grant an order enforcing a foreign arbitral award.

The United States acceded to the treaty in 1970, with the reservations that it will apply the New York Convention only to recognize and enforce awards made in the territory of another contracting state and that with regards to awards made in the territory of non-contracting states, it will apply the New York Convention only to the extent to which those states grant reciprocal treatment.

China acceded to the treaty in 1987, with the reservations that it will apply the New York Convention only to recognize and enforce awards made in the territory of another contracting state and that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, that are considered commercial under Chinese national law. China has declared that the Convention will apply to a variety of commercial relationships, including those involving economic rights and obligations resulting from contracts involving the sale of goods.[1]

What Does the New York Convention Say?

The New York Convention imposes on signatory countries conditions regarding the recognition and enforcement of foreign arbitral awards, such as requiring a contracting state to recognize foreign arbitral awards as binding and prohibiting a country from imposing more onerous conditions or fees on the enforcement of foreign arbitral awards than would be required for domestic arbitral awards. It also sets forth requirements and limitations on the availability and methods of enforcement. For example, a party seeking enforcement must provide to the court both (a) the duly authenticated original award, or a certified copy of such award, and (b) the original agreement containing the arbitration clause, or a certified copy of such agreement.

The New York Convention does not, however, guarantee that a foreign arbitral award will be enforced by a contracting state. A court may refuse to recognize or enforce an arbitral award under limited circumstances, including the incapacity of a party or invalidity of an arbitral award under the agreement’s governing law, problems with due process, or concerns of public policy. Though there is limited data on how often countries invoke an exception, the information that is available suggests that countries do so infrequently.

Nonetheless, inclusion of an international arbitration provision pursuant to the New York Convention has many advantages, and if the contract that Computers 3000 and Tech Parts signed had included an international arbitration clause, Computers 3000 would likely have been able to enforce an arbitral award issued in the United States in China.

What Should Be Included in an International Arbitration Clause?

If parties to a contract decide to include a clause on international arbitration, there are some steps they can take to maximize the likelihood of enforceability, particularly in China. The following is a list of the types of provisions that parties may want to include in an international arbitration clause as well as considerations that parties should keep in mind when trying to enforce a foreign arbitral award in China:

  • Require that all disputes involving the contract be resolved through arbitration
  • Identify the jurisdiction where the arbitration should take place
  • Identify an arbitral body that will conduct the arbitration and the rules that will govern the arbitration: Identification of a standing arbitral body is significant if the arbitration is to be enforced in China. Although the New York Convention requires that China accept ad hoc arbitration, i.e., arbitration not conducted by a standing arbitration commission, Chinese law may allow a judicial body to invalidate a foreign arbitral award if the parties chose the law of China as the governing law but failed to name a specific arbitral body to administer the arbitration.
  • Identify the location for submittal of an application to enforce a foreign arbitral award: Under Chinese law governing the enforcement of foreign arbitral awards, parties may submit an application for enforcement in only three locations: (1) a domicile or residence if one or more parties is a natural person; (2) the principal executive office of a legal person if the party is a legal person; or (3) the location of the property if the party has no domicile, residence, or principal executive office in the territory.
  • File an application with the Intermediate Court within one year if one or both parties are individuals or within six months if both parties are enterprises, institutions, government organs or other organizations
  • Consider obtaining local counsel to aid in the representation of an application: China generally bars foreign lawyers from appearing in its courts as lawyers. In a few cases, however, foreign lawyers were able to act as agent ad litem for their clients, i.e., act on behalf of their clients by court appointment.
  • Pay the non-refundable fee of 500 Yuan, plus additional fees if granted enforcement as set forth in the Measures for the Charging of Court Costs by People’s Courts
  • Be patient: Although Chinese law suggests that the Intermediate Court render a ruling within two months of receiving an application, enforcement may take one or more years due to China’s automatic appeal process whereby any refusal to enforce a foreign arbitral award is automatically reviewed by a higher court.

With the high success rate in attaining enforcement of foreign arbitral awards under the New York Convention, international arbitration clauses have proven to be useful to many companies that enter into international contracts, particularly in China.[2] Whether or not a company ultimately choses to include international arbitration clauses, it is still worthwhile to consider them as an option.