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

Last Updated: 5 February 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 II this series of articles, analysis mainly focuses on the pro ones (limit the application of public policy).

1. Reluctant to Use Public Policy as a Ground

Due to the lack of clarity concerning the exact scope of the concept of "public policy" and its openness to interpretation, Chinese courts have always been quite reluctant to use public policy as a ground for refusing recognition and enforcement of a foreign arbitral award. If there exist other legal bases for refusal of recognition and enforcement of foreign arbitral awards, the court will not consider the application of public policy.

2. Violation of Mandatory Law under Chinese Law is not Equivalent to Violation of China's Public Policy.

Violation of the mandatory provisions of laws and regulations is not necessarily equivalent to violation of China's 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 regarded 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. However, it is a violation if the infringement involves fundamental principles under Chinese law.

For example, in the case of E D & F Man Capital Markets Hong Kong Ltd. Applying for Recognition and Enforcement of the Arbitral Award under the rules of the Sugar Association of London, the Supreme People's Court rendered that:

According to related laws and regulations of China, domestic enterprises shall not engage in overseas futures trading without administrative approval. China National Sugar & Alcohol Group Corp. conducted cross-border futures transaction without approval, which is invalid under Chinese law. However, violation of mandatory provisions of Chinese law is not equivalent to a violation of China's public policy.

3. An Unfair Arbitral Award is not regarded as a Violation of China's Public Policy.

In the case of CRD Minproc Limited Applying for Recognition and Enforcement of the Arbitration Award of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), the Supreme People's Court observed that:

Shanghai Flying Wheel Industry Co., Ltd. (the party subject to enforcement) submitted the dispute over the qulity of the equipment to SCC for arbitration as per valid arbitration clause. Accordingly, the arbitral tribunal has jurisdiction over the dispute and it has adjudicated on the dispute. Both disputing Parties shall accept the arbitral award in view that they agreed to settle the dispute through arbitration. While considering whether recognition and enforcement of the arbitral award violates China's public policy, whether the award satisfies substantial justice regarding fairness is irrelevant.

4. Misconceiving Chinese Law is not Equivalent to Violation of

China's Public Policy

In the case of Louis Dreyfus Commodities Asia Pte. Ltd. Applying for Recognition and Enforcement of Arbitration Award No. 3980 of the Federation of Oils, Seeds & Fats Associations (FOSFA), the majority opinion of the Guangdong Higher People's Court held:

The arbitration award involved in this case made negative and biased comments about Chinese law. It sabotaged the authority of the Chinese legal system and thus violated China's public policy.

However, the above decision was overruled by the Supreme People's Court:

It is true that the tribunal wrongly held that there is a big gap between Chinese laws and real practices. However, the recognition and enforcement of such arbitral award still does not violate China's public policy.

Comments

Under Chinese law, public policy has never been used as a "catch-all" clause. On the contrary, Chinese courts are always quite reluctant to use public policy as a ground to refuse recognition and enforcement of a foreign arbitral award. The application scope is really limited.

Chinese courts are very prudential in approaching the issue of refusing recognition and enforcement of a foreign arbitral award. Throughout years, most foreign arbitral awards have been recognized and enforced in China except for a small number of cases — among which, even less case is refused on the ground of public policy.

As far as the issue of recognition and enforcement of foreign arbitral awards is concerned, China imposes strict judicial review on potential non-recognition and non-enforcement of foreign arbitral awards — prior to making decision on not to recognize or enforce a foreign award, the court of first instance should report the case to the higher People's Court within its jurisdiction for a review, and if the higher People's Court agrees with the lower court, it shall then report its review opinion to the Supreme People's Court. A final decision on refusing recognition and enforcement can only be made if the Supreme People's Court replies confirmatively.

Originally published on Lexology, 29th January 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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