No easy answer for disputes without foreign elements arbitrated outside China

By Vincent Mu, Martin Hu & Partners
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Based on our analysis in the previous issue, our conclusion was that the question of whether a dispute without a foreign element can be arbitrated abroad cannot be answered with a simple “yes” or “no”. Notwithstanding the fact that there is no barrier to a case being referred for foreign arbitration, there is nonetheless a great deal of uncertainty as to whether the award ultimately can be recognised and enforced in China. With respect to such cases, if it can be said that “I can guess the beginning” – such a case can be accepted and will be heard; but if “I can’t guess the ending” – there is no way to ensure that the award, after being rendered, will be recognised and enforced in China.

In the face of this situation, the author is of the opinion that each individual case should be dealt with based on its particular circumstances and enforcement should become the criterion for differentiating individual cases.

牟笛 Vincent Mu 胡光律师事务所 资深律师 Senior Associate Martin Hu & Partners
牟笛
Vincent Mu
胡光律师事务所
资深律师
Senior Associate
Martin Hu & Partners

No domestic enforcement sought

Notwithstanding the fact that the ultimate objective in the majority of disputes is enforcement in China, there nonetheless remains in fact certain disputes that do not require enforcement, or coercive enforcement, or enforcement in China. There is nothing holding a party back from referring such a dispute for arbitration abroad.

Disputes not requiring enforcement. For a party in a confirmation suit – e.g. a legal action for confirmation of the validity of a contract – the ultimate objective may not be enforcement. Accordingly, the degree of reliance on enforcement in such a case is much less than that of a party in a payment suit, e.g. a legal action involving damages. Even for parties in certain payment suits, the ultimate and principal objective may not be enforcement, for example a case in which an arbitration award is required solely to serve as the basis for the internal disposal of a bad debt.

Disputes not requiring coercive enforcement. Arbitration institutions, particularly foreign arbitration institutions, do not have a coercive enforcement function and are required to resort to the judicial authority of domestic courts for implementation of the contents of an award. Seen in this light, the core value of recognition and enforcement by domestic courts is actually only coercive enforcement. Where the parties have already reached an intent to resolve their dispute, and both have a significant degree of mutual trust, the value of coercive enforcement decreases accordingly.

Currently, most foreign arbitration institutions permit the parties to refer their case to arbitration after they have reached an agreement on resolution of their dispute. In such a case, the function of the arbitration procedure is no longer resolution of the dispute, but rather legal endorsement of the settlement agreement between the parties. Accordingly, the parties’ degree of reliance on coercive enforcement is much lower than that in ordinary cases.

Disputes not requiring domestic enforcement. Both parties in a case without a foreign element have Chinese nationality, but may nevertheless have foreign assets. Accordingly, even though a party may have a strong wish for enforcement, if it has ascertained before initiation of the action that the assets of the other party available for enforcement are not located in China, it can still initiate a foreign arbitration procedure, and, once the award is rendered, seek recognition and enforcement of the award in the country where the other party’s assets are located.

Neither the hearing nor enforcement stages of such a case has any substantive connection with the judicial regime in China, and accordingly, no consideration need be paid to the judicial stance in China. As for the country where the assets are located, its criterion for determining whether to recognise and enforce the arbitration award will more often than not be the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Whether a case has a foreign element or not is not a factor considered by the New York Convention. Furthermore, because the relationship between the country where the assets are located and the Chinese parties is not close, the possibility that the grounds of public policy will be cited as the reason for not granting enforcement is less than that in a Chinese court.

Domestic enforcement needed

The disputes in which the objective is not domestic enforcement are nonetheless the minority, and in the majority of disputes domestic enforcement remains an essential factor. Notwithstanding the fact that Chinese laws do not at present prohibit foreign arbitration of disputes without a foreign element, in judicial interpretations of the Supreme People’s Court in 2003 that were ultimately aborted, such actions were indeed defined as invalid, and given also the current consensus in arbitration circles in China against such arbitration actions, the author is of the opinion that parties cannot completely ignore the relevant risks.

Accordingly, at the arbitration clause drafting stage before any dispute arises, the author would not counsel readers to blindly opt for foreign arbitration for disputes without a foreign element. It is entirely possible for parties to draft tailored arbitration clauses by selecting arbitrators of foreign nationality, rules of a foreign arbitration institution, etc., to procure actual results in domestic arbitration that are extremely similar to those of foreign arbitration.

At the stage of considering initiation of arbitration once a dispute has arisen, if a party is resolutely unwilling to accept any option other than foreign arbitration due to unfamiliarity with China’s court system, or fear of local protectionism, or consideration of the special nature of the dispute, and is additionally willing to bear the attendant risks, the author would encourage the party to boldly try foreign arbitration.

In subsequent enforcement, notwithstanding the fact that the Supreme People’s Court requires lower-level courts to report to it all cases in which they intend to withhold recognition and enforcement, if the lower-level court intends to grant recognition and enforcement, it is not required to report the same.

From this it can be seen that the Supreme People’s Court only holds the power to deny enforcement, whereas the power to affirm enforcement remains in the hands of the lower courts at each level. On the other hand, the author would very much like to see such a case brought before the Supreme People’s Court as soon as possible. Under the existing legal framework, any decision by the Supreme People’s Court would provide a final answer to this long unanswered question.

Vincent Mu is a senior associate at Martin Hu & Partners

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牟笛 Vincent Mu

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