Many people who are victorious in arbitration do not receive the awards that have been granted to them, but are faced with difficulties in enforcement. Arbitration, by its nature, is voluntary rather than mandatory. Therefore, when one party fails to comply with an arbitration award, the other party may be forced to resort to the courts.
Petitioning for enforcement
China is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention. In signing the convention, China undertook to honour arbitral awards made in the other signatory countries.
According to the rules of the New York Convention, the procedure for the recognition and enforcement of arbitral awards is based upon the law of the country which has been petitioned. Thus, in petitioning for the enforcement of an arbitral award in a Chinese court, PRC procedural law will apply. Court procedure for the recognition and enforcement of foreign arbitral awards in contractual and non-contractual commercial disputes both inside and outside China is based on identical foundations in the New York Convention. Similarly, provisions for the enforcement and collection of arbitral awards are also based on identical criteria.
The principal procedural law governing the recognition and enforcement of arbitral awards in China can be found in the PRC Civil Procedure Law. According to article 267 of this law, PRC courts must recognize and enforce settlements reached by foreign arbitration committees. In order for a foreign arbitral award to be recognized and enforced, a claimant should directly apply to a mid-level people’s court in the place of domicile of the party against which enforcement is sought, or where its assets are located. The relevant court should then handle the case in accordance with the treaties that China has concluded or acceded to, and in accordance with mutual principles.
After a court has received a petition for enforcement, it will examine the arbitral award. If it is found that the conditions for the execution of the award are not met, this will be reported to a higher people’s court or to the Supreme People’s Court. Upon receiving the higher court’s confirmation, the court of first instance will declare the petition rejected. If, however, the higher court declares that the arbitral award complies with the conditions for its execution, this will be sufficient basis for the enforcement to go ahead.
However, the party which is petitioning for enforcement should be careful to ensure that the enforcement of the award occurs within the two-year limit stated in the amendments made to the PRC Civil Procedure Law in 2007. This two-year time limit is calculated from the last day of the performance period set forth in the arbitral award, or from the first day the arbitral award comes into effect. Failure to petition within this time is considered as giving up the right to appeal to the courts for enforcement.
Examination of the enforcement petition
The criteria according to which the PRC courts handle arbitral awards can be found primarily in the relevant clauses of the Several Opinions on the Execution Work of People’s Courts Interpretations, issued by the Supreme People’s Court. According to these interpretations, a court may accept a petition for the enforcement of an arbitral award if it meets the following conditions:
- The arbitral award must have come into effect before the petition or transfer of enforcement;
- The petitioner for enforcement must be the party confirmed in the award as the rights owner, or its legal successor;
- The petitioner must submit the application within the appropriate legal time limit;
- The content of the petition for enforcement, the enforcement objectives and the entity against which enforcement is to be carried out must be clearly and specifically identified;
- The obligor has not carried out its obligations within the time limit stipulated in the award;
- The court hearing the case must have jurisdiction to hear the case. Where an application complies with the above conditions, the court will accept the case within seven days of the date of application.
Any case that does not comply with the conditions will be dismissed by the court within seven days and will not be heard.
Further clarification of the fourth item in the above list may be appropriate. The court requires that the content of the petition for enforcement of an arbitral award, and the objectives of enforcement, must be clear and definite.
Take the following case as an example. A Chinese construction company, and an international purchaser, entered into a construction contract. When the project was half built, the builder halted all construction work. Thus, a dispute between the parties arose. The contract stipulated that arbitration proceedings would take place in the United Kingdom. The purchaser required that the builder cooperate in completing the job, and received a favourable judgment from the UK arbitration tribunal. While this judgment was recognized in China, no power of enforcement was ever granted. This was because the builder claimed that the award lacked clear and definite content, and thus refused to cooperate. In the face of this, the purchaser was powerless. Ultimately, the parties endedup settling out of court.
A similar situation also occurred in a case handled by the China International Economic and Trade Arbitration Commission (CIETAC). In a contractual dispute between a Chinese import/export company and an international purchaser, CIETAC ruled that the Chinese import/export company should continue to perform the contract. Subsequently, the intermediate people’s court in Hangzhou, and the Zhejiang Province Higher People’s Court, rejected the petition for enforcement on the grounds that the arbitral award did not clearly stipulate the obligations on the Chinese party, and was therefore unenforceable.
In its ruling, the Zhejiang Province Higher People’s Court clarified the grounds for rejecting the purchaser’s petition by stating that the award failed to define or clarify specific details pertaining to the continued performance of the contract. In a situation where one of the parties refused to perform its duties set forth in the contract, the court stated that it would “not be able to force one side to continue the performance of its duties.” Thus it can be seen that for a contract to be enforceable requires detailed, clear drafting, and requires obligations are lawful, detailed, definite and able to be performed. In practice, it is very difficult to obtain the support of a court when petitioning for the enforcement of a ruling, regardless of whether or not that ruling is made by an arbitration panel within or outside China.
Explanation and measures to be taken
In view of the above examples, we recommend that before the start of arbitration proceedings, a comprehensive and rational enforcement strategy should be formulated. Otherwise it may be very difficult to obtain the desired result.
Furthermore, in order to guarantee that each claim in an arbitration request can be smoothly made and enforced, it may be necessary for the claimant to apply for the preservation of assets. In China, the system for the preservation of assets during arbitration is not as complete as that for the preservation of assets in the litigation process. (For example, there is no system to ensure the preservation of assets before or during arbitration). However, possessing a deep knowledge of the strong and weak points of the arbitration system will at least help to avoid delays and unnecessary errors.
Charles Pan is a consultant in the Shanghai office of Yao Liang Law Offices. He specializes in international commercial dispute resolution and was formerly a division chief of the CIETAC Shanghai secretariat. For enquiries relating to dispute resolution, please contact him on +86 21 51150338 or by email at charles.pan@yaolianglaw.com
