Commercial contracts (especially international financing agreements) between Chinese parties and foreign parties often designate a foreign court outside of China as the forum in which to resolve potential disputes. Such a forum selection clause, often insisted upon by the financial institution due to its stronger bargaining position, has become a generally accepted practice in international financing transactions.
However, when entering into an international commercial contract with a Chinese party, selecting a foreign jurisdiction to resolve disputes may place the foreign party at a disadvantage with respect to future commercial activities.
I. The judgments rendered by foreign courts may not be recognized and enforced in Mainland China.
When a foreign court is named for the resolution of disputes, if the Chinese party has no property subject to enforcement outside Mainland China, the foreign party can only recover on its judgment if the judgment is recognized and enforced by a Chinese court. However, it is very difficult to obtain the recognition and enforcement of a foreign judgment in China, since such a judgment must satisfy a number of requirements set forth by relevant Chinese laws and bilateral treaties between China and the forum state. A foreign judgment will become unenforceable in China if any of these requirements are not met.
A. It is difficult for a foreign judgment to be recognized and enforced in China if no applicable bilateral treaty exists between the forum state and China.
Article 266 of the PRC Civil Procedure Law provides:
"If a people's court, after its review in accordance with the international treaties concluded or acceded to by the People's Republic of China or on the principle of reciprocity, finds that the legally effective judgment or order of a foreign court does not breach the basic principles of the Chinese law or violate the sovereignty, national security and public interests of China, the people's court shall render an order to recognize the effectiveness of such a foreign judgment. Where the execution of the judgment is necessary, the people's court shall issue a writ of execution to enforce the judgment in accordance with the relevant provisions of this Law. The people's court shall reject the recognition and enforcement of the judgment, if the judgment is against the basic principles of Chinese law or violates the sovereignty, national security and public interest of China."
This provision sets forth the statutory requirements for recognition and enforcement of a judgment or order rendered by a foreign court, including:
- A judgment or order rendered by a foreign court that has already become legally effective;
- The forum state and China have concluded a bilateral treaty or have both acceded to a multilateral treaty relating to mutual recognition and enforcement of court judgments, or have a reciprocal relationship of recognition and enforcement of court judgments; and
- The Chinese court concludes, after examination, that the judgment is not against the basic morals, or violates the sovereignty, national security or public interests of China.
A foreign judgment/order is recognizable and enforceable in China when the above requirements are all satisfied.
As a member of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention), 1 China is able to recognize and enforce arbitral awards made in more than 130 countries, and vice versa. However, as of yet China has not acceded to the Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters 2 or any other similar multilateral treaties which enable Chinese courts to recognize and enforce court judgments rendered in other countries. Furthermore, Chinese courts generally do not presume that China has de facto reciprocal interests with other countries unless the parties can prove otherwise with sufficient evidence, and no such case has been reported. 3 As a result, in practice, the party seeking recognition and enforcement of an effective judgment or order rendered by a foreign court has to invoke a bilateral treaty existing between China and the forum state. In most cases, there is no other available option.
According to the statistics from the Ministry of Foreign Affairs dated April 2, 2009, China participates in 99 bilateral judicial assistance treaties with more than 50 countries at the end of May 2008. Among them, 30 treaties relate to recognition and enforcement of civil judgments and 12 treaties relate to recognition and enforcement of commercial judgments (with countries including Turkey, Singapore, Thailand and Egypt). For the rest, some of these treaties have yet to be ratified by the domestic legislative body of the other signatory countries and, therefore, remain ineffective. 4
In short, if there is no applicable bilateral treaty providing mutual recognition and enforcement of judgments between the forum state and China, judgments rendered in the forum state will not be recognized and enforced by Chinese courts. In other words, they will have no enforceability within the territory of China.
B. Even if the forum state has concluded bilateral treaties with China, judgments rendered in the forum state will not be recognized and enforced in China if, pursuant to such treaties, the chosen court in the forum state lacks jurisdiction over the case on which the judgment has been rendered.
In addition to the general principles provided in Article 266 of the PRC Civil Procedure Law, some bilateral treaties that China has entered into may also specify the circumstances under which a contracting state may refuse to recognize and enforce judgments rendered by the other. For example, a treaty may state that a judgment shall not be recognized and enforced if the court has no jurisdiction over the dispute, or if due process is violated. Therefore, in choosing a foreign jurisdiction, it is very important for the contractual parties to find out whether the selected court has jurisdiction over the dispute pursuant to the applicable treaty.
It is also a well accepted principle that as a precondition for a court to hear the dispute and for the judgment to be recognized and enforced by foreign courts, a court must first have jurisdiction over the dispute. Many of the treaties that China participates in often stipulate that Chinese courts may refuse to recognize and enforce the judgment rendered by a foreign court having no jurisdiction over the dispute. In these treaties, there are three different sets of rules to determine whether the court of the requesting country has jurisdiction over a particular dispute:
- In accordance with the law of the requested country (e.g. the Sino-French Treaty);
- In accordance with the rule of the requested country on exclusive jurisdiction of its courts on certain disputes ( e.g. the Sino-Russian treaty); or
- In accordance with the specific conditions provided in the treaty under which the courts of the requesting country are "deemed to have jurisdiction" (e.g. the Sino-Spanish treaty).
Clearly, even if a foreign country has concluded a judicial assistance treaty with China, the parties should be cautious and refer to the provisions of the relevant treaties when drafting their forum selection clause.
For example, in a contract involving foreign interests nominates a court of a foreign country which has no actual connection with the contract to settle potential disputes arising from the contract, the Chinese courts may refuse to recognize an enforcement of the judgment rendered by the selected foreign court on the grounds that the foreign court lacks jurisdiction over the relevant disputes. This might be the case even if the forum state has concluded with China a bilateral treaty on mutual recognition and enforcement of judgments, if the treaty stipulates that the jurisdiction issue should be decided in accordance with the law of the requested country, i.e. the law of China, while Article 242 of the PRC Civil Procedure Law prescribes that parties to a contract with a foreign element shall choose a court in places that have actual connections with the dispute, to exercise jurisdiction.
II. The interim injunctions issued by foreign courts are unlikely to be recognized and enforced by Chinese courts.
In litigation proceedings, the plaintiff often applies for an interim injunction in order to prevent the defendant from evading the enforcement of the judgment by concealing properties during trial. Most countries provide interim evidence or property preservation measures similar to those under the PRC Civil Procedure Law, although the means of preservation may vary from country to country. However, there is no available interim remedy supporting foreign litigation under the law of China.
Where the defendant or the defendant's property is located in China, an interim measure against the defendant or property issued by a selected foreign court will encounter a series of enforcement problems in China.
Firstly, as mentioned above, there is no bilateral or multilateral treaty between China and some major economies (e.g. the US and Japan) on mutual enforcement of court judgments and orders. As a result, the interim injunctions rendered by courts of many countries will not be recognized and enforced by Chinese courts.
Secondly, some of the bilateral judicial assistance treaties entered into by China exclude interim injunctions from mutually recognizable and enforceable civil judgments 5. Treaties without such an exclusion clause briefly provide that signatory countries should mutually recognize and enforce the effective civil and commercial judgments rendered by courts of the other country, but no definition or scope of the term "judgment" is given. Therefore, Chinese courts will have discretion in granting or rejecting recognition or enforcement of interim injunctions issued by foreign courts. In other words, there is a high risk that the recognition and enforcement of the said interim injunctions may be rejected by Chinese courts.
Thirdly, to execute such interim measures against persons, entities and properties located in China, if not approved by Chinese courts, may even be regarded as offending the judicial sovereignty of China. In the KPMG case in 2009 concerning the Wahaha-Danone dispute, the reputable international accounting firm KPMG was ruled as having violated China's judicial sovereignty in executing orders issued by BVI and Samoa courts to temporarily freeze the assets of Wahaha in China 6, and consequently no freezing measures were executed.
In such scenarios, the defendant may conceal or transfer its properties within China by pledging or mortgaging its main assets, or by transferring the assets to its affiliated companies, or even by initiating false restructuring or bankruptcy procedures. Once the transfer of assets is completed, it will be rather difficult for the prevailing party to fully realize its substantial rights awarded by a foreign court, even if the judgment satisfies all the statutory conditions for recognition and enforcement under applicable laws and treaties. The prevailing party may even fail to recover any compensation from the losing party, which will have become an empty shell.
III. Solutions to manage the risk of selecting a foreign court
The above analysis explains why a foreign party will face a high risk that a favorable judgment rendered by a foreign court may not be recognized and enforced in Mainland China when parties nominate a foreign jurisdiction in the dispute resolution clause of the contract. If the parties agree to the exclusive jurisdiction of a foreign court and such an agreement is valid according to the PRC Civil Procedure Law 7, Chinese courts are very likely to refuse to exercise jurisdiction in disputes arising from the contract including the said agreement. Where foreign parties, who have little knowledge of Chinese courts, insist on choosing a foreign jurisdiction, one feasible solution to protect their interests is to provide in the contract that a foreign court may exercise non-exclusive jurisdiction over the relevant disputes.
Pursuant to Article 12 of Memorandum of the Second National Conference on Trial of Foreign Related Maritime and Commercial Cases issued by the Supreme People's Court on December 26, 2005, "if the parties to a foreign related contract agree to choose the non-exclusive jurisdiction of a foreign court, a Chinese court may rule that the jurisdiction of competent courts in other countries is not excluded. A Chinese court should accept the case if a party initiates a suit before the court and the court has jurisdiction over the case according to the Civil Procedure Law."
Therefore, choosing the non-exclusive jurisdiction of a foreign court to resolve disputes under a foreign related contract can be a potential solution for a foreign party that prefers foreign jurisdiction. With this approach, once disputes arise, the foreign party may either initiate a lawsuit before a Chinese court or before the chosen foreign court, depending on the situation. If the enforceable properties of the defendant are in China, the plaintiff may file a suit in a Chinese court. Therefore, the plaintiff is not only able to avoid the challenges in requesting a Chinese court to recognize and enforce a foreign judgment, but also able to apply for property preservation measures under the law of China before or during the course of litigation, to effectively prevent the defendant from transferring property and evading obligations. All of these steps are helpful and sometimes necessary to ensure the final enforcement of a favorable judgment.
Where the plaintiff initiates a lawsuit before a foreign court with non-exclusive jurisdiction as provided by the contract and recognition and enforcement of the judgment by a Chinese court is needed, the judgment runs the risk of being refused to be enforced if the judgment does not satisfy the statutory requirements. As a result, even if the plaintiff has obtained a favorable judgment from a foreign court, the plaintiff has to bring another lawsuit before a Chinese court, a parallel lawsuit, to obtain a judgment which is effective and legally enforceable within China. This will undoubtedly increase the costs of the foreign party.
Furthermore, a foreign judgment that is not recognized cannot be relied on by Chinese courts as the basis for a parallel action in China. The Chinese court, upon admission of the case, will hear the case de novo and draw factual and legal conclusions on its own, without materially considering the rulings of the foreign court on facts or liability. Nevertheless, the foreign judgment is probably sufficient to interrupt the limitation of actions legislation in China, as the judgment can prove that the plaintiff has initiated an action against the defendant overseas.
IV. Recognition and enforcement of judgments rendered by courts in Hong Kong, Macao and Taiwan
The Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region pursuant to Choice of Court Agreements between Parties Concerned ("Hong Kong Arrangement") came into effect on August 1, 2008. Before the implementation of the Hong Kong Arrangement, the Arrangement between the Mainland and the Macao Special Administrative Region on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters and the Regulation on the People's Courts' Recognition of Civil Judgments Made by Courts of Taiwan were implemented respectively in 2006 and 1998. The three arrangements enable the judgments rendered by courts in Hong Kong, Macao and Taiwan to be recognized and enforced by Mainland courts in accordance with applicable legal procedures.
However, the parties should pay careful attention to Paragraph 1, Article 3 of the Hong Kong Arrangement, which provides:
" 'A written agreement on choice of court' in this Arrangement refers to any agreement in writing between the parties, on or after the effective date of this Arrangement, expressly nominating a people's court in the Mainland or a court in the HKSAR as the court having sole jurisdiction over any dispute arising from or that may arise from a particular legal relationship."
According to the said provision, if a Hong Kong court is chosen in the dispute resolution clause to exercise non-exclusive jurisdiction over disputes under the contract, the judgments rendered by the Hong Kong court based on this dispute resolution clause will be unable to be recognized and enforced in the Mainland, and vice versa. For this reason, parties should be very careful when deciding which jurisdiction to choose in a contract.
To summarize, under the current legislation and practice of China, a foreign party faces a substantial risk that its rights may not be effectively protected if it designates a foreign jurisdiction to resolve potential disputes when entering into an international commercial agreement with a Chinese party. On one hand, it is hard to make favorable judgments rendered by foreign courts recognized and enforced in China, because very few countries have concluded treaties with China with respect to recognition and enforcement of civil and commercial judgments. On the other hand, even if judgments by foreign courts are recognizable and enforceable in China, the foreign parties may still face challenges in recovering the awarded compensation from the defendant, who may have already concealed or transferred all the assets in China, as an interim injunction could not be taken to preserve such assets in China unless it is recognized by a Chinese court.
Therefore, if foreign parties are unwilling to accept the jurisdiction of Chinese courts, it is advisable that they should choose a foreign court to exercise non-exclusive jurisdiction over related disputes. Such an approach leaves open the choice for foreign parties to initiate lawsuits before Chinese courts when needed.
(The article was originally written in Chinese, the English version is a translation.)
1 China became a member of the New York Convention in 1987.
2 The Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters was adopted at Hague Conference on Private International Law on 1 February 1971.
3 In August, 2009, Hubei High Court rendered its decision on the products liability case initiated by Hubei Gezhouba Sanlian Industrial Co., Ltd. and Hubei Pinghu Cruise Co., Ltd. against Robinson Helicopter Company, Inc. This decision was later recognized and enforced by the US District Court of Central District of California. This is a landmark case in which a PRC court judgment was successfully recognized and enforced for the first time in the US. The Case may be cited by any foreign party in requesting for application of the internationally accepted principles of comity and reciprocity. In addition, the Case could also create the possibility for the recognition and enforcement of US court judgments in the PRC. However, Chinese courts tend to be cautious when applying principles of comity and reciprocity. The applicant shall prove that judgments rendered by Chinese courts have been recognized and enforced in the forum state. The applicant shall also prove that a judgment identical to the one that is sought to be recognized and enforced in China would be recognized and enforced in the forum state, had it been rendered under the same circumstances by a Chinese court.
4 Most countries with very close economic ties with
China, such as the US, the UK, Canada, Japan and the BVI, have not
concluded civil and commercial legal assistance treaties with
China. A list of civil and commercial legal assistance treaties
that China has entered into with other countries can be found on
the website of Ministry of Commerce:
http://www.fdi.gov.cn/pub/FDI/zgjj/tzhj/zzysh/gjgyty/t20090402_104106.htm?fclose=1 (last accessed on February, 2009). According to our online survey, there are three Sino-foreign bilateral treaties on judicial assistance afterwards, with none of them on civil and commercial judicial assistance.
5 e.g. Civil and Commercial Judicial Assistance Treaties between China and Kuwait, the UAE and Tunis.
6 See Bloomberg report: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aktWOg0kuWU8
7 Article 242 of the Civil Procedure Law provides:
"Parties to a dispute over a foreign related contract or a foreign related contract involving property rights and interest may, through written agreement, choose the people's court in the place which has actual connections with the dispute as the jurisdictional court. If a people's court of the People's Republic of China is chosen as the jurisdictional court, the provisions on jurisdiction hierarchy and exclusive jurisdiction of this Law shall not be contravened."
Therefore, if the domicile of the selected court has no actual connections with the dispute, the Chinese court may hold a written agreement of the parties of nominating such a court void and hear the suit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.