Enforcing arbitral awards: a guide

Enforcement of arbitral awards in China remains a problem, with regulation still incomplete and problems such as court delays and hiding of assets, said experts including Haifeng Li of Global Law Office and Lijun Cao of Zhong Lun Law Firm.

They were speaking at the CIETAC session during Hong Kong Arbitration Week on Wednesday. Both lawyers offered advice on how to manoeuvre past these hurdles, while judge Yuan Zhang, deputy chief of the enforcement bureau of the Supreme People's Court (SPC), listed some of the conditions companies need to fulfil to get enforcement moving.

In his keynote speech, Zhang described the courts' practice and laws relevant to the recognition of arbitral awards. With respect to foreign awards: “Neither SPC guidelines nor PRC legislation distinguish mainland and foreign-related cases in terms of enforcement,” he said.

He listed four conditions that need to be met in order to enforce awards:

1. the debtor has not fulfilled his arbitral obligations;
2. the creditor must apply for enforcement, as the court cannot take the initiative to enforce the award;
3. the application must comply with procedures and formalities set by the SPC's 1998 Interpretation of the Regulation on the Enforcement of Judgments; and
4. the applicant must only apply to the court that has the jurisdiction to carry out the enforcement.

Problems and solutions

The real complications, however, lie beyond the courts. Thomas So of Mayer Brown JSM highlighted several practical issues regarding both PRC and international enforcement of awards:

• local protectionism (when going through an intermediate court where the debtor has assets, especially when the debtor is a big enterprise that provides significant tax revenue to the area, local courts can sometimes have difficulties in making decisions);
• delays (it is crucial to have all the papers filed and foreign awards translated into Chinese and authenticated);
• inconsistent decisions (as shown by the courts at the lower levels and those in provinces where they are unfamiliar with foreign cases); and
• costs (which include an initial Rmb500 application for recognition and enforcement, which is followed by a scale fee, as well as a property preservation charge if necessary. These expenses can be substantial).

One key challenge stated by Haifeng Li of Global Law Office is finding the debtor's assets. “It is very difficult because, in China, there is no uniform property registration system, meaning it is not easy for the party or court to find clues to the debtor's properties within the country or around the world,” he said. Added to this is the fact that laws only require the debtor to voluntarily report information on their assets, while prohibiting the creditor from checking the debtor's books. This makes it difficult to find out whether the debtor has hidden or transferred assets elsewhere.

A partial solution, said Li, is to apply for property preservation before or during the arbitration proceedings. However, this is only available to parties arbitrating within the mainland. “My suggestion is that, if you are entering into a transaction with an SME, you should not choose arbitration outside the country,” he said. “Choosing Chinese arbitration or litigation gives you the benefit of property preservation before taking any legal action,” he added.

Lijun Cao of Zhong Lun provided some examples. ED&F Man, a British company, had entered into a contract with state-owned China Sugar in 1994. Following a dispute, ED&F Man was granted an arbitral award and awarded US$30 million in 2001. China Sugar challenged the award, claiming violation of public policy, to which the Beijing No 1 Intermediate People's Court agreed, but the SPC overturned the decision and recognised the award. Execution seemed impossible as China Sugar had been telling the court for years that it was not doing well financially and an execution of its assets would lead to thousands of layoffs. An investigation revealed that the SOE had multiple properties, stocks in many joint ventures and shares in other companies.

China Sugar eventually settled with ED&F Man in 2013, 12 years after the arbitral award.

“The lesson here is that although the SPC may be friendly to arbitration, the lower courts may not,” said Cao. “You also need to pay special attention when SOEs are involved.”

Cao spoke of another instance where a European company brought a case against what he described as a large corporation in Zhejiang province. The award was granted in May this year, but documents such as the company registration file and certification of legal representative had to be translated into Chinese by a firm designated or recognised by the Zhejiang Higher People's Court. “All courts have different standards for document requirements, and the Zhejiang court put us in a very frustrating situation as it didn't accept our application even when we provided everything,” Cao said. “Some provinces are just not familiar with foreign-related awards.”

On the other hand, overseas enforcement of mainland awards has not been a problem. “There isn't much bad news of Chinese award enforcement in Hong Kong,” said Edmund Wan of King & Wood Mallesons, adding that the process is straightforward. Nigel Li of Lee and Li said that Taiwan, although not a party to the New York Convention, incorporates all the major provisions in the island's Arbitration Act and recognises all awards from the body's members, including those from the mainland. Simon Greenberg of Clifford Chance said there have been 11 reports of attempts to enforce mainland judgments in Europe, seven of which were carried out. The reasons for the other four (two in Germany, one in France and another in Italy) not going through had mostly to do with clause and little with CIETAC or mainland awards, he said.

Ning Fei of Hui Zhong Law Firm suggested talking to the other party as well.

“It is advisable to pursue mediation and arbitration together,” he said, adding that an increasing number of people are accepting mediation. “You should not use any information, concern or disagreement from the mediation or its result as evidence to issue the final award if the mediation fails." Fei warned, however, that mainland arbitration practitioners do not always recognise this principle.


By Katherine Jo