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Time:2014-06-16  Source:GoldenGate   Author:

Alike in many other jurisdictions, an arbitral award made in China is final and binding - no appeal is allowed. However, under certain circumstances, a losing party may challenge an arbitral award. Common examples include when there was no arbitration agreement between the parties or if the correct arbitration procedure was not followed. Such challenges, if successful, allow a local court to review the arbitration agreement and procedure.
The vast majority of arbitration matters involving foreign parties have been heard by the China International Economic and Trade Arbitration Commission (“CIETAC”). The ability to challenge any award made by CIETAC is therefore an issue of potentially great significance to all foreign enterprises in China.

Options Available

There are two options available under Chinese law for a foreign party to challenge a CIETAC award:

1.         Apply to cancel the award under Article 70 of the Arbitration Law(“Cancellation Procedure”); or
2.         Apply for non-enforcement of the award under Article 71 of the Arbitration Law(“Non-enforcement Procedure”).

The two procedures are broadly similar, with two important exceptions.

Firstly, the Cancellation Procedure must be initiated within six (6) months of receiving the award, usually by the losing party. The Non-enforcement Procedure may only be raised by the losing party after the Enforcement Procedure has been initiated by the winning party. The Enforcement Procedure may only be initiated if the losing party refuses to voluntarily enforce the award and must be initiated by the winning party within two (2) years of receiving the award.

Secondly, only the 2nd Intermediate Court of Beijing has jurisdiction to hear the Cancellation Procedure for a CIETAC award, On the other hand, there are a number of courts which jurisdiction to hear the Non-enforcement Procedure – it is dependant on where the winning party files the Enforcement Procedure. This is usually a court where the losing party is located or has assets.
Legal Grounds for the Challenge

The legal framework surrounding the Cancellation Procedure and Non-enforcement Procedure is derived from a number of different sources: international convention, domestic laws enacted by legislation and judicial interpretations issued by the Supreme Court.

The New York Convention 1958 was recognized by China in 1987. Most of the principles and criteria regarding recognition of an arbitral award were accepted into Chinese law, but interpreted according to Chinese language.

Article 58 of the Arbitration Lawand Article 258 of the Civil Procedure Lawuse similar language, reflecting the principles and criteria set out by the New York Convention 1958. It is possible to use to either article when initiating the Cancellation Procedure or the Non-enforcement Procedure.  

The Supreme Court has issued various judicial interpretations, providing comprehensive guidelines on how to review an arbitration agreement and an arbitral award. Of particular importance are the interpretations issued in 1995, 1998 and 2006.

There are a large number of circumstances stipulated by Article 58 and Article 258 in which an arbitral award may be challenged. Despite this, the vast majority of challenges concern the validity of an arbitration agreement, and whether a party is bound by such an agreement. The Judicial Interpretation of 2006 (Fa Shi (2006) No. 7) has been influential in assisting lawyers on issues such as how to identify the correct arbitration institute and whether an assignee should be bound by an arbitration agreement signed by the assignor.

In accordance with the Supreme Court’s Judicial Interpretation of 2006 (Fa Shi (2006) No.7):
--    An Arbitration Agreement can be concluded by fax, email, telefax etc., at any
time before the arbitration filing is made;
--    In case the name of the arbitration institute is not clear or a full name is not given, the Arbitration Agreement is still valid if the arbitration institute can be reasonably identified;
--    An Arbitration Agreement is binding on a successor after a merger or separation;
--    An Arbitration Agreement is binding on the assignee if the assignee knew of the
existence (AND CONTENT?) of the arbitration agreement and did not object;
--    An agreement is not valid if it says “arbitration or court” or “arbitration
institute A or arbitration institute B” and the parties cannot agree which one it should be before the arbitration filing is made;
--   Ad-hoc arbitration is risky and difficult to enforce in China; and
--   Any objection to the validity of the arbitration agreement must be raised before the first oral hearing or before the right to object is deemed to have been waived.

The other main challenges often referred to include:
      (i)                 the losing party was not given an opportunity to appoint an arbitrator;
(ii)                the losing party was not given proper notice or not properly represented;
(iii)               the composition of the arbitration tribunal or the procedure of the arbitration did not conform with the arbitration rules and is likely to have caused the award to have been made incorrectly; and
(iv)              the award is contrary to public interest.

Additionally, failing to apply for enforcement within the prescribed time limit would constitute a sufficient reason for non-enforcement. Before the Civil Procedure Law was amended in 2007, the statutory limitation period to apply for enforcement was six (6) months for a corporate entity and one (1) year for an individual. It has since been amended to two (2) years for both corporate entities and individuals.

Documentation Requirements

To initiate either procedure, the following documents are required to be submitted:

(i)               Power of Attorney;
(ii)             The applicant’s Business License, Incorporation Certificate or equivalent;
(iii)            Certificate of Legal Representative or Letter of Authorization from the person signing the Power of Attorney;
(iv)             An Motion of Cancellation or Non-Enforcement;
(v)             The Arbitral Award
(vi)              The Arbitration Agreement (if the existence and validity of the arbitration agreement is debatable); and
(vii)           Any other documents that the applicant considers to be useful.

The Power of Attorney is necessary to enable the Chinese attorney to work on this matter. There is no universal format. It is highly recommended to specify all powers the attorney shall have, such as signing and receipt of legal documents, applying for evidence preservation, participation in court hearings and enquiry meetings, joining settlement negotiation, and receiving the adjudged settlement money. Some local courts are very particular, possibly asking the lawyer to prepare a specific Power of Attorney for each matter unless that matter is specifically mentioned in the existing Power.

Different countries have different types of Business Licenses, Incorporation Certificates and Company Registration Records. The local court may ask the applicant to supply additional supporting documentation if it is unfamiliar with the format of the Incorporation Certificate provided.

A Certificate of Legal Representative or Letter of Authorization often causes confusion with foreign parties. “Legal Representative” is a unique legal concept under Chinese law. It normally refers to the Chairman of the Board of Directors of a company. In practice, it could be any company officer who has right to sign legal documents on behalf of the company. This could be a Director, CEO, CFO, Chief Legal Counsel, President or Vice President.  

These three documents need to be notarized and verified. The purpose of notarization and verification is threefold: to ensure the foreign party still exists; that the person signing the Power of Attorney has such power; and that the signatures of those signing the Power of Attorney are authentic.

Different countries have different notarization and verification procedures. The process begins with execution in front of a local public notary. This is the checked by the authority supervising the public notary and is finally verified by the Chinese Embassy/Consulate located in that area. In some countries, there may be another authority between the authority supervising the public notary and the Chinese Embassy/Consulate, such as the Ministry of Foreign Affairs of that country. 

The Power of Attorney, Incorporation Certificate and Letter of Authorization must be originals. At least two copies of each document must also be submitted.

Last but not the least, all documents for the court review shall be in Chinese or accompanied by a Chinese translation carried out by a privileged translation company.

How the Procedure is Organized

Whether it is a Cancellation Procedure or a Non-enforcement Procedure, the court shall set up a tribunal with three panel judges to hear the matter. Unlike most other civil procedures, the court will organize oral hearing(s) or enquiry meeting(s) and give the parties the opportunity to exchange their opinions before and after the court hearing. Limited discovery of the evidence will be given. Generally speaking, the Tribunal relies heavily on document review and the discovery process is not very extensive.

If the losing party initiates both procedures, the court of enforcement will suspend the Enforcement Procedure until the court of cancellation makes its decision. If a party loses the Cancellation Procedure, the court of enforcement will reject its non-enforcement petition if no new reasons are submitted.

Legally speaking, the court review will focus on procedural issues only. Merits of the dispute will not be discussed. However, Chinese law provides the court with the power to review the truthfulness of any evidence submitted by the parties. This gives the judge a chance to review the case in greater depth. If the evidence supporting the findings or rulings of the award are found to be fraudulent, or if crucial evidence has been hidden, and such hidden evidence could have effected the result of the award, the court then has right to order a retrial of the case.

Under Chinese law, the decision of either the court hearing the Cancellation Procedure or the court hearing the Non-enforcement Procedure is final. No appeal is allowed.

Internal Review Procedure

This is a unique procedure applied in China to ensure the decisions of local courts are consistent and comply with the sprit of the law.

If the Court of Cancellation or the Court of Enforcement intends to cancel or partially cancel an award in order to initiate a retrial, it must report to the High Court of that jurisdiction. If the High Court does not agree, the opinion of the High Court shall prevail and the award will be upheld. If the High Court agrees with the Intermediate Court, they must report to the Supreme Court. The Supreme Court has the final right to decide. Hence, only the Supreme Court has the right to cancel/partially cancel a CIETAC award in to order to retry a case (more details are provided by the Judicial Interpretation of the Supreme Court, Fa (1998) No. 40.

Lawyers are prohibited from participating in this Internal Review Procedure. There is no hearing, no chance to submit arguments, nothing to do but wait for the final decision. The Internal Review Procedure may take a few months.

Possible Results

If the court wishes to uphold a CIETAC award under challenge, it may take around 6 months to conclude a ruling. Or otherwise, it may take a year or even longer to make its decision. Assuming the CIETAC award is not fully upheld, the People’s Court may either rule to cancel or partially cancel an award, or order CIETAC to retrial the case.

Generally speaking, very few CIETAC awards are cancelled or partially cancelled. Retrials have occurred, but are also very rare.

Article 61 of the Arbitration Lawprovides the legal basis for a retrial and is further endorsed by the Judicial Interpretations of 2006. However, no specific guidelines are given on how to organize the retrial. CIETAC Rules are also silent on this issue.

In practice, the retrial procedure is often handled by the same tribunal. However, if any arbitrator resigns, for whatever the reason, the party who appointed him/her is permitted to appoint a new one. The tribunal is likely to conduct further hearings. The parties are allowed to submit new evidence and make further arguments. Usually, the tribunal will focus its review on the issues challenged by the People’s Court. Any party dissatisfied with the result of a retrial is entitled to challenge any award made in that retrial via a new Cancellation Procedure.

Practical Concerns

Very few foreign parties have raised challenges before the courts during the enforcement procedure, mainly because very few winning Chinese parties enforce the award against foreign parties in China. The obvious reason for this is that the losing foreign parties do not usually have assets in China.  

Furthermore, very few foreign parties apply to cancel a CIETAC award before the 2nd Intermediate Court of Beijing. If they decide to do so, they would rather do it in their home countries using the New York Convention. Be aware that foreign-invested entities such as a Joint Venture or a wholly foreign-owned enterprise are deemed to be local entities.

CIETAC enjoys good reputation in China. The likelihood of successfully challenging a CIETAC award is small. Despite this, there are still a number of reasons why it is potentially beneficial for a foreign party to pursue this route:

-       It can buy more time and postpone enforcement;
-     There have been some successes in the past;
-       The cost is affordable, and
-       It does not undermine the legal rights available in the foreign party’s home country.

1 Article 70 of the Arbitration Law: When one litigant produces evidence proving the ruling made by the commission for arbitration involving foreign concerns falls within one of the situations prescribed in Section 1 of Article 260 of the Law of Civil Procedure, the people's court shall repeal and the ruling after the evidence has been ascertained by the collegial panel organized by the people's court.

2 Article 71 of the Arbitration Law: When the adverse litigant produces evidence proving that a foreign affairs arbitration ruling falls within one of the situations stated in Section 1 of Article 260 of the Law of Civil Procedure, the people's court shall judge that the ruling not be executed after it has been examined and ascertained by a collegial panel organized by the court.

3 Article 58 of the Arbitration Law: If one litigant produces evidence to prove a ruling has one of the following, he may request that the intermediate people's court of the place where the arbitration commission is located repeal the ruling: 
(1) where there is no arbitration agreement; 
(2) where the dispute to be arbitrated is not within the scope of the arbitration agreement, or one which the arbitration commission has no authority to arbitrate; 
(3) where the formation of the arbitration tribunal or the arbitration process has violated legal procedure; 
(4) where the evidence on which the arbitration is based is counterfeited; 
(5) where one litigant has concealed evidence that could affect an impartial ruling; or 
(6) where arbitrators have solicited or accepted bribes, practised favouritism and bent the law while arbitrating a case or making a ruling.
The people's court shall repeal the ruling if a collegial panel formed by the people's court has examined the arbitration and ascertained that it has one of the situations mentioned above.

4 Article 258 of the Civil Procedure Law: If a defendant provides evidence to prove that the arbitration award made by a foreign-affair arbitration institution of the People’s Republic of China involves any of the following circumstances, the people’s court shall, after examination and verification by a collegial bench, rule to disallow the enforcement of the award: 
(1) The parties have not stipulated any clause regarding arbitration in their contract or have not subsequently reached a written agreement on arbitration; 
(2) The defendant is not duly notified of the appointment of the arbitrators or the arbitration proceeding, or the defendant fails to express his defense due to the reasons for which he is not held responsible; 
(3) The formation of the arbitration panel or the arbitration procedure is not in conformity with rules of arbitration; or 
(4) The matters decided by arbitration exceed the scope of the arbitration agreement or the authority of the arbitration institution.
If a people’s court determines that the enforcement of an award will violate the social and public interest, the court shall make a ruling to disallow the enforcement of the arbitration award.

5 Article 61 of the Arbitration Law: After accepting the request to repeal the ruling, if the people's court maintains that the arbitration tribunal still should arbitrate the dispute, it shall notify the arbitration tribunal to rearbitrate the dispute within a specified period and it shall also rule to terminate the repeal procedure. If the arbitration tribunal refuses to rearbitrate the dispute, the people's court shall rule that the repeal procedure be reinstated.

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