Seek Truth from Facts: An Empirical Study of Enforcement of Arbitral Awards in the PRC

Abstract

This Article is based primarily on a survey of 89 foreign and China International Economic and Trade Arbitration Commission (CIETAC) arbitral award enforcement cases in the PRC. The main finding of this survey is that enforcement is neither as hopeless as foreign investors and reporters are wont to suggest nor as unproblematic as official and semi-official sources would have us believe. Almost half of all foreign and CIETAC awards were enforced in the sense that the party recovered at least some amount. The enforcement rate for foreign awards was 52%, slightly higher than the 47% success rate for CIETAC awards. Furthermore, investors can expect to recover 75-50% of the award amount in 34% of the cases and half of the award at least 40% of the time. As for the factors that influence success and failure, the insolvency of the respondent was by far the biggest obstacle to collection, accounting for 43% of all non-enforcement cases and statistically significant by conventional standards when controlling for other factors. Awards were easier to enforce in Beijing, Shanghai and Guangzhou than in other cities. And the size of award was negatively correlated with enforcement, with smaller awards more likely to be enforced and large awards less likely to be enforced. Surprisingly, the nationality of the applicant (PRC or foreign) did not turn out to be relevant, although the small sample size cautions against drawing too firm a conclusion. Equally surprising, local protectionism, although widely prevalent, did not significantly affect the likelihood that an award would be enforced, though it often contributed to difficulties and delays in enforcement. With respect to rule of law issues, the core findings are that while deficiencies in the regulatory framework contribute to enforcement difficulties, the main obstacles are institutional in nature. Consistent with the view that the Party is retreating from day to day governance, only rarely did Party members intervene in specific cases, and usually then only on the basis of a personal relationship with one of the parties or lawyers. Nor was the purpose or effect of Party intervention necessarily to obstruct enforcement. On balance, Party members played a positive role in promoting enforcement in the few cases where they did get involved. To be sure, the long term effects of Party intervention on the development of rule of law are likely to be negative. Moreover, whether the Party will give its stamp of approval to the deeper institutional reforms required to address the enforcement issue remains to be seen. The weakness of the courts was readily apparent and manifested itself in a variety of ways that made enforcement difficult, including the tendency to push applicants to settle rather than to rely on compulsory enforcement. In addition, the low level of judicial competence clearly hindered the efforts of investors to enforce awards in a number of cases. On the other hand, incompetence on the part of local counsel was rarely a factor. Guanxi continued to be important, although it is hard to generalize about its importance or even to assess its impact in specific cases because both sides usually invoked multiple layers and channels of connections. The survey also demonstrates that a rule of relationships is not an adequate alternative to the rule of law and courts that are able to enforce awards. However, to address the broader issue of whether a rule of relationships is sufficient to sustain economic growth requires an examination of factors that go beyond the narrow confines of arbitral award enforcement to other aspects of the economy.