Applying New York Convention’s ‘public policy’ clause in China

By Zhang Guanglei and Chen Cheng, Jingtian & Gongcheng
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As the principal basis on which commercial entities apply for the recognition of foreign arbitral awards in China, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) specifies that where the recognition and enforcement of a foreign arbitral award would violate public policy in China, a Chinese court may rule not to recognize and enforce it.

Zhang Guanglei Jingtian & Gongcheng New York Convention
Zhang Guanglei
Partner
Jingtian & Gongcheng

Chinese law does not define the meaning of “public policy” clearly. In judicial practice, where other grounds exist for refusing to recognize and enforce an arbitral award, the court may not actively conduct a public policy review. Accordingly, there are relatively few adjudication rules for such issues, which the author argues deserve attention.

In general, public policy reviews do not touch upon substantive issues. In Reply [2008] Min Si Ta Zi No. 48, given to the Shanghai High Court, the Supreme Court held that as the assessment of the quality of the equipment in question fell within the rights of the arbitral tribunal, the court should not treat the fairness and reasonableness of the substantive arbitral findings as criteria for determining whether the recognition and enforcement of the arbitral award violated public policy in China.

Chen Cheng Jingtian & Gongcheng New York Convention
Chen Cheng
Lawyer
Jingtian & Gongcheng

In Case [2016] Hu 01 Xie Wai Ren No. 12, the First Intermediate People’s Court of Shanghai municipality held – in respect of the respondent’s claim that the liquidated damages were excessively high and thus violated the principal in Chinese law that the “purpose of liquidated damages is to compensate for actual losses” – that matters relating to liability for breach of contract were substantive matters, which the arbitral tribunal had the right to decide on.

Accordingly, it did not review such matters and found that recognition and enforcement of the arbitral award would not violate basic legal systems or harm fundamental public interests. In Case [2019] Zhe 04 Xie Wai Ren No. 2, the Jiaxing Intermediate Court likewise held that the argument by the respondent that the withholding of key evidence by the claimant resulted in an unjust award was not sufficient to constitute a violation of public policy in China.

In general, public policy involves the public interest. In Case [2014] Shen Zhong Fa She Wai Chu Zi No. 119, the respondent claimed that the applicant had used fraudulent means to induce it to execute an agreement, and if the arbitral award were recognized it would run counter to good faith, public order and good morals, and violate public policy in China.

The Shenzhen Intermediate Court held that the “public policy” clause of the New York Convention was applicable only when an arbitral award had a bearing on the basic systems and norms of a country’s laws, the basic principles of social and economic life, and the basic morals and ethics of society, etc., thereby affecting the overall interests of all members of society. This case did not involve all of these, and accordingly the clause was not applicable.

In Case [2016] Liao 02 Xie Wai Ren No. 2, the Dalian Intermediate Court held that even if the trademark in question were cancelled or transferred in accordance with the arbitral award, the only thing affected would be the economic interests of the respondent; and it did not violate basic legal systems or harm fundamental public interests. Accordingly, the respondent’s argument that the recognition and enforcement of the arbitral award would violate public policy in China was untenable.

Judicial sovereignty falls under the protection of public policy. In Case [2017] Jin 72 Xie Wai Ren No. 1, given to the Tianjin Maritime Court, the arbitration clause in question had already been found to be invalid in Civil Ruling [2017] Yue Min Xia Zhong No. 857, rendered by the Guangdong High Court. The Tianjin Maritime Court held that the recognition and enforcement of an arbitral award under the New York Convention implied a positive attitude of the court of the place of enforcement toward the existence and validity of the arbitration clause on which the award was based.

Where a Chinese court had already rendered a negative judgment on the validity of such arbitration clause, the recognition and enforcement of the award rendered on such arbitration clause would run counter to the national legal values of uniformity and consistency. Accordingly, national legal values and judicial judgment conclusions should not be excluded from the scope of what constitutes “public policy”. Accordingly, the Tianjin Maritime Court ruled not to recognize and enforce the arbitral award in question.

Violation of a mandatory provision of a Chinese law does not necessarily constitute a violation of public policy. In the cases covered by Reply [2001] Min Si Ta Zi No. 12, given to the Hainan High Court, and Reply [2003] Min Si Ta Zi No. 3, given to the Beijing High Court by the Supreme Court, the transactions in question violated mandatory provisions of Chinese laws, but the Supreme Court expressly replied that a violation of a mandatory provision of a Chinese law was not exactly equivalent to a violation of public policy in China. Accordingly, recognition and enforcement of the arbitral award should not be refused.

The rules established in the above-mentioned replies have been respected in subsequent judicial practice, for example: In Case [2018] Ji 24 Xie Wai Ren No. 163; Case [2016] Lu 11 Xie Wai Ren No. 1; Case [2017] Chuan 01 Xie Wai Ren No. 1; and Case [2014] Shen Zhong Fa She Wai Chu Zi No. 60. The transactions in question involved violations of mandatory provisions of Chinese laws on foreign exchange, import/export, etc., which led the respondents to claim that enforcement of the arbitral awards would violate public policy in China. However, all of the courts that accepted the cases held that violation of a mandatory provision of a Chinese law was not necessarily equivalent to a violation of public policy in China.

The special nature of a respondent does not necessarily violate public policy. In Case [2017] Yu 01 Xie Wai Ren No. 11, given to the Zhengzhou Intermediate People’s Court, the respondent claimed that it was a military goods company established pursuant to relevant state documents, and the purpose of its establishment was fine-tuning of the public policy of national security. Accordingly, recognition and enforcement of the relevant arbitral award would violate public policy.

The Zhengzhou Intermediate Court held that the parties had agreed to resolution by arbitration, the result of which was to be accepted by both parties. Although the respondent was a military goods company, which implied a certain special nature, its bearing of liability in accordance with the arbitral award would not necessarily lead to national security being compromised. The court ultimately ruled to recognize and enforce such arbitral award.

Zhang Guanglei is a partner and Chen Cheng is an associate at Jingtian & Gongcheng. Zhang is also an arbitrator of Hong Kong International Arbitration Centre

Zhang Guanglei Chen Cheng Jingtian & Gongcheng New York Convention

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