PRC Court Rules on Sham Arbitration

By Patrick Zheng | Charles Qin

Due to the strict contractual character of arbitration, an arbitral award, which is an outcome of an arbitration agreement, can only bind and affect the parties to it. But sometimes an award may adversely affect a third party whose rights are inextricably intertwined with the rights disposed of in the arbitration. In order to address this issue, in some jurisdictions, such as France, the law[1] provides for tierce opposition proceedings in the national court which would have jurisdiction to hear the substantive dispute had there been no arbitration agreement.  

In China, tierce opposition proceedings are more often used to address arbitration proceedings which are allegedly brought for the purpose of obtaining a legally enforceable arbitral award to the detriment of a third party’s interest.
 
A recent judicial interpretation,[2] which came into effect on March 1, 2018 (the “Provisions Concerning Enforcement of Arbitration Awards”), created a new cause of action, namely, malicious arbitration or fictitious(sham) arbitration, under which an aggrieved third party could make a tierce opposition to an arbitral award at the enforcement stage. The case below illustrates how this new regime comes into play in China.

Background

This case concerned an arbitration by a judgment debtor during the enforcement stage of the judgment. Ningbo-Zhoushan Port Authority and Ningbo-Zhoushan Port Logistics (the “Judgment Creditors”) won a litigation before Ningbo Maritime Court against Tianjin Junan Coking & Chemical Company (the “Judgment Debtor”) and applied to the Ningbo Maritime Court for enforcement of the judgments. The Ningbo Maritime Court moved the enforcement proceedings to the Tianjin Maritime Court (the “Court”), which froze the Judgment Debtor’s property, including its rights against third parties owing it money.

While the enforcement proceedings were still pending, the Judgment Debtor commenced arbitration proceedings against Jiangsu Huayuan Coking Company (“Jiangsu Huayuan”) bringing claims under the sales contract between them. The Judgment Debtor won, so the award amount was frozen as a creditor’s right against a third party. The Judgment Creditors then made a settlement agreement with Jiangsu Huayuan, by which the Judgment Debtor’s obligation to the Judgment Creditors under the judgments, and Jiangsu Huayuan’s obligation to the Judgment Debtor under the arbitral award, could both be satisfied by Jiangsu Huayuan’s direct payment to the Judgment Creditors.

Later, however, the Judgment Debtor tried to transfer its right to recover the award amount to another person, Zou Hui, and for that purpose sought to enforce the arbitral award against Jiangsu Huayuan.

The Judgment Creditors applied to the Court for an order prohibiting the Judgment Debtor from enforcing the arbitral award against Jiangsu Huayuan on the ground that the enforcement might harm the Judgment Creditors’ rights in the pending judgment enforcement proceedings.

Decision

The Court held that the Judgment Debtor commenced arbitration proceedings against Jiangsu Huayuan with the knowledge that its rights to recover the award amount had been frozen in the judicial enforcement proceedings. In so holding, the Court found that the Judgment Debtor and Jiangsu Huayuan might have maliciously colluded in transferring the frozen property by means of arbitration. Finding that enforcement of the award would damage the legitimate rights of the Judgment Creditors in the court proceedings, the Court held that the Judgment Debtor could not enforce the arbitration award. 

Comment

The Provisions Concerning Enforcement of Arbitration Awards laid down both procedural[3] and substantive[4] conditions for invoking malicious or fictitious(sham) arbitration as a ground for non-enforcement of arbitral awards. The applicant shall bear the burden to prove, inter alia, the following:

a. the arbitration was malicious or fictitious(sham), brought for the purpose of harming the legitimate rights and interests of a third party;
b. the third party is a legitimate and true holder of the rights or interests disposed of by the arbitral award; and
c. the legal relationship and facts addressed between the parties to the arbitration were false, distorted or fabricated.

In order to further address this issue, the Supreme People’s Court issued another judicial interpretation[5] (the “Interpretation regarding Fictitious(sham) Litigation”) imposing criminal liability on malicious or fictitious(sham) arbitration[6].

In China, in more and more disputes arising out of contracts which involve joint creditors or debtors, parties deliberately (with or without justification) commence arbitration against specific parties, and excluding others, thereby adversely harming the latters’ interests. The ground of tierce opposition proceedings available in China is limited to malicious or fictitious(sham) arbitration, which might give rise to criminal liability, so the unique characteristics of Chinese tierce opposition should be taken into account when drafting arbitration agreement or conducting arbitral proceedings in China. 

【Endnote】

---

[1]  The New Code of Civil Procedure, Art. 582 to 592.
[2]  The Provisions of the Supreme People’s Court on Several Issues Concerning the Handling of Cases of Enforcement of Arbitration Awards by People’s Courts.
[3]  The Provisions Concerning Enforcement of Arbitration Awards, Art. 9.
[4]  The Provisions Concerning Enforcement of Arbitration Awards, Art. 18.  
[5]  The Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues concerning the Application of Law in the Handling of Criminal Cases regarding Fictitious Litigation.
[6]  The Interpretation regarding Fictitious Litigation, Art.1.3.

---

Authors:

>

Patrick Zheng

Lawyer | Partner

Llinks Law Offices

>

Charles Qin

Lawyer | Partner

Llinks Law Offices

往期分享

长按下图识别二维码关注我们

© 通力律师事务所

本微信所刊登的文章仅代表作者本人观点, 不代表通力律师事务所的法律意见或建议。我们明示不对任何依赖该等文章的任何内容而采取或不采取行动所导致的后果承担责任。如需转载或引用该等文章的任何内容, 请注明出处。

点击“阅读原文”，直达通力官网了解更多资讯！