Applying New York Convention’s ‘public policy’ clause in China

Authors: Zhang Guanglei / Chen cheng

(This article was first published on China Business Law Journal column "Cross-border dispute resolution", authorised reprint)

As the principal basis on which commercial entities apply for the recognition of foreign arbitral awards in China, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) specifies that where the recognition and enforcement of a foreign arbitral award would violate public policy in China, a Chinese court may rule not to recognize and enforce it.

Chinese law does not define the meaning of “public policy” clearly. In judicial practice, where other grounds exist for refusing to recognize and enforce an arbitral award, the court may not actively conduct a public policy review. Accordingly, there are relatively few adjudication rules for such issues, which the author argues deserve attention.

In general, public policy reviews do not touch upon substantive issues

In Reply [2008] Min Si Ta Zi No. 48, given to the Shanghai High Court, the Supreme Court held that as the assessment of the quality of the equipment in question fell within the rights of the arbitral tribunal, the court should not treat the fairness and reasonableness of the substantive arbitral findings as criteria for determining whether the recognition and enforcement of the arbitral award violated public policy in China.

In Case [2016] Hu 01 Xie Wai Ren No. 12, the First Intermediate People’s Court of Shanghai municipality held – in respect of the respondent’s claim that the liquidated damages were excessively high and thus violated the principal in Chinese law that the “purpose of liquidated damages is to compensate for actual losses” – that matters relating to liability for breach of contract were substantive matters, which the arbitral tribunal had the right to decide on.

Accordingly, it did not review such matters and found that recognition and enforcement of the arbitral award would not violate basic legal systems or harm fundamental public interests. In Case [2019] Zhe 04 Xie Wai Ren No. 2, the Jiaxing Intermediate Court likewise held that the argument by the respondent that the withholding of key evidence by the claimant resulted in an unjust award was not sufficient to constitute a violation of public policy in China.

In general, public policy involves the public interest

In Case [2014] Shen Zhong Fa She Wai Chu Zi No. 119, the respondent claimed that the applicant had used fraudulent means to induce it to execute an agreement, and if the arbitral award were recognized it would run counter to good faith, public order and good morals, and violate public policy in China.

The Shenzhen Intermediate Court held that the “public policy” clause of the New York Convention was applicable only when an arbitral award had a bearing on the basic systems and norms of a country’s laws, the basic principles of social and economic life, and the basic morals and ethics of society, etc., thereby affecting the overall interests of all members of society. This case did not involve all of these, and accordingly the clause was not applicable.

In Case [2016] Liao 02 Xie Wai Ren No. 2, the Dalian Intermediate Court held that even if the trademark in question were cancelled or transferred in accordance with the arbitral award, the only thing affected would be the economic interests of the respondent; and it did not violate basic legal systems or harm fundamental public interests. Accordingly, the respondent’s argument that the recognition and enforcement of the arbitral award would violate public policy in China was untenable.

Judicial sovereignty falls under the protection of public policy

In Case [2017] Jin 72 Xie Wai Ren No. 1, given to the Tianjin Maritime Court, the arbitration clause in question had already been found to be invalid in Civil Ruling [2017] Yue Min Xia Zhong No. 857, rendered by the Guangdong High Court. The Tianjin Maritime Court held that the recognition and enforcement of an arbitral award under the New York Convention implied a positive attitude of the court of the place of enforcement toward the existence and validity of the arbitration clause on which the award was based.

Where a Chinese court had already rendered a negative judgment on the validity of such arbitration clause, the recognition and enforcement of the award rendered on such arbitration clause would run counter to the national legal values of uniformity and consistency. Accordingly, national legal values and judicial judgment conclusions should not be excluded from the scope of what constitutes “public policy”. Accordingly, the Tianjin Maritime Court ruled not to recognize and enforce the arbitral award in question.

Violation of a mandatory provision of a Chinese law does not necessarily constitute a violation of public policy

In the cases covered by Reply [2001] Min Si Ta Zi No. 12, given to the Hainan High Court, and Reply [2003] Min Si Ta Zi No. 3, given to the Beijing High Court by the Supreme Court, the transactions in question violated mandatory provisions of Chinese laws, but the Supreme Court expressly replied that a violation of a mandatory provision of a Chinese law was not exactly equivalent to a violation of public policy in China. Accordingly, recognition and enforcement of the arbitral award should not be refused.

The rules established in the above-mentioned replies have been respected in subsequent judicial practice, for example: In Case [2018] Ji 24 Xie Wai Ren No. 163; Case [2016] Lu 11 Xie Wai Ren No. 1; Case [2017] Chuan 01 Xie Wai Ren No. 1; and Case [2014] Shen Zhong Fa She Wai Chu Zi No. 60. The transactions in question involved violations of mandatory provisions of Chinese laws on foreign exchange, import/export, etc., which led the respondents to claim that enforcement of the arbitral awards would violate public policy in China. However, all of the courts that accepted the cases held that violation of a mandatory provision of a Chinese law was not necessarily equivalent to a violation of public policy in China.

The special nature of a respondent does not necessarily violate public policy

In Case [2017] Yu 01 Xie Wai Ren No. 11, given to the Zhengzhou Intermediate People’s Court, the respondent claimed that it was a military goods company established pursuant to relevant state documents, and the purpose of its establishment was fine-tuning of the public policy of national security. Accordingly, recognition and enforcement of the relevant arbitral award would violate public policy.

The Zhengzhou Intermediate Court held that the parties had agreed to resolution by arbitration, the result of which was to be accepted by both parties. Although the respondent was a military goods company, which implied a certain special nature, its bearing of liability in accordance with the arbitral award would not necessarily lead to national security being compromised. The court ultimately ruled to recognize and enforce such arbitral award.

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作者介绍张光磊

合伙人

010-5809 1515

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张光磊律师毕业于中国政法大学，获法学学士、民法学硕士和商法学博士学位。此外，获美国乔治华盛顿大学法学硕士学位，为哥伦比亚大学法学院访问学者。张律师拥有中国及美国纽约州律师资格，为香港国际仲裁中心在册仲裁员，中国政法大学法律硕士学院和对外经济贸易大学法学院兼职导师。

张律师的主要业务领域为争议解决，在民商事诉讼、仲裁、调解等领域拥有丰富的经验，被CLECSS评选为2018年十大杰出青年律师。在香港国际仲裁中心主办的2019国际仲裁中文赛中，张律师带领竞天公诚律师事务所获得北京赛区冠军和全国亚军，其个人在所有场次比赛中均被评为最佳律师。

张律师曾代表境内外客户处理过中国国际经济贸易仲裁委员会及其分会、北京仲裁委员会、上海国际仲裁中心、深圳国际仲裁院、珠海国际仲裁院、香港国际仲裁中心等仲裁机构及中国不同层级法院的数百宗民商事案件。张律师擅长在跨境交易纠纷中为客户制定整体解决方案，曾在美国、新加坡、香港等地的诉讼和仲裁程序中多次担任中国法顾问及专家证人。

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 陈程  

律师

0755-2155 7050

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陈程律师毕业于清华大学法学院，获法律硕士学位，拥有中国律师执业资格。陈律师的主要业务领域为争议解决，曾代表境内外客户处理过数十宗民商事诉讼仲裁案件，也曾参与过多宗商事交易的尽职调查和谈判，在争议预防和解决方面拥有丰富的经验。

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