China: Public Policy Strikes Again

Last Updated: 7 February 2017
Article by Richard Bell


Taizhou Haopu Investment Co., Ltd. vs. Wicor Holding AG, [2015] Tai Zhong Shang Zhong Shen Zi, No. 00004 (2 June 2016), ( Taizhou Intermediate People's Court of Jiangsu Province).

In a recent case in the Taizhou Intermediate People's Court of Jiangsu Province (the Taizhou Court) enforcement of an ICC award was denied to avoid violating the "societal public interest" of the PRC. This is the second case in recent times where the Chinese Court has relied on the public policy exception under Article 7 of the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong SAR (the Arrangement) to refuse to enforce a foreign arbitral award.

The factual background

The dispute concerned a joint venture contract between a Chinese entity, Taizhou Haopu Investment Co., Ltd. (Taizhou Investment) and a Swiss entity, Wicor Holding AG (Wicor).

The contract was governed by Chinese law and provided for arbitration under the ICC Rules (the Arbitration Agreement), without specifying an institution. In a previous decision in respect of a related dispute between the parties, the Jiangsu High People's Court held that the arbitration agreement was invalid under Chinese because it failed to specify an arbitration institution ([2012] Su Shang Wai Xia Zhong Zi, No. 0012, 11 December 2012)

A dispute arose between the parties, and in 2011 Wicor commenced an ICC arbitration against Taizhou Investment in Hongkong. Accordingly, the ICC Tribunal issued final arbitration award dated 18 July 2014, with an addendum dated 27 November 2014 (the Award)

Wicor then applied for enforcement of the Award before Taizhou Court. Taizhou Investment argued that the Arbitration Agreement has already been recognised as invalid 19 months prior to the Award, the ICC Tribunal ignored that decision and held the Arbitration Agreement was valid, which violated the judicial sovereignty of the PRC. As a result, enforcement of the Award in Taizhou Court will be contrary to the public policy of the PRC.

The legal background

Under PRC law, the recognition and enforcement of an award issued in Hong Kong before Chinese Court should be subject to the Arrangement. Article 7 of the Arrangement is an exclusion clause and the first and last paragraph read as follows:

"Where, after receiving a notice of an application filed in the Mainland or the Hong Kong SAR for enforcement of an arbitral award, the respondent submits evidence to prove that any of the following circumstances exist, the competent court may, upon verification, rule to refuse enforcement of the arbitral award.

Where the court in the Mainland finds that the enforcement of the arbitral award would be contrary to the societal public interest of the Mainland, or the court of the Hong Kong SAR decides that the enforcement of the arbitral award in the Hong Kong SAR would be contrary to the public policy of the Hong Kong SAR, the enforcement of the award may be refused."

The definition of "public policy" in Article 7 is quite board potentially covers a wide range of issues.  Prior to this case, the first and only time the public policy exception has been relied on was in the "Henofarm" case, where the Jinan Intermediate People's Court denied enforcement of an ICC Award on the basis that the award ruled that the respondent's application to a Chinese court for property preservation was unlawful and that related litigation in the Chinese courts violated the terms of the contract.

It is therefore arguable whether an award made on the basis of an arbitration clause which had previously been ruled as invalid was contrary to the public policy of the PRC. Although the Arbitration Agreement was invalid under Chinese law, according to Article 7 of the Arrangement, the validity of an arbitration clause should be verified under the law of the place where the award is made, in this case - Hong Kong.

The decision

On 2 June 2016, the Taizhou Court declined to enforce the Award.

The Taizhou Court acknowledged the Award was made by ICC Tribunal in Hong Kong and the recognition of the same should be subject to the Arrangement.

However, given the Arbitration Agreement had been held invalid prior to the date of the Award, it was held the enforcement of the award would be in direct conflict with the public policy of the PRC and would violate the "societal public interest" of the PRC.

The Implications

The decision in the Wicor case underscores the importance of ensuring that, in a contract between a foreign company and a Chinese company, the arbitration clause is valid under Chinese law.  This is particularly true when foreign elements are involved.

While the Chinese Courts have a reasonably good track record of recognizing foreign arbitral awards, as the decision in Wicor demonstrated, the Chinese Courts will not shy away from applying the public policy exception if the award is not consistent with Chinese Law.  This is true even if the award is valid under the law of the seat of the arbitration.

Counsel and commercial parties alike should accordingly ensure that they consider the validity of the arbitration clause under Chinese Law before the contract is signed.

Public Policy Strikes Again

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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