China has been Germany's most important trading partner for many years. As economic ties between Germany and China continue to deepen, so do questions of how cross-border claims can be effectively enforced. This article examines the recognition and enforcement of Chinese arbitral awards in Germany and analyses the extent to which their treatment differs from that accorded to Chinese court judgments.
This article shows that the enforcement of arbitral awards from China often offers much better chances of success than the enforcement of Chinese judgments in Germany. This provides an opportunity to take a closer look at the relevant legal framework as well as the current German recognition and enforcement practice with a particular focus on the special features that are relevant for arbitral awards from China.
The recognition and enforcement of foreign judgments is necessary to ensure uniform legal relationships in international legal transactions. Recognition means that a foreign judgment is legally accepted in Germany and has the same legal effects as a domestic judgment. Without recognition, identical legal issues could be assessed differently across jurisdiction. Enforcement goes beyond that. It enables a recognized judgment to actually be put into effect in Germany, e.g. by attachment, penalty payment or other state measures. Together, recognition and enforcement ensure legal certainty prevent claims from remaining ineffective.
1.1.1 Jurisdiction
First of all, the fundamental question arises as to how proceedings against a company domiciled in Germany may be brought before a Chinese court in the first place. The decisive factor for questions of jurisdiction is not the location of the company, but concrete points of connection to the factual dispute. In practice, jurisdiction is often based on a jurisdiction agreement in which the parties explicitly designate a Chinese court. In addition, a “proper” connection to China (including the place of signing of a contract, the place of performance of a contract, the location of the subject matter, the location of the property to be preserve and the location of the representative office; Article 276, the Chinese Civil Procedure Law) can justify the jurisdiction of Chinese courts. The appearance of a company without objection, i.e. a defence on the merits without a prior objection to jurisdiction, can also establish such jurisdiction under Chinese procedural law.
In addition, the Chinese courts will usually consider themselves to have jurisdiction over cases having a Chinese element. Even if there is an agreed jurisdiction clause between the parties agreeing on the jurisdiction of a foreign court, and the foreign party has initiated the court proceeding accordingly, once the Chinese party has initiated the court proceeding in a Chinese court, this Chinese court will consider itself having jurisdiction, unless the foreign party can prove that: 1) the majority of the facts took place outside of China and it is obviously inconvenient for all parties to participate in court proceeding in China, 2) the dispute is not subject to the exclusive jurisdiction of the Chinese courts , 3) no sovereign rights, national security or public interests is involved, and 4) it is more convenient for the dispute to be trialed in a foreign court (Articles 282, the Chinese Civil Procedure Law). This would render parallel litigation in practice and eventually double the cost for resolving disputes.
1.1.2 Recognition and enforcement procedures
However, the recognition and enforcement of Chinese court decisions in Germany is associated with considerable hurdles under German law. Since there is no bilateral treaty between Germany and China, recognition is based on Section 328 of the Code of Civil Procedure. In particular, problems with proper service, possible violations of German public policy and reciprocity, which has not yet been ensured, often lead to refusal in practice. Reciprocity means that the country of origin, in turn, recognizes and enforces foreign judgments. However, it has not yet been reliably proven that Chinese courts recognize German judgments to a sufficient extent, which continues to impede German recognition practice.
Under Article 299 of the Chinese Civil Procedural Law, the recognition and enforcement of a foreign court judgment is based on either 1) existence of a treaty, or 2) the principal of reciprocity. Due to the lack of bilateral treaty between Germany and China, this is eventually a chicken-egg question - if the Chinese court judgements are not recognized and enforced in Germany, the Chinese courts have no sufficient reason to recognize and enforce German court judgment in China.
In addition, the key focuses of the Chinese courts in reviewing an application for recognition and enforcement of a foreign judgment are sovereign right, national security and public interests. The Chinese courts are rather conservative in these aspects and tend to extensively apply sovereign, national security or public interests defense in recognizing and enforcing foreign court judgments. This is also the reason why, till today, the Chinese courts have only recognized German court judgments on family law (divorce) – in these cases, it is highly unlikely for sovereign right, national security or public interests to be involved, and the focus is the personal relationship between the individuals.
For the enforcement of a Chinese judgment in Germany, a declaration of enforceability is also required in accordance with Sections 722 and 723 of the Code of Civil Procedure. In these proceedings, the competent regional court examines whether the judgement has already become final and binding in the state of origin, whether the content of the decision has been formulated with sufficient clarity and whether enforcement would in principle be possible there. It is precisely at these stages that the same structural difficulties regularly arise in practice as in the recognition procedure: uncertainties regarding res judicata, deficiencies in the service of the title or ambiguities in the form of the decision often lead to the court refusing to declare enforceability. In particular, concerns relating to the right to be heard in the case of public service, the strict application of German public policy standards and the continuing lack of reciprocity weigh heavily here. The probability of success of the enforcement of Chinese judgments in Germany is therefore to be assessed as low overall.
1.2.1 Jurisdiction
Arbitration proceedings in China usually arise because jurisdiction is established by the will of the parties. In arbitration proceedings, the jurisdiction of Chinese arbitration institutions such as the China International Economic and Trade Arbitration Commission (CIETAC) is based solely on a previously agreed arbitration clause with a specific designation of an administering institution. A non-party may also be bound by an arbitration agreement through legal succession. Such agreements are usually concluded at the contract formation stage and are binding on the parties regardless of the jurisdiction in the country in which they are domiciled. If the contracting parties (e.g. a German and a Chinese company) agree on such a clause, they thereby undertake to settle disputes not before state courts, but before the selected arbitral tribunal in China. In this way, arbitration proceedings can also occur in China, even if one of the companies involved has its operational focus or its branches outside China.
1.2.2 Procedure
In contrast to the enforcement of Chinese court judgments, which regularly fails in Germany due to strict legal requirements and actual hurdles, the recognition and enforcement of Chinese arbitral awards is significantly less complicated. This is primarily due to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC), to which both Germany and China are parties. With 173 contracting states, this NYC is one of the world's most important instruments for international dispute resolution and greatly facilitates the enforcement of foreign arbitral awards. Article III of the NYC, for example, obliges the contracting states to recognize and enforce foreign arbitral awards in principle. Only in narrowly defined cases of Article V can enforcement be refused. In Germany, these provisions apply directly via Section 1061 I 1 of the Code of Civil Procedure, so that the courts' review is based exclusively on the standards of the NYC.
In an international context, arbitral awards can only be refused recognition or enforcement for a few reasons that must be interpreted narrowly. The grounds for refusal are conclusively regulated in Article V of the NYC and relate in particular to serious procedural violations such as a violation of the right to be heard, a violation of the arbitration mandate or fundamental violations of German public policy. However, such a violation of public policy is only assumed by the case law if the application of foreign law leads to a result that is in intolerable contradiction to the fundamental principles of the German legal system. On the other hand, a mere incorrect application of the law is not sufficient. For example, wrong decisions are to be accepted, since a review of the content of the arbitral award is prohibited (so-called révision au fond).
The hurdle for refusing recognition or enforcement is therefore high overall, so that in practice arbitral awards are usually declared enforceable in Germany without major difficulties.
In a direct comparison of arbitration proceedings with state court proceedings, a number of special features must be taken into account, which are particularly significant in international commercial transactions. A key difference lies in the far-reaching autonomy of the parties to the arbitration proceedings: the parties can shape the proceedings themselves in essential parts, for example by determining the applicable procedural rules, the procedure or the language of the proceedings, while state courts are bound by mandatory national procedural law.
In addition, there is the possibility of filling the arbitral tribunal, at least in part, through one's own selection decisions. Each party regularly appoints an arbitrator, which promotes a balanced and neutral decision-making body.
Another difference is that state proceedings typically go through several instances (in China, two instances), whereas arbitration proceedings are generally designed in a single-tier procedures. The delays often associated with multi-instance proceedings are therefore largely eliminated. The arbitral award is final and binding and can only be challenged in narrowly limited exceptional cases, which enables a rapid establishment of legal peace and avoids lengthy appeal or revision proceedings.
In summary, especially in relation to China, the choice of arbitration proceedings, insofar as an agreement on this is possible, often proves to be the more promising way to dispute resolution. Chinese court judgments have so far been rarely recognized in Germany, as questions of proper service, the right to be heard and reciprocity in particular continue to create uncertainty. Arbitral awards, on the other hand, benefit from clear international standards and much easier enforceability worldwide. The UN Convention enables enforcement that often cannot be achieved in state decisions in this constellation. For companies, this means a generally faster, more flexible and neutral procedure, which offers additional legal certainty through extensive party autonomy, the composition of the arbitral tribunal and the one-stage nature. This creates an instrument that can be used to efficiently resolve cross-border conflicts.
This is precisely why it is highly advisable to seek legal advice at an early stage and to have existing contracts reviewed in order to include an effective arbitration clause if necessary. It is often precisely this contractual decision that determines whether claims can actually be successfully enforced in practice.
Moritz Kopp
Chiara-Lucia Peterhammer
Katharina Reichert
This article was written in collaboration with experts from the Hui Ye Law Firm:
Cheng Chen
Rachel Tao
