China: Refuse To Recognize And Enforce Foreign Arbitral Awards On The Ground Of Public Policy - A Chinese Law Perspective (I)

Last Updated: 23 January 2018
Article by John Liu and Minli Tang

According to Article 5.2 (b) of the New York Convention, recognition or enforcement of a foreign arbitral award may be refused if it is contrary to the public policy of the host country. Nonetheless, the New York Convention does not define what "public policy" is, leaving significant discretion in the hands of the courts in those Contracting States. As one of the Contracting States, China has not rendered any definitive judicial interpretation on the definition of public policy. However, one can still get the hint from reported cases.

According to Chinese law, if the court of first instance tends to refuse recognition or enforcement of a foreign arbitral award, that court shall report the case to the local higher court and if the higher court agrees with the lower court, it shall then report the case to the Supreme People's Court. Only if the Supreme People's Court agrees on the refusal, the court of first instance can then render the ruling.

There is a notable difference in the language of the New York Convention and the relevant Chinese law. While the New York Convention uses the phrase "public policy", Chinese law uses "public interest" in all codified law. However, many judicial replies of the Supreme People's Court regarding the issue of recognition and enforcement of foreign arbitral awards used the term "public policy" and "public interest" interchangeably.

Therefore, although there are some academic debates over the distinction between "public policy" and "public interest", it seems that Chinese law does not distinguish "public interest" with "public policy". Therefore, for the purpose of clarity and convenience, "public policy" is to be regarded as the equivalent of "public interest" in this article. 

There are two sets of standards, one pro-recognition/enforcement, another anti-recognition/enforcement. For Part I of this series of articles, analysis mainly focuses on the anti ones (contrary to public policy), with some exceptions.

1. In Violation of the Fundamental Principles of Chinese law

The fundamental principles of Chinese law which are of ultimate significance, especially those constitutional principles, should be included as an integral part of public policy. The foreign arbitral awards in violation of these kinds of fundamental principles shall not be recognized or enforced.

Under Chinese law, these fundamental principles mainly refer to the cornerstone principles in the PRC Constitution, e.g. the unity of the nation and all its peoples, and the principle of "One Country, Two Systems", etc.

EXCEPTION: the Basic Principles of the General Substantive Law Do not Represent Public Policy

It has been held by Chinese courts that the basic principles of general domestic substantive law, in most circumstances, shall not to be considered as part of public policy. Even if a foreign arbitral award violates the basic principles of general substantive law, courts will not deliberately decide to go against it.

2. In Violation of State Sovereignty

In practice, the main issue involving state sovereignty is whether foreign arbitral awards violate China's judicial sovereignty. Infringement on the jurisdiction power of Chinese courts constitutes violation of China's public policy.

A typical example is that, under Chinese law, although parties may agree to submit foreign-related disputes to arbitration in a foreign forum, in principle, disputes without foreign-related factors are not allowed to arbitrate outside China.

Therefore, an arbitration agreement between the parties to submit purely domestic disputes to a foreign arbitral institutions is invalid. When this happens, Chinese courts tend to invoke Article 5.1 (a) of the New York Convention and decide on refusal of recognition and enforcement of the arbitral award.

EXCEPTION: Parties which are registered in Free Trade Zone

Article 9 (2) of the Opinions of the Supreme People's Court on Providing Judicial Protection for the Construction of Pilot Free Trade Zones provides for a limited exception:

If one party or both parties are foreign-invested enterprise/s registered in the FTZs and agree to submit disputes for arbitration outside China, after receiving the reward, if the parties apply for refusing to recognize or enforce the award on the ground that the arbitration clause/agreement is invalid, courts shall not support; or in the events that the opponent party hasn't objected to the validity of the arbitration clause/agreement in the arbitration proceedings, then after the award is rendered, claims that the arbitration clause/agreement is invalid on the ground that the relevant case has no foreign-related factors, thus further applies for refusing to recognize or enforce the award, courts shall not support.

3. Endangering China's National Security and Public Safety

According to the current judicial practice, there is no real case involving refusal of recognition and enforcement of foreign arbitral awards on the basis of "endangering China's national security and public safety" in China.

However, in some judicial replies to the lower courts, the Supreme People's Court did express the view that national security and public safety shall be given significant considerations. E.g. In one of its reply to a lower court, the Supreme People's Courts stated that there was no evidence suggesting that the goods involved in the subject case would cause serious harm to public hygiene and safety. As the public health was not at risk, to enforce that foreign arbitral award would not violate China's public interest. From this, one can say that if public safety is at risk, then the relevant foreign arbitral award shall not be recognized or enforced.

4. In Violation of China's Public Order and Good Morals

If the recognition and enforcement of a foreign arbitral award would harm the public order and good morals, Chinese courts will decide to refuse recognition or enforcement of the award on the basis of public policy. However, the meaning of "good morals" changes as time passes and the courts will take the specific social background into consideration as far as the concept of "good morals" is concerned.

For example, in 1990s, Chinese government imposed strict restrictions against some foreign organizations to enter or perform in China (mainly because the performance was too misbehaved). Nowadays, the courts may reach a different decision as the government has lifted most of the restrictions and people become more open-minded.

Originally published in Lexology January 19 2018

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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