No Foreign-Related Elements? No Chinese Arbitral Enforcement

No Foreign-Related Elements? No Chinese Arbitral Enforcement

Mia Tan, European-American Desk

It is evident in practice that some foreign-invested enterprises (“FIEs’’) in China have a tendency to choose foreign arbitration institutions, such as the ICC international Court of arbitration and London Court of International Arbitration (LCIA), to settle a dispute that may arise under the contract between it and its counterparty. FIEs should note that in cases without foreign-related elements in the contract, such arbitration clauses will most likely be ruled as invalid and thus the arbitral award will not be enforceable in China. However, what can be deemed as a “foreign-related element”? How shall a FIE set forth its dispute resolution clause? In this article, starting with a real-world typical case, we will introduce the relevant laws and regulations in the People’s Republic of China (PRC) and bring some insights in this regard. 

Case

Beijing Chaoshenglai Emerging Sports Leisure Co., Ltd. (北京朝来新生体育休闲有限公司, hereinafter “BCESL”) VS. Beijing Suowangzhixin Investment Consulting Co., Ltd.（北京所望之信投资咨询有限公司, hereinafter “BSIC”）on Applying for Recognition and Enforcement of Foreign Arbitral Award (Case No. (2013)二中民特字第10670号). 

Facts

1. BCESL is a limited company invested in by a Chinese citizen and incorporated in Beijing, China. BSIC is a limited company invested in by a Korean citizen and incorporated in Beijing, China. Neither of them have habitual residence outside of China.
2. In July 2007, BCESL and BSIC signed a contract in China concerning cooperation in operating a golf course located in Beijing collaboratively. No elements outside of China are of concern. In that contract, both parties agreed on an arbitration clause providing that any dispute arising thereunder shall be submitted to the Korean Commercial Arbitration Board (“KCAB”) for arbitration. Later, a dispute arose under the contract.
3. In April 2012, BSIC initiated arbitration before KCAB and thereafter BCESL filed a counter-claim. In May 2013, KCAB issued an arbitral award.  
4. In June 2013, BCESL applied for recognition and enforcement of the KCAB arbitral award before Beijing’s Second Intermediate People’s Court.

Court’s Decision

In January 2014, the People’s Court finally ruled against the recognition and enforcement of the KCAB arbitral award by reason that the arbitration clause under the contract is invalid. The Court held that:

• According to the Civil Procedure Law of the PRC and the Arbitration Law of the PRC, disputes under commercial trade with foreign-related elements can be settled by either domestic or foreign arbitration institutions. However, such laws do not allow one party to submit a dispute without a foreign-related element to a foreign arbitration institution for arbitration.
• Both BSIC and BCESL are Chinese legal persons though BSIC’s shareholder is a foreigner. The contract was entered into in China, and the object of the contract, i.e. the golf course, is located in China. The establishment, change, and termination of civil relation between BSIC and BCESL all occurred within China. There is no foreign-related element under the contract.
• The arbitration clause under the contract without a foreign-related element shall be held invalid as it violates the laws of the PRC. The arbitral award issued according to such arbitration clause shall thus be unenforceable. 

A&Z’s Comments

To better understand the case, one should first note what a “foreign element” is. According to the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Law of the People's Republic of China on Foreign-Related Civil Relations (I), only under any of the following circumstances may the People's Court determine a civil relation has foreign-related elements:

1. Where either party or both parties are foreign citizens, foreign legal persons or other organizations or stateless persons;
2. Where the habitual residence of either party or both parties is located outside the territory of China;
3. Where the object is outside Chinese territory;
4. Where the legal fact that leads to establishment, change, or termination of the civil relation happens outside the territory of the PRC; and
5. Other circumstances that may be determined as a foreign-related civil relation (savings clauses barely apply).

FIEs should note the fact that their shareholders are foreigners or companies incorporated in a foreign country which cannot be deemed as “foreign-related elements”, as FIEs are considered Chinese legal persons.

In actuality, the laws of the PRC do not expressly provide that a dispute without a foreign-related element is not allowed to be settled by a foreign arbitration institution. However, in 2012, the Supreme People’s Court as the highest judicial authority expressed its opinion that one party is not allowed to submit the dispute with no foreign-element to a foreign arbitration institution. Thereafter, many Courts have followed the Supreme People’s Court’s opinion.

Therefore, if one party of a contract without foreign-related elements submits the dispute to a foreign arbitration institution for arbitration and the arbitral award needs to be enforced in the PRC, the Chinese Court will likely rule against the recognition and enforcement of such an arbitral award. 

A&Z’s Insights for FIEs

Before concluding a contract with a Chinese individual or a company incorporated in China, a FIE shall judge if any foreign-related elements exist under the contract. If no foreign-related elements exist, it is advisable to agree on a domestic arbitration institution, for example CIETAC, or a Chinese People’s Court rather than a foreign arbitration institution.