Two recent issues related to the enforcement of arbitral awards in Asia have brought the topic to the fore. Lawyers say that while the region has a generally good record of enforcing awards, clients should always be aware of the possible risks.
Arbitration in Asia is thriving, with the region touting destinations like Hong Kong and Singapore, which compete with London, Paris and New York as the most popular arbitral seats in the world. South Korea also opened its Seoul International Dispute Resolution Centre (SIDRC) in the capital just a few years ago.
Asia has been especially effective with enforcing awards as well. South Korea, for example, revised its Arbitration Act, which took effect late November, making the enforcement of arbitration awards even easier and faster.
“Asian jurisdictions generally have excellent records of enforcing awards, whether those awards are made in Asia or elsewhere,” says Justin D’Agostino, global head of disputes at Herbert Smith Freehills in Hong Kong. “The key international arbitral seats in Asia – Hong Kong, Singapore, Seoul and Kuala Lumpur – as well as mainland China are New York Convention jurisdictions. And most, if not all, have arbitral legislation based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law.”
Of course, that doesn’t apply to all jurisdictions in the region. Challenges to enforcing arbitration awards in disputes like Semperit-Sri Trang in Thailand and Ranbaxy-Daiichi in India have raised concerns about certain jurisdictions.
Semperit, an Austrian rubber and plastic products maker, accused Thai natural rubber producer Sri Trang of breaching a joint venture agreement and wants damages of about 82 million euros. Sri Trang has denied these claims.
The Austrian group won an arbitration award in Zurich, but the award will be difficult to enforce in Thai courts. Semperit CEO Thomas Fahnemann told Reuters that the legal dispute has hurt the company’s day-to-day operations, and has decided to invest in Malaysia instead.
Meanwhile, Japanese pharmaceutical giant Daiichi Sankyo is also having difficulties enforcing an arbitration award in a local court in India. Daiichi accused former shareholders of Indian drugmaker Ranbaxy Laboratories of concealing critical information when it bought control of the company. The Japanese company won an award of about $500 million at arbitration in Singapore last year, which the ex-Ranbaxy shareholders are challenging in India.
“India has been known for unnecessary court interference in arbitral awards, although the situation is improving following active intervention by the Modi government,” observes D’Agostino.
“The legal regime in Indonesia is also less well developed, and foreign parties may encounter significant delays and other obstacles when seeking to enforce awards in that country.”
The Southeast Asian country is one of the most difficult jurisdictions to enforce arbitration awards. Lee Young Seok, secretary-general of SIDRC and an international dispute resolution partner at Yulchon, has an ongoing case that he has been trying to enforce an award from London in Indonesia for the past six years.
“There are several steps, but not only are the steps very slow, but also the responsible parties keep raising different proceedings – like injunctions to prevent enforcement,” says Lee. “The court hears the enforcement case until those proceedings are all resolved. They don’t move, and once one of the proceedings is about to be closed, then another proceeding begins.”
Lee believes Indonesia’s slow court system and culture, as well as influential people in business and politics, are affecting the enforcement of awards. “When the respondent has some business or political influence, then they can prolong the proceedings as long as they want,” he adds. “That’s my impression.”
GOOD RECORD
On the other side of the spectrum are Hong Kong and Singapore, Asia’s top arbitration centres. “I hardly see any rulings that are not enforceable because the courts took the attitude – and I stress the word attitude – that they will not intervene with the arbitrators in Hong Kong and Singapore,” points out Ronald Sum, chairman of the International Chamber of Commerce (ICC) Arbitration in Hong Kong and dispute resolution partner at Troutman Sanders.
“Obviously, there are criteria that allow you to set aside the awards if, for example, the arbitrator has gone mad, which is highly unlikely, or if the arbitrators are so grossly error in law.”
China is difficult to place in the spectrum. There is a perception – perhaps an unfair one – that it is difficult to gauge whether an arbitration award will be enforced in Chinese courts. The obvious reason is the country’s court system, which runs on civil law rather than a Common Law precedent system.
“In Hong Kong and Singapore, where the courts use the precedent system, you can go to court and dig out a case, and you know you’ll be able to enforce it, so it’s an added comfort. I think it’s more psychological,” says Sum.
“China has the same set of rules, but people are worried because it’s courts-driven, so it’s difficult to gauge what the outcome is, and I think this bothers people.”
Unlike in jurisdictions like Hong Kong and Singapore, where lawyers can search for awards and judgments on judicial websites or legal research services like Thomson Reuters’ Westlaw to read and understand a judge’s reasoning, it is difficult to search for cases in China, where cases are not compiled.
“Judges in China are not are not common law judges – they are civil law judges,” explains Sum. “They do not run on the precedence system, so what’s the point of compiling it?”
PUBLIC POLICY
The most common reason for refusing enforcement of an arbitration award is public policy, primarily because of its vague concept. But the ambiguousness of the public policy defence is at another level in Chinese courts, where the presiding judge’s view of public policy is also a factor, adding an element of unpredictability to the task of providing advice.
“A judge’s public policy may be different from another judge’s public policy, so it’s subjective,” says Sum. “It is this subjectiveness that makes it a bit… I wouldn’t say difficult, but it is a bit uncertain for practitioners.”
In Hong Kong, however, it’s almost impossible to get an arbitration award refused on that ground. “The Hong Kong courts have taken the view that public interest is basically so difficult that even practitioners like us couldn’t even be bothered pleading public policy,” says Sum. “And 99.9 percent of the time, that is bound to lose, unless you have such a compelling case and it’s so obvious. Besides that, the Hong Kong courts stick to the view that they’re not going to touch the award and they’re going to let you enforce it.”
Fortunately for arbitration lawyers, the public policy defence is becoming less popular because if the court does refuse enforcement of an arbitration award on that ground, then it is regarded as a very low stage of arbitration development, notes SIDRC’s Lee.
“They are trying to be more sophisticated and tend to focus more on procedural issues, such as due process in arbitration proceedings or scope of arbitration agreement,” he says. “Most of the countries are signatories to the New York Convention, so the causes of refusal to enforcement are quite limited, but those are the most commonly seen grounds.”
NEVER TOO EARLY
It’s never too early to start thinking about the worst-case scenario, stress the disputes lawyers. “We always advise clients to look at enforcement issues long before beginning a claim, starting with drafting the dispute resolution provisions in a contract,” shares May Tai, an arbitration partner at Herbert Smith Freehills in Hong Kong.
“Consider your options carefully, and make sure your arbitral seat is a New York Convention jurisdiction,” she advises. “Also, if the counterparty’s core business is based in a jurisdiction where it is difficult to enforce, it could be worth your while to spend time and money to check whether the company has assets in other jurisdictions where enforcement may be easier.”
Doing your research can certainly pay off or compensate losses. If the other party has assets in China, it could be worth it to search for cases in that jurisdiction.
“Although it’s not a precedent, search for cases by judges in Beijing, Shanghai, Guangzhou. You get a sense of what the judge is thinking in the event that something happens, and assuming the judge is still there and hasn’t retired, the possibility of this person going on a tangent is low,” says Sum of Troutman Sanders. “You get a pretty comfortable feel of how to advise clients on what will likely happen. That is, if you have to go into detail, and some clients do want that.”
During the arbitration proceedings, Lee advises clients to ensure due process, particularly when the other party fails to appear or simply files an answer and does not show up later on.
“If the other party doesn’t appear, it means there are two scenarios: one is they don’t have the money and they do not have any defence. The other scenario is that even if we obtain an award, they can easily defend enforcement in their local jurisdiction,” he says. “To prepare for that, you must ensure, together with the tribunal members, that the arbitration proceeding itself has the appearance of due process so there cannot be any due process challenge later on.”
And if the jurisdiction is not popular, then get local expert advice. “Before you initiate an arbitration proceeding, you must seek some advice from the local jurisdiction where enforcement is to be initiated, especially when those jurisdictions are not very popular or very typical like some of the advanced countries,” Lee said. “You need to get advice from the local lawyers on how to make enforcement easier. That kind of activity is very essential before initiating arbitration proceedings.”
CHINA TREATED UNFAIRLY?
Clients and lawyers are more comfortable with Hong Kong or other Common Law systems than China, but Sum says that’s all in their head. “Everyone has the funny idea that China runs on a different system. But actually, no – China’s system is extremely similar to the New York Convention,” says Sum.
He also believes what people are concerned about is not the law, but the procedures. While Hong Kong and Singapore tend to have a reputation for simplicity and speed, Sum describes the procedures in China “as more cumbersome” but not necessarily “complicated”.
And while the most important part of arbitration – the enforcement – does take a lot longer, Sum thinks there’s a misunderstanding. “Most of the time, only a certain part of the award is set aside,” he explains. “It’s cumbersome, but once you get part the Chinese courts, they’ve done a good job.”
Sum, however, expects China’s legal system to improve, thanks in part to Beijing’s efforts like One Belt, One Road. “China is already a world economy, but it’s going to be bigger and more international given the One Belt, One Road initiative. You cannot promote this when your legal system is not good. I can only see it becoming an even better system in due course,” he concludes.