Pursuant to article 15 of the Sino-Foreign Equity Joint Venture Law and article 25 of the Sino-Foreign Co-operative Joint Venture Law, the Chinese or foreign parties to a joint venture may apply to a Chinese or foreign arbitration body in accordance with an arbitration agreement for arbitration of a dispute arising from the performance of a Sino-foreign equity or co-operative joint venture contract (JVC). Article 244 of the Civil Procedural Law rules out the possibility of selecting a foreign court or a court outside China to govern this kind of dispute, so many foreign investors prefer to solve JVC disputes by means of arbitration outside China (in foreign countries, as well as in Hong Kong, Macau and Taiwan). Since joint ventures are established in China, it is likely that the prevailing party to an arbitration case will need to apply to a court in China for recognition and enforcement of an award delivered by a foreign arbitration body.
China formally acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as New York Convention, in 1987, after which arbitral awards made pursuant to the convention in other signatory states were recognised and enforced. If the foreign and Chinese parties to a joint venture have concluded an arbitration agreement in their JVC, or have reached a separate arbitration agreement for the selection of arbitration in another signatory state, then they may apply to a Chinese court, pursuant to the convention, for recognising and enforcing an award made during the arbitration proceedings conducted in accordance with such arbitration agreement. Recognition and enforcement of an award may be refused by a Chinese court only if the circumstances specified in the convention arise.
Hong Kong is one of the region’s major arbitration centres. However, arbitral awards made in Hong Kong could not be recognised and enforced under the convention because they do not meet the requirements that “an award shall be made in the domain of a signatory state”. To this end, the Supreme People’s Court of China and the Court of Final Appeal in Hong Kong reached the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and Hong Kong Special Administrative Region in 1999, which serves as a legal basis for the mainland to enforce arbitral awards made in Hong Kong. Major provisions under the arrangement, including the reasons for refusal of the recognition and enforcement of awards (article 7), are consistent with the provisions under the New York Convention.
Mainland courts review foreign awards pursuant to article 5 of the convention (article 7 of the arrangement). The Supreme People’s Court has issued a judicial interpretation on the strict interpretation of the reasons for refusal of the recognition and enforcement of an award, and has established a “reporting” system, under which the refusal to recognise or enforce any foreign arbitral award must be submitted to the Supreme People’s Court for examination and approval. The Supreme People’s Court has also imposed stringent restrictions on the application of the “reservation of public policy”. It has rarely cited public policy reasons to refuse recognising and enforcing an award that is in violation of the prohibitive provisions under Chinese law.
While mainland courts, in practice, have taken an attitude that is very supportive to arbitration, business and legal practice have to be careful to avoid minefields in foreign arbitration involving joint venture disputes to ensure the full recognition and enforcement of an award.
First, joint ventures themselves are not parties to JVCs and their arbitration clauses. JVCs are the core legal documents for investors to agree on setting up a joint venture. However, a joint venture formed pursuant to such a JVC is not a party to a JVC or its arbitration clause.
In the case application by Hemofarm DD, MAG International Trade Company and Sura Mody Media, for recognition and enforcement of an arbitral award No. 13464/MS/JB/JEM made by ICC International Court of Arbitration against Jinan Yongning Pharmaceutical (2008), the Supreme People’s Court held that the arbitration clause of the JVC was binding only upon the disputes arising from joint venture matters between the parties to the JVC, but it was not binding upon the disputes between the Chinese investors and the joint venture. The court ruled that the ICC tribunal had gone beyond the scope of the arbitration agreement specified under the JVC by hearing and ruling the contractual dispute between the Chinese investor and the joint venture in the arbitration, constituting a situation for refusal of the recognition and enforcement of the award under article 5 of the convention.
Second, a decision to dissolve a joint venture must go through judicial proceedings; and an arbitral tribunal does not have the power to make an award on dissolution. Articles 181 and 183 of the Company Law provide that if a company has difficulties that cannot be resolved through amiable means, the shareholders may request a people’s court to dissolve the company. However, this power cannot be handed over to an arbitral tribunal through an arbitration agreement in a JVC.
In the case application by Qingdao Jiacheng Engineering for revocation of an arbitral award (2009) CIETAC-BJ (No. 0355) made by China International Economic and Trade Arbitration Commission (2011), the Supreme People’s Court held that article 181 provides for judicial dissolution only and there was no legal basis for an arbitration body to deliver an award for dissolving the company. Although the case involved an arbitral award made in China, the opinion that the request for judicial dissolution of a company is non-arbitrable applies equally to the recognition and enforcement of foreign arbitral awards.
It should be noted that in accordance with the opinion of the Supreme People’s Court on an earlier case of the application by Ningbo Yongxin Auto Parts Manufacturing for the revocation of an award Yong Zhong Cai Zi (2007) No. 44 by Ningbo Arbitration Commission (2009), since the termination of a Sino-foreign equity JVC would inevitably lead to the dissolution and liquidation of the joint venture as required by law, the arbitral tribunal can still point out that the joint venture must be dissolved and liquidated after making a ruling over the termination of the JVC.
Zhang Shouzhi and Huang Tao are partners of the International Litigation Department at King & Wood Mallesons’ Beijing office. Their respective e-mails are [email protected] and [email protected] Liu Shoujie is a consultant to this department. His email is [email protected] You may contact the authors by phone at: + 86 10 5878 5588.