First Time PRC Court Recognizes a US Court Judgment Based on Principle of Reciprocity
The Wuhan Intermediate People’s Court (Wuhan Court) recently handed down a decision recognizing and enforcing a civil judgment made by a US court (Wuhan Decision) based on the principle of reciprocity.
As discussed in our alert earlier this year on the recognition of a Singapore court judgment by a Jiangsu court (Nanjing Decision), this indicates that in the absence of a bilateral treaty for mutual recognition and enforcement of judgments, Chinese courts are starting to recognize foreign court judgments based on the principle of reciprocity.
Our alert will discuss this development and its implications.
What it means for you
For parties doing business in China, the Wuhan Decision is a positive development. Under the PRC Civil Procedure Law, Chinese courts can recognize and enforce foreign court judgments only on the basis of international convention, bilateral treaties or the principle of reciprocity, provided they do not violate basic principles of Chinese law, state sovereignty and security, or public interest. In other words, unless China has entered into a bilateral treaty with a foreign jurisdiction for the mutual recognition and enforcement of court judgments, the only practical available ground to recognize commercial judgments from the foreign jurisdiction is the principle of reciprocity.
The Wuhan Decision again demonstrates the Chinese courts' willingness to apply the principle of reciprocity to enforce foreign judgments in the absence of conventions or treaties. Both the Wuhan and Nanjing decisions 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. We anticipate we will see more and more PRC courts apply the principle of reciprocity in deciding requests to enforce foreign court judgments. This means that in such circumstances, foreign parties will not need to re-litigate their cases as they did in the past when seeking to enforce judgment against assets located in China.
Parties can also be guided by the findings of the Wuhan Court which also discussed whether there was any need to re-litigate the case. The respondents argued that the relevant US judgment had no legal force in the PRC and that they had not received notice of the legal proceedings in the US. As the judgment was a default judgment supported by documents confirming that proper procedures had been taken, the Wuhan Court considered that this case was one of judicial assistance and did not involve any examination of the substantive rights and obligations of the parties, which had been decided by the US Court.
The Wuhan Decision
The dispute arose out of a share transfer agreement involving the transfer of 50% of the shares in an American company for US$150,000. The claimant transferred the sum of USD 125,000 to the respondent in accordance with the agreement but the respondents absconded with such funds. The claimant sought to recover the funds and obtained a money judgment against the respondents from the Los Angeles County Superior Court. As the respondents owned property in Wuhan, Hubei province, the claimant took steps to apply to enforce the judgment over such property.
The Wuhan Court granted the claimant's application and made the following findings, among others:
1. Under the PRC Civil Procedure Law, an application for recognition and enforcement of a foreign judgment is allowed only in accordance with the provisions of an international treaty concluded or acceded to by the PRC or under the principle of reciprocity.
2. As China and the US have not entered into any international treaty on the mutual recognition and enforcement of judgments of foreign courts, the application for recognition and enforcement should be examined under the principle of reciprocity.
3. China and the US have a reciprocal relationship in the recognition and enforcement of civil judgments due to an American court having previously recognized and enforced a civil judgment of a Chinese court.
4. Recognizing and enforcing the relevant US judgment would not contravene the fundamental principles of the laws of China or the sovereignty, security, or public interest of China as the relevant judgment concerns a contractual relationship between the parties in relation to an equity transfer.
5. The Wuhan Court has jurisdiction over the case since the respondents owned properties in Wuhan.
Actions to Take
The Wuhan Decision reminds parties to continue to be vigilant when managing litigation risks. We recommend that both foreign and Chinese businesses take the following steps:
- Parties entering into transactions who wish to submit their disputes to foreign courts (but have concerns over enforceability of the foreign judgment in China) should check in advance whether there is a bilateral treaty between the foreign nation and China. If there is no applicable treaty, the parties should investigate whether the relevant foreign courts have previously enforced judgments issued by Chinese courts and vice versa.
- Chinese companies should seek legal advice and vigorously defend their cases in foreign proceedings even if those foreign nations such as US and Singapore have no bilateral enforcement treaties with China.
- Given the ease of enforceability of arbitral awards under the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 which has been ratified by more than 150 countries including China, clients should seek advice on the suitability of arbitration for parties entering into cross-border transactions.