China: The "Golden Landmark Case" – A New Dawn For Enforcement Of Foreign Arbitral Awards In China?

Siemens International Trading (Shanghai) Co., Ltd vs. Shanghai Golden Landmark Co., Ltd (2013) Hu Yi Zhong Min Ren (Wai Zhong) Zi No. 2 (27 November 2015) (Shanghai No.1 Intermediate People's Court).

In a recent case in the Intermediate People's Court of Shanghai, the Court decided to recognise and enforce a foreign arbitration award in China, even though the arbitration took place in Singapore between two PRC-incorporated companies. This represents a break from past decisions, and has interesting implications for foreign parties operating in the PRC through PRC entities.

The factual background

The dispute concerned a sale and purchase contract entered into between two PRC entities. Both of the entities were wholly foreign owned enterprises (categorized under PRC law as "WFOEs").

The contract was governed by PRC law, but provided for any disputes to be resolved in Singapore, before the Singapore International Arbitration Centre (SIAC). A dispute arose between the parties, and in 2007 the Buyer commenced arbitration in Singapore against the Seller.

The Seller challenged the tribunal's jurisdiction, arguing that PRC law did not permit disputes without a "foreign element" to be arbitrated outside of the PRC. The tribunal rejected the Seller's challenge. The Seller accordingly submitted to arbitration and filed a counterclaim against the Buyer.

In its decision, the tribunal rejected the Buyer's claims, and issued an award in favour of the Seller. However, the Buyer failed to satisfy the entire award, and in June 2013 the Seller commenced proceedings in Shanghai for the recognition and enforcement of the award.

The Buyer challenged the application on the basis that the dispute had no "foreign element" (both parties were PRC registered entities and the contract was part performed in China). The Buyer argued that because PRC law does not allow for non-"foreign-related" disputes to be arbitrated outside the PRC, the award could not be upheld.

The legal background

Under PRC law, the general rule is that "domestic" disputes can only be arbitrated in the PRC, whereas "foreign-related" disputes may be arbitrated either within or outside the PRC. This means that for domestic disputes, the arbitration must be seated in China and subject to the rules of a Chinese arbitral institution. Awards seated in a jurisdiction outside the PRC which relate to a "domestic" dispute may not be recognised and enforced in the PRC.

PRC law has previously drawn a clear distinction between "foreign-related" disputes and "domestic" disputes. The law provides that a "foreign element" in a case will arise in any of the following circumstances[1]:

  • At least one party to the underlying legal relationship is a foreign national, foreign legal entity, or other organisation or individual without nationality;
  • The usual residence of one or both parties to the underlying legal relationship is in the territory of a foreign state;
  • The subject matter of the dispute is located outside of the PRC;
  • The legal facts establishing, altering or terminating the parties' relationship occurred outside of the PRC; or
  • Any other circumstances whereby the legal relationship can be regarded as "foreign-related".

The definition of what constitutes a "foreign-related" dispute appears at first glance to be quite broad. However, in practice, the main test has been whether or not any of the parties to the dispute are foreign parties. If they are then the dispute will be considered to be "foreign-related". In addition, PRC-incorporated foreign-invested entities ("FIEs") and WFOEs are considered to be "domestic" entities.

The result is that foreign parties who conduct business in the PRC using FIEs or WFOEs have often been obliged to arbitrate their disputes in the PRC.

The decision

On 27 November 2015, the Shanghai No.1 Intermediate People's Court ruled that the dispute was "foreign-related", and it recognised and enforced the award.

The court acknowledged both parties were incorporated in the PRC and the relevant equipment had been delivered in the PRC and was being held in the PRC. These factors all indicated that this was a "domestic" dispute.

However, the court then considered the final limb of the test – i.e. whether there were any other circumstances that might cause the legal relationship to be regarded as "foreign-related".

The court held that there were, as the parties were both WFOEs, and they had both been incorporated in the Shanghai Waigaoqiao Bonded Zone, which formed part of the China (Shanghai) Pilot Free Trade Zone ("Shanghai FTZ"). The court held that this differentiated them from ordinary domestic companies, because the source of their registered capital, their ultimate ownership interests, and their business decision-making were all closely connected with foreign investors. The court further held that because the objective of the Shanghai FTZ had been to facilitate foreign investment, particular emphasis should be placed on these factors when considering whether or not they constituted a "foreign element".

In addition, the Seller had procured the goods in question from abroad and had then stored the goods under bond (no tariff duties were due) in the Shanghai FTZ before transferring them out of the tariff-free zone and delivering them to the Buyer. The court held that this aspect of the contract's performance bore the features of an international sale of goods, as opposed to an ordinary domestic sale of goods.

The court held that these factors constituted "other circumstances", and they were sufficient for the legal relationship between the parties to be categorised as "foreign-related". The arbitration agreement was therefore valid and the court proceeded to recognise and enforce the award.

This decision goes beyond earlier PRC court decisions, which have held that purely "domestic" disputes, including those involving FIEs and WFOEs, should not be arbitrated outside the PRC.

It is also the first known PRC court decision that has shed light on what "other circumstances" might mean, when determining if a contract is "foreign-related".

The implications

A number of significant implications arise out of this decision. First, it suggests a willingness by the PRC courts to construe the term "foreign-related" relatively broadly, and to permit PRC entities to arbitrate their disputes outside of the PRC, where there are various "foreign elements" in play.

Secondly, it differentiates between the status of companies formed inside free trade zones such as the Shanghai FTZ and companies incorporated on the mainland.

Thirdly, it tends to indicate a more "enforcement friendly" approach to foreign awards.

The decision will therefore be of interest to foreign companies who do business in China through a free zone registered entity and who wish to have foreign arbitration as the dispute resolution mechanism in their contracts.

However, precisely because this decision appears to be the first to shed light on what "other circumstances" might mean, it should be treated with caution at this stage. It is unclear if the decision would have been endorsed by the Supreme People's Court, had it reached that stage, or if the same reasoning will be followed in the future by other PRC courts. There were also some unusual facts in the case which may have persuaded the court to enforce the award.

Footnote

[1] Article 1 of the Interpretation on Certain Issues Concerning the Application of the Law of the People's Republic of China on the Application of Laws to Foreign-Related Civil Relations (issued by the SPC and which came into force on 7 January 2013)

The "Golden Landmark Case" – A New Dawn For Enforcement Of Foreign Arbitral Awards In China?

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions