Andy Cui| Partner & Cross-Border Procurement Compliance Expert
Many foreign buyers feel reassured when negotiating with Chinese suppliers if the supplier accepts dispute resolution clauses favoring arbitration in the buyer’s jurisdiction (e.g., AAA in New York, ICC, SIAC in Singapore, or HKIAC in Hong Kong). But does a favorable arbitration award truly ensure recovery of losses if a dispute arises?
Case Study: Arbitration Clause ≠ Guaranteed Compensation
An Italian buyer recently prepared to purchase materials from a Chinese supplier. After lengthy negotiations, the supplier accepted all contract terms, including the following arbitration clause:
“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration administered by the Singapore International Arbitration Centre (‘SIAC’) in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (‘SIAC Rules’) for the time being in force, which rules are deemed to be incorporated by reference in this clause. The seat of the arbitration shall be [Singapore]. The Tribunal shall consist of 3 arbitrator(s). The language of the arbitration shall be English. The law governing this arbitration agreement shall be Singapore law.”
The Italian buyer, confident in the transaction, believed that even if disputes arose, losses would be recoverable through SIAC arbitration. However, our legal background investigation revealed critical risks:
1.Small-scale operations: Only 12 employees with social insurance records
2.No export history: Despite being established for 17 years, the supplier had zero export records.
3.No offshore assets: The supplier had no assets outside China, and no fixed assets were found domestically.
Key Risks:
l Even if the buyer wins a SIAC award, enforcement would require applying to Chinese courts to freeze the supplier’s domestic bank assets—a time-consuming process that allows the supplier to transfer funds.
l Chinese courts may refuse recognition and enforcement of foreign awards under specific conditions.
Based on the aforementioned information, we have designed a dispute resolution solution for the Italian client that enables the court to promptly freeze the supplier's bank account in the event of a dispute.
Enforcement Challenges Against Chinese Suppliers
1. Supplier Asset Transparency
If the supplier exhibits shell company red flags, enforcement becomes futile:
- Fake registration addresses (Red Flag #7).
- Zero employees/social insurance (Red Flag #1).
- Undisclosed litigation history (Red Flag #4).
2. Chinese Court Enforcement Thresholds
Based on our analysis of cases over the past 20 years where Chinese courts refused to recognize and enforce foreign arbitral awards, we summarize the following circumstances under which Chinese courts may reject recognition and enforcement of foreign arbitral awards:
- Invalid Arbitration Agreement
- Procedural Irregularities
Parties to the arbitration agreement were not properly notified by the arbitral tribunal, or were unable to freely express their views or present their case during the arbitration proceedings.
The arbitral tribunal exceeded its authority or acted beyond the scope of the arbitration agreement.
- Improper Tribunal Composition
The composition of the arbitral tribunal violated the agreed-upon rules or applicable laws.
- Non-Binding or Revoked Awards
The arbitral award lacks binding force or has been revoked by a competent authority.
- Non-Arbitrable Subject Matter
The subject matter of the arbitration is not arbitrable under Chinese law.
The arbitration or award violates China’s public policy.
- Statutory Time Limit Expired
The application for recognition and enforcement of the foreign arbitral award exceeded the statutory time limit.
All these circumstances require special attention from foreign purchasers when drafting and executing procurement contracts, as well as when initiating arbitration proceedings.
Why Suppliers Accept Offshore Arbitration Clauses
Some suppliers readily agree to arbitration clauses because:
- They know enforcement in China requires lengthy court procedures, giving them time to transfer assets.
- They know certain foreign arbitral awards could be rejected.
- Their Chinese entities may be shell companies with pre-depleted or hidden assets.
SLC-Hub Solutions: Prevention Over Arbitration
1. Pre-Contract Risk Screening
Use our 48-Hour Risk Assessment to identify:
✅ Shared addresses with 5+ unrelated companies.
✅ Legal representatives holding multiple concurrent roles.
✅ Tax violations or low credit scores.
2. Enforcement-Focused Supply Contract Design
3. Proactive Asset Monitoring and Contract Performance & Supplier Operation Monitoring
Act Now
Don’t let a “perfect” arbitration clause become a shield for shell companies.
Reply with your supplier’s name for a Free 48-Hour Shell Company Risk Assessment.
Why Us?
★ Top 3 Law Firm in China (2023 ALB Ranking).
★ 68% of clients avoided losses through pre-contract screening.
★ 15+ Years in cross-border dispute resolution.
Legal compliance starts with transparency. Let our expertise protect your supply chain.