Ningbo court enforces China-seated foreign arbitral award

“Watch this space,” he said. “Where you have to arbitrate in China, if it becomes clear that you may arbitrate under the auspices of a foreign institution, this will be a significant new option for foreign parties.”

Many foreign parties are obliged by PRC law to arbitrate in China, or find themselves having to agree to do so as part of the contract negotiation process. But they are often concerned about using Chinese institutions which, although improving, have some shortcomings.

In the recent case, Duferco, a Switzerland-based steel producer and distributor, commenced an ICC arbitration against Ningbo City Handiwork Import & Export Co for breach of a sale and purchase contract. After adjudication by the ICC in Beijing according to the provisions of the contract, an award of just over US$230,000 was made against the Chinese company. Duferco then applied to the Ningbo Intermediate Court for recognition and enforcement of the award, but the respondent company complained that the conduct of ICC arbitration inside the China violates PRC laws.

The respondent apparently relied on Article 16 of the PRC Arbitration Law , which refers to using a “selected arbitration commission”. Most arbitration specialists take this to mean one of China's own arbitration commissions, such as the China International Economic and Trade Arbitration Commission (Cietac), the Beijing Arbitration Commission or the Shanghai Arbitration Commission.

The Ningbo court nevertheless passed judgment enforcing the ICC award, saying it did not consider it as a domestic award under Article I(1) of the New York Convention. This states: “[The Convention] shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.”

Lawyers and academics have labelled this reasoning as shaky at best. It relies on an interpretation that is open to debate, said Choong, and which is not well supported by the background work carried out during the drafting of the Convention.

It appears that the Ningbo court was attempting to follow a policy approved by the Supreme People's Court in an earlier case (Zueblin – see below) which stated that an ICC award is a non-domestic award even if the arbitration took place in China.

Establishing uncertainty
The unfortunate result for companies using the ICC in China is continued uncertainty. Lawyers including Pé advise companies to choose arbitration in Hong Kong, where possible, and to use a mainland institution otherwise.

“If you are compelled to have arbitration in mainland China, for the time being it's probably safer going for a reputable mainland institution like Cietac,” Pé said. “Although there may be some perceived shortcomings, you have a clearer picture of where you stand in terms of enforcement.”

Uncertainty over the status of ICC arbitrations conducted in China was seen in a similar case from 2006 involving German company Zueblin. It had used a standard ICC clause in its contract. After an award was granted by the Shanghai ICC, the Wuxi Intermediate Court (with the approval of the Supreme People's Court) eventually refused to enforce it, holding that the contract failed to name a specific arbitration institution as it referred only to arbitration rules and not a court and saying that the ICC award was an award “not considered as domestic” under the New York Convention.

“The concept of international commercial arbitration should be interpreted in a broad way. An arbitration is considered international if the arbitration agreement involves any international element,” wrote Renmin University law professor Doctor Zhao Xiuwen in a 2007 paper commenting on Zueblin.

Following Zueblin, the ICC subsequently issued a new model clause specifically applying to arbitration in mainland China which reads (with newly-added words marked in italics):

“All disputes arising out of or in connection with the present contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

It is thought that Duferco did not use this updated clause in its contract with Ningbo City Handiwork. Choong said, however, that although using the ICC China clause may offer added comfort, the issue is now of less concern following a September 2006 Supreme People's Court interpretation which partially relaxed the requirement of Article 16 of the Arbitration Law, saying it may not be necessary to specify an institution by name if can be inferred from the rules referred to in the arbitration clause. PT

[Click here to read more about the enforcement of awards and court judgments in China]