Key notes on the enforcement of international arbitral awards in Mainland China

Where the dispute resolution mechanism for a cross-border transaction is arbitration in an international arbitration institution and, if the party that is to have a payment obligation is an entity or individual located in the People’s Republic of China (the PRC or Mainland China), we are usually asked: (i) whether the arbitral award can be enforced in the PRC; and (ii) about practical issues relating to enforcement proceedings. 

By way of background, as a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), foreign arbitral awards are enforceable in the PRC. In recent years, the PRC courts have been more inclined to support applications for recognition and enforcement of foreign arbitral awards. This is based on research that we have conducted, showing that the number of courts in the PRC that have supported the recognition and enforcement of international arbitral awards under the New York Convention increased from 63% in 2001 to 87% in 2022. However, based on our review and analysis of the cases that we have handled over the years, we have also noticed that the PRC courts have adopted a conservative approach in their interpretation of Article V of the New York Convention relating to “non-enforcement” of an arbitral award. 

Based on our experience in handling cases on the recognition and enforcement of foreign arbitral awards in the PRC, here are some key points to consider when agreeing an arbitration clause with an entity or individual located in the PRC and enforcing foreign arbitral awards in the PRC.

The arbitration clause

In respect of domestic arbitral awards, PRC Civil Procedural Law empowers the PRC courts to conduct both a procedural and substantive review of domestic arbitral awards. However, for international arbitral awards under the New York Convention, the PRC courts are only able to conduct a procedural review in the recognition and enforcement proceedings of that arbitral award. In the PRC, a large number of procedural disputes in enforcement proceedings in respect of the New York Convention are in respect of disputes over the arbitration clause itself. Therefore, having an effective and clear arbitration clause is key to ensuring the effective enforcement of the arbitral award.

a. Key elements of an arbitration clause

The PRC courts pay particular attention to the arbitration clause when considering cases. We therefore recommend that parties draft the arbitration agreement and clause in such a way so as to ensure that: (i) the arbitration institution is clearly identified; (ii) the application of the applicable arbitration rules is clearly stated; and (iii) the arbitration clause is valid under the law applicable to it¹. 

We have also noted circumstances in which arbitration clauses cite only the arbitration rules of a designated arbitration institution, without specifying the arbitration institution. PRC laws specify that if a specific arbitration institution can be identified under the selected arbitration rules, consensus on arbitration is deemed to have existed between the parties. However, when it comes to the enforcement of international arbitral awards, the lack of certainty on the arbitration institution may be exploited by the respondent as a defence that there was no valid arbitration clause between the parties involved and this may result in the arbitration clause being held to be unenforceable². In these circumstances, the applicant will instead have to bear the burden of proof in demonstrating that the arbitration clause is valid under applicable law, and this could lead to additional time and costs spent on the enforcement process as further expert opinion(s) on the application of foreign law may be required.

b. The costs of extensive arbitration mechanisms

We have seen arbitration clauses that contain extremely complex arbitration mechanisms, including limits on the identity of arbitrators, special mechanisms for disclosure of conflicts of interest of arbitrators, bilingual language for arbitration, say bilingual in English and Chinese, detailed terms on the process to initiate arbitration and exclusions relating to the service of arbitration proceedings. Such terms may initially appear to protect the interests of the parties, but in fact increase the overall costs to the parties in any subsequent arbitration and enforcement proceedings. 

In the course of enforcement in the PRC courts, we have encountered many occasions where the respondent will meticulously pick out details of the arbitration proceedings that are inconsistent with the arbitration clause and use it against the applicant, putting the applicant in a defensive position. Overly complex drafting on procedural matters is prone to omissions and non-compliance with the arbitration process may be a cause for non-recognition and non-enforcement if challenged (with supporting evidence) by the respondent during the enforcement proceedings³.

c. The seat of arbitration 

We have also seen arbitration clauses that do not explicitly state the seat of arbitration and instead rely on referring the issue to the appointed arbitration institution for determination under the arbitration rules. In practice, if there is no specific agreement on the law applicable to the arbitration clause, the PRC courts will apply the law of the seat of arbitration as the basis for interpreting the arbitration clause⁴. In the absence of an agreement on the seat of arbitration, the PRC courts will also review the arbitration rules of the designated arbitration institution, which may cause substantial delay or entitle the parties to raise further arguments within the enforcement proceedings.

At present, practical jurisprudence⁵ suggests that the seat of arbitration determines the nationality of an international arbitral award. In this context, whether the country of the seat of arbitration is a party to the New York Convention determines whether the international arbitral award can be enforced directly in the PRC or whether the PRC courts should take into account the reciprocal relationship between the PRC and the relevant country to determine the enforceability of the arbitral award. The latter is more uncertain and difficult to enforce.

d. Service clause for the arbitration proceedings 

In our experience, service of arbitration proceedings constitutes a key ground for non-recognition and enforcement cases in the PRC. Service in this context includes: (i) service of the notice of arbitration and procedural notifications, such as the notice of arbitration and notice of the appointment of arbitrators⁶; and (ii) service of the arbitral award.

In practice, we have encountered cases where the parties have specified their registered address in the transaction documents, but in the enforcement proceedings before the PRC courts, the respondent has argued that the address stated in the transaction documents is not its latest or correct registered address. This could result in the PRC courts having to pay detailed attention to issues relating to service, thereby delaying enforcement proceedings.

Therefore, we recommend that a service clause for arbitration proceeding is clearly agreed to by the parties in the transaction documents, rather than having the parties assume that the registered or business address as set out in the transaction documents is sufficient for this purpose. 

We recommend that service of arbitration clauses specify the authorised contact person, email address and service address of the parties. In addition, the parties should confirm that the address is deemed to be binding for: (i) the parties to receive notice of arbitration and notices from the arbitration institution (including the selection of arbitrators and other procedural documents relating to the arbitration); and (ii) service of the arbitral award. The parties should also agree on a period of time for deemed service and the steps required to be taken by the parties to update their contact details (if required). 

Parties should also take note of any provisions in the arbitration rules with regard to the interpretation of a party’s “address”. An example is in the rules of service to which a party and the tribunal need to effect service to the “last known address” of that party so as to constitute proper service. In some cases, we have observed respondents raising these provisions in order to argue that they were not properly served at their last published office address. In cases where the parties have specified a service of arbitration clause and the arbitration institution has served notice in accordance with the service clause, such defences are less likely to be upheld by the courts. However, in order to minimise any delays as a result of any potential defences in enforcement proceedings and to ensure effective service, applicants should check through the counterparty’s latest registered address on the China Enterprise Information Disclosures Platform when conducting service of arbitration and ensure that service is also traced to that address.

Public policy issues

According to the PRC judicial practice, PRC courts in general, have adhered to the New York Convention's philosophy of supporting international arbitration and facilitating enforcement of an arbitral award. They have interpreted and strictly applied the “public policy" grounds, holding that violation of public policy under the New York Convention is limited to “situations where the recognition and enforcement of a foreign arbitral award would result in violation of the fundamental principles of PRC laws, infringe upon PRC national sovereignty, endanger public security, violate good customs and other circumstances that would endanger the fundamental public interests of the PRC"⁷.

The most frequent questions we have encountered on this issue relate to enforcement of cross-border guarantees and security. As the PRC strictly regulates its foreign exchange and financial markets, many respondents have argued that enforcement of an arbitral award in respect of cross-border security or a cross-border transaction violates the PRC foreign exchange controls or financial regulatory regime. The general trend towards cases in relation to enforcement of such foreign arbitral awards, including that of the Shanghai Financial Court on the recognition and enforcement of foreign arbitral awards involving foreign exchange control issues, is that cross-border investments involving foreign exchange controls and cross-border regulations are, without explicit provisions to the contrary, generally not a matter of national public policy in the PRC.

In general, PRC judicial practice endorses a higher threshold for defining national public policy. Nevertheless, as the PRC government has special regulations on financial security, it cannot be ruled out that transactions in breach of such regulations may be held to be unenforceable due to public interest considerations (for example, in the case of transactions involving the exchange of Bitcoin for RMB, the PRC court has explicitly upheld that the arbitral awards supporting such transactions are contrary to public interest and should be ruled unenforceable⁸). Hence, we recommend that parties should, when structuring transactions, take account of the sectors that may be subject to public policy considerations, such as financial, foreign exchange, energy and national security.

Asset preservation

The enforcement of foreign arbitral awards within the PRC is usually divided into two stages: (i) the recognition stage; and (ii) the enforcement stage. Usually, recognition proceedings would take between 4 to 6 months (or longer depending on the caseload of the PRC courts) following which, the arbitral award can be formally enforced as if it were a domestic award.

Despite this, the PRC laws do not provide for the simultaneous application for asset preservation during international arbitration proceedings. The Supreme People's Court of the PRC has now clarified that parties are allowed to bring an application for asset preservation simultaneously when applying for the recognition and enforcement of a foreign arbitral award⁹. This is a favourable decision for the enforcement of foreign arbitral awards in the PRC, as it allows the applicant to freeze the assets of the respondent to maximise the benefits of the award without having to wait until completion of the recognition proceedings to do so. 

In this regard, a party that intends to bring an application for the recognition and enforcement of an international arbitral award should assess the status of the respondent's assets in the PRC.

Statue of limitations

In accordance with the relevant provisions of the PRC laws, the statute of limitations for application for the recognition and enforcement of international arbitral awards is two years. This result of this is that the applicant will need to submit an application to the courts to enforce the arbitral award within two years after receipt of the arbitral award, otherwise it will lose the opportunity to enforce the award in the PRC. Currently, the application documents must be accompanied by a Chinese translation and be notarised and legalised before submission and these steps will usually take up to a month. Applicants should take note of such timelines when preparing for the post-award negotiation or settlement with the respondent.

It is also worth noting that the PRC has acceded to the Convention on the Abolition of the Requirement for Legalization of Foreign Public Documents (the Hague Convention), which will come into force in the PRC on November 7, 2023. The effect of the Hague Convention is that the current requirements for legalisation of foreign public documents may no longer be required. 

Jurisdictional issues

Pursuant to the relevant provisions of PRC laws, the courts that have jurisdiction in relation to the recognition and enforcement of international arbitral awards are the courts where the respondent is domiciled and where the principal property of the respondent is located¹⁰. 

Currently, when compared to the courts in less developed regions (e.g. the Western or Northern areas of the PRC), the courts in the coastal areas of the PRC (e.g. cities in the Eastern Region): (i) have a better understanding and good grasp of foreign-related trial procedures; (ii) are able to prioritise key issues when considering cases; (iii) run trial proceedings and asset preservation enforcement hearings efficiently; and (iv) have English speaking personnel. The courts in the less developed regions may therefore require extra documentation for arbitration procedures from applicants due to their lack of experience in reviewing cases on the recognition and enforcement of foreign arbitral awards, which may increase the cost and time spent by the applicant.

It is therefore vital, to give full consideration to the choice of courts that will determine the issue of enforcement of the arbitral award so as to ensure that the enforcement proceedings are effective and efficient.

Conclusion

International arbitration is now a mainstream way of resolving disputes between Chinese and offshore companies in cross-border transactions. Based on our experience of cross-border cases on the recognition and enforcement of arbitral awards in the PRC, the PRC courts expect commercial parties to give detailed consideration to key practical and legal points such as the service of process, the seat of arbitration, public policy and the cost of complex arbitration clauses when negotiating and agreeing to arbitration clauses within their commercial contracts. Parties should also plan their strategy for enforcing arbitral awards to ensure that any practical steps needed to be complied within the PRC to effectively enforce the award have been completed so as to ensure that the recovery from enforcing the award is maximised.

1. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Article V, paragraph 1(a) Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
   (a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.
2. The Supreme People's Court’s reply to Taizhou Haopu Investment Co., Ltd.’s application for determination on validity of the arbitration clause, [2012] Civil IV No. 6, March 1st, 2012.
3. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Article V, paragraph 1(d) Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
   (d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place. 
4. Interpretation of the Supreme People's Court concerning Some Issues on Application of the Arbitration Law of the People's Republic of China, Article 16, The examination of the effectiveness of an agreement for arbitration which involves foreign interests shall be governed by the laws agreed upon between the parties concerned; if the parties concerned did not agree upon the applicable laws but have agreed upon the place of arbitration, the laws at the place of arbitration shall apply; if they neither agreed upon the applicable laws nor agreed upon the place of arbitration or the place of arbitration is not clearly agreed upon, the laws at the locality of the court shall apply. 
5. The Supreme People's Court’s Reply to the Request for Instructions on Application for Recognition and Enforcement of a Foreign Arbitral Award between DMT Ltd. (France) (Applicant) v. Chaozhou City Huaye Packing Materials Co., Ltd. and Chao'An County Huaye Packing Materials Co., Ltd. (Respondents), [2010] Yue Civil IV No.2, June 21, 2010, in which the decision regarded the arbitral awards made in Singapore by the ICC Court of Arbitration as Singaporean awards, rather than French awards.
6. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Article V, paragraph 1(b) Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
   (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.
7. The Supreme People's Court’s reply on Weston Wacker's Application for Recognition and Enforcement of an English Arbitral Award, [2012] Civil IV No. 12, May 21, 2012.
8. The Supreme People's Court of Issuing the Thirty-Sixth Group of Guiding Case, No. 199, [2018], Yue 03 Civil Special No.719.
9. Minutes of the National Symposium on Foreign-related Commercial and Maritime Trial Work of Courts, 109.【Arbitration Preservation in Recognition and Enforcement Procedures】Where a litigant applies to a people's court for recognition and enforcement of a foreign arbitral award, and the people's court accepts the application, if the litigant applies for property preservation, the people's court may enforce the property preservation according mutatis mutandis to the Civil Procedure Law and relevant judicial interpretations. The applicant shall provide a security, otherwise the application will be rejected.
10. Civil Procedure Law of the People's Republic of China, Article 290, Where an arbitral award of an overseas arbitration organisation requires ratification and enforcement by a People's Court of the People's Republic of China, the parties concerned shall submit an application directly to an intermediate People's Court at the location of the respondent's residence or the location of the respondent's   Civil Procedure Law of the People's Republic of China, Article 290, Where an arbitral award of an overseas arbitration organisation requires ratification and enforcement by a People's Court of the People's Republic of China, the parties concerned shall submit an application directly to an intermediate People's Court at the location of the respondent's residence or the location of the respondent's properties, the People's Court shall handle the matter pursuant to the international treaty concluded or participated by the People's Republic of China or in accordance with the principle of reciprocity.