REUTERS | Nir Elias

Developments in international commercial arbitration involving Chinese parties

It has been well reported over the past few years that Asian arbitration centres are growing in popularity and are administering a larger share of arbitrations. This is reflected in the Singapore International Arbitration Centre’s (SIAC’s) annual report for 2016, published earlier this year. This report shows that in 2016, SIAC had its highest ever number of administered cases (343 new cases in 2016, a 27% increase on the 2015 figures), and administered its largest aggregate sum in dispute (of US$ 11.72 billion). The Hong Kong International Arbitration Centre’s (HKIAC) 2016 case statistics show a slight dip in total new cases (460 in 2016, as compared to 520 in 2015), but this is not significant enough to dispute the fact that the trend over the past five years or so has been towards improvement, growth and increased popularity of these centres (see, for example, the Queen Mary and White & Case 2015 International Arbitration Survey, which found that the most improved arbitral seat over the past five years was Singapore followed by Hong Kong, the most improved arbitral institution over the past five years was the HKIAC followed by the SIAC, and the five most preferred arbitral institutions are the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), HKIAC, SIAC and the Stockholm Chamber of Commerce (SCC)).

A further interesting fact to emerge from these figures relates to the growth in the number of Chinese parties involved in arbitration. In 2016, 76 new cases administered by SIAC involved Chinese parties or parties which are subsidiaries of a Chinese parent, whereas in 2015 this figure was 46. For both the HKIAC and SIAC, the second most common nationality among parties to arbitration is Chinese. Obviously this is a function of many factors, not least geography and language. However, it is clear that more arbitrations are happening globally which involve Chinese parties and that the Chinese market is seen as a growth area for international arbitral institutions. Moreover, the ICC, HKIAC and SIAC have all recently opened representative offices in the Shanghai Free Trade Zone. Indeed, over the past few years, our firm has seen a growth in the number of arbitration clauses being included in contracts involving Chinese parties. These often, but not exclusively, provide for arbitration under SIAC or HKIAC rules.

International arbitration involving Chinese parties is becoming more common. But is it becoming easier? China became a party to the New York Convention in 1987. However, for a long time there have been challenges associated with enforcing “foreign” arbitration awards in mainland China. Local protectionism has been identified as a stumbling block to enforcement. This is where a party seeking to enforce a foreign arbitration award against a party in mainland China may be thwarted by local judges’ attempts to placate or to avoid upsetting that Chinese party, if it is influential in that local area. There has also historically been a lack of clear guidance on the deadlines for local courts to report applications to enforce arbitration awards to the Higher People’s Court or Supreme People’s Court. This has led to applications remaining pending before local courts and never being decided.

Steps have been taken in recent years to mitigate these problems. For example, China’s Civil Procedure Law of 2013 now requires that the court must issue a written decision containing the reasoning for refusing to enforce an arbitral award. Moreover, if a court has not decided on an application for enforcement within six months, parties are now able to apply to a higher court for a decision. These mitigating steps and, perhaps, a greater understanding of arbitration in China more broadly, have resulted in increased rates of enforcement of foreign arbitration awards in mainland China. In a 2016 survey by King & Wood Mallesons, it was found that from 1994 to 2004 a mere 37% of all applications for enforcement were granted, whereas from 2005 to 2015, that number increased to 68% (and 86% in the period 2011 to 2015). The survey also revealed that 83% of SIAC awards, and 78% of HKIAC and ICC awards, were successfully enforced in China.

In another step forward in December 2016, the Nanjing Intermediate People’s Court enforced a China International Economic and Trade Arbitration Commission (CIETAC) Hong Kong Arbitration Centre award; the first time an award from this centre has been enforced in China (although in that case the respondent party specifically admitted it was bound by and had failed to comply with the terms of the award). It also appears that Chinese courts are becoming more willing to enforce awards issued by foreign arbitral institutions, even in circumstances where all parties to the arbitration are Chinese (a situation which would previously have been considered by the Chinese courts to be a “domestic” dispute which should not be arbitrated outside China and thus not capable of being enforced). In January 2017, the Supreme People’s Court issued an opinion holding that if two wholly owned foreign enterprises registered in a Chinese Free Trade Zone resolve their dispute through an arbitration conducted outside mainland China, the court will not find the arbitration agreement invalid for lack of a “foreign element”.

Whilst enforcement appears to be getting easier and Chinese courts appear to be becoming more arbitration friendly, questions still remain as to the extent to which parties do, in practice, receive payment of sums due under awards against Chinese parties. Pursuant to the Civil Procedure Law, execution measures are open to parties to arbitration which have had awards made in their favour, but only once the court has recognised and enforced the award. Thus, before a court has recognised and enforced the award, there is a risk of dissipation of assets. This risk is heightened by the fact that it can sometimes be difficult to trace ownership of assets. For example, local company registries can be administratively burdensome to access and can sometimes deny information in respect of assets to persons who do not themselves hold an ownership interest in the asset. There can also be language and cultural difficulties, for example in identifying accurate Chinese language company or individual names, or in circumstances where assets are transferred to parties’ family members or friends. However, parties can take comfort in the fact that the Chinese courts do provide some protection to parties seeking to execute arbitration awards once they have been enforced. The defendant in such proceedings is obliged to report to the court on its asset situation and the court is obliged to provide the report to the applicant. The court also has the right to carry out investigations on the report (on application by the applicant) and has the power to make its own enquiries as to the defendant’s financial affairs. Applicants can also seek orders for the freezing of bank accounts and other assets pending payment of an award.

In summary, Asian arbitration centres are clearly benefiting from the increased number of Chinese parties involved in international arbitration. Awareness of international arbitration as a legitimate means of dispute resolution is also growing within China and the Chinese courts appear to be steadily taking a more arbitration friendly stance. Enforcement is becoming easier and whilst challenges around execution of awards remain (and will likely do so for some time), there are means in place whereby foreign parties who have been successful in international arbitration proceedings against Chinese counterparties can seek to enhance the likelihood that their awards are, ultimately, paid.

Kirkland & Ellis Jonathan Newman

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