PRC court clarifies enforcement of Mainland award made by foreign institution

On 6 August 2020, Guangzhou Intermediate People’s Court made a civil ruling that an arbitral award made in Guangzhou by the ICC should be regarded as a Chinese arbitral award with a foreign element. It follows that the award should be enforced under Article 273 of the PRC Civil Procedure Law, rather than under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

(2015) Sui Zhong Min Chu Si Zi No. 62 or (2015)穗中法民四初字第62号

Background

This case concerned a supply contract between Brentwood Industries (US) as the seller, Guangzhou Faanlong Machinery Engineering Co Ltd (PRC) as the buyer, and Guangzhou Zhengqi Trading Co Ltd (PRC) as the agent of the buyer. Article 16 of the contract provided that “any dispute arising from or in connection with this contract shall be settled through friendly negotiation. If no settlement can be reached through negotiation, it shall be submitted to ICC for arbitration in the place where the project is located in accordance with international convention and practice” (emphasis added). Article 17 provided that “the applicable law of this contract is PRC law”. In this case, the project was located in Guangzhou, Mainland China.

On 16 December 2010, Brentwood brought a claim against Faanlong and others (Respondents) in the Court. The Court declined to hear the case, as there was an arbitration agreement between the parties. On 9 May 2011, Brentwood applied to the Court to invalidate the arbitration clause. Brentwood was not successful. Subsequent to the Court’s ruling confirming the validity of the arbitration clause, on 31 August 2012, Brentwood commenced ICC arbitration against the Respondents. The arbitration was administered by the ICC through its Secretariat Asia Office based in Hong Kong. On 17 March 2014, the sole arbitrator made a final award in favour of Brentwood. On 13 April 2015, Brentwood applied to the Court for recognition and enforcement of the award.

The Court’s ruling on enforcement

Brentwood argued that judicial practice in Mainland China is that the nationality of the arbitral award is determined by the place where the arbitration institution is located. Accordingly, as the award was made by the ICC, which is headquartered in Paris, it should be recognised and enforced in Mainland China in accordance with the New York Convention. Alternatively, if the Court considered that the award was made by the ICC Secretariat Asia Office based in Hong Kong, the award is a Hong Kong arbitral award and should be recognised and enforced in accordance with the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region (Mainland and Hong Kong Mutual Arrangement).

The Respondents argued that (1) the award was not “made in the territory of a State other than the State where the recognition and enforcement of such awards are sought “ (Article 1 of the New York Convention), and thus should not be recognised and enforced under the New York Convention; (2) ICC was not an arbitration institution stipulated in the PRC Arbitration Law and it was not legal for it to administer arbitration in Mainland China; and (3) the validity of the arbitration clause and the enforceability of the arbitral award were two separate legal issues under different rules. The fact that the arbitration clause was held valid did not necessarily suggest that the award made pursuant to it was enforceable.

The Court ruled that the award, made in Guangzhou by the ICC, should be regarded as a foreign-related arbitral award made in Mainland China. Enforcement of the award should be brought under Article 273 of the PRC Civil Procedure Law. It rejected Brentwood’s arguments for recognition and enforcement under the New York Convention or the Mainland and Hong Kong Mutual Arrangement and directed Brentwood to re-apply for enforcement under the PRC Civil Procedure Law.

Comment

It is a long-standing question whether foreign arbitration institutions can administer arbitration seated in Mainland China under the current PRC Arbitration Law regime. The traditional view was no, because “arbitration commission” in the PRC Arbitration Law meant Chinese arbitration institutions only. However, with the increase in commercial dealings between Chinese and foreign parties, the strict interpretation of the law no longer sits well with the demands of commercial parties. China’s Supreme People’s Court has recently, in several cases and judicial interpretations, confirmed the validity of clauses providing for arbitrations administered by foreign institutions seated in Mainland China. This latest decision made by the Guangzhou Court took a further step,  supporting that the arbitral award made in arbitration seated in Mainland China and administered by a foreign arbitration institution can be enforced under PRC Civil Procedure Law. However, as Mainland China is not a case law jurisdiction, this latest decision by Guangzhou Court, even though it should have been vetted by the Supreme People’s Court via the internal reporting system, is not a binding authority in Mainland China.

Viewed in light of the fact that foreign arbitral institutions are now permitted to operate in Beijing and extended free trade zones in Shanghai (see here), we are hopeful that there will be a final clarification in the near future on the question of whether foreign arbitral institutions can administer arbitration seated in Mainland China. Legal practitioners in Mainland China have been calling for an amendment to the existing PRC Arbitration Law to address this issue. If that happens, it would be a significant step towards China further opening up its legal services market to foreign players. Having said that, before that final missing piece of the puzzle is complete, we would recommend that parties avoid agreeing to an arbitration clause that provides for arbitration seated in Mainland China to be administered by a foreign arbitral institution.

If you have questions or would like discuss any aspect of this post, please contact Helen Tang, Stella Hu or Briana Young of Herbert Smith Freehills, Weina Ye of Kewei Law Firm, or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner, Shanghai
+86 21 2322 2160
Weina Ye
Weina Ye
International Partner, Kewei
+86 21 2322 2132
Stella Hu
Stella Hu
Of Counsel, Beijing
+86 10 65355017
Briana Young
Briana Young
Professional Support Consultant, Hong Kong
+852 2101 4214

 

 

New BAC Rules to enter into force on 1 September 2019

The Beijing Arbitration Commission (BAC) has updated its arbitration rules and fee schedule. The new versions will replace the current (2015) version, with effect from 1 September 2019.

Among a number of notable amendments, BAC’s revised fee structure marks a significant step towards aligning Chinese arbitral practice with international standards. The new fee schedule:

  • distinguishes between the institution’s administrative charges and the arbitrator’s fees, with a clear imposition of higher charges for the latter. Under the current fee schedule, arbitration fees are payable entirely to the institution, without transparency as to the proportion that is paid to the arbitrators;
  • applies equally to both domestic and international arbitrations, removing any differentiation between the fees applicable. In addition, parties to domestic arbitrations can now agree to have the arbitrator’s fees charged on an hourly basis whereas under the current rules, this option is only available for international arbitrations;
  • increases the minimum administrative charges as well as arbitrator’s fees. For arbitrations involving amounts in dispute below RMB 250,000, the administrative charges and arbitrator’s fees shall be RMB 5,000 and RMB 12,000 respectively, totalling RMB 17,000. Under the current rules, the minimum arbitration fees payable for a dispute up to and including RMB 1,000 is only RMB 5,100, a sum that barely covers one hour of a sole arbitrator’s hourly rate;
  • imposes a maximum on the administrative charges and arbitrator’s fees, thereby preventing disproportionately high costs for high-value cases. For arbitrations involving amounts in dispute of RMB 5 billion and above, the administration fees will be capped at RMB 8.761 million. If the disputed amount is RMB 8.682 billion and above, the arbitrators’ fees will further be capped at RMB 18 million. Where hourly rates apply, an arbitrator’s hourly fee shall be capped at a maximum of RMB 5,000.

Other highlights of the new BAC Rules include:

  • the threshold for ordinary procedures before a full panel of three arbitrators has been increased from RMB 1 million to RMB 5 million. Where the amount in dispute falls below RMB 5 million, summary procedures handled by a sole arbitrator shall apply (Article 54);
  • a claimant may file a single notice of arbitration where a dispute arises out of multiple contracts provided that (i) the contracts contain identical or compatible arbitration clauses and (ii) the contracts are collateral or the contracting parties are identical and the subject matter of the arbitration is of a similar or related nature (Article 8);
  • amendments to the emergency arbitration procedure. Drawing on its experience of administering the first emergency arbitration in China in 2017, which resulted in an award that was successfully enforced in Hong Kong, BAC has clarified the emergency arbitration regime in its new rules. This includes clearer stipulations of the procedures and fees involved in the appointment of emergency arbitrators (Article 63);
  • the period for BAC to accept a case after a claimant’s payment of the requisite fees is extended from five to 10 days (Article 9);
  • an option for certain administrative deadlines to be extended by approval of the Secretary-General of the BAC, depending on the circumstances of each case, is now expressly codified (Article 70).

The new BAC Rules and fee schedule will no doubt be warmly welcomed by users and practitioners, enhancing BAC’s reputation as one of China’s most progressive arbitral institutions.

 

Helen Tang
Helen Tang
Partner, Mainland China
+86 21 2322 2160
Michelle Li
Michelle Li
Partner, Mainland China
+86 21 2322 2162
Hew Kian Heong
Hew Kian Heong
Partner, Mainland China
+86 21 2322 2150
Stella Hu
Stella Hu
Senior Consultant, Hong Kong
+852 2101 4248

STATE COUNCIL OF CHINA ANNOUNCED GROUND-BREAKING POLICY TO ALLOW FOREIGN ARBITRATION INSTITUTIONS TO SET UP BUSINESSES IN SHANGHAI FREE TRADE ZONE TO ADMINISTER CASES IN MAINLAND CHINA

On 6 August 2019, the State Council of China published the “General Planning of the New Area of ​​the China (Shanghai) Pilot Free Trade Zone Program” (“General Planning“).  Under Article 4 of the General Planning,  reputable overseas arbitration and dispute resolution institutions will be allowed to “set up business organisations in the new area [of the China (Shanghai Pilot Free Trade Zone)] and conduct arbitration businesses in relation to civil and commercial disputes arising in the areas of international commerce, maritime affairs, investment, etc.” and the relevant bodies will “support and assure the application and enforcement of interim measures by Chinese and foreign parties before and during the arbitration proceedings, such as asset preservation, evidence preservation and action preservation.”

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HERBERT SMITH FREEHILLS PROMOTES FOUR ARBITRATION SPECIALISTS TO OF COUNSEL

Herbert Smith Freehills has promoted four new Of Counsel from within the global arbitration practice with effect from 1st May. With promotions in New York, Singapore, Hong Kong and Beijing, the new Of Counsel are:

Florencia Villaggi, New York: Florencia specialises in international arbitration. She is a native Spanish-speaking practitioner from Latin America, trained in the Civil Law system but with extensive practice in a Common Law jurisdiction. Her experience encompasses commercial and investment arbitration, with focus on the Latin American region and the energy sector.

Dan Waldek, Singapore: Daniel is a highly rated disputes lawyer specialising in construction, energy and infrastructure disputes covering projects across Asia Pacific. He is admitted as a solicitor in England and Wales and the BVI, and is a Recognised Foreign Lawyer with the Singapore International Commercial Court.

Antony Crockett, Hong Kong: Antony has a significant regional and international market profile in business and human rights. He is qualified in Australia (Victoria), England and Wales, and Hong Kong SAR. He acts as an advocate in international arbitration proceedings and in arbitration-related court proceedings.

Stella Hu, Beijing: Stella is a trilingual Mainland Chinese arbitration specialist with experience in complex cross-border disputes. She has strong client relationships with Chinese State-owned companies, private companies and financial institutions.

Paula Hodges QC notes,  “We are delighted to welcome four new Of Counsel from within the global arbitration practice, which – together with our recent Partner promotions –  showcases the outstanding lawyers we have in our international arbitration practice. With Of Counsel promotions in New York, Singapore, Hong Kong and Beijing, it is wonderful to see affirmation of the strength and breadth of the talent across the network.”

SPC ISSUES PROVISIONS ON ACTION PRESERVATION IN IP RIGHTS DISPUTES

The Supreme People’s Court of China (SPC) has released a new set of judicial interpretations concerning interim injunction applications for intellectual property rights (IP Rights)-related disputes. The Provisions on Application of Laws in Adjudication of Action Preservation Cases Involving Intellectual Property Disputes (Fa Shi [2018] No. 21) (Provisions) were published on 12 December 2018 and take effect on 1 January 2019. Prior to that, a consultation draft of the Provisions was released for public consultation on 26 February 2015.

The Provisions provide further guidance on interim injunctive relief (i.e. action preservation) applications made under Articles 100 and 101 of the Civil Procedure Law 2017 (2017 CPL) in cases concerning IP Rights and unfair competition, and clarify certain key concepts therein. (For more information on interim relief in the PRC, contact briana.young@hsf.com to request a copy of our guide “Interim Relief in Mainland China”.)

Some important articles in the Provisions, which are covered in this post, are:

  • Article 6, which provides for circumstances classified as “urgent circumstances” under Articles 100 and 101 of the 2017 CPL;
  • Article 7, which lists the factors that the courts shall take into consideration in determining whether an action preservation order should be granted;
  • Article 10, which elaborates on the concept of “irreparable harm” under Article 101 of the 2017 CPL in cases related to IP Rights or unfair competition. Risk of “irreparable harm” is an element that needs to be proved in any application for pre-litigation or pre-arbitration action preservation orders; and
  • Article 16, which specifies circumstances under which applications for action preservation will be considered “wrongful”.

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