Arbitration, the Courts and the Enforcement of Rights in China

1
Arbitration, the Courts and the Enforcement of
Rights in China

• Donald J Lewis
• Faculty of Law
• The University of Hong Kong

2
Enforcement Issues

• The Importance of Enforcement
• an essential element for any functional legal
  system and Rule of Law
• necessary for WTO compliance
• fundamental assumption of private contracts and
  protection of investors rights

3

• China has a weak system of rights enforcement
• Multiple enforcement authorities
• Emphasis on arbitration, not litigation, as
  primary means of formal dispute resolution
• Peoples Courts are marginalized
• However, Peoples Courts are the primary PRC
  institution for enforcement of rights

4
Arbitration in China

• Arbitration in China serves the Administrative
  not the Legal System
• Arbitration awards, however, can only be enforced
  through the Legal System, viz., the Peoples
  Courts

5

• Arbitration in China
• China International Economic and Trade
  Arbitration Commission (CIETAC)
• China Maritime Arbitration Commission (CMAC)
• Local Arbitration Commissions (LACs)
• Arbitration in Hong Kong
• Hong Kong International Arbitration Centre
  (HKIAC)

6

• Characteristics of the current PRC arbitration
  system
• Bifurcation of the system Foreign-related vs
  Domestic
• NOTE Bifurcation relates to both
• (1) Type of Chinese arbitration organization
  and
• (2) Type of dispute

7

• Types of Chinese arbitration organization
• Foreign-related arbitration commissions
• CIETAC
• CMAC
• Domestic local arbitration commissions
• Types of dispute
• Foreign-related disputes with a foreign
  element
• (1) Foreign party
• (2) Object of dispute outside of China
• (3) Legal relations created or terminated
• outside of China

8

• Types of dispute (continued)
• Domestic disputes without a foreign element
• (1) Between Chinese legal and/or natural
• persons
• (2) Involving foreign investment enterprises
• (FIEs)

9

• Recent Overlap in Jurisdiction
• 1996 State Council Notice
• Domestic LACs have jurisdiction to hear ALL
  foreign-related disputes
• 1998 Revised CIETAC Arbitration Rules
• CIETAC has jurisdiction to hear SOME domestic
  disputes (i.e. disputes involving FIEs)

10

• Bifurcation still exists and is important for
  enforcement purposes
• Why is it important?
• Foreign awards and awards of foreign-related
  PRC arbitration organs are easier to enforce, not
  subject to substantive review

11

• Caveat Ambiguity created by CIETAC awards
  involving domestic disputes with FIEs

12
Arbitration in China

• Enforcement and setting aside of PRC arbitration
  awards
• 1991 Civil Procedure Law
• See Arts 217 and 260
• 1995 Arbitration Law
• See Arts 58, 63, 70 and 71
• Broader grounds for denial of enforcement or
  setting aside domestic vs. foreign-related
  awards

13

• Compare
• Foreign-related awards Art 260, Civil
  Procedure Law
• Grounds for denial of an application for
  enforcement
• 1) the parties have neither included an
  arbitration clause in their contract nor
  subsequently reached a written arbitration
  agreement
• 2) the person against whom the application is
  made was not notified to appoint an arbitrator or
  to take part in the arbitration proceedings or
  the person was unable to state his opinions his

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• opinions due to reasons for which he is not
  responsible
• 3) the composition of the arbitral tribunal or
  arbitration procedure was not in conformity with
  the rules of arbitration or
• 4) matters decided in the award exceed the scope
  of the arbitration agreement or are beyond the
  arbitral authority of the arbitration organ.
• Note the above provisions follow the New York
  Convention and are limited to procedural
  irregularities only

15

• Domesticawards Art 217, Civil Procedure Law
• Grounds for denial of an application for
  enforcement
• Note Grounds 1,3 and 4 (but not 2), Art 260, are
  duplicated.
• In addition, the following grounds are provided
• 1) the main evidence for ascertaining the facts
  was insufficient
• 2) the law was applied incorrectly or
• 3) one of several arbitrators committed
  embezzlement, accepted bribes, practiced
  favoritism or made an award that perverted the
  law.

16

• Accordingly, grounds for denial of an application
  for enforcement of a domestic award include
• errors of law
• insufficiency of evidence and
• arbitrator misconduct.
• These are matters related to substantive judicial
  review
• By contrast, denial of enforcement of
  foreign-related awards is limited to grounds
  found in New York Convention

17
The Courts Enforcement Problems

• Problems of Enforcement of Arbitration Awards and
  Court Judgments
• Local protectionism
• Enforcement actions must take place at
• (1) place of domicile of the defendant or
• (2) place where the defendant has assets

18

• Lack of judicial independence
• Judges are appointed or dismissed by local
  peoples congresses
• Financing of the courts controlled by local
  peoples governments
• Corruption

19
The Courts Enforcement Problems

• Enforcement is carried out by a special tribunal
  of the Peoples Courts the Enforcement Division
• Enforcement divisions suffer from widespread
  corruption and ineffectiveness
• Low prestige
• Judicial personnel have limited legal education
• Travelling and other expenses often sought from
  parties

20
The Courts Enforcement Solutions

• PRC Supreme Peoples Court has acknowledged such
  enforcement problems
• 1995 Supreme Court Notice
• 1998 Supreme Court Notice
• 1998 Supreme Court Enforcement Regulations
• Five-Year Judicial Reform Plan

21
The Courts Enforcement Solutions

• Basic Scheme for Enforcement of Foreign and
  Foreign-Related Arbitration Awards
• Pre-reporting mechanism for denial of
  applications for enforcement and approval of
  applications to set aside awards by local courts
  (1995/1998 Supreme Court Notices)

22

• General Scheme for Enforcement of ALL Arbitration
  Awards and Court Judgments
• More definitive guidelines for enforcement
  procedures to be followed by parties and local
  courts ( 1998 Supreme Court Enforcement
  Regulations)
• Comprehensive Overhaul of Judicial Administration
  (including Enforcement)

23

• Re-organization of enforcement divisions
• Job transfer
• Enhanced legal professional training
• Minimum levels of qualified judicial personnel,
  including bailiffs
• Improved enforcement success rates
• Political rectitude
• (1999 Five-Year Judicial Reform Plan)
• Is This Enough to Ensure Effective Enforcement?

24
Hong Kong - China

• Since July 1, 1997, problems of enforcement of
  mainland awards in Hong Kong courts and
  vice-versa
• Reason non-application of New York Convention
  after the handover
• 1999 Mainland-HKSAR Arrangement provides
  framework for resolution of problems

25
Hong Kong - China

• Subsequent PRC and HKSAR Government Action
• HK Arbitration (Amendment) Ordinance 2000
• PRC Supreme Peoples Court Notice (January 24,
  2000, effective February 1st)

26
Hong Kong - China

• Main Provisions
• Replacement system of enforcement of arbitration
  awards follows New York Convention
• Reciprocal enforcement of HK awards by mainland
  courts, and awards of recognized Mainland
  arbitral authorities by HK courts
• Defences to enforcement are the same as New York
  Convention