By Dai Yue and Li Tianren King & Wood Mallesons’ Dispute Resolution group
On 30th June 2017, the Intermediate People’s Court of Wuhan, Hubei Province (‘’Wuhan Intermediate Court’’) handed down its judgment in Application to Recognize and Enforce a Foreign Civil Judgment by Liu Li v. Tao Li and Tong Wu” (2015 E Wuhan Zhong Min Shang Wai Chu Zi No. 00026) (“Judgment”) in which the Court considered the recognition and enforceability of a foreign judgment in China. For the first time, the Court, on the basis of acknowledging juridical reciprocity between China and the US, ruled that a US civil court ruling was to be recognized as legally binding on Chinese soil.
The case concerns a shares transfer agreement (‘’Agreement’’) dispute between the Applicant Liu Li (‘’Applicant’’) and the Respondents Tao Li and Tong Wu (‘’Respondents’’). After the Applicant had paid USD 125,000 to the Respondents to purchase shares according to the Agreement, the Respondents failed to transfer the equity. The Applicant filed a report with the local police, yet the issue remained unresolved. The Applicant then filed a civil complaint with the Los Angeles Superior Court, California, US. A ruling was rendered on 24 July 2015, in favour of the Applicant. The court ruled that the Respondents repay USD 147,492 in total, including the equity transfer costs of USD 125,000 as well as interest, procedural costs, and other fees. However, the Respondents did not execute the ruling. This led the Applicant to file a claim in the domicile of the Respondents, the Wuhan Intermediate Court, for the recognition and enforcement of the US ruling.
During the hearing of the case, the Wuhan Intermediate Court reviewed the documents submitted by the Applicant relating to the recognition and enforcement of a Chinese civil ruling by the United States District Court for the Central District of California. The Wuhan Intermediate Court concluded “after scrutiny, it is found that the materials submitted by the Applicant proves there is precedence as to recognition and enforcement of civil rulings of Chinese courts in US, so reciprocity for mutual recognition and enforcement of civil rulings is determined existing between the two countries.”
Legal grounds and judicial practices for Chinese courts’ recognition and enforcement of a foreign judgment or ruling
Recognition and enforcement of foreign judgments on Chinese soil is governed by the Civil Procedure Law and a separate Interpretation of the Civil Procedure Law as promulgated by the Supreme People’s Court.
In brief, when determining whether a foreign judgment or ruling will be recognized and enforced, Chinese courts rely on the following six standards:
- The foreign judgment in application must be final and effective;
- Pursuant to applicable foreign laws, the court rendering the judgment must have jurisdiction over the case;
- Pursuant to applicable foreign laws, the litigation procedure conducted in the foreign court must be fair and legitimate, for instance, the respondent has been duly served and is given the opportunity to be heard, etc.;
- Conflicting judgments do not exist; Chinese court is not hearing any case with identical parities for the same subject matter, or has not issued effective judgment; nor does it recognize a third-country judgment of the same case;
- International treaties or reciprocity exist between China and the other country for mutual recognition and enforcement of civil and commercial judgments; and
- Recognition and enforcement of such judgment does not contradict with the basic principles of PRC law or violate sovereignty, security or the public interest.
In judicial practice, the recognition and enforcement of foreign judgments is performed by Chinese courts in a prudent manner. According to a reply from the Supreme Court, in practice, when scrutinizing whether reciprocity exists, courts usually apply the de facto reciprocity standard, i.e. examine whether precedence of mutual recognition and enforcement between China and the country as seat of the court in issue does exist. Previously, due to the determination that reciprocity did not exist, in 1995, 2001, 2004, 2006, 2009 and 2011, recognition of judgments of Japan, Germany, UK, Australia, Germany and Republic of Korea were rejected respectively.
However, developments over the past two years indicate a potential shift by Chinese courts, which appear increasingly pro-active in establishing reciprocity. On 16 June 2015, in the “Several Opinions on the Provision of Judicial Service and Guarantee by People’s Courts for the ‘One Belt and One Road’ Construction”, the Supreme People’s Court indicated that where an agreement on judicial assistance has not yet been reached between China and certain Belt and Road countries, Chinese courts may provide judicial assistance to parties from relevant countries to facilitate the formation of reciprocity. On 9 December 2016, the Intermediate People’s Court of Nanjing, Jiangsu Province (“Nanjing Intermediate Court”) issued an influential ruling in the “Case of Application by Kolmar Group AG and Jiangsu Textile Industry (Group) Import & Export Co., Ltd for Recognition and Enforcement of Civil Judgment by Foreign Court”. The Nanjing Intermediate Court ruled that the civil judgment of the Singapore Court was to be recognized and enforced in China and stated that “because the Supreme Court of the Republic of Singapore has enforced a civil judgment by the Intermediate People’s Court of Suzhou, Jiangsu Province in January 2014, based on the principle of reciprocity, a Chinese court may recognize and enforce qualified civil judgments by courts in Singapore”.
3.Application of reciprocity in Judgment No.00026
A key reason for the recognition of the foreign judgment in Judgment No. 00026 was the recognition and enforcement of the Chinese civil ruling by a US court. The case occurred in 2009 when the United States District Court for the Central District of California recognized and enforced a judgment rendered by Hubei Higher People’s Court (“Hubei Higher Court”) in a product liability case of Hubei Gezhouba Sanlian Industrial, Co., Ltd. (Sanlian), Hubei Pinghu Cruise Co., Ltd. (Pinghu) v. Robinson Helicopter Company, Inc. (RHC).
This case concerned tortious liability in relation to product quality. In 1994, Sanlian bought a Model R44 helicopter from RHC for commercial sightseeing. During its very first flight, the helicopter crashed resulting in the death of three people. In 1995, Sanlian first filed an action in the Los Angeles Superior Court against RHC based on product liability. RHC argued that China was a more suitable and convenient forum for the litigation on the ground of forum non conveniens, and agreed to waive their statute of limitation defense. The Los Angeles Superior Court accepted RHC’s defense based on forum non conveniens and the case was stayed the same year.
In 1995, Sanlian initiated litigation against RHC before the Hubei Higher Court, but the Hubei Higher Court dismissed the action on the ground that the helicopter purchase agreement between Sanlian and RHC contained a provision requiring arbitration. Sanlian then filed a motion in the California Court of Appeal on the ground that there was no available court in China. In 1997, the California Court of Appeal filed its decision affirming the stay order and one of the grounds is that RHC agreed to submit to the jurisdiction of the appropriate court in China and abide by any final judgment rendered in China.
In 1998, Sanlian initiated arbitration against RHC before the International Chamber of Commerce International Court of Arbitration and the arbitrator ruled a lack of jurisdiction because Sanlian and RHC did not enter into any arbitration agreement, and stated that this ruling may serve as basis for Sanlian to file a lawsuit before an appropriate PRC court. In 2001, Sanlian and Pinghu filed a PRC lawsuit against RHC regarding product liability dispute before the Hubei Higher Court. After the case was accepted, the Hubei Higher Court served RHC under the Hague Convention, and rendered its judgment in December 2004, supporting most of the plaintiffs’ claims and damages of over RMB 20 million together with relevant interests by RHC.
Recognition of this Chinese ruling in the US also took a considerable amount of time. In 2006, Sanlian filed a complaint before the Central District of California seeking to enforce the above PRC judgment against RHC. In 2007, the Central District of California granted its judgment in favor of RHC on the grounds that the statute of limitations had expired before the PRC lawsuit was filed, and the judgment was subsequently appealed by Sanlian before the United States Court of Appeals for the Ninth Circuit (Ninth Circuit Court). In 2008, the Ninth Circuit Court concluded that the statute of limitations had not expired before the PRC lawsuit was filed, and the case was reversed and remanded.
The Central District of California mainly addressed four issues under the Uniform Foreign Money-Judgments Recognition Act (UFM-JRA): (i) whether a PRC court has the jurisdiction; (2) whether the service of process, procedures of trial and judgment are proper; (3) whether the PRC judgment is final; (4) whether the PRC judgment would violate relevant public policy. In August 2009, the Central District of California issued a judgment recognizing and enforcing the judgment of the Hubei Higher Court. Thereafter, RHC appealed to the Ninth Circuit Court. On 29 March 2011, the Ninth Circuit Court affirmed the judgment of the Central District of California, which had finally recognized the judgment rendered by the Hubei Higher Court.
As noted above, the enforcement of Hubei Higher Court judgment by US court is unique because: (i) the dispute is relating to personal injury and property damage caused by product quality liability; (ii) the plaintiffs sought almost all possible judicial remedies, including courts in the U.S. and PRC, and international arbitration; and (iii) the defendant expressly agreed to submit to the jurisdiction of PRC court.
In enabling reciprocity between China and the U.S., Judgment No. 00026, the Wuhan Intermediate Court reached a quick conclusion on the reciprocity merely based on the fact that the US court once recognized and enforced a PRC judgment without considering the unique elements in that enforcement by the US court, as discussed above. This constitutes a significant development in PRC judicial practice.
It is interesting that the enforcement of the Singapore ruling by the Nanjing Intermediate Court in Jiangsu Province was based on the fact that Singapore court once recognized a PRC judgement of Suzhou Court also located in Jiangsu Province. And in the Judgment No.00026, when the Wuhan Intermediate Court in Hubei Province enforced the US ruling, the reciprocity was based on the fact that the US court once enforced a PRC judgement made by the Hubei Higher Court. But we believe these are coincidences.
Having said the above, it is yet to be proved whether there will be consensus by the PRC courts on the sound reciprocity between China and the U.S. in future judicial practice. In addition, since a large number of the U.S. civil judgments may support excessive punitive damages, in deciding whether to recognize and enforce a judgment by the U.S. court, PRC courts might now focus on other issues such as whether judgments will violate Chinese fundamental legal principles and public interest.
 “Reply of the Supreme People’s Court to Whether Chinese People’s Court Shall Recognize and Enforce Japanese Court’s Judgment on Credit and Debt” (26 June 1995  Min Ta Zi No. 17)
 “Several Opinions of the Supreme People’s Court on the Provision of Judicial Service and Guarantee by People’s Courts for the “One Belt and One Road” Construction” (Fa Fa  No. 9)
 “Case of Application by Kolmar Group AG and Jiangsu Textile Industry (Group) Import & Export Co.,Ltd for Recognition and Enforcement of Civil Judgment and Ruling Special Procedure by Foreign Court” (2016 Su 01 Xie Wai Ren No. 3)