Chinese Court Recognizes U.S. Judgment for the First Time

Does This Change How We View Chinese Contracts?

CategoriesChina

This past June, the Intermediate People’s Court of Wuhan City recognized and enforced a commercial monetary judgment granted on the basis of default by the Superior Court of Los Angeles – a first for any U.S. judgment in the People’s Republic of China. (A Chinese language text of the original ruling, Li v Tao and Tong, which was only made publicly available in September of this year, can be found here.)

Limited Impact

After almost six months since the decision was handed down, however, we have not seen an increase in similar judgments. This could be for several reasons, including:

  • China is a civil law jurisdiction that does not require its courts to follow precedents.
  • The facts of this particular case may have been just the right ingredients needed to encourage recognition this one time, but not especially so in others (e.g., all parties were Chinese citizens, the amount in controversy was only US$125,000).
  • Finally, even if future U.S. judgments were to be recognized on a regular basis in China, punitive damages or other non-monetary relief might be rejected as being incongruent with basic PRC legal principles, or for national security, safety or social public interest reasons. In this instance, the Chinese court actually rejected the California court’s award for post-judgment interest on the basis that the U.S. judgment did not mention the post-judgment interest.

 

Increasing Cooperation – On Both Sides

However, there does appear to be a genuine trend in China towards promoting global cooperation:

  • In 2015, China began its “One Belt and One Road” Initiative to make China a global hub connecting rapidly developing East Asia economies at one end with more developed European economies at the other.
  • In 2016, after the Supreme People’s Court of China issued an opinion encouraging Chinese courts to enhance international judicial assistance and promote mutual recognition and enforcement, a Chinese court in Jiangsu recognized, on the basis of reciprocity, a Singaporean commercial judgment in 2016[1] (also a default judgment) – the first recognition by China of a common law jurisdiction outside Hong Kong.
  • In the decision in Li v Tao and Tong (2017), a PRC Court recognized and enforced a U.S. judgment for the first time.

Will 2018 be the year that a PRC court recognizes a U.K. judgment for the first time?  In 2015, the U.K. recognized a judgment issued by Qingdao Maritime Court in Spliethoff’s Bevrachtingskantoor Bv v. Bank of China Limited,[2] opening up an opportunity for China to again apply principles of reciprocity in judgment recognition and enforcement. It could be just a matter of time.

Considerations When Dealing with Chinese Counterparties

Speculation aside, here are some of the things you may wish to consider when drafting contracts with Chinese counterparties, as these continue to be relevant today and for the foreseeable future:

  • Always Assess the Assets. Whether at the start of a new commercial relationship or at the tricky point where there appears to be no amicable means of resolving a dispute, it is important to assess your counterparty’s global asset profile. If the counterparty has significant U.S. assets, then going forward with U.S. litigation may make sense. Also consider tools available in other jurisdictions where there could be real estate, operations, or payables owed by customers elsewhere. For example, a Mareva injunction, not available in the U.S. but an option in Commonwealth jurisdictions, is a powerful freezing order that can stop judgment debtors from dissipating their assets and therefore frustrating collection on a future judgment.
  • Arbitration Awards May Be Enforceable in China. While there is limited certainty that a court-issued judgment will be enforced in China, that is not the case with foreign arbitration judgments. PRC law explicitly permits foreign arbitration and China is also a contracting state to the New York Convention on the Recognition and Enforcement of Arbitral Awards of 1958 (the “New York Convention”). Also, while there are certain legal grounds for China to refuse the recognition and enforcement of award, there is a strong track record of enforcing, or at least settling, arbitration awards in China.
  • Hong Kong. Commercial judgments from Hong Kong, whose strong common law system and easy access to Chinese speakers often makes it an ideal location to settle disputes with Chinese counterparties, will be recognized and enforced in China, subject to certain limitations. However, be aware that Hong Kong courts may refuse to hear any case without a connection to Hong Kong. And even if the case is heard, Chinese courts frequently refuse to enforce judgments where the parties choose a law with no connection to the underlying transaction as a violation of Chinese public policy.
  • China. Though it might seem terrifying to litigate in China, it can often be the most straightforward path to success when engaging with Chinese parties whose only assets are in China. Moreover, Chinese litigation procedure allows for preliminary seizure of assets and other prejudgment relief unavailable elsewhere that can be very effective in speeding up resolution.

Of course, when drafting any dispute resolution clause, there is no one-size-fits-all answer, and a holistic approach is required to make the best determination.  While Li v Tao and Tong gives us hope of more options for Americans engaging with Chinese counterparties, special care must always be taken when handling multi-national parties – Chinese and otherwise.

Please don’t hesitate to get in touch if you have further questions. The team at Rooney Nimmo stands ready to help.

[1] Kolma v SUTEX Group, Case No. (2016) Su-01 Xie Wai Ren 2 Civil Judgment, Intermediate People’s Court, Nanjing City, Jiangsu Province China.

[2] [2015] EWHC 999 (Comm). Bank of China only requested the recognition of Chinese judgment but not enforcement.

 

Joan Hon – Partner New York – joan.hon@rooneynimmo.com

This article is one of a series intended to de-mystify common legal issues for the non-lawyer and entrepreneur audience – they are designed to foster discussion and is by no means exhaustive. These materials are for informational purposes only. Nothing herein is intended nor should be regarded as legal advice. The distribution of this article to any person does not establish an attorney-client relationship with our firm. Rooney Nimmo assumes no liability in connection with the use of this publication. This bulletin is considered attorney advertising under the applicable rules of New York State. Rooney Nimmo UK is regulated by the Law Society of Scotland and Rooney Nimmo US by the New York Rules of Professional Conduct. All Attorneys and Solicitors listed in this firm stipulate their jurisdictional limitations. Rooney Nimmo in the USA is a law firm registered as a New York State Professional Corporation.