Arbitration in China – Recent Developments  attorney in shanghai china
Use of Arbitration in China Continues to Grow 
During the last two decades, the number of arbitrations in Mainland China (the Mainland), including arbitrations involving foreign entities investing into the Mainland, has increased dramatically.  China International Economic and
Trade Arbitration Commission (CIETAC) administered just 37 arbitrations in 1985, but this number increased to 981 by 2006.  The growth continued in 2007 when CIETAC administered 1,118 arbitrations and remained arguably the busiest
arbitral institution in the world.  CIETAC is currently reviewing its panels of arbitrators, and the expectation is that the panels will be expanded and broadened, and will include more foreign arbitrators.  The number of arbitrations
administered by the Hong Kong International Arbitration Centre also continues to grow.  Many of these arbitrations arise from transactions in the Mainland.

The following information contains important updates relating to: 
*  Extension of the limitation period for enforcement in the Mainland
*  Implications of a new arrangement between Macau and Mainland China
*  Implications for Taiwan

Extension of Limitation Period for Enforcement

Currently, under the Mainland's Civil Procedure Law, a party that wishes to enforce a judgment or arbitral award faces a relatively tight time limit. When the parties to an arbitration are corporate entities, the limitation period for enforcing the
arbitral award is six months from the date specified for performance (e.g., payment).  When the parties are individuals, the time limit is one year.

In order to apply for enforcement of an award, an applicant must submit to the Mainland court an application form in Chinese, the award and evidence showing the other party's address and property.  Any documents not in Chinese must
be translated into Chinese, and any documents created outside the Mainland must be notarized by a notary public and legalized by the Chinese embassy or consulate in the country where they were created.  While six months or one year
may not appear unduly short, the time pressure can be considerable when the enforcing party is slow to start the process, perhaps because it is not initially aware of the time limit.  attorney in shanghai china

It is worth noting that this short limitation period is not aimed specifically at foreign arbitral awards and applies equally to Mainland judgments and awards.  However, it may be more difficult for a foreign party that is unfamiliar with the process and the limitation period to comply.  If the application is not filed on time, the enforcing party will be deemed to have waived its right to file the application, and the court will not accept a late application.

Relief has now arrived in the form of a new Civil Procedure Law, which comes into force on April 1, 2008.  It provides a two-year time limit for the submission of an application for enforcement.  This new limit will apply across the board – the artificial distinction between individuals and corporate entities has been removed.  The new provision represents a major improvement and may perhaps be seen as reflecting a greater responsiveness of the Supreme People's Court to users' needs.
Over the last few years, the Supreme People's Court has been taking steps to improve judicial enforcement of arbitral awards and has issued "Interpretations" that effectively direct lower courts to take the enforcement of arbitral awards
seriously.  Actual enforcement in cash terms remains more problematic.  "Guangxi" or connections with local authorities in the place where enforcement is sought can still have a significant impact on the chances of successful enforcement. 

Partial enforcement is often the most that can be achieved.  This issue is not exclusive to foreign arbitral awards – similar issues are faced when enforcing domestic judgments or awards in the Mainland.

Broader Implications of a New Arrangement Between Macau and Mainland

China for Reciprocal Recognition and Enforcement of Arbitral Awards

China, along with approximately 140 other sovereign states, is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention).  However, the New York Convention does not apply between the Mainland and Hong Kong or Macau, given that Hong Kong and Macau each reverted to Chinese sovereignty in the late 1990s and therefore do not qualify as foreign states.

Trade between Macau and the Mainland increased dramatically in the late 1990s, and that increase has continued following the handover of sovereignty of Macau on December 20, 1999.  Macau itself has changed from a quiet backwater into a thriving casino enclave where the amounts gambled on each table exceed those in Las Vegas many times over.

On October 30, 2007, the Arrangement between the Mainland and Macau on Reciprocal Recognition and Enforcement of Arbitral Awards (Macau Arrangement) was signed; it came into force on January 1, 2008.  Although there have been
few commercial arbitrations in Macau, the Macau Arrangement is significant in terms of allowing Mainland companies to enforce Mainland awards against Macau companies in Macau.  It is also significant in demonstrating that the Supreme
People's Court is becoming more sophisticated in its understanding of and approach to arbitration.

The Macau Arrangement is similar to the Arrangement for Mutual Enforcement of Arbitral Awards Between the Mainland and Hong Kong (Hong Kong Arrangement) signed in June, 1999, and implemented on February 2, 2000.  The Hong Kong Arrangement has broadly been viewed as a success.  A comparison of the Macau Arrangement with the Hong Kong Arrangement is instructive.

Enforcement but not Recognition

Initially, concerns were expressed that the Hong Kong Arrangement appeared to provide only for the mutual enforcement of awards and not for their mutual recognition.  Enforcement obliges the losing party to carry out what was
ordered in the award.  Recognition is more limited but bars litigation of the same matters disposed of in the arbitration.  In practice, the failure of the Hong Kong Arrangement to provide for recognition of awards has not caused significant
problems, or, if it has, they have not been widely publicized.  Nevertheless, the fact that the Macau Arrangement provides for the "reciprocal recognition and enforcement of arbitral awards" represents an improvement over the Hong
Kong Arrangement.

Refusal to Enforce on Grounds of Social and Public Interests

The Hong Kong Arrangement provides that:

"A court of the Mainland may refuse to enforce the award if it considers that the enforcement of such award in the Mainland is contrary to the social and public interests of the Mainland.  A court of the HKSAR may refuse to enforce the award if it considers that the enforcement of such award in the HKSAR violates the public policy of the HKSAR."
The concept of "social and public interests" in the Mainland is broad and ill defined.  It could be used to refuse enforcement of an award because of the social or economic consequences that would follow if a company that was a significant employer were placed in financial difficulty.  By contrast, the "public policy" ground for refusing enforcement in Hong Kong has been narrowly defined by the Hong Kong courts.  For example, in the leading case of Hebei Import & Export Corp. v Polytek Engineering Co. Ltd. No. 2, a Permanent Judge of Hong Kong's Court of Final Appeal commented:
"…courts should recognise the validity of decisions of foreign arbitral tribunals as a matter of comity, and give effect to them, unless to do so would violate the most basic notions of morality and justice."
To summarize, in theory the Hong Kong Arrangement does not provide genuine reciprocity between Hong Kong and the Mainland given that "public policy" in Hong Kong is narrower than "social and public interests" in the Mainland.  

The Macau Arrangement also allows Mainland courts to refuse to enforce a Macau award on the ground that the award is against the "social and public interests of the Mainland".  However, the general view is that the Hong Kong Arrangement has worked relatively well in practice, and the hope is that the Macau Arrangement will do likewise.

Limitation of Scope to Civil and Commercial Awards
On ratifying the New York Convention, China applied the commercial reservation, thereby making clear that it would enforce only foreign commercial awards.  The Hong Kong Arrangement is silent on this issue, referring only to "arbitral awards," and there have been calls for its scope to be clarified.  Article 1 of the Macau Arrangement makes clear that it applies to "civil and commercial arbitral awards."

Application of the Macau Arrangement to Documents of Reconciliation

Whereas the Hong Kong Arrangement refers only to an arbitral award, the Macau Arrangement refers to an arbitral award or document of reconciliation.  This is particularly significant.  Arbitration in the Mainland, including arbitration
under the auspices of CIETAC, is unusual in the degree of emphasis and encouragement placed on achieving a conciliated/mediated settlement.  Indeed, article 40 of the CIETAC Arbitration Rules provides:

"1. Where the parties have reached a settlement agreement by themselves through negotiation or conciliation without involving the CIETAC, either party may, based on an arbitration agreement concluded between them that provides for arbitration by the CIETAC and the settlement agreement, request the CIETAC to constitute an arbitral tribunal to render an arbitral award in accordance with the terms of the settlement agreement...
2. Where both parties have the desire for conciliation or one party so desires and the other party agrees when approached by the arbitral tribunal, the arbitral tribunal may conciliate the case during the course of the arbitration proceedings.
3. The arbitral tribunal may conciliate the case in the manner it considers appropriate.
…
6. Where settlement is reached through conciliation by the arbitral tribunal, the parties shall sign a written settlement agreement.  Unless otherwise agreed by the parties, the arbitral tribunal will close the case and render an arbitral award in accordance with the terms of the settlement agreement."
Likewise, the Mainland's Arbitration Law contains provisions specifically aimed at achieving a conciliated/mediated settlement.  
An English translation available on CIETAC's Web site states:
"Article 51 The arbitration tribunal may reconciliate [sic] a case before passing the award. Whereas the parties concerned accept the reconciliation effort of their own accord, the arbitration tribunal may conduct the reconciliation. Should the reconciliation fail, the arbitration tribunal shall pass the ruling in time.
Whereas an agreement is reached through reconciliation, the arbitration tribunal shall compile the reconciliation document or make an award based on the results of the agreement. The document of reconciliation and the arbitral award are equally binding legally.
Article 52 The document of reconciliation shall specify the arbitration claims and the results of the agreement between the parties concerned. The document of reconciliation shall be signed by the arbitrator and affixed with the seal of the arbitration commission before being delivered to the parties concerned. 
The document of reconciliation becomes legally binding immediately upon [being] received by [the] parties concerned.
If any party concerned has gone back on his word after receiving the document of reconciliation, the arbitration tribunal shall make a timely ruling."

As can be seen from the above, Mainland law provides for a "document of reconciliation" that is different from a consent award.  Many Mainland arbitrations (probably a majority) end in settlement.  The fact that the Macau Arrangement covers "documents of reconciliation" as well as awards greatly increases its scope.

 Implications for Taiwan

Although political tensions between the Mainland and Taiwan remain, their trade ties are becoming ever stronger.  Now that the Hong Kong Arrangement and the Macau Arrangement are in place, this begs the question whether an arrangement between the Mainland and Taiwan might be agreed upon.

In 1992, Taiwan's Legislative Yuan passed legislation authorizing Taiwanese courts to recognize and enforce Mainland court judgments and arbitral awards.  In 1998, China's Supreme People's Court reciprocated in terms of permitting recognition and enforcement of Taiwanese arbitral awards.  In practice both the Mainland's courts and Taiwan's courts have been enforcing arbitral awards made in the other's jurisdiction.  The process is not completely reliable.  However, it seems unlikely that the Mainland and Taiwan will enter into a formal arrangement similar to those considered above unless and until the political climate changes dramatically. attorney in shanghai china

Conclusion
A host of new laws are being introduced in the Mainland and it is clear that the Supreme People's Court is becoming more sophisticated in its understanding of arbitration and more responsive to users' needs.  It is reassuring to see
movement in the right direction in terms of enforcement of arbitral awards.

For Further Information
In addition to the points summarized in this bulletin, there are other important aspects of arbitration in China to be aware of, including a lack of clarity as to the status/recognition of non-Chinese arbitral institutions such as the International Chamber of Commerce.  For assistance with your dispute resolution needs relating to China, please contact:

tel: 18721500024 attorney in shanghai china