Chinese investment revolution

Enforcing arbitral awards in China just got easier, following a court ruling on public policy

A London company’s 11-year battle to enforce an arbitral award in China has just been won. The award, rendered by the Sugar Association of London in 2001, was enforced with a settlement agreement between state-owned China National Sugar & Alcohol Group Corporation and ED&F Man (Hong Kong), a subsidiary of the UK commodities powerhouse.

For those interested in the recognition and enforcement of foreign arbitral awards in China there is much to be learned from this legal battle.

When ED&F Man applied for recognition and enforcement of the award in China, both the Beijing First Intermediate Court and the Beijing High Court held that the futures contract between China Sugar and ED&F Man violated Chinese law and contradicted Chinese public policies. On these grounds, the application was to be rejected.

Chinese companies, when dealing with unfavourable awards, often cite public policy as a ‘last resort’ defence. Many Chinese courts believed that violation of Chinese law should be deemed a violation of Chinese public policy. However, the Chinese Supreme People’s Court, replying to a request for instruction, ruled for recognition of this award and pointed out that violation of the compulsory provisions of Chinese laws did not necessarily equal violation of Chinese public policies.

The Supreme People’s Court was widely acclaimed by the international arbitration community for this, perhaps the most significant contribution of the case to Chinese judicial practice. As a result, to the delight of foreign companies, Chinese courts are now more cautious in using ‘public policy’.

Another important lesson is that in Chinese judicial practice the applicant in enforcement proceedings is expected to provide information on the property of the person against whom enforcement is sought. If they cannot locate enforceable assets the court may refuse to take action. Foreign companies should be aware of this, as they often believe it is the courts’ job to locate enforceable property.

This case once ran into difficulty for that reason. In 2003 the Beijing First Intermediate Court suspended enforcement proceedings on the grounds that no enforceable property belonging to China Sugar could be located. In 2011 the same court reactivated enforcement proceedings because attorneys found these assets.

Finally, during enforcement proceedings, if a third party claims ownership or other substantive rights to the property it may raise an objection. Where the court rejects this the third party may file an objection to enforcement lawsuit, requesting the court to a) confirm its rights and b) suspend enforcement. The third party and the person against whom enforcement is sought shall be plaintiff and defendant respectively.

Foreign companies and their attorneys should familiarise themselves with this recently introduced procedure and make their preparations accordingly, failing which the court may rule in a third party’s favour, thus frustrating enforcement proceedings.