In order to better understand how Chinese courts understand and apply the concept of “public policy” to foreign arbitration awards, it is instructive to consider three specific case studies.

Case Study 1:

Refusal to Enforce a Foreign-Related Award on Public Policy Grounds As mentioned above, the SPC has not, at least between 2000 and 2008, refused to enforce a single “foreign” arbitral award on the ground of public policy. A “foreign arbitral” award, however, should not be confused with a “foreign-related” arbitral award. Under Chinese law, a “foreign” arbitral award refers to an arbitral award issued by an arbitration body located outside China. A “foreign-related” arbitral award, on the other hand, refers to an award issued by a Chinese arbitration body inside mainland China (e.g., the China International Economic and Trade Arbitration Commission or CIETAC, the Shanghai Arbitration Commission, etc.) with respect to a foreign-related dispute (e.g., where at least one of the

parties to the arbitration is not Chinese). The provisions of the Civil Procedural Law in China do not directly define the terms “foreign arbitral award” and “foreign-related arbitral award.” However, as a matter of practice, arbitral awards rendered by arbitration bodies located inside mainland China which have a foreign element are referred as "foreign-related" arbitral awards; arbitral awards rendered by the arbitration bodies outside of China are referred as “foreign” arbitral awards. This first case study concerns a “foreign-related” CIETAC arbitration dating from 1977.

In this case, a U.S. musical group entered into a contract to perform a concert in China, but the concert was suspended due to what authorities considered to be the objectionable content of the performance.11 Specifically, the Chinese authorities asserted that the U.S. performers had breached the contract by performing “heavy metal music,” which was not approved by the Ministry of Culture of China and that was otherwise “not suitable” for China. After not being paid for their concert, the U.S. musical performers commenced an arbitration in mainland China pursuant to the CIETAC arbitration clause in the contract. The CIETAC arbitration tribunal, in turn, awarded damages to the U.S. performers. The SPC, upon review of the decision issued by the lower court, concluded that the musical performance had in fact violated the social public interest of China, and as such, the Ministry of Culture’s suspension of performance was caused by the breach of contract of the performing party. As a result, the SPC held that the CIETAC arbitral award could not be enforced without causing damage to the social public interests of China. Therefore, pursuant to Paragraph 2 of Article 260 of the Civil Procedure Law of the Peoples Republic of China (1991), the SPC refused to enforce the award.

Case Study 2:

Refusal to Vacate a Foreign Arbitral Award on Public Policy Grounds In this case, dating from March 1999, a Japanese company commenced an arbitration against a Chinese state-owned enterprise (SOE) under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce.13 In its arbitration demand, the Japanese company alleged that the SOE had, by contract, assumed the obligation to pay back certain debt owed to the Japanese company by a Hong Kong company, and that the SOE was delinquent in repaying this debt.

After the Stockholm arbitration tribunal ruled in favor of the Japanese company, ordering the SOE to repay the debt, the SOE challenged the arbitration award in China’s Haikou Intermediary Court. Specifically, the SOE argued that the arbitral award violated the “public policy” of China because the repayment of the foreign debt to the Japanese company had not been approved by the State Administration on Foreign Exchange (or SAFE), and that SAFE approval was compulsory. SAFE is an agency of the Chinese government that is in charge, among other things, of approving the flow of foreign currency into and out of China. The Haikou Intermediary Court, which had original jurisdiction over the enforcement of the proceeding, agreed with the SOE and found against enforcement of the arbitral award. The Hainan High People’s Court thereafter affirmed the decision of the Intermediary Court, and sent it to the SPC for approval. The SPC agreed with the lower courts that the SOE had in fact violated the laws and regulations of China regarding the approval and registration of foreign debt and China’s policies on foreign exchange administration. However, the SPC went on to rule that “violation of compulsory provisions in the administrative regulations and departmental regulations will not naturally constitute a violation of the public policy of China” (italics added). Therefore, the SPC reversed the lower courts, ruling that the foreign arbitral award was enforceable and could not be vacated on the ground that it violated the public policy of China.

Case Study 3:

Recent SPC Decision Refusing to Enforce Foreign Arbitral Award on Public Policy Grounds. On 22 December 1995, one Chinese company, Jinan Yongning Pharmaceutical Co., Ltd. (Yongning Company), and three non-Chinese companies signed a contract to set up a joint venture. The joint venture contract provided that any disputes arising under the contract would be submitted to arbitration under the rules of the International Chamber of Commerce (ICC) in Paris. Subsequently, a leasing dispute occurred between the Yongning Company and the joint venture entity. A Chinese court, accepting jurisdiction over the dispute, ruled in favour of the Yongning Company, and ordered that the assets of the joint venture be impounded. As a result of this impounding, the operation of the joint venture was suspended and the joint venture was eventually closed.

In July 2005, the three non-Chinese parties to the underlying joint venture contract, invoking the arbitration clause in the contract, commenced an ICC arbitration in Paris against the Yongning Company. After hearing both sides, the ICC arbitration tribunal ruled that the Yongning Company had breached the joint venture contract by petitioning a Chinese court to impound the assets of the joint venture. As a result, the ICC tribunal ordered the Yongning Company to pay US$6,458,708.40 as damages. Because the Yongning Company did not pay the money mandated by the ICC arbitration award, the three non-Chinese companies lodged a lawsuit in Jinan Intermediate People’s Court on 10 September 2007, seeking the courts recognition and enforcement of the foreign arbitral award. The Court, however, held that the arbitration clause in the joint venture contract only bound the disputes between the contracting parties, and therefore did not bind the leasing disputes between the Yongning Company and the joint venture. As a result, the Chinese court ruled that the ICC arbitration award, by purporting to resolve a dispute that was subject to the jurisdiction of the Chinese courts, violated China’s judicial sovereignty and, with it, Chinese public policy. Accordingly, the Jinan Intermediate People’s Court held that the arbitral award should not be enforced, which decision was affirmed by the SPC.

Conclusion: An Evolving Judiciary

The above three case studies provide at least some parameters about what constitutes “public policy” under Chinese law with respect to the enforcement of foreign arbitral awards. As can be seen from Case Study 2, it appears that administrative regulations, such as the SAFE regulations, do not constitute public policy. In fact, even a violation of a compulsory provision in an administrative regulation does not lead to violation of public policy. To the contrary, a violation of public policy seems to require proof of an affront to the higher “social public interest” of China as a whole, whether it relates to the moral order of the country (Case Study 1) or the sovereignty of the Chinese courts (Case Study 3). This difficult level of proof may explain why the SPC has apparently vacated only one foreign arbitral award on public policy grounds since (at least) 2000. It is likely that China’s judicial policy toward foreign arbitral awards will continue to evolve in a positive way. This evolution is inseparable from China’s business, cultural and economic environment; privatization and rapid economic growth will surely, over time, create the changes that require a more sophisticated and “internationalist” judiciary. China already has traveled far in transforming itself from a closed society to one that is governed by transparency and rule of law. The likelihood is that enforcement of foreign arbitral awards will follow a similar path of integration into the global legal and business system.

(Edited By: China West Lawyer)