Contractual parties often prefer arbitration to litigation for example due to the confidentiality of the civil proceedings, neutrality of arbitrators, availability of multilingual arbitration rules or finality of the arbitration award.

Domestic awards rendered by arbitral institutions in the PR China are directly enforceable at the enforcement division of the competent state court in China like domestic court judgments without further ado. This is certainly advantageous for any creditor and prevailing party. Hong Kong is different. The awards of the Hong Kong International Arbitral Centre for example are enforceable according to an announcement of the Chinese Supreme People’s Court on the Mutual Enforcement of Arbitral Awards between the Mainland China and Hong Kong, and require special recognition procedures in practice for its enforcement in China.

Foreign awards rendered by arbitral institutions outside of the PR China (and Hong Kong) are enforceable in China pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). The New York Convention applies to the recognition and enforcement of foreign arbitral awards and the referral by a court to arbitration. Accordingly any prevailing party needs to apply to the competent lower People’s Court in China for an order to recognize and enforce the award first. Enforcement measures at the enforcement division of the competent state court in China are only available upon the issuance of a court order in favor of recognition and enforcement. The time for the issuance of a final order on an application for enforcement of a foreign arbitral award in China may take one year or even longer. Therefore the creditor may face risks as to concealment or dissipation of assets during the review of an application for enforcement.

In practice Tier 1 cities such as Shanghai, Beijing or Guangzhou have higher enforcement rates concerning foreign arbitral awards than Tier 2 (e.g. Shenyang, Tianjin, Suzhou) or Tier 3 and lower cities (e.g. Nantong, Shaoxing or Yantai), and Shanghai apparently has the highest enforcement rate in China in this regard.

In case the competent lower People’s Court in China is inclined to deny enforcement of foreign arbitral awards, it must report to the Higher People’s Court or in certain cases to the Chinese Supreme People’s Court. At the request of the losing party the relevant court may refuse the recognition and enforcement of the foreign arbitral award under Article V of the New York Convention under the following circumstances:

(a) The parties were under some incapacity, or the said arbitration agreement is not valid under the law to which the parties have subjected it; or

(b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or

(c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration; or

(d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the arbitration agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made; or

(f) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or

(g) The recognition or enforcement of the award would be contrary to the public policy of that country.

In China, in case the competent court refuses the recognition and enforcement of the foreign arbitral award, the reasons are noticeably based on procedural errors during the arbitration proceedings. This may include the failure of arbitral institutions to issue the foreign arbitral award within the time pursuant the arbitral rules, or the failure to extend the time for issuing an award and notify the parties accordingly. Therefore it is advisable to ensure that the arbitral procedure is always conducted in accordance with the arbitral rules and the procedure agreed by the parties in their relevant contracts.

Dr. Oliver Maaz, Attorney at Law
Shanghai