When cross-border business transactions lead to cross-border controversies, arbitration before an international panel of arbitrators—as opposed to litigation in the courts of a particular country—is usually the contracting parties’ dispute-resolution mechanism of choice. Neutrality is a key reason for this. Both the venue for an international arbitration (normally, a third-party country from which neither of the parties in dispute is a citizen) and, more importantly perhaps, the decision makers in the arbitration (normally, a three member panel of arbitrators where the Chairman is from a third-party country) are considered “neutral” to both sides of the dispute. However, enforceability is at least as important a reason as neutrality. Typically, arbitration awards are far easier to enforce across national boundaries than are the judgments of national courts. This is because more than 140 countries that have ratified the New York Convention on Recognition and Enforcement of International Arbitration Awards (the New York Convention), are treaty bound to enforce foreign arbitral awards. There is no comparable international treaty for the enforcement of foreign court judgments. 

In 1986, the People’s Republic of China ratified the New York Convention. Over the more than 20 years that have transpired since China ratified the treaty, Chinese companies have become regular participants in proceedings before the International Chamber of Commerce, the Stockholm Chamber of Commerce, the Hong Kong International Arbitration Centre and similar international arbitral bodies. For many, however, the question remains whether the Chinese courts are faithful to the New York Convention in enforcing foreign arbitral awards, particularly when the awards go against local Chinese companies.

Validity of Arbitration in China

If it can be said that arbitration is generally the preferred method of dispute resolution for international commercial transactions, it can also be said that arbitration is the vastly preferred method of dispute resolution for non-Chinese businesses doing business in China. There are good reasons for this, including the relative weakness of the Chinese court system and the difficulty (if not impossibility) of enforcing foreign court judgments in China. Chinese law certainly recognizes the validity of arbitration. However, while most of the requirements for a valid arbitration under Chinese law are similar to those found in the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Arbitration, Chinese arbitration law differs from arbitration laws of most other countries in two critical respects:

(a) Under Chinese law, domestic disputes with no foreign element, including a dispute between a Chinese party and the Chinese subsidiary of a foreign party, must have their seat of arbitration inside mainland China; and,

(b) When the place of arbitration is within mainland China, Chinese law requires that the arbitration be administered by a Chinese arbitration institution rather than an international arbitration institution.

As a result of the limitations that Chinese law imposes on arbitration, Chinese courts have considerably more discretion to "set aside" (or refuse to enforce) arbitral awards rendered inside mainland China. Unlike foreign arbitral awards rendered outside mainland China, which can only be set aside on very limited grounds set forth in the New York Convention, domestic arbitral awards can be set aside by the Chinese courts on the ground that the evidence for ascertaining facts was insufficient or that there was a clear error in the application of the law. Arbitral awards rendered inside mainland China can, in other words, be reversed by the Chinese courts much like a normal court appeal. This, in turn, makes any arbitration inside mainland China ultimately reliant on the views of the Chinese courts if the losing party chooses to challenge the concerned arbitral award. The fact that the local Chinese courts have less discretion to vacate a foreign arbitral award is a critical point for non-Chinese companies doing business in China. The local courts in China are still mostly financed by the local governments, and certain local Chinese governments have proved all too willing to interfere improperly in the judicial process with a view to obstructing enforcement. Thus, by agreeing that any dispute with a Chinese business will be arbitrated outside mainland China, a non-Chinese business should, in theory, be able to avoid a Chinese court "re-deciding" a case already decided against the Chinese business.

China’s Enforcement and “Public Policy”

As mentioned above, even the New York Convention permits the courts of the signatory states to refuse to enforce foreign arbitral awards in certain limited circumstances. Most significantly, the New York Convention permits the courts of the signatory states to refuse to enforce a foreign arbitral award that violates the “public policy” of the state. In practice, this “public policy” exception has been interpreted very narrowly by western courts, allowing a foreign arbitral award to be vacated on public policy grounds only when there is clear evidence that the arbitration violated the due process rights of the participants (e.g., evidence that an arbitrator took a bribe from one of the parties). Legal practitioners outside China tend to believe that the Chinese courts are quite loose in invoking “public policy” as a reason to reject the enforcement of arbitral awards that are rendered outside China. This belief, however, is somewhat of a misconception. On 17 April 2000, the Supreme People’s Court of China (SPC) issued a notice mandating that no foreign arbitral awards could be vacated or refused for enforcement unless approved by the SPC. Therefore, since at least 2000, any decisions by the lower Chinese courts vacating a foreign arbitral award are subject to automatic review by the SPC. In turn, the SPC has been able to monitor efforts by parties and lower courts to prevent the enforcement of foreign arbitral awards since 2000.

This process has apparently had some positive results for the enforcement of arbitration awards against Chinese companies. According to a 2008 speech by Wan E’xiang, a deputy Chief Justice of the SPC, the lower courts of China refused to enforce foreign arbitral awards on public policy grounds seven to eight times between 2000 and 2008.1 However, the SPC did not uphold any of these lower court decisions. As a result, and according to the deputy Chief Justice, “public policy” has actually not been invoked by the Chinese courts to vacate a single foreign arbitral award, at least, in the 2000-2008 time period. This is because, to quote the deputy Chief Justice, “public policy” must be dealt with in a very precautious and prudent way [in respect of the enforcement of a non-Chinese arbitral award].

Due to the lack of available statistics on judicial decisions in China, the deputy Chief Justice’s remarks cannot be independently verified. That said, there seems little reason to doubt his official representation. Indeed, on 11 August 2008, just a few months after the deputy Chief Justice’s speech, the SPC upheld a decision4 by an intermediate court in Shandong province that refused to enforce an arbitral award issued by a Paris arbitration tribunal on the ground that the award violated the public policy of China. This case was hailed by the Chinese media as “the first case” to “refuse to recognize a foreign arbitral award on the grounds of the public policy.”

Defining “Public Policy”

All signatories to the New York Convention pledge to honor foreign arbitral awards, by a process in which the enforcing party may present a copy of the foreign arbitral award to the appropriate judicial body in the chosen country for enforcement. However, as discussed above, the New York Convention allows national courts to overturn a foreign arbitral award if the award violates the “public policy” of that country. Hence, China, like almost all of the other states that have signed on to the New York Convention, can refuse to enforce foreign arbitral awards by invoking public policy. The problem is that the term “public policy” is not defined under Chinese law. Under some Chinese protocols, the concept of “public policy” has been equated with the social public interests, which is a concept also not defined under Chinese law. For example, according to the Agreement Between Mainland China and Hong Kong SAR Concerning the Mutual Recognition and Enforcement of Arbitration Awards, if a court in the mainland decides that it is against the social public interests of the mainland to enforce an arbitral award that is rendered in Hong Kong, the court of mainland China may refuse to enforce the arbitral award. According to the Deputy Director of the Enforcement Bureau of the SPC, “ ‘social public interests’ is a concept that falls within the political domain rather than a term of law…” For a foreign-related or foreign arbitral award, social public interests are the same as the State’s sovereign interests.”

(Edited By: China West Lawyer)