The China legal world was abuzz this last weekend about a Chinese court in Wuhan enforcing a California judgment against a couple of Chinese citizens. On one level this is indeed a huge deal, but on a practical level, this really does not change anything with respect to what you as an American company should put in your China contracts in terms of where your disputes should be resolved.
At least not yet, and likely not for a very long time.
Since this blog’s inception, we have preached how terrible it is to draft a contract with a Chinese entity that calls for disputes between the parties to be resolved in the United States. That has not changed.
About a year ago, in Enforcing US Judgments in China. Not Yet, I wrote of how China had never enforced a United States court judgment.
At least once a month, one of my firm’s China lawyers will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays.
As we have consistently written, nope, nope, nope.
I then went on to discuss how my firm’s China lawyers are often called on to conduct research on this very issue (usually for lawyers or companies wanting to prove to their insurance company or to a court that it would be futile for them to pursue enforcement of their United States judgment in China) and I pulled a large section from a recent memorandum on that topic:
Article 282 of the PRC Civil Procedure Law, requires all of the following conditions be met for enforcement of a foreign judgment to be recognized in China:
The foreign judgment has taken legal effect in the jurisdiction in which it was rendered.
The country where the deciding court is located has a treaty with China or is a signatory to an international treaty to which China is also a signatory or there is reciprocity between the countries.
The foreign judgment does not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.
Though China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it is not a signatory to any international treaty on recognition and enforcement of foreign court judgments. There is no bilateral treaty between China and the U.S. on recognition and enforcement of foreign court judgments. There also is no bilateral treaty between the two countries on civil or commercial judicial assistance.
Even judgments from countries that have an enforcement treaty with China are oftentimes not enforced in China. For example, China and Australia entered into an agreement on reciprocal encouragement and protection of investments in 1988 that mandates both countries promulgate laws recognizing and enforcing each other’s judgments. But in response to a 2007 request by the Guangdong Province High People’s Court for instructions regarding an application by an Australian plaintiff for recognition and enforcement of an Australian court judgment, the Supreme People’s Court of China rejected enforcement. Since there was no international treaty to which China was a signatory nor any treaty between China and Australia on mutual recognition and enforcement of court judgments, nor any reciprocity between the two countries, the application should be rejected.
Since China is not a signatory to any international treaty on recognition and enforcement of foreign court judgments nor is there any treaty between China and the U.S. regarding judgment enforcement, the only possible way to get a U.S. judgment enforced in China would be if there were reciprocity between the two countries, but there isn’t.
In considering the question of reciprocity, a Chinese court will consider whether there is any precedent indicating reciprocity. In other words, the court will seek to determine whether there are any prior cases where a U.S. court recognized or enforced a Chinese court’s decision. If there are no examples of a U.S. court having enforced a Chinese judgment, the Chinese court will almost certainly rule against enforcing the U.S. judgment because the reciprocity requirement will not have been met.
In 1994, the Dalian Intermediate People’s Court considered a Japanese party’s application to recognize and enforce a Japanese judgment and two rulings. The application was eventually referred to China’s Supreme People’s Court for guidance and the SPC held that because there was no multilateral or bilateral treaty governing such matters between China and Japan and because the two countries had not established reciprocity, the Japanese judgment would not be recognized or enforced by a Chinese court. This case confirms China requires factual reciprocity, not presumed reciprocity.
But are there any examples of a U.S. court enforcing a Chinese Judgment? On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the Uniform Foreign Money Judgments Recognition Act and in 2011, the Ninth Circuit Court of Appeals affirmed the district court’s decision. The plaintiffs in that case were Hubei Gezhouba Sanlian Industrial Co. Ltd. and Hubei Pinghu Cruise Co. Ltd., two PRC companies located in Hubei Province. The plaintiffs won a judgment against Robinson Helicopter Company Inc., a California corporation, at the Higher People’s Court of Hubei Province. The United States District Court for the Central District of California held that the PRC judgment was final, conclusive and enforceable under PRC laws and the plaintiffs were therefore entitled to an issuance of a domestic judgment in the amount of the PRC judgment.
This was the first time a U.S. Court recognized and enforced a PRC judgment, but it does not necessarily mean a Chinese court will invoke the principle of reciprocity to recognize and enforce a U.S. court judgment. First, the enforcing court in that case is in California (though it was federal court), and the laws usually differ from state to state in the U.S., so it’s uncertain whether a Chinese court will deem the U.S., as a country, to have established a reciprocal relationship with China. Second, since the enforcing court was a federal court, it’s also not clear whether a Chinese court will deem a state court’s judgment enforceable in China. Third, the enforcing court is not the U.S. Supreme Court, thus, a Chinese court may not deem it to amount to reciprocity at the highest judicial level between the two countries. Finally, that case involved a U.S. defendant who had previously argued that only China had jurisdiction over the case, so it hardly could be deemed unfair for a U.S. court to rule on enforcing the Chinese judgment.
Chinese courts tend to be more willing to recognize and enforce foreign divorce judgments involving Chinese citizens so they don’t have to initiate a separate divorce proceeding. However, since this is not a divorce case, it almost certainly is not relevant.
We have not been able to find a single instance where a Chinese court enforced a U.S. non-divorce judgment.
This memorandum does not address the possibility of your suing the Chinese company directly in China and there are times where doing so makes sense.
In conclusion, a U.S. court judgment against ______________ will almost certainly not be recognized or enforced in China. Unless ___________ has assets in the U.S. or in some country other than China that enforces US judgments, a US judgment will probably not be collectable against this company in any way.
Earlier this year, in Is Now the Time to Take Your U.S. Judgment to China? I pondered whether China might be ready to start enforcing U.S. judgments and I talked of how I would love to see someone take such a judgment to a Chinese court to test this out:
I find it hard to believe that this decision regarding [enforcing] the Singapore judgment did not receive a thorough vetting from on high and maybe it does signal a change in enforcement of foreign judgments in China. I for one would love to test it out, but I would want to do it with the perfect case, or something close to it. The perfect case would be a Chinese defendant company that is a real bad hombre (sorry to use a Trump line, but I just cannot help it) who cheated someone in a commercial dispute and then got sued in a U.S. federal court and fought and lost on the merits. Ideally the judgment is for millions of dollars and the Chinese company has the wherewithal to pay it. I know it is asking too much but if the Chinese defendant appealed the lower court’s ruling and lost on appeal also, well that would be the icing on the cake.
I will now discuss the Wuhan (Liu Li v. Tao Li and Tong Wu) case and explain why it has not changed the risk equation for enforceability to impact how you should be writing your contracts with Chinese companies.
This Wuhan case was before the Intermediate People’s Court of Wuhan City. The case sprung from a commercial dispute involving a plaintiff (a Chinese citizen) who paid USD$125,000 to two Chinese citizen defendants for shares in a California company and then got nothing, not even a return phone call. Plaintiff then sued defendants for fraud in Los Angeles Superior Court. Defendants were served with the complaint and summons in this case but they ignored it and the Los Angeles court granted plaintiff a default judgment. Note this was a dispute between Chinese Nationals on both sides and the dispute involved a United States sale of stock. In other words, the fact that it was a United States sale of stock means that it was wholly appropriate for a US court to reach a decision in the case and the fact that the dispute was entirely between Chinese Nationals gives a Chinese court every incentive in the world to enforce the judgment. The additional fact that the defendants certainly appear to be “bad hombres” (I apologize again for using that line but since I started with it I have to continue with it) is all the more reason to expect enforcement.
Plaintiff then took that default judgment to the Wuhan court to have it enforced there. The Wuhan court ruled it had jurisdiction because the defendants live and have assets there. The court ruled defendants had notice of the Los Angeles action and it also held that the Los Angeles judgment did not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.
Most importantly, the court found reciprocity between China and the United States (California?) and it also held that it should not consider the merits of the Los Angeles court’s ruling, beyond determining that it did not violate any China basic principle. The court found reciprocity based on the Robinson Helicopter case I discuss above. For more on the Robinson Helicopter case see Your Company Can Be Sued In China And That Matters.
This all sounds good right? But for the following reasons I am of the view that this changes little.
- This is just one case and it comes from an intermediate court in Wuhan. Are you willing to risk a $30 million contract by making it subject to U.S. court jurisdiction based on this one case out of Wuhan?
- Did this decision depend on reciprocity with California as opposed to the United States as a whole? If you are a Texas company are you going to be willing to risk a $30 million contract by making it subject to Texas court jurisdiction?
- The underlying case involved a dispute between two groups of Chinese nationals. The case only makes sense if the defendants have property in Wuhan. So the Wuhan court just takes this a dispute between two Chinese that should properly be settled in China. There is always a chance a Chinese court will enforce an arbitration award or a foreign judgment when the parties on both sides are Chinese. It is not at all clear this case can or will be extended to enforce a judgment in a dispute between a foreign party and a Chinese national and the Chinese side appears in China and strongly opposes enforcement.
- The the bad act in the underlying lawsuit occurred in the U.S. It is normal for there to be jurisdiction in the place where the bad act will occur. So this case is perfectly normal. Why would you sue someone in China for a stock transaction violation that takes place in the U.S.? It is just a strange accident of fate that the seller/defendant also had presence and assets in China. In fact, it is probable that the entire transaction was illegal under Chinese law because Chinese citizens are supposed to have government approval before investing overseas and it is doubtful these defendants had that approval. This likely illegality also probably colored the Wuhan court’s decision.
- The Wuhan court found reciprocity based on the Robinson Helicopter case in which a California federal court enforced a Hubei province court judgment. Wuhan is in Hubei province and the judgment it enforced here was from California. Would the Wuhan court have ruled the same way if Robinson Helicopter had enforced a Beijing judgment? Would the Wuhan court have ruled the same way had Robinson Helicopter been a decision out of Kansas? No way to know.
- Even if you get past the various hurdles above, there is a final hurdle which essentially neuters one’s ability to sue a Chinese company in the United States and then use that judgment to collect in China: service of process. China’s Central Authority and its courts have over the last few years begun dragging their feet so much when it comes to Hague Service of Process that those lawyers who do it (and one of the China lawyers in my firm does these all the time) have been discussing among themselves whether it is even possible. It seems China is taking years to effect Hague service of process on Chinese defendants in U.S. cases and it is quite possible that it is no longer effecting such service at all. Without proper service (or at best, with service that takes two to three years), how valuable is suing a Chinese company in the United States?
This Wuhan case arose from a highly unusual and unique situation. When our China attorneys insist on China-centric contracts, we are focusing exclusively on business activity taking place entirely or primarily in China. For example, take this same lawsuit. What if the stock were stock in a Chinese entity and the transfer was supposed to take place in China? Would it make sense to take that law suit to Los Angeles? And if it were to be brought in Los Angeles, would a Chinese court really be likely to enforce the judgment that results from it? Same for failure to deliver product manufactured in China. Same for violations of IP agreements or for violations of reseller agreements and for violations of JV agreements and so on and so on. If you are going to enter into a contract with a Chinese company and some or all of the goods and services covered by the contract are going to be made or provided in China, your situation is going to be 180 degrees different from the situation that gave rise to this Wuhan case.
What is the best way to resolve a dispute in China? Even if we were living in a fantasy world where service of process in an American dispute can be made quickly and easily (or even at all) against a Chinese defendants and the Chinese courts promptly enforce those monetary awards from U.S. courts, you must consider the cost and expense of a U.S. litigation. Consider the problem of evidence and proof if your contract is mostly or all about China. Consider all of these things and then ask yourself whether setting up your contract to require litigation in a U.S. court and then enforcement of any eventual judgment in that court would make sense for you on any particular contract, or even ever? In what circumstances would having to go to two courts be a good contracting strategy?
In the case where a tort has occurred in the U.S., the situation is more complex. The product was made in China but the damage occurred in the U.S. In that setting, a law suit in the U.S. makes legal sense. However, the question then whether the U.S. is the best place to sue? Is it likely that a U.S. style products liability award will be enforced in China against an unwilling defendant? These are important issues and far more likely to be situation specific than the issue of what to put in your contract. So in this respect, this Wuhan case does make it more difficult to figure out the proper way to proceed in China for certain kinds of legal disputes.
But not typically for commercial contracts regarding matters that will mostly or exclusively take place in China. China is not a colony of the United States or of any other country. We are no longer in the early 20th century where China was carved up into foreign spheres of interest and where foreign law was applied against the Chinese people. China is a modern country with an increasingly developed legal system. China is not what it was in the 1980s, where there was virtually no legal system that could be used to resolve disputes. The Chinese know this and its courts fervently believe this and they are offended by foreign parties who insist on applying foreign law and foreign dispute resolution to matters 100% conducted in China. For this reason, it will almost certainly never be the case that China’s courts will enforce foreign judgments for what is truly a China-centered business dispute. For example, if you enter into a Joint Venture arrangement with a Chinese company and you think you can resolve your intra-company joint venture disputes in the United States and have a Chinese court enforce that resolution, you will almost certainly be sadly mistaken. If foreign companies are going to do business in China, they need to be prepared to accept having their disputes resolved in China.
At this point, it would be a mistake for anyone to draft a contract with a Chinese company with a jurisdiction provision calling for disputes to be resolved in U.S. courts. Unless and until there is that certainty, or unless your Chinese counter-party truly has assets in the United States (See Suing Chinese Companies and Citizens in the United States and in Canada: When it Makes Good Sense), it would behoove you to draft your contracts with Chinese companies to have disputes resolved in a Chinese court or, in some cases, before a China-qualified arbitral body. See Is Your China Contract Worthless?
But, if you already have a contract that calls for U.S. court jurisdiction, it would absolutely make sense for you to consider moving forward with litigating it in a U.S. court and trying to effect Hague service of process on the Chinese defendant(s). And then if you succeed in effecting Hague service and in securing a U.S. court judgment, you take that judgment to a Chinese court to have it enforced, perhaps you even do the same if you get the U.S. court judgment even without having effected Hague service.
But to count on this one decision on which to base future US-China contracts? No, that would not be smart.
What are your thoughts?