In 1986, the People’s Republic of China ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), the multinational treaty that requires the courts of signatory states to enforce foreign arbitral awards. For many, however, the question remains whether Chinese courts are faithful to the New York Convention in enforcing foreign arbitration awards against Chinese companies.
The New York Convention permits the courts of signatory states to refuse to enforce foreign arbitral awards that violate the “public policy” of the state. Western courts have generally interpreted this public policy exception very narrowly, only vacating awards that clearly violate the due process rights of the participants, e.g., where there is evidence that one of the arbitrators was bribed.
Practitioners outside China tend to believe Chinese courts are far more willing to invoke public policy as a reason to reject the enforcement of foreign arbitral awards. This, however, is somewhat of a misconception. Because any Chinese court decision refusing to enforce a foreign arbitral award is subject to the mandatory review of the Supreme People’s Court of China (SPC), the SPC has been able to monitor attempts by the Chinese lower courts to reject foreign arbitral awards. This mandatory review requirement, which was adopted by the SPC in 2000, has apparently had a positive effect. According to a 2008 speech by Deputy Chief Justice of the SPC, Wan E’xiang, between 2000 and 2008 the SPC did not uphold a single decision by the Chinese lower courts that refused to enforce a foreign arbitral award on public policy grounds.
Still, the fact that public policy is not defined by Chinese law is problematic for foreign companies that hope to enforce foreign arbitration awards in China. Under some Chinese protocols, public policy has been equated with “social public interests”, but this term itself is vague and subject to manipulation. According to the Deputy Director of the Enforcement Bureau of the SPC, “‘social public interests’ is a concept that falls within the political domain rather than a term of law. … For a foreignrelated or foreign arbitral award, social public interests are the same as the State’s sovereign interests.”
In order to better understand how Chinese courts apply the concept of public policy to foreign arbitration awards, it is instructive to consider three specific case studies.
Case Study 1: Morality
In this first case, dating from 1977, a US band contracted to perform a concert in China. This concert, however, was suspended when Chinese authorities asserted that the performance included heavy metal music that had not been approved by the Ministry of Culture of China, and was otherwise “not suitable” for China. After not being paid, the musical group commenced arbitration and the arbitration tribunal awarded damages to the performers.
Upon review of the arbitration award, the SPC concluded the performance did in fact violate China’s social public interest and, as such, the performers had breached the contract. As a result, the SPC held that the arbitral award could not be enforced without damaging China's social public interests and refused to enforce the award.
Admittedly, this case took place over three decades ago, and the moral issue that the authorities had with the music would likely not be a public policy issue in China today. Nevertheless, morality is a relative concept, and this case demonstrates that morality does play a role in the Chinese concept of public policy.
Case Study 2: Mandatory Administrative Regulations
In this second case, dating from 1999, a Japanese company commenced an arbitration against a Chinese state-owned enterprise (SOE) under the Arbitration Rules of the Stockholm Chamber of Commerce. Specifically, the Japanese company alleged the SOE was contractually obligated to pay back certain debt owed to the Japanese company by a Hong Kong company, and that the SOE was delinquent in repaying this debt.
After the Stockholm tribunal ruled in favour of the Japanese company, the SOE challenged the award in a Chinese court, arguing the award violated Chinese public policy because the repayment of the foreign debt to the Japanese company had not been approved by the State Administration on Foreign Exchange and this approval was compulsory. The lower court agreed and refused to enforce the award.
Upon review, the SPC agreed with the lower court that the SOE had violated Chinese law regarding the approval of foreign debt, as well as China’s policies on the foreign exchange administration. However, the SPC went on to explain that “violations of compulsory provisions in the administrative regulations and departmental regulations will not naturally constitute a violation of the public policy of China” (authors’ emphasis). The SPC therefore reversed the lower court’s decision, ruling that the award could not be vacated on public policy grounds.
Case Study 3: Sovereignty of the Chinese Courts
In this third case, dating from 2009, a Chinese company and three foreign companies executed a contract to form a joint venture. This contract provided that all disputes among the parties would be resolved by International Chamber of Commerce (ICC) arbitration. When a dispute subsequently arose between the Chinese company and the joint venture entity, the Chinese company commenced a lawsuit against the joint venture entity in the Chinese courts, which ruled in favour of the Chinese company and ordered the assets of the joint venture be impounded. The three foreign parties thereafter commenced an ICC arbitration against the Chinese party. The foreign tribunal held that the Chinese company had breached the joint venture contract by petitioning a Chinese court to impound the joint venture assets, and awarded damages to the foreign parties.
When the Chinese company did not pay these damages, the foreign parties brought suit in China, seeking enforcement of the arbitral award. The Chinese court, however, held that the arbitration clause in the joint venture contract only covered disputes between the contracting parties and, therefore, did not cover the dispute between the Chinese party and the joint venture entity (which was not a party to the contract). As a result, the Chinese court ruled that the ICC arbitration award, by purporting to resolve a dispute that was subject to the jurisdiction of the Chinese courts, violated China's judicial sovereignty and, with it, Chinese public policy. This decision was affirmed by the SPC, which ruled the arbitration award should not be enforced.
Conclusion: An Evolving Judiciary
The above three case studies provide some parameters about what constitutes public policy under Chinese law with respect to the enforcement of foreign arbitral awards. As appears from Case Study 2, the violation of administrative regulations, even mandatory regulations, does not constitute public policy. Rather, a violation of public policy seems to require proof of an affront to the higher social public interest of China, whether it relates to China’s moral order (Case Study 1) or the sovereignty of its courts (Case Study 3).
While no one can ever guarantee a foreign arbitral award will be enforced in China, the climate is better than many think. Moreover, if China expects its economy to continue its global march, it seems clear that it will increasingly require a more sophisticated and “internationalist” judiciary to soothe foreign investors and importers. The Chinese concept of public policy, as applied to foreign arbitration awards, will also need to evolve.