15 September 2016

One Arrangement, Two Systems: considerations when enforcing awards between Hong Kong and the PRC

This article was written by Edmund Wan (partner), Teng Haidi (partner), James McKenzie (associate), Yu Qing (paralegal) and Jack Nelson (trainee solicitor).

Introduction

The foundational instrument for the enforcement of international arbitral awards, the New York Convention (the “Convention”),[1] has made arbitral awards readily enforceable across the world but, in application, the Convention remains reliant upon the divide between domestic and international arbitration awards.

Cross-border enforcement of arbitral awards within the constitutional principle of “one country, two systems” and between the People’s Republic of China (the “Mainland”) and Hong Kong in 1997 threw this limitation into sharp relief. Indeed, reunification brought about a wholly unsatisfactory state of affairs where Hong Kong awards were, for a period of time, unenforceable in the Mainland, and vice-versa. The solution to this problem, brokered between the authorities of Hong Kong and the Mainland, was a bespoke agreement, the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and Hong Kong (the “Arrangement”).

This article discusses the history behind the Arrangement and its practical, and somewhat asymmetrical, effect on the enforcement of Mainland arbitral awards in Hong Kong and on the enforcement of Hong Kong arbitral awards in the Mainland. 

Background to the Arrangement

In 1975 the United Kingdom ratified the Convention, with application to Hong Kong taking effect in 1977.[2] Ten years later, the Mainland ratified the Convention. This made Mainland arbitral awards readily enforceable as Convention awards in Hong Kong, and vice-versa. Upon the resumption of Chinese sovereignty over Hong Kong on 1 July 1997, the Chinese Government extended the application of the Convention to Hong Kong. However, issues concerning the enforcement of arbitral awards arose quickly thereafter.

In late 1997, an application in Hong Kong to enforce a Mainland arbitral award pursuant to the Convention[3] was rejected on the basis that Hong Kong and China were no longer “separate parties” to the Convention.[4] In Mainland China, the People’s Courts also received applications to enforce Hong Kong arbitral awards, but were reluctant to issue any decisions in the absence of a specific agreement.[5] This undesirable enforcement lacuna persisted for some two years while a series of negotiations took place between the relevant Mainland and Hong Kong authorities. These negotiations culminated on 21 June 1999, when the Arrangement was finally agreed between Hong Kong’s Department of Justice and the Supreme People’s Court.

Under the Arrangement, Hong Kong’s courts agreed to enforce awards made pursuant to the Arbitration Law of the People’s Republic of China ([1994] No. 31) (the “Arbitration Law”). In turn, the People’s Courts of the Mainland agreed to enforce awards made pursuant to Hong Kong’s Arbitration Ordinance (previously Cap. 341, now Cap. 609) (the “Arbitration Ordinance”). Once effective, the Arrangement re-established the mutual enforcement of arbitral awards between the Mainland and Hong Kong along the lines of the pre-1997 situation.[6]

Enforcing a Hong Kong award in the Mainland

In accordance with the Arrangement, where a party fails to comply with an arbitral award made in Hong Kong, the other party may apply to the relevant People’s Court to enforce the award. This section discusses the criteria, process and practical issues regarding the enforcement of a Hong Kong award in the Mainland.

Process of enforcement

Holders of arbitral awards made in Hong Kong, whether institutional or ad hoc, can apply for enforcement in the Mainland under the Arrangement.[7] The Intermediate People’s Court at the place of domicile of the respondent,[8] or the place where the respondent's property is located, has jurisdiction over the enforcement application, and the enforcement application will be governed by the relevant Mainland laws, including the Arrangement.

In order to enforce a Hong Kong award in the Mainland, an applicant must submit: (i) a written application for enforcement; (ii) the arbitral award; and (iii) the arbitration agreement. Applicants may also be required to submit a certificate of effectiveness issued by the relevant arbitration institution proving that the arbitral award has come into effect. These documents, and all other supporting documentation, have to be translated into simplified Chinese in order to be admissible in a People’s Court.

If an Intermediate People’s Court decides not to enforce an award, that Court must submit their decision to the relevant Higher People’s Court for review. If the Higher People’s Court decides to uphold the lower court’s decision to not enforce the award, it must then report this decision to the Supreme People’s Court.[9] The Supreme People’s Court will then review the matter and reply with a final decision.[10]

Refusal of enforcement

Article 7 of the Arrangement stipulates the circumstances under which the Mainland court could refuse the application for enforcement of a Hong Kong arbitral award. As is discussed with respect to enforcement in Hong Kong below, many of the circumstances can be avoided by prudent and careful conduct during the arbitration. More problematic are the issues of: (i) arbitrability; and (ii) public policy, both of which are dealt with below.

Arbitrability

Under the Arrangement, if the relevant court finds that under the law of the place of enforcement the dispute is not arbitrable (i.e. incapable of being settled by arbitration), then the court may refuse to enforce the award. Under the Arbitration Law, only contractual disputes and other disputes over rights and interests in property between citizens, legal persons and other organizations may be arbitrated.[11] Family and succession disputes, as well as administrative disputes, are specifically proscribed as not capable of being settled through arbitration.[12]

Therefore, if the subject matter of a Hong Kong award is clearly proven to fall out of the scope of the disputes that are capable of being settled through arbitration, the enforcement of such an award will be refused in the Mainland. Accordingly, parties seeking to enforce Hong Kong awards in the Mainland should first ensure that the relevant dispute is arbitral as a matter of Chinese law.

Public policy

Article 7(5) of the Arrangement states enforcement of an arbitral award may be refused if a Mainland court finds that the enforcement would be contrary to the public interests of the Mainland.

There is no specific provision under Mainland law regarding the definition of violation of public policy. However, the Supreme People's Court has previously ruled that “the principle of public policy should be applicable only under the circumstances that the recognition of an arbitral award would violate China's basic legal system and cause damage to China's fundamental social interests”.[13] In other cases the Supreme People’s Court has emphasised that public interest should be strictly interpreted and limited in its use, and that violation of mandatory rules of the law, administrative rules and departmental regulations does not necessarily comprise violation of public interest.[14] Accordingly, any rejection of enforcement of an arbitral award by an Intermediate People’s Court is likely to attract significant judicial scrutiny upon review.

Asset preservation

There is no specific rule regarding asset preservation pending enforcement of an arbitral award under the Arrangement.[15]

Nonetheless, there is one case where the Fuzhou Intermediate People’s Court granted asset preservation pending enforcement of a Hong Kong arbitral award.[16] The Court reasoned that the application filed under the Arrangement should be treated as akin to an enforcement under the Civil Procedure Law, which allows for asset preservation. In the absence of further Supreme People’s Court guidance, it is unclear whether the Fuzhou Intermediate People’s Court’s pragmatic approach applies across the Mainland.

Enforcing a Mainland award in Hong Kong

In Hong Kong, Mainland awards are enforced in a similar manner to Convention awards, and also benefit from the strong presumption in favour of enforcement that Convention awards enjoy.[17] Asset preservation is readily available, and Hong Kong courts stand ready to assist the arbitral process.

An applicant can choose to enforce an award under Section 84 of the Arbitration Ordinance either by way of summary procedure, or alternatively by an action on the award on the basis that the award is a debt due.[18] In both cases, the application will be heard by the Court of First Instance. As evidence for enforcement of an award, a plaintiff will have to produce: (i) the authenticated original arbitral award or a duly certified copy of it; (ii) the original arbitration agreement or a duly certified copy of it; and (iii) a certified translation of the arbitral award and agreement if they are written in a language other than English or Chinese.[19]

Recognised Mainland arbitral authorities

Under Section 2(1) of the Arbitration Ordinance, a “Mainland award” is defined as an “arbitral award made in the Mainland by a recognised Mainland arbitral authority in accordance with the Arbitration Law of the People’s Republic of China” (emphasis added). Accordingly, not all arbitral awards are eligible for enforcement under the Arbitration Ordinance. A list of recognised mainland arbitral authorities is published and updated in the Gazette from time to time by the Secretary of Justice.[20] The list includes CIETAC and the China Maritime Arbitration Commission, as well as most domestic arbitration commissions established under the Arbitration Law.[21]

Refusal of Enforcement

The Court is empowered to refuse the enforcement of a Mainland award on the grounds listed in Section 95 of the Arbitration Ordinance, which mirror the grounds for refusal to enforce a Convention award. A few examples are: where a party to the arbitration agreement was under some incapacity; or where the arbitration agreement was invalid; or where a party was not given proper notice of the appointment of the arbitrator. Many of these instances can be cured by prudent and informed conduct during the arbitral proceedings, drafting of the arbitration agreement, and the appointment of arbitrators. Although the Court is empowered rather than required to refuse enforcement in these circumstances, refusal typically follows a finding that a relevant ground has been established as a matter of practice.

As with the enforcement of Hong Kong awards in Mainland China, the most problematic and highly debated ground of refusal is where it would be contrary to public policy to enforce the award. This is dealt with further below.

Notable asymmetries in the application of the Arrangement

Apart from the differences in arbitrability noted in Section 2 above, the Arrangement also reflects the differing negotiating power of Hong Kong and the Mainland. This is demonstrated by the various asymmetries in its application to enforcement of awards between the two territories.

First, there is an asymmetry regarding the refusal of enforcement. Under Article 7, a Hong Kong court can refuse enforcement of a Mainland award if the court “decides that the enforcement of the arbitral award in Hong Kong would be contrary to the public policy” of Hong Kong. However, under this same Article, a Mainland court can refuse enforcement of a Hong Kong award if the court “holds that the enforcement of the arbitral award in the Mainland would be contrary to the public interests of the Mainland”. The actual effect of these differences has not been tested in either Mainland or Hong Kong courts. Nonetheless, a plain reading of Article 7 indicates that Mainland courts have a wider margin of discretion to refuse enforcement than that enjoyed by courts in Hong Kong.

Second, the Hong Kong courts have adopted a restrictive approach to the public policy exception in respect of both Convention awards and Mainland awards. The Keeneye case[22] and subsequent Hong Kong authority[23] evidence that courts will take a pro-enforcement approach and will not readily refuse to enforce Mainland arbitral awards. In particular, the public policy ground has been interpreted narrowly. The judgment also illustrates the Hong Kong court’s deference to decisions of Chinese courts in deciding whether or not to enforce a Mainland award, citing it as a “very strong policy consideration”.

Third, Article 2 of the Arrangement explicitly provides that enforcement cannot be sought in the Mainland and Hong Kong simultaneously even where respondent owns property in both regions. The rule may be circumvented where the result of enforcement proceedings in one jurisdiction is insufficient to fully satisfy the award.[24] In such a case, the applicant may apply to the court of the other jurisdiction for enforcement of any outstanding liabilities, provided that the total amount recovered across both Hong Kong and the Mainland does not exceed the amount awarded.

Fourth, Article 5 states that the differing limitation periods applicable in the Mainland and Hong Kong will continue to apply. In the Mainland, the time limit for an application to enforce awards is two years.[25] In Hong Kong, the time limit is six years.[26] Accordingly, an applicant who finds themselves out of time in the Mainland may still enforce an award in Hong Kong.

Conclusion

As Chinese parties have increasingly favoured Hong Kong as their seat of arbitration, the number of enforcements under this Arrangement, and its importance to enforcement proceedings in the Mainland, has slowly but inexorably increased. The Arrangement’s importance is expected to increase further as Hong Kong continues to be the seat of choice for Chinese parties seeking a neutral venue.

As can be seen from the foregoing, although the Arrangement has been effective in plugging the lacunae created by reunification of Hong Kong with the Mainland, notable limitations and asymmetries exist between Hong Kong and the Mainland in their enforcement of each other’s arbitral awards.

To avoid difficulties, parties seeking to enforce awards under the Arrangement should first consider whether the award is institutional or ad hoc, and where the relevant assets are located. Thought should then be given to the applicable limitation periods, and the availability of asset preservation. Finally, any potential grounds for refusing enforcement should be canvassed before beginning the enforcement process in either jurisdiction.


[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, effective on 7 June 1959.
[2] Arbitration (Amendment) Ordinance (No. 85 of 1975).
[3] Ng Fung Hong Ltd v ABC [1998] 1 HKC 213.
[4] Specifically, Findlay J stated that “since the People’s Republic of China resumed sovereignty over Hong Kong on 1 July 1997, Hong Kong and Mainland China have ceased to be separate parties to the New York Convention vis-à-vis each other.”
[5] “Regulations abiding Mutual Enforcement of Arbitral Awards Between the Mainland and Hong Kong”, China Law (4) 18.
[6] The Arrangement was promulgated on the Mainland in January 2000, becoming effective on 1 February 2000 (see 法释[2000]3号). In coordinated legislative action, the Arrangement was incorporated into Hong Kong law by the Legislative Council in January 2000 through the Arbitration (Amendment) Ordinance 2000 (2 of 2000), becoming effective on 1 February 2000.
[7] Notice of the Supreme People’s Court on Issues Related to the Enforcement of Hong Kong Arbitral Awards in Mainland China (Fa [2009] No. 415).
[8] Where there are multiple respondents to an award, Article 21 of the Civil Procedure Law of the People’s Republic of China ([1991, revised 2012] No. 44) provides that “[w]here the places of domicile or places of habitual residence of several defendants in the same action are located within the jurisdictions of two or more people's courts, both or all of such people's courts shall have jurisdiction over the action.” Therefore all Mainland courts with jurisdiction over the place of domicile of the respondent will have jurisdiction over the enforcement application and the applicant may apply to any of these courts for enforcement.
[9] Article 2 of the Notice of the Supreme People’s Court on Handling Relevant Issues about Foreign-related Arbitration and Foreign Arbitral Issues by the Supreme People’s Court (No. 18 [1995]).
[10] The Civil Procedure Law of the People’s Republic of China ([1991, revised 2012] No. 44) and the Arrangement are silent with respect to timing. Generally speaking, review by an Intermediate People’s Court takes approximately one year. If that court’s decision is to be reviewed by a Higher People’s Court and then by the Supreme People’s Court, this will take at least another year.
[11] Article 2, Arbitration Law.
[12] Article 3, Arbitration Law.
[13] Reply to the Request for Instructions on Non-Recognition of No. 07-11 (Tokyo) Arbitral Award of the Japan Commercial Arbitration Association ([2010] Min Si Ta Zi No. 32).
[14] See, eg, Reply to Haikou Intermediate People’s Court Regarding the Request for Instructions on Non-Recognition and Non-Enforcement of the Arbitral Award of the Arbitration Institute of the Stockholm Chamber of Commerce [2001] Min Si Ta Zi No. 31; Reply to the case of E.D. & F. Man (Hong Kong) Limited - Application for Recognition and Enforcement of the Arbitration Award of the London Sugar Commission, [2013] Min Si Ta Zi No. 3; Reply to the Request for Instructions Re the Hong Kong Xiang Jin Grain and Oil Food Co., Limited - Application for Enforcement of the Arbitration Award of Hong Kong International Arbitration Center [2003] Min Si Ta Zi No. 9.
[15] This contrasts with the specific powers of Mainland courts to grant asset preservation in respect of applications for the recognition and enforcement of the Hong Kong civil judgments, Macau arbitral awards, Macau civil judgments, Taiwan arbitral awards, and Taiwan civil judgments. See respectively Article 14 of Arrangement of the Supreme People's Court between the Mainland and the HKSAR on Reciprocal Recognition and Enforcement of the Decisions of Civil and Commercial Cases under Consensual Jurisdiction; Article 11 of Arrangement between the Mainland and the Macau SAR on Reciprocal Recognition and Enforcement of Arbitration Awards; Article 15 of Arrangement between the Mainland and the Macau Special Administrative Region on the Mutual Recognition and Enforcement of Civil and Commercial Judgments; Article 10 of Provisions of the Supreme People's Court on Recognition and Enforcement of the Arbitral Awards of the Taiwan Region; Article 10 of Provisions of the Supreme People's Court on Recognition and Enforcement of the Civil Judgments of Courts of the Taiwan Region.
[16] Fujian Zongheng Gaosu Information Technology Limited Co., Fujian Focus Media Limited Co., Cheng Zheng v Shidai Cayman Investment Co. (Case no.: (2014) Rong Zhi Jian Zi No. 51).
[17] The Hong Kong court will consider Hong Kong case law regarding the Convention to be influential to the enforcement of Mainland awards. See Shantou Zheng Ping Xu Yueli Shu Kuao Trading Co Ltd v Wesco Polymers Ltd [2002] HKEC 76.
[18] Section 92, Arbitration Ordinance.
[19] Section 94, Arbitration Ordinance.
[20] A list of recognised Mainland arbitral authorities is published in the Hong Kong Government Gazette and can be accessed at: http://www.gld.gov.hk/egazette/pdf/20111521/egn201115213248.pdf
[21] The Supreme People’s Court issued a judicial interpretation on 5 July 2015 to clear up any residual confusion surrounding the recently established Shanghai International Arbitration Centre and the Shenzhen Court of International Arbitration, clarifying the procedure for deciding jurisdiction and enforcing awards emanating from these institutions.
[22] Gao Haiyan v Keeneye Holdings Limited [2012] 1 HKLRD 627.
[23] See, eg, Granton Natural Resources Company Limited v Armco Metals International Limited [2012] HKCFI 1938; Re PetroChina International (Hong Kong) Corporation Limited [2011] 4 HKLRD 604; 廣東長虹電子有限公司 v Inspur Electronics (HK) Limited [2014] HKCFI 2403. Cf 樓外樓房地產咨詢有限公司 v 何志蘭 [2015] HKCFI 664, where the Court of First Instance refused to enforce two Mainland awards after deciding that the Notice of Hearing was not properly served.
[24] Section 93(2), Arbitration Ordinance (Cap. 609).
[25] Article 215, Civil Procedure Law.
[26] Section 4(1), Limitation Ordinance (Cap. 347).

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