China: Recent Enforcement of a LMAA Award In China — A Reflection Of Chinese Courts' View Towards Public Policy And Property Preservation

Last Updated: 6 March 2018
Article by John Liu and Minli Tang

I. Factual Background

The case concerns a dispute between the claimant, Korea Line Corporation ("KLC"), who sought enforcement of a LMAA arbitral award in China against the respondent, HNA Group Co., Ltd. ("HNA"), a leading a Chinese conglomerate.

On August 5 2008, KLC, as the shipowner, signed a charterparty (the "Charterparty") with Grand China Shipping (HK) Co Ltd. ("Grand China") and the employed vessel was "K. DAPHNE". On the same day, HNA issued a performance guarantee (the "Guarantee") to KLC for Grand China's performance under the Charterparty and agreed that all disputes arising out of or relating to the Guarantee shall be submitted to London arbitration under LMAA terms and English Law. During the performance of the Charterparty, due to the continuous delayed payment by Grand China, KLC commenced an arbitration against HNA according to the arbitration clause under the Guarantee.

On January 13 2016, the arbitral tribunal issued the final award (the "Award") and rendered that HNA should pay USD77,830,179.46 plus interest to KLC.

However, HNA did not fulfill its payment obligation under the Award, KLC therefore applied to Haikou Maritime Court for recognition and enforcement of the Awards in China and filed an application for property preservation against HNA during the judicial review period of the Awards.

II. Issues before the Court

  1. Was there any legal basis, under Chinese law, for property preservation in the process of application for recognition and enforcement of the Award?
  2. Would recognition and enforcement of the Award violate China's public policy?

III. The Judgment

  1. There is no legal basis, under current Chinese law, for property preservation in the process of application for recognition and enforcement of the Award

The property preservation application was made in the process of judicial review of recognition and enforcement of a foreign arbitral award. Such interim measure, if taken by a Chinese court, is within the scope of judicial assistance and should be dealt with according to any international convention or bilateral treaty entered by both China and UK or the principle of reciprocity. However, there is no such convention or treaty signed by China and UK which has relevant provision regarding interim measures during the judicial review period.

In addition, the current Chinese law does not specify whether an order of property preservation can be issued during the judicial review period of recognition and enforcement of a foreign arbitral award. The relevant article of the Civil Procedure Law of the People's Republic of China is Article 100, however, the article is only applicable to domestic litigation procedures in China.

Therefore, there is no legal basis under current Chinese law for such property preservation in the subject case.

B. Recognition and enforcement of the Award does not violate China's public policy

HNA once argued that there was no effective arbitration agreement between the two parties and even if there was an arbitration agreement the arbitration procedure was not in conformity with the agreement. However, HNA subsequently withdrawn the aforementioned arguments. Therefore, the court would not initiate the judicial review of the aforementioned matters but only conducted a judicial review on whether or not the enforcement of the Award would violate public policy in China.

The current law in China does not have an express definition for public policy nor have stipulated the applicable standards. However, in judicial practice, Chinese courts are always feeling reluctant to invoke public policy as a ground to refuse recognition or enforcement of a foreign arbitral award.

In the subject case, the court held that providing an external guarantee by HNA without administrative approval did violate the relevant regulations at that time (such as Administrative Regulations of the People's Republic of China on Foreign Exchange Administration and Measures for the Administration of External Guarantees Provided by Domestic Institutions) and also violated Article 6 of the Interpretation of the People's Supreme Court on Some Issues Concerning the Application of the Guarantee Law of the People's Republic of China. However, Administration of Foreign Exchange over Cross-border Assurance, implemented on June 1 2014, has already amended the old regulations and stipulated that a new registration mechanism has replaced the previous approval mechanism. Therefore, for a guarantor of an external guarantee, all he needs to do is to register the guarantee with the relevant administrative authority.

Moreover, the Supreme People's Court of China also explicitly confirmed that violation of compulsory provision under Chinese law is not necessarily equivalent to a violation of public policy.

Therefore, the court held that the recognition and enforcement of the Award would not violate public policy in China.

IV. Comments

The subject case is quite typical when talking about recognition and enforcement of foreign arbitral awards in China and here are some practical comments and tips.

  1. The Scope of public policy as for recognition and enforcement of foreign arbitral awards

Chinese courts are always reluctant to use public policy as a ground to refuse recognition and enforcement of foreign arbitral awards. Based on the existing cases, the judicial attitude of Chinese courts can be briefly summarized as follows:

  • Factors which may constitute violation of public policy
  • in violation of the fundamental principles of Chinese law (not in violation of the general substantive law, but in violation of the fundamental legal principles, such as the principles under constitutional law, etc.)
  • in violation of China's state sovereignty
  • jeopardizing the public safety
  • in violation of morality and social customs
  • Factors which do not constitute violation of public policy
  • violation of compulsory provisions under Chinese substantive law is not necessarily equivalent to violation of public policy
  • recognizing and enforcing an unfair arbitral award is not necessarily a violation of our public policy
  • misconceiving Chinese law is not equivalent to violation of china's public policy

B.  Interim measures in the arbitration proceedings

As mentioned earlier in this article, under current Chinese law, no provisions deal with the issue regarding interim measures during the application of recognition and enforcement of foreign arbitral awards in China.

Nevertheless, when conducting arbitration (rather than recognition and enforcement) in China, parties may still be able to apply for certain interim measures. The existing provision mainly provides for the preservation of property and evidence either in the arbitration proceedings or before the commencement of the arbitration proceedings.

Property Preservation

If necessary, parties can apply for property preservation. Parties can apply for preservation before or during the arbitration proceedings. It shall be noted that if the applicant fails to apply for arbitration within 30 days from the adoption of preservation measures by the People's Court, the People's Court shall discharge the preservation. (Article 101 of Civil Procedure Law)

Where a party applies for the property preservation, the arbitration commission shall submit the application to the People's Court. Where there is a wrongful application, the claimant shall compensate the respondent for losses incurred during the property preservation procedures. (Article 28 of the Arbitration Law)

In domestic arbitrations, if the party makes an application for property preservation, which is submitted to the People's Court by the arbitration institution, the local court (the courts of the first instance) of the domicile of the respondent or the locality of the properties shall decide the case and enforce the property preservation order. (Article 11 of the Provisions of the Supreme People's Court on Several Issues Concerning Judicial Enforcement by the People's Courts (for Trial Implementation))

In foreign-related arbitrations, if the party makes an application for property preservation, which is submitted to the people's court by the arbitration institution, the intermediate people's court of the domicile of the respondent or the locality of the properties for which preservation is applied shall decide the case and enforce the property preservation order. (Article 12 of the Provisions of the Supreme People's Court on Several Issues Concerning Judicial Enforcement by the People's Courts (for Trial Implementation))

Evidence Preservation

Where evidence is vulnerable to being destroyed or lost and would be difficult to recover, the parties may apply for the preservation of the evidence.

In domestic arbitrations, where a party applies for evidence preservation, the arbitration commission shall submit the application to the local People's Court (the courts of the first instance) of the locality of the evidence. (Article 46 of the Arbitration Law)

In foreign-related arbitrations, the foreign-related arbitration commission shall submit the application to the intermediate People's Court of the locality of the evidence. (Article 68 of the Arbitration Law)

Interim Measures

There is no specific provision of interim measures except for property preservation and evidence preservation under Chinese law. If parties apply for preservation in accordance with Chinese law, arbitration commissions shall submit the application to the People's Court which has the jurisdiction (the arbitral tribunal has no power to make the decision). Meanwhile, the arbitral tribunal can make the decision pursuant to the specific rules made by the arbitration commission of those interim measures that are not provided in the law.

Previously published in Lexology - 22 February 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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