If you want your money, arbitrate

    Although the law appears quite clear, an examination of the framework available for actually putting this into practice is not quite so encouraging.

    “China has not set up a mature legal regime for recognition and enforcement of foreign judgments,” says Eugene Chen, a Shanghai-based counsel with Lovells. “In practice, it is extremely difficult (and in most cases likely impossible) to enforce a foreign court judgment in China.”

    China is not a party to any multilateral treaties which specifically cover the recognition and enforcement of foreign judgments. It has, however, concluded some bilateral treaties, although not with the US or Japan – two significant trading partners.

    The relative lack of transparency in the PRC legal system means it is difficult to access appropriate records, but what is clear is that no US judgments have ever been enforced in China, and Chen says he is aware of three publicly reported instances of attempts to enforce foreign judgments by other foreign parties, only one of which was successful.

    The first was an action filed unsuccessfully by a Japanese plaintiff who was part of a joint venture in China which had incurred debt owed in Japan. The plaintiff applied in the Japanese courts to have the Chinese joint venture company served as a third party and to use its assets as security. When the Chinese company was approached, it refused. The plaintiff then applied to a court in Dalian, which certified a question to the Supreme People's Court (SPC). The SPC issued a letter in June 1995 laying out the distinction between legal reciprocity and factual reciprocity, and stating that China follows factual reciprocity: it will look at whether there are any previous cases which have used the principal of reciprocity. (This begs the question of how reciprocity can ever begin if it can only begin when it has already started …)

    The one successful effort involved an Italian company that had bought assets of a bankrupt company, also Italian, which included a porcelain company based in Hainan. In 1999, a court in Italy made a certification that the Hainan company was among the assets that had been purchased; the applicant then tried to obtain control of this company and was refused. It next applied to the Foshan intermediate people's court to enforce the Italian bankruptcy judgment. The court agreed to enforce on the basis that there is an existing bilateral agreement between China and Italy.

    China does, of course, have bilateral treaties with other countries, none of which have yet given rise to successful enforcements, and Chen cautions against reading too much into the result of the Italian case. There is, therefore, clearly not enough evidence that enforcement of a foreign court judgment can be relied on. Realistically, there is no choice in mainland China but to go back and start your action all over again (unlike in Hong Kong, where it is possible to sue on the original judgment and treat it as a debt).

    “In reality you can always sue on the judgment, but effectively you have to re-litigate the whole thing,” says DLA Piper Shanghai office managing partner Roy Chan.

    The ideal approach is to deal with the problem before it happens, by thorough due diligence focusing on finding out where a company's assets are located and taking note of those that are in a jurisdiction which is likely to be more amenable to the enforcement of a foreign judgment, such as Hong Kong or Singapore. If a company has not been fortunate enough, or has not had the foresight, to be able to do this before a dispute arises, it will need to trace and target enforceable assets wherever else it can. Chan points out the need to be creative.

    “[In one case] we were able to locate some off shore assets of Chinese companies and managed to enforce the award in an overseas jurisdiction accordingly,” he says. “You need to find some clever ways of doing it.”


Blame the economy again
The global economic downturn is adding to the problem of enforcing court judgments in China. In December 2008, when the calamity was still young, the PRC Supreme People's Court (SPC) issued a draft policy opinion asking courts all levels to “order such compulsory enforcement measures as seizure, impounding or freezing assets of companies prudently”, “to make effort to mediate disputes” and “promptly offer judiciary support to help enterprises in operational difficulties in view of economic crisis”. The opinion was finalised and came into effect on May 25 2009 as the Several Opinions on Properly Handling Current Enforcement in Response to the International Financial Crisis (最高人民法院关于应对国际金融危机做好当前执行工作的若干意见).

    “The Supreme People's Court … demands the cautious application of asset preservation orders and encourages enforcement settlement when dealing with enforcement cases concerning enterprises which are temporarily short of capital but have sound business prospects,” explains Mia Qu, a partner of King & Wood.

    In a news briefing on October 13, Yu Lingyu, the chief of the executive bureau of the SPC, discussed the recent push to clear up a backlog of enforcement cases (in which the people's courts are said to have dealt with over 330,000 financial cases with a value of up to Rmb343 billion (US$50 billion)). Yu said one of the key points to this work was to focus on cases involving the government or army. “In regard to cases related to special subjects such as government departments, the people's courts should handle such case impartially according to laws and regulations,” he was quoted as saying.

    Foreign parties may have their doubts about the effectiveness of this clearing-up work. According to Chan, the impact of the SPC's Several Opinions could be to protect domestic enterprises, particularly state-owned companies, from efficient and strict enforcement of judgments (or arbitral awards) against them by foreign parties.

    “There are concerns that such policy creates injustice and unfairness in the treatment between foreign and domestic entities,” he says.

    There has been at least one positive development: although it may be tough to obtain damages from struggling or state-owned companies, the Court appears keen to ensure enforcement of judgments against those with plenty of funds. To that end, says Qu, the SPC has issued draft rules for comment, entitled Several Provisions of Supreme People's Court on Restricting High Consumption of Respondents (关于限制被执行人高消费的若干规定（征求意见稿), which aim to impose restrictions on excessive consumption of luxury goods by respondents in enforcement cases. 

Hope found in arbitration
Overall, the picture seems quite bleak, but there is a ray of hope.

    “The first option is always to try and arrange for arbitration for any disputes,” says Chen.

    Lawyers say they have noticed a tendency towards the use of arbitration, and also an encouraging trend in the courts when dealing with awards.

    “We are seeing an increased attention to the application for recognising and enforcing foreign arbitral awards,” says Jones Day partner Benjamin Bai. And according to Allen & Overy dispute resolution consultant Fai Hung Cheung, there has been a “sharp rise in the use of arbitration in Asia for financial disputes” compared with what happened in the previous financial downturns (in 1997 and 2003). Cheung cites two reasons for this: arbitration awards have much wider cross-border recognition than judgments, and arbitration proceedings have an intrinsically private nature.

    “They attract much lower reputational risks for parties to arbitration, which is what our clients like about arbitration,” he says.

    “They seem to provide more predictability for parties to arbitration than litigation,” adds Bai. Between 2002 and 2006, almost 80% of the 74 applications for foreign arbitral awards were recognised and enforced in China.

    “Economic growth in China has given rise to the number of international disputes involving Chinese parties, as a result, driving demand for dispute resolution both in China and Hong Kong,” Bai says.

    Although most companies have little difficulty in getting an award made by a Chinese arbitral institution enforced in the Chinese courts, the situation is very different when it comes to awards made by a foreign institution sitting in China. There has been uncertainty and heated debate for a long time as to whether or not the PRC courts will enforce an award granted by a foreign arbitration tribunal or body which is sitting in China, and also as to whether such an award will be regarded as a domestic or foreign award.

    This makes the recent decision of a Ningbo court (detailed on page 8) particularly interesting. There, the court enforced an award issued by a Beijing-seated International Chamber of Commerce tribunal by labelling it as non-domestic under the New York Convention. But Chan says that the Ningbo decision has not done enough to significantly change the situation. There is still uncertainty as the Supreme People's Court has not a judicial interpretation on the issue (which would effectively have the force of law) since the decision by the Ningbo Intermediate People's Court. In a case where a lower court intends to deny the enforcement of an award, a 1995 directive, the Circular of the Supreme People's Court on Issues in the People's Courts' Handling of Foreign-related Arbitrations and Foreign Arbitrations (最高人民法院关于人民法院处理与涉外仲裁及外国仲裁事项有关问题的通知) says the lower court must first consult with the SPC.

    “This was useful to ensure that the local courts were meeting their commitments under the New York Convention,” says Chan.

    But in the Ningbo case, the lower court reached a positive decision and so did not need to go back to the SPC. Top judges have therefore not been officially consulted and, according to Chan, have confirmed that they are not taking any particular stance on the matter, and do not intend to in the immediate future.

    “As far as we know, there is not an intention at the moment for the SPC to issue an interpretation on this point,” Chan says.

    Despite this uncertainty regarding some foreign arbitral institutions, arbitration remains a very popular and reliable choice for foreign companies. Lawyers have built up considerable experience dealing with arbitral awards in China and say the general picture is positive in terms of enforcement. They also point to the generous time period allowed for submission of an application for enforcement of an arbitral award. This was extended to two years by Article 215 of the revised Civil Procedure Law, which came into force on April 1 2008.

    Arbitration is of course, not the only means of alternative dispute resolution (ADR). Mediation has long been popular in China, and mediation agreements concluded during arbitration, administrative mediation, community mediation, commercial mediation, industrial mediation or other forms of ADR can be enforced by the courts once they have affirmed the validity of the agreements (see the SPC's Several Opinions on Improving the Dispute Resolution Mechanism and Linking Litigation and ADR)

    Reviewing the options, it is clear that opting for litigation is far from ideal. Going to court in China presents a range of unknowns for foreign parties. Using the more familiar system at home may result in a favourable judgment, but enforcing that judgment in China to obtain the money owed will be extremely challenging, despite some interesting recent developments. Until some recognised success is achieved by a foreign party in China, most companies will want to use arbitration in China as their first choice. As PRC arbitral institutions continue to become more reliable, the privacy, speed and enforceability of Chinese arbitration will probably far outweigh any concerns related to the need for express agreements and doubts over the status of foreign institutions.