Traditionally, many foreign companies have preferred to resolve disputes with Chinese counterparts through arbitration outside of China. Some arguments to choose for international arbitration:
- Arbitration outside China may be deemed more reliable than litigation or arbitration within China.
- Under the Convention for the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) to which China is a member, arbitral awards reached in most countries can be recognized and enforced in China.
There are a number of counter-arguments, which have further gained in force over the years. For example:
- Litigation and arbitration in China now have a good reputation, especially in the big cities such as Shanghai, Beijing and Guangzhou.
- Litigation or arbitration in China allows preliminary injunctions such as the freezing of the defendant's assets, which may be crucial not only for the enforcement of the final judgment or award but can also help to pressure the defendant into a mediated settlement;
- While the law establishes a relatively short deadline for recognition and enforcement of an international arbitration award in China, in practice this is generally a very long and arduous process that can take many years.
A recent legal development in China should provide international companies with additional considerations. The Supreme People's Court (China's highest court, SPC) has issued two new provisions, both effective from 1 January 2018:
- SPC Provisions on Several Issues relating to the Trial of Cases Involving Judicial Review of Arbitration (Chinese: 最高人民法院关于审理仲裁司法审查案件若干问题的规定) (the "SPC Trial Provisions")
- SPC Provisions on Issues relating to the Reporting and Review of Cases Involving Judicial Review of Arbitration (Chinese:关于仲裁司法审查案件报核问题的有关规定) (the "SPC Reporting and Review Provisions")
Jurisdiction, Procedures and Applicable Law
The SPC Trial Provisions deal mainly with two issues:
- The SPC Provisions on Implementing Convention on the Recognition and Enforcement of Foreign Arbitral Awards Entered by China effective from 1987 (Chinese: 最高人民法院关于执行我国加入的《承认及执行外国仲裁裁决公约》的通知) establishes that an application for recognition and enforcement of a foreign arbitration award should be made at the Intermediate People's Court where either the person subject to the enforcement or its property is located. The SPC Trial Provisions provide that if neither the person subject to the enforcement nor its property are in China but the award relates to a case decided by a Chinese court or domestic arbitration institution, then the application for recognition and enforcement can be made in that Chinese court, or at the Intermediate People's Court where that domestic arbitration institution is located.
- An international arbitration award does not need to be notarized / legalized before it is submitted to a Chinese court for recognition and enforcement. Note that many courts already did not require such notarization / legalization, though the practice was not uniform. With more certainty, this should save the applicant both time and cost.
- When a Chinese court reviews a case for recognition of an international arbitration award through the New York Convention, it should refer to the law that the parties have agreed to apply to determine the validity of the arbitration agreement; but if no such agreement was reached, then the law of the jurisdiction where the arbitration is held or where the arbitration institution is located shall apply to determine the validity of the arbitration agreement; if the law of the jurisdiction where the arbitration is held conflicts with the law where the arbitration institution is located, the law that affirms the validity of the arbitration agreement shall apply.
System of Reviewing Arbitral Awards
In the SPC Provisions on Issues in the People's Courts' Handling of Foreign-related Arbitrations and Foreign Arbitrations effective in 1995 (Chinese: 最高人民法院关于人民法院处理与涉外仲裁及外国仲裁事项有关问题的通知), China introduced a review system whereby a Chinese court's decision to deny recognition of a foreign arbitration award must be confirmed by the next higher court, the Higher People's Court (at provincial level); and if the Higher People's Court agrees with the decision to refuse, then the Supreme People's Court must be asked for approval. This system was introduced to make it more difficult for Chinese courts to reject foreign arbitral awards without legal grounds.
The SPC Review and Reporting Provisions extend this system to domestic arbitral awards. The final decision for a refusal to enforce a domestic arbitration award must be made by the Higher People's Court, or by the Supreme People's Court if (i) the parties to the dispute are domiciled in different provinces, or (ii) the refusal to enforce is based on reasons that public interests are violated.
This move could make the system more reliable, by taking away the final authority of individual Chinese courts to reject an enforcement. But it also has another consequence: it could hugely increase the workload of China's higher courts, including the Supreme People's Courts. The workload of Chinese judges is already very high; and so this could have a further negative impact on the time needed for a company to get its award enforced - whether the arbitration award is international or domestic.
Above all, it is a good sign that the Supreme People's Court continues to take initiatives to improve China's system for enforcement of judgments and arbitral awards. All commercial players in China, including international companies operating in China or with Chinese counterparts, benefit from improvements to China's legal system.
At the same time, developments cannot please everyone, and when it comes to the recognition and enforcement of foreign arbitral awards, the new provisions described in this article could have a negative impact as well. The process to get a foreign arbitration award recognized in China is already complex and subject to uncertainty; by adding to the burden of China's courts, these rules could have the unintended effect of hurting rather than helping this process.
The SPC Review and Reporting Provisions do offer more security for arbitral awards that were issued by domestic arbitration institutes. This may encourage even more international companies to turn towards domestic arbitration institutions with an international reputation, such as the SHIAC in Shanghai and the CIETAC in Beijing already enjoy a good reputation.
At the same time, the fact is that more and more international companies prefer to work directly with the courts, and these provisions are unlikely to slow this trend, let alone stop or reverse it. Chinese courts have gained so much in expertise and especially in the larger cities have become very adept at adjudicating disputes, in an efficient and cost-effective way.
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.