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A New Era of Reciprocity: Trends in Foreign-Judgment Recognition in China

Thursday, November 30th, 2017, 6:09 pm

On September 12, 2017, China signed the Hague Convention on Choice of Court Agreements at the Ministry of Foreign Affairs of the Netherlands. The Convention requires the courts of a member nation, if not chosen as the dispute-resolution venue in an agreement between contracting parties, to stay all proceedings in favor of the courts of the chosen member nation. Importantly, the Convention also mandates that judgments rendered by the chosen courts be recognized by the courts of all member nations.

Currently, the Convention has only three signatory members, the European Union, Mexico and Singapore. The United States and Ukraine have signed but not yet adopted the Convention. Once the Chinese National People’s Congress adopts the Convention, courts in China will be required to recognize and enforce judgments of the courts of other member states chosen by the parties in civil and commercial cases, subject to certain conditions and limited exceptions. This represents a break from the past. Different from arbitration awards, which enjoy the protection of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, ratified or acceded to by 157 countries, recognition of foreign judgments historically has been handled unilaterally or based on principles of comity or reciprocity provided under the local laws of the recognizing court.

In the past, Chinese courts had been reluctant to enforce foreign court judgments. Things started to change in 2015 when the Supreme People’s Court issued certain judgment-enforcement liberalizing principles to support the Chinese government’s “One Belt One Road” initiative. In 2016, a Chinese court, the Nanjing Intermediate People’s Court, recognized and enforced a civil judgment of the Singapore High Court, based on a finding of reciprocity in the absence of a treaty between the nations. On June 30, 2017, a Chinese court, the Wuhan Intermediate People’s Court, recognized and enforced a judgment issued by a court in the United States. This was potentially a watershed moment, marking the first time that a Chinese court recognized and enforced a U.S. court judgment. The two cases and the recent signing of the Convention appear to indicate a profound shift in the Chinese courts’ attitude towards foreign-judgment recognition.

We expect this trend to continue, albeit tentatively, as Chinese courts become increasingly comfortable with the enforcement of foreign court civil judgments.

1. Framework and History for Recognition of Foreign Judgments in China

Under the Chinese Civil Procedure Law, foreign judgments can be recognized and enforced by Chinese courts based either on the provisions of an international treaty or the principle of reciprocity. If there is an applicable treaty to which China and the foreign country are parties, or if there exists reciprocity between the two nations pertaining to the enforcement of judgments, the foreign judgment may be enforced so long as it does not violate the basic principles of Chinese law or the Chinese nation’s sovereignty, security and public interest.

China is not a signatory to the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters. While, as mentioned, China recently signed the Hague Convention of 30 June 2005 on Choice of Court Agreements (Choice of Court Convention), which includes judgment-recognition obligations, China’s participation in the Convention has not yet become effective. Furthermore, China has never concluded a judgment recognition and enforcement treaty with a common-law jurisdiction (excepting Hong Kong). As a result, whether a foreign judgment may be enforced in China depends on whether reciprocity is found by the Chinese courts. Article 544 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law expressly prohibits a Chinese court from recognizing a foreign judgment other than a divorce judgment unless there is an effective treaty or a relationship of reciprocity.

Prior to 2016, Chinese courts had never found such reciprocity.

In 2015, China’s Supreme People’s Court issued “Several Opinions on Providing Judicial Services and Safeguards for the Construction of the ‘Belt and Road’ By People’s Courts” (“2015 Supreme Court Opinion”). The 2015 Supreme Court Opinion articulates a set of policies and principles that Chinese courts should follow to advance the government’s “One Belt One Road” economic development program. On the topic of judgments, the 2015 Supreme Court Opinion instructs the courts to “promote mutual recognition and enforcement of judicial judgments issued by countries along the ‘Belt and Road’.” Notably, the opinion encourages the Chinese courts, even where China has not yet concluded a judicial assistance agreement with the foreign county, to consider providing judicial assistance to the foreign country with the aim of fostering reciprocal relations.

Shortly after the 2015 Supreme Court Opinion was issued, the Nanjing Intermediate People’s Court recognized and enforced a Singapore court judgment based upon a finding of reciprocity. There was no treaty between the countries or any other formal basis on which to find reciprocity. Instead, reciprocity was found to exist based on a 2014 decision of the High Court of Singapore recognizing and enforcing a judgment rendered by the Intermediate People’s Court of Suzhou City. In other words, without insisting on de jure reciprocity, the Nanjing Court made a finding of de facto reciprocity and enforced the judgment on that basis.

To many practitioners, the Nanjing Court’s ruling appeared to establish a new rule of de facto reciprocity; this view seems to be largely confirmed by the Wuhan Ruling.

2. The Wuhan Ruling and the Robinson Case

The U.S. judgment recognized by the Wuhan Intermediate People’s Court (“Wuhan Court”) was a civil money judgment rendered by the Los Angeles County Superior Court. The underlying case, Liu Li v. Tao Li and Tong Wu, involved a dispute in California involving an alleged fraudulent share transfer transaction between Liu Li (the “Plaintiff”) and Tao Li and Tong Wu (the “Defendants”). In July 2015, the Plaintiff received a default judgment due to the Defendants’ failure to appear in the action in the amount of US$147,492.00, representing the purchase price of the shares, prejudgment interest and other costs. Because the Defendants are Chinese citizens with assets in China, the Plaintiff applied to the Wuhan Court in October 2015 to recognize and enforce the U.S. judgment.

Even though no Chinese court had ever previously enforced a U.S. judgment, the Wuhan Court concluded that the grounds for recognition and enforcement were present. The Wuhan Court found that reciprocity existed based on the decision of the U.S. District Court, Central District of California (later affirmed by the Ninth Circuit), recognizing and enforcing the judgment of a Chinese court. Based on this finding of reciprocity, the Wuhan Court decided to enforce the U.S. judgment, concluding that it did not violate any basic principle of Chinese law, or the sovereignty, security or public interest of China.

The federal court judgment relied on by the Wuhan Court was issued in the case of Hubei Gezhouba Sanlian Industrial, Co., Ltd. v. Robinson Helicopter Co., Inc., 425 Fed. Appx. 580 (9th Cir. 2011). The Robinson case was the first time a U.S. federal court recognized and enforced a Chinese judgement. In 2001, Hubei Gezhouba Sanlian Industrial Co., Ltd. (“Sanlian”) and Hubei Pinghu Cruise Co., Ltd. (“Pinghu”) filed an action against Robinson Helicopter Company, Inc. (“RHC”) in the Higher People’s Court of Hubei Province in China, seeking damages against RHC arising out of the March 1994 crash of a helicopter into the Yangtze River. In December 2004, the Higher Court of Hubei issued a default judgment in favor of Sanlian and Pinghu and against RHC. The Plaintiffs sought enforcement in the United States District Court for the Central District of California under California’s Uniform Foreign-Money Judgments Recognition Act. The $6.5 million enforcement judgment was ultimately affirmed by the United States Court of Appeals for the Ninth Circuit and was the first ever United States appellate court ruling affirming the enforcement of a PRC court judgment in the United States. In rendering this opinion, the court concluded that the principles governing the recognition of foreign money judgments in the U.S. do not discriminate against any particular jurisdiction as long as the criteria for enforcement are met.

3.Looking Ahead

Even though China’s signing of the Choice of Court Convention does not have immediate legal consequence since it still needs to be ratified by the National People’s Congress, it is in keeping with the Chinese courts’ newfound willingness to enforce foreign judgments. Once China formally joins the Convention, there will be increased opportunities for the recognition of Convention members’ court judgments by Chinese courts and vice versa, which will lead to a new era for international judicial cooperation and provide an important alternative option to arbitration in international dispute resolution. And, as we have seen, Chinese courts appear to be increasingly receptive to enforcing foreign judgments even for non-Convention members, such as the United States, based on reciprocity and we expect this trend to continue.

One open question relates to the geographic scope of reciprocity. In both cases discussed above, the Chinese court found reciprocity where the foreign court had previously recognized a judgment issued by a Chinese court located within the same province. Thus, the Wuhan Court, in Hubei province, found reciprocity based on a California court’s prior recognition of a judgment rendered by the Higher Court of Hubei. Similarly, the Nanjing Court, located in Jiangsu province, recognized a Singapore Court’s judgment based on the Singapore Court’s prior recognition of a judgment issued by a Court in Suzhou, also in Jiangsu province. It remains to be seen whether this was a coincidence. As China is one nation, there would seem to be no compelling reason for the reciprocity inquiry to be province-specific, but for now the question is unresolved.

A converse question is whether the Chinese court would enforce a judgment issued in one political subdivision of a country (for example, by one State in the U.S.) when the judgment relied on for reciprocity was issued by a different political subdivision of the foreign country. In the Wuhan case, the Wuhan Court enforced a judgment issued by a Court in California based on the prior recognition of a Chinese court’s judgment by a different court in California. If the Chinese judgment had been recognized by the Courts of a different State, would the result have changed? Again, there would seem to be no valid reason to narrow the geographic scope of reciprocity as long as the Courts are within the same country.

Indeed, the judgment enforced by the Wuhan Court was issued by a California State Court, yet the Wuhan Court relied for its reciprocity finding on the enforcement of a Chinese judgment by a California Federal Court. This finding of reciprocity, even though the State and Federal Courts are entirely separate Court systems, suggests that the Chinese courts will not approach the reciprocity inquiry with a hypertechnical focus, although we will need to wait for other examples to draw more definitive conclusions.

Finally, there are unresolved questions involving service of process. In its ruling, the Wuhan Court noted that the Defendants were served with process in the California action and defaulted. The Wuhan Court declined to permit the Defendants to relitigate the merits of the case or the propriety of service on them since the method of service used in that case was authorized by the California Court. In a future case, the issues may be less clear-cut. There might not be a Court Order prescribing the method of service. The defendants might be in China, and serving process in China via the Hague Convention on Service Abroad is a difficult and protracted process. In such cases, it remains to be seen whether and to what extent the Chinese courts will permit a collateral attack on the foreign judgment and relitigation of the underlying merits and service of process issues.

* * *

China’s newfound willingness to enforce foreign judgments, as reflected in recent court decisions as well as its signing of the Choice of Court Convention, potentially marks a significant shift in the dynamics of US-China transnational litigation. The prevailing parties in U.S. litigations may have an easier time in the future to claim reciprocity in China to enforce their monetary awards, without needing to re-litigate the underlying merits of the dispute.

Increased enforcement of U.S. judgments in China will lead to increased enforcement of Chinese judgments in the United States under the principle of comity. Indeed, on October 27, 2017, as this article went to press, the U.S. District Court for the Central District of California recognized another Chinese judgment, this one rendered by the Suzhou Industrial Park People’s Court and affirmed by the Intermediate People’s Court of Suzhou City, Jiangsu Province. As this reinforcing process of bilateral judgment-recognition continues to unfold, the mutual recognition of civil judgments between U.S. and China could one day become the rule, not the exception, facilitating responsible cross-border business activities between the two countries.

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Matthew Sava
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Ning Zhang
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