Bridging the Enforcement Gap?

Enforcing foreign arbitral awards in China has never been straightforward. Foreign companies have found in the past that even after winning an arbitral award in a foreign country, it may not be easy to persuade a People's Court to recognize and enforce the award against a Chinese defendant.

A foreign arbitral award is enforceable in China pursuant to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") which provides for reciprocal enforcement of arbitral award in member countries. China became a member of the New York Convention in 1987.

In order to enforce a foreign arbitral award in China, the enforcing party must file an application for registration and enforcement with the Intermediate People's Court in the domicile of the party against whom the enforcement of the award is sought (the "award debtor") or in the locality where the property subject to enforcement is located. The party seeking enforcement must submit to the People's Court a written application for registration and enforcement with an original or certified copy of the arbitration agreement and the arbitral award. A translation of the documents of any documents not in Chinese is normally required. The People's Court will then review the award for procedural irregularities and then decide whether to enforce the award in accordance with the provisions of the New York Convention. Unfortunately, requiring a party to apply to the Intermediate People's Court where the award debtor is located and therefore has the strongest ties and is generally able to call upon government connections for support often leads to problems of local bias in enforcement.

Since China's accession to the New York Convention in 1987, the People's Courts have often refused to recognize and enforce foreign arbitral awards based on the various grounds provided for in the New York Convention. Specifically, Article V of the New York Convention permits a People's Court to refuse enforcement of a foreign arbitral award under the following circumstances: (i) the parties neither included an arbitration clause in their contract nor subsequently reached a written arbitration agreement; (ii) the matter decided in the award exceed the scope of the arbitration agreement or fall outside of the jurisdiction of the arbitration organization; (iii) a party against whom the application for enforcement is sought was not given proper notice of the appointment of arbitrator or the arbitration proceedings, or was unable to present its case for reasons for which they were not responsible; (iv) the arbitration tribunal's composition or the arbitration procedures used failed to conform with applicable rules or law; or (v) the award has not yet become binding on the parties or has been set aside by the court of the country that rendered the award. Additionally, a People's Court can also refuse to enforce an arbitral award if the subject matter of the underlying dispute between the parties is not capable of settlement by arbitration under the law of that country, or if the recognition or enforcement of the award would be contrary to the public policy of that country.

One of the most publicized examples of the problems facing a foreign company seeking to enforce an arbitral award in China involved Revpower, a US manufacturer of industrial batteries. In 1988, Revpower entered into a joint venture contract with Shanghai Far East Aero-Technology Import & Export Corporation ("SFAIC") to build a battery making plant. Pursuant to the terms of the contract, Revpower was to supply the parts, equipment and engineering staff to the plant and was in return required to buy a fix number of batteries from the plant at a previously agreed price. However, as a result of a price dispute between the parties, Revpower initiated arbitration proceedings against SFAIC in Stockholm in 1989. Three years later, the arbitrators rendered an award in favor of Revpower in the sum of approximately US$5 million. In 1993, Revpower applied to the Shanghai Intermediate People's Court (the "Shanghai Court") to register and enforce the award against SFAIC. It took two years for Revpower successfully to register the award with the Shanghai Court notwithstanding China's accession to the New York Convention and the existence of procedures for the registration and enforcement of awards in China. However, despite registration and subsequent diplomatic pressure, the Shanghai Court then refused to enforce the award. Ultimately, the Shanghai Court dismissed Revpower's application on the ground that SFAIC had in the interim filed for bankruptcy and that there was accordingly no assets against which the award could be enforced.

In contrast, on November 17, 1997, the Beijing Intermediate People's Court ("Beijing Court") enforced a Stockholm arbitral award totalling more than US$2 million in favor of Food Industries Planning and Servicing Ltd. of Switzerland ("FIPS").

FIPS entered into a contract with China Huayang Trading Corp. ("Huayang") for the sale and purchase of a turn-key food processing plant. As Huayang failed to make certain payments under the contract, FIPS invoked the arbitration clause under the contract and commenced ad hoc arbitration proceedings against Huayang in Stockholm. In April, 1995, the arbitrator rendered an award in favor of FIPS. FIPS filed an application for registration and enforcement of the award with the Beijing Court in September, 1995 and the Beijing Court granted the application in November, 1997. It took two years for the Beijing Court to enforce the award because the Civil Procedure Law of the PRC ("CPL") does not stipulate a time period within which an award must be enforced.

This is one of the few reported cases of successful enforcement of foreign arbitral awards in China. As there is no centralized record keeping mechanism in China, it is difficult to state with any certainty the percentage of cases that have been successfully enforced. It appears, however, that these have been limited in number.

Given China's past enforcement record, there remains considerable uncertainty concerning the extent to which the People's Courts will recognize and enforce future arbitral awards. However, because of China's emergence in the international market, China has taken measures to fulfill its obligations under the various international treaties it is a member. Specifically, the National People's Congress revised the Civil Procedure Law of the PRC in 1991 to introduce new provisions relating to enforcement of foreign arbitral awards and promulgated the Arbitration Law in 1995. By contrast, measures for enforcement of foreign judgments are severely limited. The uneven quality of Chinese courts also provides a significant disincentive to litigating in China. For this reason, notwithstanding the difficulties in enforcing arbitral awards, international arbitration still offers an attractive alternative to litigating in the People's Courts or even domestic arbitration. The Beijing Intermediate People's Court's recent enforcement of the Stockholm arbitral award gives some reason for optimism.

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