Are NNN Agreement Enforceable in China?

If you believe that the Chinese company does not comply with the NNN agreement, you may resolve the dispute via arbitration outside of China and enforce the arbitral award in China.

There are some successful cases to prove the feasibility of this strategy.

I. A Case: Chinese Court enforced an SCC’s Award Relating to NNN Agreement

The foreign companies involved in this case are Johnson Matthey Davy Technologies Limited (JMD) and Dow Global Technologies LLC (Dow), while the Chinese counterparty is Luxi Chemical Group (Luxi).

JMD and Dow are engaged in joint research and development of low-pressure carbonyl synthesis technology to manufacture products containing butanol and octanol and have licensed to build dozens of such plants worldwide.

In order to obtain the technology license from JMD and Dow, Luxi made preliminary contact and communicated with them.

On 10 Sept. 2010, the parties signed a Non-Use and Confidentiality Agreement on Low Pressure Carbonyl Synthesis Technology (hereinafter referred to as the “NNN Agreement”) for the purpose of evaluating the technology. After that, JMD and Dow disclosed some of the technical information to Luxi.

However, the parties failed to reach an agreement on the technology license.

Pursuant to the NNN agreement, Luxi assumed the obligations of non-use and confidentiality with respect to the information provided by JMD and Dow.

However, JMD and Dow found that Luxi had constructed several plants using their confidential technology, in violation of Luxi’s non-use and confidentiality obligations thereunder.

On 28 Nov. 2014, JMD and Dow filed an application for arbitration to the Arbitration Institute of the Stockholm Chamber of Commerce (hereinafter referred to as the “Arbitration Institute” or “SCC”) against Luxi’s breach.

In December 2017, the SCC granted an arbitral award.

In accordance with the arbitral award, the arbitral tribunal found that Luxi had used protected confidential information to design, construct, and operate its butanol production plant, thereby constituting a breach and continuing breach of the NNN agreement.

Accordingly, Luxi shall pay the compensation of USD 95,929,640 (exclusive of interests), the interests accrued thereon in the amount of approximately USD 10.1097 million, and arbitration fees, attorney’s fees, expert’s fee, etc. paid by JMD and Dow in a total amount of USD 5,886,156.

In June 2018, as Luxi did not voluntarily perform the obligations under the arbitral award, JMD and Dow applied to the Chinese court for the recognition and enforcement of such arbitral award.

In August 2020, Liaocheng Intermediate People’s Court in China’s Shandong Province made a ruling to recognize and enforce the arbitral award.

II. How do Chinese courts review foreign arbitration awards

Can I initiate arbitration proceedings against Chinese companies in my country and then have the awards enforced in China?

You probably don’t want to go to faraway China to sue a Chinese company, and you don’t want to agree in the contract to submit the dispute to an arbitration institution that you don’t know about.

You want to initiate arbitration to resolve the dispute at your doorstep.

However, the vast majority or even all of the assets of Chinese companies are located in China. Therefore, you will probably have to go to China to enforce the arbitral award.

This relates to the recognition and enforcement of foreign arbitral awards in China. Under Chinese law, you will need to engage a Chinese lawyer to assist you in petitioning the Chinese courts to recognize your award, and then have the Chinese courts enforce the award.

Our previous article “Can Foreign Arbitral Awards Be Enforced in China?” mentions that:

Commercial arbitral awards made in the territories of other signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) are enforceable in China. Moreover, China is friendly to foreign arbitral awards.

Therefore, there is no essential difference between the recognition and enforcement of foreign arbitral awards in China and the recognition and enforcement of foreign arbitral awards in other countries.

To help you have a clear understanding, we have prepared the following Q&A.

1. Will Chinese courts recognize and enforce the judgments of my country’s arbitral awards?

The list of countries that are parties to the New York Convention covers the vast majority of countries in the world. As long as your country is a contracting party, the answer is YES.

To see if your country is a contracting party, please check out the List of States at newyorkconvention.org.

2. If Chinese courts can recognize and enforce my arbitral award, how will the Chinese court review the award concerned?

A Chinese court shall make a ruling to recognize and enforce an arbitral award in accordance with the law, unless the foreign arbitral award falls under any of the following circumstances:

(1) Invalidity of arbitration agreement

It refers to situations, among others, where

• The party to the arbitration agreement is under some legal incapacity under the law applicable to it;

• The arbitration agreement shall be deemed invalid under the chosen governing law; or

• Where no governing law has been chosen, the arbitration agreement shall be deemed invalid under the law of the State where the award was made.

(2) The Respondents’ right of defense was not guaranteed

It refers to situations, among others, where

• The person subject to enforcement has not received proper notice of the appointment of an arbitrator or of the arbitration proceedings; or
• The person subject to enforcement fails to defend the case due to other reasons.

(3) The dispute dealt with by the arbitration award is beyond the scope of the arbitration agreement

It refers to situations, among others, where

• The arbitral award deals with a dispute that is not the subject of submission for arbitration or is not covered by the provisions of the arbitration agreement; or

• The arbitral award contains decisions on matters beyond the scope of the arbitration agreement.

(4) There are defects in the composition of the arbitration tribunal or in the arbitration procedure

It refers to situations, among others, where

• The composition of the arbitration tribunal or the arbitration procedure does not conform to the agreement between the parties; or

• In the absence of agreement between the parties, the composition of the arbitration tribunal or the arbitration procedure is inconsistent with the law of the country where the arbitration takes place.

(5) The arbitration award has not yet taken effect or been cancelled

It refers to situations, among others, where

• The arbitral award is not binding on the parties; or

• The arbitral award has been cancelled or suspended by the competent authority of the country where the award was made or the country on which the law on which the award is based.

(6) The matters in dispute shall not be submitted to arbitration

It refers to situations where, according to Chinese law, disputes cannot be settled by arbitration.

(7) The arbitration award contravenes China’s public order

The contents of the arbitral award contravene China’s public order.

It is worth noting that based on past cases before Chinese courts, the grounds for refusal of recognition and enforcement of foreign arbitral awards mainly focus on procedural flaws, such as, “the party did not get a written notice”, “the party failed to defend”, “the composition of the arbitration organization or the arbitration procedures do not tally with both sides of the agreed by the parties, or “in the absence of an agreement between the parties, the composition of the arbitration organization or the arbitration procedures are inconsistent with the laws of the seat of arbitration “.

Less frequently cited is “contrary to public policy”. Even foreign arbitral awards that violate certain mandatory provisions of Chinese law do not necessarily constitute a “violation of public policy”. Violation of public policy only applies to relatively serious circumstances under which enforcement would otherwise constitute a “violation of basic principles of law, violation of state sovereignty, a threat to public security, violation of good customs”.

3. When should I apply to China for recognition and enforcement of my arbitral awards?

If you apply to Chinese courts for recognition of your arbitral awards or for recognition and enforcement at the same time, you should apply to Chinese courts within two years.

(1) Where your arbitral award provides for the period of debt performance, it shall be counted from the last day of that period;

(2) Where your arbitral award provides for the debt performance by stages, it shall be counted from the last day of each performance period as stipulated;

(3) Where your arbitral award does not provide for a period of performance, it shall be counted from the date when this award takes effect.

4. Which court in China should I apply to for recognition and enforcement of my arbitral awards?

You may apply to a Chinese intermediate court of the place where the Chinese company is located or where the property subject to execution is located for recognition and enforcement.

5. To apply to Chinese courts for recognition and enforcement of my arbitral awards, do I have to pay the court fees?

Yes.

Please read our earlier post “Time and Expenses – Recognition and Enforcement of Foreign Arbitral Awards in China“.

When you win the case, the court fee shall be borne by the respondent.

6. When I apply to Chinese courts for recognition and enforcement of my arbitral awards, what materials should I submit?

You need to submit the following materials:

(1) The Application Form;

(2) The applicant’s identity certificate or business registration certificate (if the applicant is a corporate body, the identity certificate of the authorized representative or the person in charge of the applicant must also be provided);

(3) The Power of Attorney (authorizing lawyers to act as agents ad litem);

(4) The original arbitral award and a certified copy thereof;

(5) Documents proving that the defaulting party has been duly summoned in case of a default award, unless otherwise stated in the judgment;

(6) Documents proving that an incapacitated person has been properly represented, unless otherwise stated in the award.

If the aforementioned materials are not in Chinese, then you also need to provide the Chinese translation of these materials. The official seal of the translation agency shall be affixed to the Chinese version. In China, some courts only accept Chinese translations provided by agencies listed in their lists of translation agencies, while others do not.

Documents from outside China must be notarized by local notaries in the country where such documents are located and certified by local Chinese consulates or Chinese embassies.

III. How do Chinese courts enforce foreign arbitral awards

If you get a winning judgment or arbitral award, and the property that can be used to repay debts is located in China, then the first thing you need to know is the enforcement mechanism in the Chinese courts.

To start with, there are 3 things you should bear in mind.

If it is a Chinese court judgment or a Chinese arbitral award, then it will definitely be enforced by the Chinese courts in accordance with law.

If it is a foreign court judgment, then you need to know whether, and to what extent, it can be enforced in China. For more information, please read earlier posts, “Enforcing Judgments in China While Litigation in Another Country/Region”, and “Can Foreign Judgments Be Enforced in China?”.

If it is a foreign arbitral award, then it is can be enforced in most cases under the New York Convention. For more information, please read an earlier post “Enforcing Arbitral Awards in China While Arbitration in Another Country/Region”.

Then when it comes to the enforcement stage in China, be it enforcing a judgment or an arbitral award, you can apply to the Chinese courts for collecting the debts.

So how does it work? How can the enforcement measures taken by Chinese courts be used for debt collection?

If a judgment debtor refuses to pay off the debts specified in a judgment or arbitration reward, a Chinese court may take the following fourteen (14) execution measures.

1. Mandatory disclosure of the judgment debtor’s property

The judgment debtor shall report his property situation existing at the moment and one year before he has received the notification of execution. If the judgment debtor refuses to do so or makes a false report, the court may impose a fine or detention on him, or his legal representative, principal heads, or the person directly responsible.

2. Execution of the judgment debtor’s cash and financial assets

The court is empowered to make inquiries with relevant units on the judgment debtor’s property, such as savings, bonds, stocks and funds, and may seize, freeze, transfer or appraise his property according to different situations.

3. Execution of the judgment debtor’s movable and immovable property

The court is empowered to sequester, seize, freeze, auction off or sell off the judgment debtor’s movable and immovable property, the amount of which shall not go beyond the scope of the debtor’s obligation.

4. Auction or sale of the judgment debtor’s property

After sequestering or seizing the judgment debtor’s property, the court shall instruct him to fulfill his obligations specified in the legal document. If the debtor fails to fulfill his obligations upon expiration of the period, the court may, auction off the sequestered or seized property. If the property is not suitable for auction or both parties agree not to auction off the property, the court may entrust relevant units to sell off the property or sell off the property by itself.

5. Delivery of the judgment debtor’s property

With respect to the property or negotiable instruments specified for delivery to the judgment creditor in the legal document, the court is empowered to order the person who has in possession the property or negotiable instruments to deliver it to the creditor, or after carrying out a compulsory execution, to forward the property or negotiable instruments to the creditor.

6. Transfer of ownership of the judgment debtor’s property

Where the legal documents specify the transfer of ownership of the real estate, land, forest right, patent, trademark, vehicles and vessels, the court may ask relevant units to assist in execution, i.e., to handle certain formalities for the transfer of certificates of such property right.

7. Execution of the judgment debtor’s income

The court is empowered to withhold or withdraw the judgment debtor’s income, the amount of which shall not go beyond the scope of the debtor’s obligation. The employer that pays wages to the judgment debtor, as well as the banks where the debtor has bank accounts, must cooperate in the execution of income.

8. Execution of the judgment debtor’s creditor’s right

The court is empowered to enforce the mature creditor’s right that the judgment debtor holds against another party, and notify the said another party to perform the liabilities to the judgment creditor.

9. Double interests for belated payment

If the judgment debtor fails to fulfill his obligations concerning pecuniary payment within the period specified by a judgment or ruling rendered by a Chinese court, an award rendered by a Chinese arbitral tribunal, or any other legal document, he shall pay double interest on the debt for the belated payment.

However, in the case of requests to enforce a foreign court judgment or a foreign arbitral award in China, the judgment debtor is not required to pay such double interest.

10. Exit restriction

The court is empowered to impose exit restrictions against the judgment debtor. If the judgment debtor is a legal person or an entity, the court may impose exit restrictions against its legal representative, main responsible person, or the directly responsible person who may influence performance.

11. Restriction on high-level consumption

The court is empowered to impose restrictions against the judgment debtor on his/her high-level consumption and relevant consumption not necessary for livelihood or business operation. The restricted high-level consumptions include having high consumption activities at start-rated hotels; commuting by airplane, first-class seat if by train or second class or better if by water; taking any seat of the high-speed trains started with G; purchasing real estate; paying huge tuition for his/her children to go to private schools. If the judgment debtor is listed on the List of Dishonest Judgment Debtors, the court may also impose such restrictions on the debtor.

12. List of Dishonest Judgment Debtors

If the judgment debtor undertakes certain dishonest conduct, such as to circumvent execution through the diversion of property, the court is empowered to include the debtor into the List of Dishonest Judgment Debtors, and to impose credit discipline on the dishonest debtor in matters, such as financing and borrowing, market access and accreditation.

13. Fine and detention

The court is empowered to impose a fine or detention on the judgment debtor, depending on the seriousness of the act. If the judgment debtor is a legal person or an entity, the court may impose a fine or detention on its principal heads or the person directly responsible. A fine on an individual shall be less than RMB 100,000; a fine on a legal person or an entity shall be between RMB 50,000 and RMB 1,000,000. The period of detention shall not be longer than 15 days.

14. Criminal responsibility

If the judgment debtor has the capability to satisfy the judgment or ruling rendered by a court but refuses to do so, and the circumstances are serious, the debtor shall be convicted and punished for committing the crime of refusing to satisfy a judgment or ruling. The offender shall be liable to fixed-term imprisonment of not more than three years, criminal detention or a fine.

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