National flags of USA and China put on a table with books, gavel and a balance scale of justice behind. A symbol of cooperation between two nations, Washington and Beijing i.e. business dialogue, etc.

New Chinese Court Decision Recognizing American Judgements Will Have Limited Precedential Effect

Published on in Business Organizations/Government

By Li Zhongheng

The well-established trading relationship between China and the U.S. comes with its fair share of legal disputes. Traditionally, the judgments of American courts have not been enforced in China. However, on June 30, 2017, a Chinese local court issued a court order recognizing and enforcing an American civil money judgment. This decision creates the possibility that parties may be able to enforce their U.S. judgments in China without needing to re-litigate the underlying merits of the dispute. Unfortunately, the actual impact of this decision will likely be limited. 

Background

One of the major consequences from the increased trade and economic cooperation between the People’s Republic of China and the United States (U.S.) is the growing number of legal disputes that result in unenforceable judgments.[1] Although businessmen often elect arbitration as their dispute resolution mechanism when they are handling China related contracts; from time to time, there are commercial disputes that end up in court with an American judgment. According to Article 281 of Chinese Civil Procedure Law[2], an American judgment can only be enforced directly in China through the principle of “reciprocity” since China and U.S. are not part of a treaty with respect to the mutual recognition and enforcement of judgments.[3] Therefore, when a Chinese court decided to enforce an American judgment on the basis of “reciprocity” Sino-American business participants and lawyers wondered if the case was to mark a shift in Chinese policy towards recognizing American judgments based on “reciprocity.”

The Wuhan Decision

On June 30, 2017, the Wuhan Intermediate People’s Court (the “Wuhan Court”), an appellate Court of Hubei Province, issued a court order recognizing and enforcing a civil money judgment rendered by the Los Angeles Superior Court (the “Wuhan Decision[4]”) based on the principle of reciprocity.[5] The case Liu Li v. Tao Li and Tong Wu[6] arose from a commercial dispute involving a plaintiff who paid $125,000 to defendants for shares in a California company; however, upon receiving the money from the plaintiff, the two defendants disappeared and the plaintiff received nothing.[7] The plaintiff then sued defendants for fraud in the Los Angeles Superior Court, and later the court granted the plaintiff a default judgment.

The plaintiff then submitted this default judgment to the Wuhan Court to ask the court to recognize the judgment and enforce it. The Wuhan Court ruled that it had jurisdiction over the plaintiff’s motion because the defendants lived and had assets in Wuhan at the time of the judgment. After scrutinizing all the evidence submitted by the plaintiff, the court ruled that the Los Angeles Superior Court had noticed the defendants properly and the corresponding judgment did not violate any basic principles of Chinese law, national sovereignty, security, or social public interest under Article 282 of Chinese Civil Procedure Law.[8]

Moreover, the Wuhan Court ruled that based on the previous case: Hubei Gezhouba Sanlian Industrial Co., Ltd. et. al. v. Robinson Helicopter Co., Inc., 06-01798 (C.D. Cal 2009), judicial reciprocity had already been established between China and the U.S..[9] In the Sanlin case, the United States District Court for the Central District of California enforced a monetary judgment of almost $6.5 million awarded by the Higher People’s Court of Hubei Province (the Supreme Court of Hubei Province) against Robinson Helicopter Company, an aircraft manufacturer based in Torrance, California.[10]

The Wuhan Decision is eye-catching because it is the first time a Chinese court has recognized and enforced a U.S. court judgment based on the principle of reciprocity; the case is regarded as a positive signal for parties seeking to enforce U.S. judgments in China.[11] Notable transnational dispute resolution lawyers predicted that the decision would “reinforce the position that if a foreign court has previously enforced a Chinese court judgment, a Chinese court will likely apply the principle of reciprocity to enforce the court judgment of that foreign nation.”[12] However, even if this decision is a “positive signal,” its impact will still be limited due to ambiguities in the Wuhan decision.

The Ambiguity of Wuhan Decision

The Wuhan Decision leaves ambiguous whether reciprocity was established between the China and U.S., or merely between the Hubei Province and the State of California. Prior judicial practices of China suggest that it is prudent to read the Decision as limited to creating reciprocity between the Hubei Province and the State of California (“provincial reciprocity”) for the following reasons.

First, the Wuhan Court did not distinguish between American federal court and state court in its judgment. Under the Wuhan Court’s understanding the Sanlian Case only indicated that a Chinese court judgment had been enforced in California by an American Court located in California. That Chinese judgment was made by the Higher People’s Court of Hubei Province, which is analogous to the appellate level of the Wuhan Court.[13] Accordingly, the Wuhan Court might merely confirm that there is just an established reciprocity between the Hubei Province and the state of California.

It is precisely this narrow interpretation of reciprocity that was adopted in the notable case of Kolmar Group AG.[14] In December 2016, the Nanjing Intermediate People’s Court (Nanjing Court) of Jiangsu Province recognized and enforced a judgment rendered by the High Court of Singapore based on the principle of reciprocity.[15] The Nanjing Court made the decision based on a previous Singapore Court judgment rendered in 2014 to enforce a judgment issued by the Suzhou Intermediate People’s Court of Jiangsu Province; it is clear that the Nanjing Court of Jiangsu Province would not have made the decision if the Singapore Court had not previously enforced the judgment rendered by another court of Jiangsu Province.

At this time the Wuhan Decision and the Nanjing Decision are unique as the only instances where a foreign judgment has been enforced by a Chinese court, absent a treaty allowing for the mutual recognition and enforcement of each country’s judgments. In both of these cases the recognition of the foreign judgment by the Chinese jurisdiction was preceded by the foreign jurisdiction having recognized a judgment from the Chinese jurisdiction.[16]

Second, this “provincial reciprocity” theory is supported by China being a civil law country, which means that it does not place as great an emphasis on the precedential value of individual case. The Wuhan Court, as an intermediate court whose jurisdiction is only confined to a specific municipal area, has no qualification or authority to make a judicial decision that would have a binding effect on other Chinese courts.[17] Therefore, strictly speaking, it is not up to the Wuhan Court (or Nanjing Court) to decide whether there is reciprocity between China and the U.S.

Third, an important detail about the Wuhan Decision that has been omitted in many analyses is that the case involved a dispute between Chinese nationals.[18] This significant, but underemphasized fact may play a fundamental role in the case. If the Wuhan Court failed to enforce the American judgment, then the legal interest of a Chinese citizen would have been violated. Granted the Wuhan Court did accept the American Court’s decision as to which Chinese national should win. However, most of the time, parties seeking to enforce an American court’s judgment in China are from the United States, and therefore lose this home court advantage.

Conclusion

Although the Wuhan Decision is a welcome one, in the words of an American-Chinese legal expert this decision actually “changes nothing.”[19] Therefore, until the U.S. and China conclude a bilateral or multilateral treaty governing mutual enforcement of civil judgments, for American businessmen and lawyers handling China-related contracts, it is still the first choice to elect arbitration as the dispute resolution mechanism. Under such mechanism, American parties could be properly protected by the New York Convention as it guarantees the recognition and enforcement of arbitration awards in all the party states, including both the United States and China.[20]

 

 

 

[1] George W. Thompson and Meng Jiang, Enforcement of Foreign Court Judgments: A Comparison of the Rules in the United States and the Peoples Republic of China, Thompson & Associates, PLLC Article (Feb. 3, 2016), https://www.gwthompsonlaw.com/enforcement-of-foreign-court-judgments-china-usa/.

[2] “Article 281: Where an effective judgment or ruling of a foreign court requires recognition and enforcement by a people’s court of the People’s Republic of China, a party may apply directly to the intermediate people’s court of the People’s Republic of China having jurisdiction for recognition and enforcement or apply to the foreign court for the foreign court to request recognition and enforcement by the people’s court in accordance with the provisions of an international treaty concluded or acceded to by the People’s Republic of China or under the principle of reciprocity.” Civil Procedure Law of the People’s Republic of China [Revised], Law Info China (April. 1, 2008), http://www.lawinfochina.com/display.aspx?lib=law&id=19.

[3] Dan Harris, China Enforces United States Judgment: This Changes Pretty Much Nothing, China Law Blog (Sep. 5, 2017), https://www.chinalawblog.com/2017/09/china-enforces-united-states-judgment-this-changes-pretty-much-nothing.html.

[4] Liu Li v. Tao Li and Tong Wu, (2015) Yue Wuhan Zhong Min Shang Wai Chu Zi No. 00026, the Intermediate People’s Court of Wuhan City, Hubei Province, 30 June 2017. http://en.pkulaw.cn/display.aspx?id=80a75a51a4b1d5e1bdfb&lib=case.

[5] Ik Wei Chong and Samuel Yang, Chinese court enforces a foreign judgement for the first time on the basis of reciprocity, Clyde & Co Insight Article (April 19, 2017), https://www.clydeco.com/insight/article/chinese-court-enforces-a-foreign-judgement-for-the-first-time-on-the-basis.

[6] Id. at 4.

[7] Jie Huang, Chinese Court Recognizes US Commercial Money Judgment, LETTERS BLOGATORY (Sep. 4, 2017), https://lettersblogatory.com/2017/09/04/chinese-court-recognizes-us-commercial-money-judgment/.

[8] “Article 282: After examining an application or request for recognition and enforcement of an effective judgment or ruling of a foreign court in accordance with an international treaty concluded or acceded to by the People’s Republic of China or under the principle of reciprocity, a people’s court shall issue a ruling to recognize the legal force of the judgment or ruling and issue an order for enforcement as needed to enforce the judgment or ruling according to the relevant provisions of this Law if the people’s court deems that the judgment or ruling does not violate the basic principles of the laws of the People’s Republic of China and the sovereignty, security and public interest of the People’s Republic of China. If the judgment or ruling violates the basic principles of the laws of the People’s Republic of China or the sovereignty, security or public interest of the People’s Republic of China, the people’s court shall not grant recognition and enforcement.” Civil Procedure Law of the People’s Republic of China [Revised], Law Info China (April. 1, 2008), http://www.lawinfochina.com/display.aspx?lib=law&id=19.

[9] Id. at 1.

[10] Ariel Ye and Ge Yan, The Hubei Gezhouba Sanlian Case: Enforcement of a Chinese Monetary Judgment in the United States, China Law Insight (March 23, 2012), https://www.chinalawinsight.com/2012/03/articles/dispute-resolution/the-hubei-gezhouba-sanlian-case-enforcement-of-a-chinese-monetary-judgment-in-the-united-states/#more-655.

[11] Cynthia Y.S. Tang and Anthony K.S. Poon, First Time PRC Court Recognizes a Foreign Judgment Based on Principle of Reciprocity, Baker McKenzie Insight Publication (Feb. 07, 2017), http://www.bakermckenzie.com/en/insight/publications/2017/01/first-time-prc-court-recognizes-a-foreign/.

[12] Craig I. Celniker, Timothy W. Blakely, Sarah Janette Thomas, Gary Zeng, and Cheryl Zhu, PRC Court Recognizes a U.S. Court Judgment for First Time Based on Principle of Reciprocity, Morrison & Foerster Client Alert (Sep. 11, 2017), https://www.mofo.com/resources/publications/170908-prc-court-principle-reciprocity.pdf.

[13] According to the Constitution and the Organic Law of the People’s Courts, China practices a system of courts characterized by “four levels and two instances of trials.” The judicial authority of the China is exercised by the following people’s courts: local people’s courts at various levels; military courts and other special people’s courts and the Supreme People’s Courts. The local people’s courts are divided into basic people’s courts, intermediate people’s courts and higher people’s courts. The latter one is always the appeal court of the former one. From China’s judicial system: people’s courts, procrastinates, and public security, http://www.olemiss.edu/courses/pol324/chnjudic.htm.

[14] Case name (Original in Chinese and had been translated): (2016) Su-01 Xiewairen No.3. ((2016）苏01协外认3号). https://cgc.law.stanford.edu/zh-hans/judgments/jiangsu-2016-su-01-xie-wai-ren-3-civil-ruling/.

[15] Id. at 11.

[16] Id.

[17] Joan Hon, Chinese court recognizes U.S. judgment for the first time – Does This Change How We View Chinese Contracts? Rooney Nimmo Blog (Dec. 19, 2017), http://www.rooneynimmo.com/blog/chinese-court-recognizes-u-s-judgment-for-the-first-time/.

[18] Id. at 3.

[19] Id.

[20] Id. at 12.