Challenges of Enforcing U.S. Arbitral Awards in China: What American Companies Need to Know

Enforcing arbitral awards in foreign jurisdictions is inherently challenging, and U.S. companies seeking enforcement in China face particular obstacles despite China's adherence to the 1958 New York Convention. Here we explore key hurdles and provide strategic insights to improve enforcement prospects.

Understanding the Legal Framework

China recognizes and enforces foreign arbitral awards under the New York Convention. The Supreme People's Court of China (SPC) maintains a policy favoring enforcement[zhonglun.com ], reflected in a historical enforcement success rate of approximately 90-95%[legalblogs.wolterskluwer.com ][zhonglun.com ]. However, certain legal and practical complexities continue to pose significant hurdles.

Common Obstacles to Enforcement

1. Procedural and Documentation Requirements

Chinese courts strictly adhere to procedural formalities:

• Awards and arbitration agreements must be authenticated and translated into Chinese[legalnetlink.net ].
• Mistakes in filing procedures or incomplete documentation can lead to dismissal or delays[legalblogs.wolterskluwer.com ][legalnetlink.net ].
• There is a strict two-year statute of limitations from the date the award is due[legalnetlink.net ].

2. Grounds for Refusal

China follows the limited refusal grounds outlined in Article V of the New York Convention[zhonglun.com ]:

• Invalid arbitration agreements or lack of proper notice to the respondent.
• Awards exceeding the scope of the arbitration agreement.
• Procedural irregularities during arbitration.
• Public policy violations, although rarely invoked, remain a potential obstacle, particularly in sensitive or high-profile cases[shepwedd.com ].

3. Local Judicial Practices

Despite the central government's pro-arbitration stance, enforcement can vary by region:

• Local protectionism can influence lower courts, especially when the debtor is economically significant locally[tlblog.org ].
• The SPC employs a prior-reporting system where lower courts must report refusals up the hierarchy, which helps mitigate biased decisions but can cause additional delays[legalnetlink.net ].

Practical Challenges

1. Asset Preservation Difficulties

• Identifying and preserving assets quickly is crucial, yet complex.
• Chinese debtors often transfer or conceal assets, complicating enforcement[legalnetlink.net ].

2. Delay Tactics by Debtors

• Debtors commonly initiate annulment proceedings in the award's originating jurisdiction, prompting Chinese courts to suspend enforcement until resolution[zhonglun.com ].
• Spurious local lawsuits or administrative actions by debtors can further delay or complicate enforcement.

3. Currency Exchange Controls

• Even after a favorable ruling, remittance of awarded funds out of China can encounter significant regulatory hurdles.
• Chinese banks rigorously review and may reject or delay foreign currency transfers, citing regulatory compliance or tax issues[lexology.com ][lexology.com ].

Notable Cases Illustrating Challenges

• Evidence Verification: A German tour company faced extensive procedural delays due to evidence verification, ultimately prevailing but after considerable legal effort[zhonglun.com ].
• Public Policy Defense: Cases involving punitive damages or excessively high interest rates have occasionally led Chinese courts to partially enforce awards, removing elements deemed against Chinese public policy.

Recommendations for U.S. Companies

1. Meticulous Arbitration Preparation

• Ensure arbitration clauses clearly specify the arbitration seat, governing law, and arbitral institution recognized by China.
• Document all procedural steps thoroughly, especially notice and service.

2. Swift Action for Enforcement

• File promptly within China's two-year statute of limitations[legalnetlink.net ].
• Immediately seek asset preservation measures to secure debtor assets[legalnetlink.net ].

3. Engage Experienced Local Counsel

• Local attorneys familiar with enforcement nuances significantly enhance the likelihood of successful asset recovery.

4. Contractual Safeguards

• Include protective clauses like upfront payments, milestone billing, and financial guarantees from Chinese counterparties to reduce enforcement risks[lexology.com ][lexology.com ].

Conclusion

While enforcing U.S. arbitral awards in China is feasible, navigating the procedural intricacies, managing debtor delay tactics, and overcoming practical hurdles require careful strategic planning and local expertise. With proactive measures, American companies can significantly improve their chances of successfully enforcing arbitral awards in China.

References

1. Zhong Lun Law Firm. (2024). Recognition and Enforcement of Foreign Arbitral Awards in China: Statistical Analysis and Trends. Retrieved from https://www.zhonglun.com/research/articles/54574.html

2. Wolters Kluwer Legal Blogs. (2024). Recognition and Enforcement of Foreign Arbitral Awards in China Between 2012-2022: Review and Remarks, Part I. Retrieved from https://legalblogs.wolterskluwer.com/arbitration-blog/recognition-and-enforcement-of-foreign-arbitral-awards-in-china-between-2012-2022-review-and-remarks-part-i/

3. Legal Net Link. (2024). Overview: Recognizing and Enforcing Foreign Arbitral Awards in China. Retrieved from https://legalnetlink.net/resources/overview-recognizing-and-enforcing-foreign-arbitral-awards-in-china

4. Sheppard Mullin. (2024). Refusal to Enforce Arbitration Awards on Grounds of Public Policy in China: A Question of Timing. Retrieved from https://shepwedd.com/knowledge/refusal-enforce-arbitration-awards-grounds-public-policy-china-question-timing

5. TL Blog. (2024). Enforcing Chinese Judgments: Local Protectionism and Commercial Litigation Analysis. Retrieved from https://tlblog.org/enforcing-chinese-judgments-a-response/

6. Lexology. (2024). Currency Exchange Controls and Banking Compliance in China Cross-Border Transactions. Retrieved from https://www.lexology.com/library/detail.aspx?g=776d48f8-c2f2-41ef-893f-8b54ae201ba8

7. Harris Sliwoski. (2024). Collecting on Judgments Against Chinese Companies: Enforcement Strategies and Success Rates. Retrieved from https://harris-sliwoski.com/chinalawblog/collecting-on-judgments-against-chinese-companies/