Enforcement of a Foreign Arbitral Award in China: Issues, Criticisms, and Practical Solutions

ENFORCEMENT OF A FOREIGN ARBITRAL AWARD IN CHINA: ISSUES, CRITICISMS, AND PRACTICAL SOLUTIONS

1.) INTRODUCTION

The lack of enforcement of a foreign award in China is frequently pointed out in arbitrational issues . Similar to arbitration systems worldwide, the arbitration committee is not empowered to enforce the award. The step of enforcement are to be done via the courts. As a result, the prevailing party most often must apply to a court to have the award recognized and enforced. Foreign awards that are not paid voluntarily also may be filed with a court to compel enforcement. As China acceded to the New York Convention1958, awards are enforceable in other signatory countries on the basis of reciprocity. While in principle the same should apply in China, in practice, enforcement is problematic.

Almost one in four applications are denied , but anecdotal information implies the number may be much higher . It appears that enforcement is easier to secure in major cities such as Beijing, Shanghai, and Guangzhou, and smaller awards appear more likely to be enforced than larger ones. This fact is not surprising given that the primary reason for non-enforcement appears to be insolvency on the part of the Chinese party. China International Economic and Trade Arbitration Commission (CIETAC) and local commission awards are not enforceable in China under the New York Convention, but rather under Article 260 of China~{!/~}s own Civil Procedure Law, which, much like the New York Convention, allows courts to refuse enforcement only for a limited number of procedural reasons.

The problem lies in the greater relative weight accorded by Chinese judges to foreign awards made by arbitral bodies outside China versus that given to foreign and foreign-related awards coming from within. While courts are required to receive approval from the Supreme People's Court prior to refusing to enforce a foreign arbitral award, courts have occasionally circumvented this requirement by employing delaying tactics when local interests are adversely affected by the arbitration rulings.
These acts commonly known as local protectionism are very effective in delaying the award and give ample time for the local party to transfer funds away from the its account, frequently claiming insolvency.

Enforcement in Chinese courts is complicated by the same factors that make parties unwilling to litigate disputes in these same courts; the very basis of the need of arbitration. Court officials often lack sufficient legal training and inadequate training has led to delays of more than one year in accepting or processing an application for arbitral enforcement. Local protectionism, the influence of party officials, lack of professional ethics, and inadequate authority may complicate enforcement.

2.) METHODOLOGY

Research materials are gathered predominantly from internet sources. I have been able to conduct in-depth interviews with various members of Chinese business associations in Perth . Many of them conduct businesses in both China and Australia. They are often prominent members of the Chinese community in Perth which facilitated the author in having informal talks with other transplanted Chinese on the challenges facing Australians in conducing business there. They have been able to provide many practical insights on the inner workings of various aspects of enforcement in China. Almost all of them, however, declined to the cited as many worry it might affect them negatively due to their expressed criticisms to certain governmental conducts throughout the interviews .

3.) ARBITRAL ISSUES PRIOR TO ENFORCEMENT

Even prior to enforcement an of an award, China~{!/~}s arbitral system has received criticisms on its arbitral procedures itself . Foreign parties have questioned the fairness of CIETAC proceedings stemming from inadequate procedural and professional standards. Although empirical data is scant, critics cite the prevalence of ex parte communications, breaches of confidentiality and conflicts of interest, asserting that these reflect a low level of institutional ethics and compromise the quality of CIETAC awards. Parties may find that CIETAC proceedings more closely resemble a business negotiation rather than an arbitration proceeding.
This is evident in CIETAC~{!/~}s eagerness to settle cases prior to issuing awards, and its rules against publishing dissenting opinions in cases where the decision is not unanimous.

Foreign parties have also questioned Article 53 of CIETAC~{!/~}s rules requiring arbitrators to decide cases in accordance with ~{!0~}the principle of fairness and reasonableness.~{!1~} At other arbitration institutions, arbitrators would employ this principle only if explicitly permitted to do so by the parties. Otherwise, the arbitral panel should make its decision based on the strict letter of the law governing the contract and the contract provisions.

According to interviewed sources, there are rampant absence of substantive evidence rules, false testimony and evidence tampering are not uncommon during arbitration, and CIETAC has no requirements that documents be authenticated. Even though should attempts of authentication be made, it is common practice to purchase legal and authentic documents from corrupt officials of various agencies. There are also claims that local protectionism and corruption are pervasive, with foreign parties reporting that local officials are prone to falsify documents or refuse to provide evidence that might damage the case of a local company. This will be further looked into on the section dealing with local protectionism.
4.) RECOGNITION OF A FOREIGN AWARD IN CHINA

The recognition and enforcement of foreign arbitral awards in China is basically divided into three situations; First, in accordance with the New York Convention ; second, in accordance with bilateral conventions concluded by China, and third by the principle of reciprocity.
China kept two reservations as it joined the New York Convention, that is reciprocity reservation and commercial reservation. In accordance with the declaration of reciprocity reservation, China only recognizes and enforces a foreign arbitral award sought in another member of the ~{!0~}New York Convention~{!1~}. This does not present an issue to Australian companies seeking arbitral enforcement in China as Australia is a member of the New York Convention.
In accordance with the declaration of commercial reservation, China shall apply the New York Convention only to disputes arising out of legal relationships. It is crucial that Australia understand the definition of the commercial legal relationship under the Chinese law. The ~{!0~}contractual or non-contractual commercial legal relationships~{!1~} of the Chinese law means the commercial rights and duties arising from contracts, infringements or relevant legal regulations. It is vital to note that in accordance to Chinese law, it shall not include disputes between foreign investors and host country as a commercial legal relationship.

5.) REFUSAL OF ENFORCEMENT
Regulations on recognition and enforcement of foreign judgments are mainly regulated in ~{!0~}Civil Procedure Law of P.R.C.~{!1~}. In accordance with the article 267, if a legally effective judgment or order made by a foreign court requires recognition and enforcement by a people's court of the People's Republic of China, the party concerned may directly apply to the intermediate people's court of the People's Republic of China which has jurisdiction over the case for recognition and enforcement, or the foreign court may, in accordance with the provisions of the international treaties concluded or acceded to by the People's Republic of China or on the principle of reciprocity, request recognition and enforcement by a people's court.
Where an execution is necessary, a writ of execution shall be issued and enforced in accordance with the relevant provisions of this Law; if it contradicts the basic principles of the law of the People's Republic of China or the state and social, public interest of China, the people's court shall refuse its recognition and enforcement.
The court reserves a right to refuse enforcement in accordance to Article 260 of the Civil Procedure Law. This may that the parties neither included an arbitration clause in their contract nor subsequently reached a written arbitration agreement; the matters decided in the award exceed the scope of the arbitration agreement or fall outside the jurisdiction of the arbitration organization; a party against whom the application for enforcement is sought was not requested to appoint an arbitrator or requested to take part in the arbitration proceedings, or was unable to present its case for reasons for which they were not responsible; or the arbitral tribunal's composition or the arbitration procedure used failed to conform with applicable rules. In addition, the Civil Procedure Law grants a People's Court the right not to enforce awards if it finds that doing so would compromise the "social and public interest of China." .

A procedural ground for which enforcement of an arbitral decision in China may be refused is the failure to meet time limitations for submitting an enforcement application. China's time limitation provisions apply uniformly to domestic, foreign-related, and foreign arbitration awards. For cases in which at least one party in the arbitration is a Chinese natural person, an application to enforce the arbitral award must be submitted within one year of the final date required by the arbitration decision.

6.) ENFORCEMENT STATISTICS

The most famous empirical study of the enforcement of arbitration awards in China is by Randall Peerenboom published in the American Journal of Comparative Law Vol 49. According to him, almost half of all foreign and CIETAC awards were enforced in the sense that the party recovered at least some amount. The enforcement rate for foreign awards was 52%, slightly higher than the 47% success rate for CIETAC awards. Investors can expect to recover 75-50% of the award amount in 34% of the cases and half of the award at least 40% of the time. As for the factors that influence success and failure, the insolvency of the respondent was by far the biggest obstacle to collection, accounting for 43% of all non-enforcement cases .

In the 35 cases where applicants were able to enforce the award at all, they recovered 100% of the award in 34% of the cases, 75-99% in 34%,50-74% in 14% of the cases and less than half in 17% of the cases. For the entire 72 cases, an applicant had a 17% chance of recovering 100%, a 17% chance of recovering 75-99%, a 7%chance of recovering 50-74%, and a 10% chance of recovering less than half of the award. Hence, in about one-third of the cases, the applicant was able to obtain 75-100% of the award and half of the award in about 40% of the cases. Accordingly, awards were easier to enforce in Beijing, Shanghai and Guangzhou than in other cities. And the size of award was negatively correlated with enforcement, with smaller awards more likely to been forced and large awards less likely to be enforced.

The take-home message of this study is that the chances of a 100% recovery of a foreign award in China is less than 20%. Hence foreign parties should not be realistically expect the amount upon enforcement of the arbitration. It is also beneficial for the award to be enforced in major cities.

The correlation of the size of the award where large awards are less likely to be enforced initially seems rather surprising. One would expect the larger the sum the more high profile the case would be and be under the scrutiny of more powerful agencies. Hence it seems logical than that~{!/~}d be less local protectionism involved. However the reverse seems to be true. The larger awards invokes larger scale of protectionism as the local party, which might include some officials themselves, stand to lose much more both financially and career-wise.

7.) ISSUES IN ENFORCEMENT
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 favour 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.
The Revpower case is a foreign company~{!/~}s worst arbitration nightmare. It is a very likely scenario facing all arbitration enforcement in China. Delays which often results in insolvency is still plaguing companies seeking enforcement. Revpower was unable to get the award enforced despite substantial diplomatic involvement.
An analysis of the Revpower case invokes two major issues. Why was there such a long delay that enabled SFAIC be dissolved for bankruptcy within that timeframe? According to Article 23 of the CIETAC Arbitration Rules, a property preservation action may not be brought until after the arbitration panel has already been seated. The application for property preservation must be brought by the party to the Arbitration Commission and then the Commission must bring the action to the Intermediate People's Court in the jurisdiction where the property is located for a ruling on the requested measure. This is problematic in that it may be time consuming and the party against whom the action is brought may have enough advance notice to be able to remove its property or assets from the jurisdiction.
The Revpower case may be cited here as that was a case in which the courts delayed action to preserve property or, more clearly stated, to enforce the award so that the Chinese party had time to get rid of its assets and property prior to the award being enforced. If there are no assets, the Chinese court could avoid enforcement due to impossibility in accordance to its Civil Procedural Law. Therefore, having a workable property preservation provision seems essential to achieving full compliance with or enforcement of an arbitral award. It is so far, not apparent in the annals of modern Chinese law that this issue will be picked up anywhere in the near future.
7.1) Local Protectionism
Local protectionism is the most frequently cited obstacle to enforcement of arbitration awards. It is basically situations where the government, courts, or officials give preferential treatment to the local parties. The reason varies tremendously.
Localities usually conduct protectionism under the name of 'assistance to the local economy'. Sources verified cigarettes, autos and alcohol, products with are the top items subject to local protectionism. This ~{!0~}Robin Hood~{!1~} mentality is often the excuse given by the officials for doing so. ~{!0~}Getting money from the rich foreigners to serve the poor people of the village~{!1~} is their main argument, though it is unlikely that the majority of the people there are being served of their best interest.
With both political and economic reforms since the late 1970s, the central government allowed more management decisions to be made at lower levels, with a redistribution of resources and greater attention to profitability. The decentralization process has given cities and counties significant decision-making power. Many state-owned enterprises are mandated to localities. Hence the local authorities wield significant power on their respective areas. This also means pressure to perform and build the local economy as well as a chance to enrich their own pockets. For these reasons, local authorities are literally obsessed with economic growth and local GDP growth rates which are the leading criteria for evaluating cadre performance. They are not shy to use their administrative rights to assist and protect local enterprises . There is heavy local government~{!/~}s reliance on the local companies for taxes and employment. Hence the bigger the local company, the less likely the award will be enforced.
For the same reason, and also out of fear of public exposure that would reflect badly on themselves and give a bad impression to leaders, local officials may also endure or shield local companies that engage in illegal activities, including smuggling, corruption, and the manufacture of fake or illegal products .
In lawsuits between local and non-local enterprises, a local litigant usually enjoys a tremendous advantage in courts. Prosecutors and judges overwhelmingly favour companies in their district. Even when the court scarcely holds local ones guilty, local authorities often tolerate or even protect local parties that refused or delay to comply with court verdicts on debt payment. There is reason to suspect bribery often plays a heavy hand as well.
In the context of enforcement of foreign arbitration awards, local protectionism, other than the obvious refusal of local courts to enforce the awards, can cause significant delays. These delays are to buy time for transfer of money and assets of the local companies to other accounts upon which the local companies claim insolvency due to lack of assets and concurrently the local courts claim impossibility of enforcement. The local officials may tip off local companies about an application of enforcement enabling them to transfer assets almost before the case reaches court . Local government~{!/~}s reliance on the local companies for taxes and employment may give the local officials a legitimate excuse while reporting to their superiors of their actions.. Hence a favour and obligation to look after the said companies.
7.2.) Triangular Debts
Triangular debt is something that might not be familiar to Australian companies pursuing arbitral enforcement in China. Triangular debt refers to the situation in which one state-owned company owes money to another company, which in turn owes money to a third company, and so on. Basically a lender cannot repay its own loans because its borrowers are unable to repay their debts. The foreign party will have a very tough time on the recovery of triangular debt as more often than not these involves state owned enterprises with heavy political links. Furthermore the triangular debts can go further up the chain. If foreign company A, receive judgment enforcing award from local company B1 and it have heavy triangular debts with state own enterprises C1,C2,C3,C4,C5, with each of these enterprises having triangular debts with 20 other state own enterprises, then company A will have a tremendously hard time tracing down and trying to obtain court judgements for all these. It is an exercise of futility. Given the sorry state of many state-owned enterprises and China~{!/~}s on-going march toward the market, one would expect the number of insolvent companies to continue to grow .

7.3) Weakness of Courts

Although not something that foreign parties will be seeking, the judge responsible for enforcement will try to mediate a settlement. Generally judges pressure parties to settle because they often lack the power to enforce awards if the respondent refuses.
Foreign parties who have just won a hard fought arbitration understandably may not initially be eager to compromise when it comes time to collect the award. Yet there are many reasons why they might have to settle. Historically, great importance has been attached to saving face and preserving social harmony . Judges, viewed by the people not only as the upholder of justice, but will claim superior wisdom for preserving peace via mediation. Hence mediation can be a win-win situation for judges. He receives credit if the mediation is successful and not needing to go through the time and energy for court proceedings as well as a pat on the back from superiors.

Furthermore bargaining is a common part of everyday life and business. The Chinese held that there is nothing other than death than cannot be bargained with. A contract, though stated in black and white, is ~{!0~}dead~{!1~} while the dynamic business situation is deemed ~{!0~}alive~{!1~}. It is up to the people to solve it. That being said, in all practicality, most parties settle because the respondent doesn~{!/~}t have sufficient assets to pay in full or they don~{!/~}t want to chase third party debtors . Triangular debts is the major reason to settle. Foreign parties must have a solid concept of triangular debts in order to appreciate the sheer complexity of debt recovery in China.

Another source of the weakness of local courts is the reliance of local courts on the local municipal government. Judges are appointed by the people~{!/~}s congress and courts are funded by the government at the same level.
Thus, basic and intermediate level courts depend on the municipal government for salaries, bonuses and allocation of housing. Such financial dependence gives local governments tremendous leverage over the courts. Sources said the power of the municipals extent to that of threatening and intimidation of judges.

In the Chinese government, the powers of military virtually overrule the powers of the court. According to the Randall Peerenboom, lawyers noted that they would be less likely to pursue a third party debtor if the debtor were a military company. In one case, CIETAC issued an award calling for the liquidation of a joint venture between a Taiwanese party and a military-owned company in Guangzhou with proceeds to be split according to a 70/30 ratio. The Chinese party refused to comply with the award, and indeed tried to have the award set aside in Beijing. After the Beijing IPC rejected its petition, the Chinese party challenged enforcement of the award on public interest grounds. Not only did the local court fail to enforce the award, it failed to take any action at all.

7.4) Secrecy

Secrecy in the Chinese legal systems are put in accordingly to protect in interest and cause of the people. Secrecy comes in many forms such as back-room ~{!0~}judicial committees~{!1~} deciding cases, secret ex parte meetings between the Chinese party and the judge, and guanxi used to influence local political elites and decision makers The unavailability of published opinions by Chinese courts makes it difficult to trace the outcomes of arbitral enforcement. It also makes it difficult for lawyers to adequately advise their clients on the variety of outcomes possible when deciding to invest in China or for lawyers to adequately assess risk once a dispute breaks out. There are generally two options: pursue negotiations which may end less favourably than an arbitral award or face the possibility that if an arbitral award is won the losing party may not comply with the award and the Chinese courts will likely refuse enforcement.

8.) PRACTICAL SOLUTIONS

It is often stated that prevention is better than cure. In this case the same idiom rings true. It is far better to be very cautious in conducting business in China. Having knowledge in the local laws and being aware of China~{!/~}s approach to both arbitration procedures and enforcement is a good foundation. A good arbitration clause remains critically important.

8.1) The Need for Guanxi Development

It would be highly erroneous for any Australian company to venture into business in China bearing only contracts, arbitration clauses and lured into false sense of security by having these legal documents. As presented throughout the essay, China is not a country that runs wholly by the word of law but rather the age-old concept of guanxi. In all practicality, it is who you know in China that will make or break your deals, especially in terms of enforcement.

This concept might not be as familiar to the Australian business community whose ~{!0~}give it a fair go~{!1~} mentality might not prepare them with the mental framework needed to aggressively pursue their interests in China. They will need to lay a foundation of guanxi. This at times require significant financial investments and time.

Guanxi plays an integral role in conducting business in China. Establishing guanxi with upper level management and government officials is one of the first steps in building a successful business and facilitation of enforcement. It is implied that once guanxi has been established, both sides of the relationship are obliged to reciprocate assistance when asked, much like ~{!0~}You scratch my back I~{!/~}ll scratch yours~{!1~}.
A good way of starting guanxi development is utilizing the local Chinese business associations. Many of the prominent members are highly connected to various branches of enforcement in China. They are also well versed in the many challenges of international trade issues. Many of such associations have members in the legal sector who are well qualified for provide counsel. Experienced business advisors are an asset for any Australian companies wishing to venture into China. Although one might tend to think that these advisors might not be fully utilized in many management issues, it should be realized that you might not be paying for how he advises, but rather who he knows.

Australian companies are bound by laws of ethics. This includes prohibitions against various forms of briberies. One might encounter certain dilemmas when attempting to build guanxi. Bribery is used in all manners and forms in China. While the interpretation of bribery is rather loosely used in China, it has always been a way of doing business and the assurance of smooth running in many aspects of life. Heavy entertaining and providing lavish gifts are normal and acceptable ways of developing guanxi.

Certainly the AWB case rings loud on the Australian~{!/~}s dilemma of doing international business. Can an Australian company accept business failure for not complying with the business norms of other countries? That is an ethical decision that will not be covered in this essay. It is important for the company to make a pre-arranged decisions should they encounter this issue; in the likely situation when certain government officials hint that the AUSD$500,000 award can be enforced without delay if the company is willing to contribute 1/8th the amount to ensure ~{!0~}smooth running~{!1~} of the proceeding. Payment does not guarantee enforcement but failure to do so will invoke extremely high level of political interference into local protectionism as well as dashing any hopes of doing further business with the state companies. These likely dilemmas awaiting small to medium scale Australian companies.

8.2) Go in as a Big Company
Larger companies with substantial global presence can be expected to be more successful in getting the award enforced. Currently the Chinese government places great importance on attracting foreign investment. Hence local officials have come under increasing pressure to ensure awards are enforced. This is especially noticeable in the technology manufacturing sector and if the large company represents a major employer in the area. The author encountered first hand experience while working in the technology manufacturing sector. The large multi-national company was building a new manufacturing plant in a Southern China district. Upon completion the plant will employ more than 3,000 direct workers. It was by far the biggest employer in the area. Hence it has high bargaining positions. Requests of ~{!0~}consultation fees~{!1~} by local officials for ~{!0~}smooth operational running~{!1~} was refused without suffering any backlashes. Any contractual award was enforced by the local government promptly although the author is not aware of any arbitration award enforcement issues during the author~{!/~}s tenure with the company. The local government was cooperating fully and local officials were concerned about any possibilities of ruining the image of their town as a favourable environment for foreign investments. However it is also noted that they have vested interest; namely the co-ownership of lands and shops in the investment region.

9.) CONCLUSION

Arbitration enforcement for Australia or other foreign businesses in China is still weak. It is certainly not as rosy as the Chinese government or CITEAC claim to be. Any Australian company seeking arbitration enforcement must expect various enforcement issues ranging from local protectionism to weak court systems. Furthermore the company should not expect full amount awarded due. Guanxi development is vital for doing business in China, especially for enforcement purposes. Due to the listed factors, most sources had little confidence on the practicality of enforcement of foreign arbitrational award in China. Arbitrational enforcement is too off-the-book and involves intricate webs of substantial political manipulation.

There is hope for further strengthen of arbitrational award enforcement as China is still progressing at an astounding speed. Reliance on foreign investments especially in technology creates a need to sharpen the enforcement of arbitrational awards as most foreign companies prefer arbitration than litigation. However, until China is able to provide more power to the courts as well freeing the courts from local governance, arbitration award enforcement remains merely an optimistic hope at best. The best advice so far to prospective Australian companies is that an enforcement of arbitration award in China is most likely a losing situation. It is better for the company to negotiate for a partial recovery instead of reliance of the Chinese courts to provide enforcement. Arbitration enforcement of foreign awards with Chinese parties, for the time being, is unlikely to be satisfactory for the foreign party.