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Enforcement Of A Foreign Arbitral Award In China: Issues, Criticisms, And Practical Solutions

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ENFORCEMENT OF A FOREIGN ARBITRAL AWARD IN CHINA: ISSUES, CRITICISMS, AND PRACTICAL SOLUTIONS

1.) INTRODUCTION

The lack of enforcement of a foreign award in China is frequently pointed out in arbitrational issues . Similar to arbitration systems worldwide, the arbitration committee is not empowered to enforce the award. The step of enforcement are to be done via the courts. As a result, the prevailing party most often must apply to a court to have the award recognized and enforced. Foreign awards that are not paid voluntarily also may be filed with a court to compel enforcement. As China acceded to the New York Convention1958, awards are enforceable in other signatory countries on the basis of reciprocity. While in principle the same should apply in China, in practice, enforcement is problematic.

Almost one in four applications are denied , but anecdotal information implies the number may be much higher . It appears that enforcement is easier to secure in major cities such as Beijing, Shanghai, and Guangzhou, and smaller awards appear more likely to be enforced than larger ones. This fact is not surprising given that the primary reason for non-enforcement appears to be insolvency on the part of the Chinese party. China International Economic and Trade Arbitration Commission (CIETAC) and local commission awards are not enforceable in China under the New York Convention, but rather under Article 260 of China’s own Civil Procedure Law, which, much like the New York Convention, allows courts to refuse enforcement only for a limited number of procedural reasons.

The problem lies in the greater relative weight accorded by Chinese judges to foreign awards made by arbitral bodies outside China versus that given to foreign and foreign-related awards coming from within. While courts are required to receive approval from the Supreme People's Court prior to refusing to enforce a foreign arbitral award, courts have occasionally circumvented this requirement by employing delaying tactics when local interests are adversely affected by the arbitration rulings.

These acts commonly known as local protectionism are very effective in delaying the award and give ample time for the local party to transfer funds away from the its account, frequently claiming insolvency.

Enforcement in Chinese courts is complicated by the same factors that make parties unwilling to litigate disputes in these same courts; the very basis of the need of arbitration. Court officials often lack sufficient legal training and inadequate training has led to delays of more than one year in accepting or processing an application for arbitral enforcement. Local protectionism, the influence of party officials, lack of professional ethics, and inadequate authority may complicate enforcement.

2.) METHODOLOGY

Research materials are gathered predominantly from internet sources. I have been able to conduct in-depth interviews with various members of Chinese business associations in Perth . Many of them conduct businesses in both China and Australia. They are often prominent members of the Chinese community in Perth which facilitated the author in having informal talks with other transplanted Chinese on the challenges facing Australians in conducing business there. They have been able to provide many practical insights on the inner workings of various aspects of enforcement in China. Almost all of them, however, declined to the cited as many worry it might affect them negatively due to their expressed criticisms to certain governmental conducts throughout the interviews .

3.) ARBITRAL ISSUES PRIOR TO ENFORCEMENT

Even prior to enforcement an of an award, China’s arbitral system has received criticisms on its arbitral procedures itself . Foreign parties have questioned the fairness of CIETAC proceedings stemming from inadequate procedural and professional standards. Although empirical data is scant, critics cite the prevalence of ex parte communications, breaches of confidentiality and conflicts of interest,

asserting that these reflect a low level of institutional ethics and compromise

the quality of CIETAC awards. Parties may find that CIETAC proceedings more

closely resemble a business negotiation rather than an arbitration proceeding.

This is evident in CIETAC’s eagerness to settle cases prior to issuing awards,

and its rules against publishing dissenting opinions in cases where the

decision is not unanimous.

Foreign parties have also questioned Article 53 of CIETAC’s rules

requiring arbitrators to decide cases in accordance with “the principle of

fairness and reasonableness.” At other arbitration institutions, arbitrators

would employ this principle only if explicitly permitted to do so by the

parties. Otherwise, the arbitral panel should make its decision based on the

strict letter of the law governing the contract and the contract provisions.

According to interviewed sources, there are rampant absence of

substantive evidence rules, false testimony and evidence tampering are not

uncommon during arbitration, and CIETAC has no requirements that

documents be authenticated. Even though should attempts of authentication be made, it is common practice to purchase legal and authentic documents from corrupt officials of various agencies. There are also claims that local protectionism and corruption are pervasive, with foreign parties reporting that local officials are prone to falsify documents or refuse to provide evidence that might damage the case of a local company. This will be further looked into on the section dealing with local protectionism.

4.) RECOGNITION OF A FOREIGN AWARD IN CHINA

The recognition and enforcement of foreign arbitral awards in China is basically divided into three situations; First, in accordance with the New York Convention ; second, in accordance with bilateral conventions concluded by China, and third by the principle of reciprocity.

China kept two reservations as it joined the New York Convention, that is reciprocity

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