Sarbanes Oxley : Law : China
ARBITRATION AND FOREIGN INVESTMENT IN CHINA:
WITHOUT TRANSPARENCY, LITTLE PREDICTABILITY
The Wall Street Journal recently described the difficulty
one foreign investor faced in achieving success
in its business venture in China.1 After investing in and bringing its China clothing store to fruition,
Singapore Crocodile clothing company found itself
at odds with its former Chinese manager, who, after
being fired, pilfered Singapore Crocodile's files, stole
its employees and opened a competing business
right in the same shop Singapore Crocodile had
originally been licensed to do business.2 The initial problem seemed to come about by inattentiveness
by Singapore Crocodile's owners, but the real lesson
is that foreign investors are often left with nothing
to safeguard their interests when such disputes arise.
While Singapore Crocodile did file numerous lawsuits
in Chinese courts, it found that its former
Chinese colleague seemed beyond the law as, even
after criminal embezzlement charges had been
brought against her, police refused to detain her and,
four years later, none of Singapore Crocodile's lawsuits
have been successful.3
Global Holding and Investment Co., LLC
Foreign lawyers in China frequently complain
about the lack of predictability of China's legal system,
both in terms of the transparency of China's
laws and regulations and in terms of the enforcement
of those laws within its court system. These
factors are critical not only to the ability of China
to attract and maintain foreign investment, but to
the ability of foreign investors and their lawyers to
plan and prepare for possible disputes that may
arise in the course of doing business in China. In
addition, even when a contract contains a valid
arbitration clause and an arbitral tribunal finds in
favor of the foreign party, if the Chinese party does
not voluntarily comply with the arbitral award, the
foreign investor is left to rely on a dysfunctional
Chinese court system for enforcement of the
award. As arbitration is the preferred method of
dispute resolution for commercial transactions,
this paper sets out to explore China's arbitration
system, its laws and regulations, the enforcement
of arbitration awards by China's courts,4 and how
an ineffectual legal system ultimately influences
business and capital investment.
Arbitration and Enforcement
"To enter a court is to enter a tiger's mouth."5 This
traditional Chinese proverb holds true today, with
China's broadly drafted civil code, largely unreported
court cases and secretive court system with
its protectionist leanings. But the saying may hold
equally true for foreign parties who have agreed to
arbitrate their disputes before a China
International Economic and Trade Arbitration
Commission (CIETAC) panel or even for those
parties seeking to get foreign arbitral awards
enforced in China's courts.6 Perhaps the biggest
problem for foreign parties involved in commercial
disputes is relying on the Chinese courts to protect
their rights. After all, even if foreign parties rely on
foreign courts and foreign arbitration systems to
resolve disputes, where the Chinese party refuses to
comply voluntarily with an arbitration award, the
foreign party's only recourse is to go to the Chinese
courts to seek enforcement.
Numerous law review articles have cited China's
enforcement rate as improving in recent years, but
enforcement rates of less than 50 percent are still
reported for those cases where parties do not voluntarily
comply with the arbitration panel's award.
Yet what is recovered in many enforcement cases
brought before Chinese courts is often far from
rewarding.7 This stands in sharp contrast to
Chinese parties seeking to enforce judgments
abroad using the New York Convention, as it has
been reported that Chinese parties have experienced
at least a 90 percent success rate of getting
their arbitral awards enforced overseas.8
Three documents are fundamental to understanding
arbitration and the enforceability of arbitration
awards involving foreign investors and Chinese
individuals or companies in China: CIETAC
Arbitration Rules, the Arbitration Rules of the
People's Republic of China and Section 260 of the
Civil Procedure Law of the People's Republic of
China. To understand how China's rules compare
with international standards, these rules must be
read in light of Article V of the Convention on
Recognition and Enforcement of Foreign Arbitral
Awards9 ("the New York Convention") to which
China became a party in 1987, when China's legal
system was still at its infancy.10
The CIETAC Rules
Based on rules found in Anglo-U.S. legal systems,
11 CIETAC was formed in 1954 as a means of
arbitrating domestic commercial disputes in China
and has since developed into a center for foreign-related
and domestic dispute settlement.12
CIETAC's rules have gone through several redrafts
over the years in an effort to bring them into closer
conformity with standards of international arbitral
institutions and international expectations.13
All of this has been done with an eye toward
encouraging foreign investment in China.
CIETAC's Arbitration Rules were most recently
revised in 2000, the effect of which broadened the
scope of disputes that may be brought before
CIETAC. CIETAC's jurisdiction extends over any
dispute that has arisen from contractual or noncontractual
matters concerning economic and
trade transactions.14 This allows for a broad scope
so long as the parties have contracted broadly
(rather than narrowly) to resolve any disputes arising
from not only their immediate contract terms,
but also any dispute arising from their business
transactions and/or relationship. CIETAC Article 2
further extends the scope to cover international or
foreign-related disputes, disputes arising from foreign
investment enterprises (generally in the form
of joint ventures), any dispute related to Hong
Kong, Macao or Taiwan, and ?any other domestic
dispute that the parties have agreed to arbitrate by
the Arbitration Commission.? CIETAC's broad
jurisdiction clause means that, in theory, the
Chinese courts should have little cause to declare a
CIETAC award unenforceable on jurisdictional
grounds save for where the parties had not actually
agreed to arbitrate their dispute in the first place.15
Articles 52-61 of the CIETAC rules cover when and
how a CIETAC tribunal shall make an award. The
award must be made within nine months from the
date at which the arbitration tribunal is formed;
requests for extensions may be made at the request
of the arbitration tribunal and will be granted if the
Secretary-General of CIETAC considers that it is
really necessary and the reasons for extension are
truly justified.16 What "really necessary" and "truly
justified" means is uncertain as there is little if any
case law published by Chinese courts to allow for
interpretation; but theoretically where difficulties
arise in arbitration and there is need for an extension
to fully complete the arbitration, extra time will be
permitted. Neither the New York Convention17 nor
the UNCITRAL Model Rules18 impose time restrictions
on arbitral proceedings. CIETAC's nine month
time constraint might be viewed as too
stingy and difficult to comply with and might even
encourage arbitrators to proceed too quickly, even
where parties are unable to be present.19
The award made by the arbitration panel must be
based upon a majority decision, or if a majority cannot
be reached, the presiding arbitrator must make
the decision. The final determination of the arbitral
tribunal, with oversight by the CIETAC
Commission, shall be binding with no right of
appeal.20 The finality of arbitration and the stated
inability to appeal the award is congruent with international
standards and expectations for arbitration.
CIETAC Article 63 governs enforcement of arbitral
awards made pursuant to the CIETAC rules. Article
63 states that the parties must execute the award
within the time limit specified in the arbitral award
or immediately if no time limit is stated. When the
losing party refuses to comply with the award, then
the winning party may seek enforcement through
the Chinese courts. Here, the problem of enforceability
leaves the realm of CIETAC rules and enters
the domain of Chinese courts and civil procedure
law, as discussed below.
Enforcement - The Concern
If the losing party does not voluntarily comply
with the arbitration award, the prevailing party
may seek enforcement in the local District People's
Court with jurisdiction over the location of the losing
party or the assets in dispute, and, in principle,
enforcement should be quite feasible.21 But, in reality,
foreign parties have substantial reason to be
skeptical about the Chinese courts' ability and/or
desire to enforce awards against Chinese parties.22
Perhaps the most famous case for non-enforcement
of arbitral awards in China is the Revpower case
where a U.S. company entered into a joint venture
with Shanghai Far East Aero-Technology Import
& Export to develop a battery factory.23 When relations
between the joint venturers went sour,
Revpower brought the case to arbitration and an
award was entered in favor of Revpower for $4.5
million. The Chinese court so delayed recognition
and enforcement of the award that the losing party
was able to dissipate its assets so that thereafter any
enforcement of the award would be pointless.24
And this recognition by the Chinese courts came
only after top-level diplomatic efforts were made
by the U.S. to bring the dispute to resolution. By
November 2001, it was reported that the Revpower
case had yet to be resolved and the award had
reached up to $10 million with interest.25
This dissipation of assets appears tailor-made for
CIETAC's Article 23, allowing for property preservation
during the arbitration process so that parties
will not be able to dispose of assets.26 One problem
with Article 23, however, is that a property preservation
action may not be brought until after the
arbitration panel has already been seated. The
application for property preservation must be
brought by the party to the Arbitration
Commission and then the Commission must bring
the action to the Intermediate People's Court in
the jurisdiction where the property is located for a
ruling on the requested measure. This is problematic
in that it may be time consuming and the
party against whom the action is brought may have
enough advance notice to be able to remove its
property or assets from the jurisdiction. The
Revpower case may be cited here as that was a case
in which the courts delayed action to preserve
property ? or, more clearly stated, to enforce the
award ? so that the Chinese party had time to get
rid of its assets and property prior to the award
being enforced. While Revpower ended in diplomatic
embarrassment for China, China scholars
have not reported a dramatic increase in the
Chinese courts' reliability since then. If there are
no assets, the Chinese court could avoid enforcement
due to impossibility. Therefore, having a
workable property preservation provision seems
essential to achieving full compliance with or
enforcement of an arbitral award.
The remainder of this article details the legal and
extra-legal bases on which Chinese courts may
deny enforcement of arbitral awards, including
those awards that appear on their face to have been
obtained properly. As will be seen, assuming that
the parties had a properly formed arbitration agreement
and arbitral panel, Chinese courts appear
more likely to use extra-legal means, rather than
strict application of the relevant law, when vacating
or avoiding enforcement of awards granted by arbitration
The Chinese Courts in Action
As a matter of Chinese statute, Article 206 of the
China Civil Procedure Law (CCPL) governs the
enforcement of arbitration awards. Article 206 provides
that arbitration awards shall be enforced, unless:
Article 260 further provides that the award may be
overturned if it is found to violate social or public
interest.28 Chinese statutory law regarding enforcement
of arbitration awards is therefore largely consistent
with that of countries with more established
traditions of arbitration.
- the parties have not stipulated clauses on arbitration
in the contract or have not subsequently
reached a written agreement on arbitration;
- the person against whom the application is
made is not duly notified to appoint the arbitrator
or to proceed with the arbitration, or the
said person fails to state its opinions due to reasons
for which he is not held responsible;
- the composition of the arbitration panel or the
procedure for arbitration is not in conformity with
the rules of arbitration; or
- matters decided exceed the scope of the arbitration
Substantial difficulties arise, however, because
many times the awards are refused enforcement
due to reasons outside of China's laws, rules and
regulations. The principal reasons cited for such nonenforcement
include local protectionism and lack
of judicial independence, ?guanxi,? and secrecy.29
Any number of these factors could come into play
when a party brings an arbitral award before a
Chinese court for enforcement and all of them
have little to do with the law. Thus, lawyers working in China face an uphill battle in trying to properly advise clients on outcomes, risks and probabilities
once a dispute reaches this stage. That may be
why the majority of disputes are settled prior to or
during arbitration so that parties may avoid the
court system's lack of predictability.30
Local protectionism and lack of judicial independence
frequently comes into play in the local courts
where arbitral awards are sought to be enforced.
Lawyers have complained of a lack of impartiality
on the part of Chinese arbitrators and on the part
of local courts where the arbitration is sought to be
enforced.31 As for courts, this problem arises
because of institutional flaws that bring about a
lack of judicial independence; the close link
between the political leadership and the judiciary
has frequently been cited as the culprit.32 Judges are
appointed by local government officials and are
reliant on the government not only for their jobs
and their paychecks but for their housing and basic
living as well.33 This interconnectedness of politics
and the judiciary goes even farther, though, as
Beijing takes authority in directing judges and
courts on how they should decide their cases.34
In 2000, Beijing's leadership sent a directive to all
courts that said, in essence, ?When preparing your
judgments, it is true that you should pay attention to
the law; but you must also pay even greater attention
to the political and social consequences of your judgments.?
35 Since that time, both foreign and Chinese
lawyers representing foreign interests have not won a
single case before a Chinese court.36 If this directive is
being followed where arbitral awards are concerned,
seeking enforcement of arbitral awards in China is
not only an uphill battle but a losing one that is not
worth the time, energy or money of a foreign party
to pursue. That is a sad indictment of the Chinese
legal system. For whatever reason, it seems courts,
judges and ?judicial committees? are more bound to
follow the political directives of the Chinese leadership
than to follow the rule of law.
Guanxi has always been a means of gaining favors
for all things from goods and services to winning
friends and influencing people in China. As involves
the courts, this means that where a party or a party's
counsel has a connection in the judiciary or within
the country's or region's political elite, that party
may be more likely to get his way in the courts.
Citing the case of the Chinese manager of the
Singaporean clothing company, the Chinese manager's
connections enabled her to function as though
she was above the law.37 In any society connections
can be helpful. But so long as connections and
guanxi allow parties to win such great favors in the
legal system and allow Chinese entities to escape liability
based on those connections, it will be difficult
for foreign business interests to function as the
civil code remains misleading and unpredictable.
Secrecy is perhaps the greatest flaw overarching the
entire Chinese legal system. Secrecy comes in many
forms such as back-room ?judicial committees?
deciding cases, secret ex parte meetings between
the Chinese party and the judge, and guanxi used
to influence local political elites and decision makers.
Both foreign and Chinese lawyers representing
foreign clients have complained of judges meeting
privately with the Chinese party. This distorts the
court proceeding as the foreign party is not cognizant
of all that is going on ?before the court;? the
Chinese judges do not seek out the foreign party
for such covert meetings.38 Such meetings could
easily give the Chinese party the upper hand.
Secrecy is a factor not only when judges hold private
meetings with the Chinese party, but where
decisions are made by ?judicial committees? or
backroom ?judges? who have neither seen nor
heard the case, yet freely overrule the opinion of
the judge or judges who heard the case.39
The unavailability of published opinions by
Chinese courts makes it difficult to trace the outcomes
of arbitral enforcement.40 It also makes it
difficult for lawyers to adequately advise their
clients on the variety of outcomes possible when
deciding to invest in China or for lawyers to adequately
assess risk once a dispute breaks out. There
are generally two options: pursue negotiations
which may end less favorably than an arbitral
award or face the possibility that if an arbitral
award is won the losing party may not comply with
the award and the Chinese courts will likely refuse
While the Chinese legal system seems to have all of
the theoretical underpinnings for proper enforcement
of both foreign and domestic arbitral awards,
adherence to the rule of law remains lax and unpredictable.
It is this weakness of the court system that
pushes judges and arbitrators to coerce parties to
settle rather than relying on compulsory enforcement.
41 Changing this system and moving China
from a nation governed by men to a nation governed
by law is critical for China's post-WTO
entry success. WTO member states are required to
have transparent legal systems that allow for predictability
in international trade relations. So long
as the mechanism for dispute resolution remains
ineffective, disputes will continue to spill over into
government-to-government relations.42 For now,
however, where a Chinese party loses the arbitration
and fails to voluntarily adhere to the arbitration
panel's decision and award, the foreign
party's best bet is to seek a settlement. Relying on
the Chinese courts as they currently exist seems far
too risky a means of achieving a satisfactory resolution
where the Chinese party refuses to comply
with an arbitral award. To overcome what otherwise
would likely be a lose-lose situation, the
foreign party may be best off negotiating a settlement
for partial recovery with the Chinese party
rather than expending its valuable time and
resources for the slim chance that its enforcement
action will be successful.
1 Ben Dovlen, ?Foreign Investors Find That China's Legal System Resolves Few Disputes,? 4/7/03 Wall St. J. A14 (April 7, 2003).
3 Id. One Chinese lawyer quoted in this story said of resolving disputes, ?Rule One is to try to resolve the dispute before it gets to the
courts. [Rule Two is to] try your best to follow Rule One.? This indicates that China's courts and its legal system may be of little help to foreigner businesses when disputes arise. While the Chinese manager in this case did seem to be one with very special connections ? she was described as being a frequent ?special guest? to China's political elite ? it nonetheless demonstrates the unpredictability and lack of transparency of China's legal system.
4 This paper will limit analysis to disputes arising between foreign investors and Chinese individuals or Chinese companies. This paper
will not discuss dispute resolution between foreign companies and the Chinese government as there are additional considerations to be
taken into account where sovereigns are involved.
5 Traditional Chinese proverb, as reported in Bee Chen Goh, Law Without Lawyers, Justice Without Courts: On Traditional Chinese
Mediation (Ashgate Publishing Co. 2002).
6 The CIETAC Arbitration Rules were adopted in 1988 to meet the growing needs of a market economy and to develop both international and domestic trade. Since then, CIETAC's Arbitration Rules have gone through several changes, each time bringing the rules in closer alignment with international treaties (the New York Convention) and bilateral commitments to dispute resolution. See Presentation of Prof. Mochtar Kusuma-Atmadja Arbitration in the 1990s: Developments in East Asia: Arbitration in the Southeast Asia Region: People's Republic of China (presented April 29, 1996).
7 Randall Peerenboom, Enforcement of arbitral awards in China, 28 China, Bus.Rev. 812 (Jan. 1, 2001). Mr. Peerenboom published a
study on enforcement of 89 foreign and CIETAC arbitration awards brought before the Chinese courts for enforcement, of which only
49 percent actually recovered. Of those 49 percent, only 17 percent received full recovery, 10 percent received less than half of the award, and one-third of all applicants were likely to receive between 75 to 100 percent of the award.
8 Bumpy ride for reform, S. China Morning Post 2 (available in 2001 WL 29884334).
9 U.S.C.A.§ 201 (June 10, 1958). Article V(1) of the New York Convention allows enforcement of an arbitral award to be refused by a competent court where (a) the party or parties entering into the contract were under some kind of incapacity or the agreement was not valid under the law governing the agreement, (b) the party against whom the award was invoked was not given proper notice of the arbitration proceedings or the appointment of an arbitrator, (c) the award deals with issues beyond the scope of issues contemplated by the parties to be dealt with in arbitration, (d) the composition of the arbitral tribunal was beyond the scope of the parties' agreement, or (e) the award has been set aside by the competent authorities of the country in which the award was made. The award may also be set aside under Article V (2) where (a) the subject matter of the dispute is not capable of settlement by arbitration under the law of that country, or (b) recognition and enforcement of the award would be contrary to the public policy of that country.
10 It could be said that even today, China's legal system is still in its infancy as prior to the development of its civil code in 1982, China's court system served primarily as a penal system; civil disputes were resolved by mediation within the community. See Bee Chen Goh, Law Without Lawyers, Justice Without Courts: On Traditional Chinese Mediation (Ashgate Publishing Ltd. 2002). The new civil code was written primarily with the goal of encouraging foreign investment. Chinese themselves still remain leery of the court system and tend to prefer mediation as their primary means of dispute resolution.
11 See Arbitration Rules of the China International Economic and Trade Arbitration Commission.
12 Of course, foreigners contracting with Chinese companies need not limit themselves to CIETAC and may agree to bring disputes before arbitral bodies located outside of China. Under the New York Convention, theoretically, China should be bound to enforce such awards within its borders. Chinese parties may be more inclined to resolve disputes before CIETAC (for example, arbitrations conducted under the CIETAC rules must be conducted in Chinese) and therefore the arbitration body the parties choose contractually ? whether that be the International Chamber of Commerce, ad hoc arbitration, or otherwise ? may depend on which party has the greater bargaining power.
13 See at FN 7.
14 CIETAC Article 2, .
15 In such a case, it seems unlikely that a dispute would have ever made it through arbitration to a final award as the arbitration panel
itself would have either found that the parties had not agreed to arbitrate or the party claiming no agreement to arbitrate would have
brought the case directly to the courts.
16 CIETAC Arbitration Rules, Article 52.
17 9 U.S.C.A. ? 201 (June 10, 1958).
18 United Nations Commission on International Trade Law: Model Law on International Commercial Arbitration (June 21, 1985).
19 See CIETAC Arbitration Rules Article 42. This rule states that arbitrators may proceed and enter a default judgment where one of the parties is not present. Read in conjunction with the automatic nine-month time limit, this rule could work to a party's disadvantage as it unduly speeds up the arbitration process and could cause a party to default merely due to conflicting schedules. It should be noted that under the UNCITRAL Model Rules there is no time limit placed on when an arbitration hearing should be complete.
20 CIETAC Arbitration Rules, Articles 52-61.
21 Enforcement of An Award. If the losing party's assets are located outside of China, the winning party can apply to a foreign court so long as that court is in a country that is signatory to the New York Convention.
22 E-mail from Clive Ansley, Attorney, Arvay Finlay, Canada and China law expert, to Megan Penick, Letter to the angry young man!
(Sept. 11, 2002) (copy on file with author). Mr. Ansley's letter was a response in explanation to a Chinese law student who had objected to Mr. Ansley's criticism of the Chinese legal system. In the letter, Mr. Ansley describes how even Chinese lawyers and judges, themselves, decry the ineffectiveness of the legal system. Sometime in 2000, Mr. Ansley reported that a directive came down to the maritime courts from Beijing with the words, ?Whenever you have a dispute involving a foreign party and a Chinese party, you must ensure that your judgment reflects the national interest.? Since that time, no foreigner in the maritime court has won a case. It seems likely that such a directive would not be limited to the maritime courts alone.
23 Supra n. 10.
26 CIETAC Arbitration Rules, Article 23, .
27 Arbitration Law of the People's Republic of China (adopted Aug. 31, 1994).
28 Id. Although the New York Convention and the UNCITRAL rules also allow non-enforcement on that basis, it has been noted by
China scholars that Chinese courts rarely invoke the public policy exception for denying enforcement for fear of weakening China's
credibility on the world stage.
29 ?Guanxi? refers to relations or special connections that can allow one to get special favors. In this case, guanxi would refer to the
Chinese party's or Chinese counsel's connections with judges, officials, or politicians that might help to shape the outcome of the case.
30 Some China lawyers might argue there is predictability as it can almost always be predicted that the non-Chinese party will lose in the end.
31 Denton Wilde Sapte, Arbitration newsflash (Jan. 2002).
32 E-mail, supra n. 26.
33 Supra n. 42.
34 E-mail, supra n. 26; supra n. 9.
35 E-mail, supra n. 26.
36 Id. Here, Mr. Ansley was addressing the Chinese Maritime Courts specifically, as that is where 95 percent of the cases involving
foreigners take place; this is largely because in the case of maritime cases foreign parties have little choice but to go before the Chinese courts once their ships have been seized in Chinese waters. But as of the date of this paper, foreigners remain limited in their ability to litigate successfully in the civil courts. By implication this means that foreign parties would have great difficulty in successfully taking arbitral awards before the Chinese courts for enforcement against their Chinese adversaries. But, by signing onto the New York Convention, China has bound itself to allow foreigners to bring arbitral enforcement actions before its courts.
37 Supra n. 1.
38 Where such meetings take place, the foreign party usually is unaware of its occurrence and has no way to protect itself against such
39 Supra n. 9; E-mail, supra n. 26.
40 Bonnie Hobbs, O'Melveny & Myers, CIETAC Arbitration Rules and Procedures: Recent Developments and Practical Guidelines,
41 Supra n. 9.
42 Supra n. 38. The Revpower case is a prefect example of this as when an arbitral award was entered in Revpower's favor, the Chinese government so delayed action to enforce the judgment that the judgment ended up unenforceable by way of insolvency. Whether such outcomes will become common, or whether China will work to protect and improve its status as a favorable place to conduct business, is yet to be seen.
Note: This article was previously published in
the Fall 2004 edition of The International Law Quarterly, a publication of the International Litigation Committee of the Section of Litigation, American Bar Association. Volume 20, Issue 2.
Global Holding and Investment Co., LLC