China: Wuhan Intermediate People's Court Recognises A US Court Judgment – Breakthrough In Cross-Border Litigation?

Last Updated: 10 January 2018
Article by Nick Beckett and Falk Lichtenstein

In an unprecedented move, the Wuhan Intermediate People's Court (the "Wuhan Court") delivered a judgment recognising and enforcing a United States commercial judgment. The judgment, delivered on 30 June 2017, signals an important shift in Chinese judicial attitude towards foreign judgments.

I. THE FACTS

The seminal case is Liu Li v Tao Li and Tong Wu.  Liu Li ("Liu") had entered into a share transfer agreement with Tao Li ("Tao") and Tong Wu ("Tong"). Tao agreed to transfer shares registered in a Californian company to Liu for USD 125,000. Liu transferred the sum to Tao accordingly, however, Tao failed to transfer the shares to Liu. Both Tao and Tong disappeared after receiving the sum.

On 17 July 2014, Liu brought a claim for fabricated share transfer and fraud against Tao and Tong at the Los Angeles Superior Court in California. As neither Tao nor Tong appeared in court, Judge Steward delivered a default judgment in favour of Liu. The judge ordered that Liu be compensated for a total sum of USD 147,492, the compensation being the total of the purchase price of the shares, the pre-judgment interest and the court fees.

As both Tao and Tong owned assets in Wuhan, Liu applied to the Wuhan Court seeking to enforce the US judgment. Liu argued that reciprocity is established between China and United States, and referred to the case of Hubei Gezhouba Sanlian Industrial Co., Ltd et. Al. v Robinson Helicopter Co., Inc. in which the District Court of the Central District of California recognised and enforced a Chinese judgment delivered by the Higher People's Court of Hubei Province.

II.  THE RULING

Pursuant to the PRC Civil Procedure Law, Chinese courts can recognise and enforce foreign court judgments under two circumstances. Firstly, when an international treaty concluded or acceded to by the People's Republic of China provides for mutual recognition and enforcement; or secondly, when the principle of reciprocity is established. Notably, there is no international treaty allowing mutual recognition between China and the United States. Therefore, Liu relied solely on the principle of reciprocity.

The Wuhan court held that reciprocity was established between China and the United States by Hubei Gezhouba Sanlian Industrial Co., Ltd et. Al. v Robinson Helicopter Co., Inc. The court further held, the recognition and enforcement of the US judgment in this case would not harm the sovereignty, security or public interest of China, the principle of reciprocity may be upheld. Therefore, the judgment delivered by Judge Steward was recognised and enforced.

III. RECIPRIOCITY IN CHINA

To date, China has not ratified the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters. China has also not entered into any bilateral treaties allowing for mutual recognition and enforcement of civil judgments with popular western jurisdictions. As such, the principle of reciprocity is particularly important when dealing with a Chinese counterparty in private international law.

Against the backdrop of the 'One Belt, One Road' initiative, Chinese courts are adopting a liberal attitude towards judicial reciprocity. In July 2015, the Supreme People's Court of China issued an opinion encouraging Chinese courts to enhance international judicial assistance and to promote mutual recognition and enforcement especially with countries along the 'One Belt and One Road'. The Supreme People's Court used the case of Kolma v SUTEX Group, where the Nanjing Intermediate People's Court recognised and enforced a Singaporean commercial judgment, as an example to illustrate how courts should establish reciprocity.

In Europe, the High Court of the United Kingdom recognised a Chinese judgment rendered by the Qingdao Maritime Court in Spliethoff's Bevrachtingskantoor Bv V. Bank of China Limited. The judgment, delivered in 2015, created a precedent to establish reciprocity in China. In the wake of Liu Li v Tao Li and Tong Wu, English counterparties may take comfort in a high possibility for future Sino-British judicial reciprocity.

Liu Li v Tao Li and Tong Wu has been described by commentators as an important breakthrough, and rightly so, considering the far-reaching impact of the judgment. Judicial reciprocity between the United States and China will beget reciprocity on Sino-US trade and investments. Foreign courts, especially those of major jurisdictions, should note this positive shift in attitude and take advantage of the current pro-reciprocity behaviour by demonstrating a willingness to recognise and enforce Chinese judgments. In a context of increasing international mobility, judicial systems should work towards the goal of creating a coherent and unified patchwork of private international law.

To date, however, it is still recommended not to rely on such reciprocity and rather to include arbitration clauses in international contracts. Under Article 128 of the PRC Contract Law, in contracts involving foreign interests (this is always the case if at least one contracting party is a foreign party) arbitration before a foreign arbitration institution can be chosen. As China is a contracting state to the New York Convention on the Recognition and Enforcement of Arbitral Awards of 1958 (the "New York Convention"), arbitral awards issues by an arbitration institution in another contracting state to the New York Convention will be acknowledged and enforced in China.

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.

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