PRC Court Recognizes a U.S. Court Judgment for First Time Based on Principle of Reciprocity

by Morrison & Foerster LLP
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On June 30, 2017, the Wuhan Intermediate People’s Court (the “Wuhan Court”) issued a decision recognizing and enforcing a civil money judgment issued by the Los Angeles Superior Court arising out of a contractual dispute (the “Wuhan Decision”). Because there is no applicable treaty on the recognition and enforcement of judgments between the United States and the People’s Republic of China (PRC), the Wuhan Court based its decision on the principle of reciprocity.

This decision represents the first time that a PRC court has recognized and enforced a U.S. court judgment, and it is significant that the Wuhan Court acknowledged the existence of reciprocity between the U.S. and the PRC in deciding to enforce the U.S. court judgment at issue.

This is a positive development for parties seeking to enforce U.S. judgments (and, in particular, California judgments) in the PRC. The Wuhan Decision, however, is not precedential, and it remains to be seen whether other PRC courts will adopt the Wuhan Court’s approach and recognize U.S. judgments based on reciprocity. As such, arbitration remains the best option for international parties entering into contracts with PRC parties because the enforcement of arbitral awards is guaranteed by the New York Convention, which has more than 150 participating jurisdictions, including the PRC.

1.        PRC Framework for Recognition of Foreign Judgments

Article 282 of the PRC Civil Procedure Law provides that PRC courts will recognize and enforce foreign judgments or rulings if required by:

(a) a multilateral or bilateral treaty concluded or acceded to by PRC, or

(b) the principle of reciprocity,

provided that the judgment is not in violation of the basic principles of the PRC law or sovereignty, security or the public interest of PRC.

The first basis under Article 282 for recognition and enforcement was not applicable in the Wuhan Decision because neither the U.S. nor the PRC has ratified the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters or otherwise adopted a bilateral treaty on recognition and enforcement of civil judgments. (By contrast, the PRC does have relevant bilateral agreements with other countries and regions, including France, Spain, Italy, Greece, Hungary, Hong Kong and Macau.)

The second basis for recognition and enforcement is the principle of reciprocity. Broadly speaking, this principle considers how the court that issued the foreign judgment would view a request to enforce a judgment from a PRC court. There is, however, no official interpretation or guidance, legislative or judicial, as to what constitutes reciprocal treatment under PRC law, leaving the Wuhan Court to consider the issue of reciprocity based on the record before it.

2.        Background

The underlying case before the Los Angeles Superior Court involved a dispute over a share transfer agreement between PRC domicilliaries pertaining to shares in a U.S. company. The plaintiff brought an action against two defendants alleging that the defendants had defrauded her of USD 125,000 by means of a fake share transfer transaction. The defendants failed to appear, and the court entered a default judgment in favor of the plaintiff on July 24, 2015 (the “U.S. Judgment”).

In October 2015, the plaintiff applied to the Wuhan Court to recognize and enforce the U.S. Judgment. In support of her application, and the argument that the principle of reciprocity should apply, the plaintiff cited the judgment of the U.S. District Court for the Central District of California in Hubei Gezhouba Sanlian Indus. Co. v. Robinson Helicopter Co., No. 2:06-CV-01798-FMCSSX, 2009 WL 2190187 (C.D. Cal. July 22, 2009), aff’d, 425 F. App’x 580 (9th Cir. 2011). In Robinson Helicopter, the U.S. court enforced a multimillion dollar monetary judgment awarded by the Higher People’s Court of Hubei Province, the PRC, against Robinson Helicopter Company, an aircraft manufacturer based in California. The United States Court of Appeals for the Ninth Circuit ultimately affirmed the district court’s decision on appeal.

3.        The Wuhan Decision

The Wuhan Court held, without detailed analysis or discussion, that the Robinson Helicopter precedent was sufficient to satisfy the requirements of reciprocity. The Wuhan Court also concluded that the U.S. Judgment did not violate basic principles of PRC law, state sovereignty, security or the public interest, again without detailed analysis or discussion. Notably, the Wuhan Court declined the defendants’ invitation to assess the underlying merits of the parties’ dispute under the share transfer agreement. In doing so, the Wuhan Court held that because the PRC proceeding involved only an application for judicial assistance, it would be inappropriate to review the substantive rights and obligations of the parties, which already had been adjudicated by the U.S. court judgment.  

Accordingly, the Wuhan issued a ruling on June 30, 2017, recognizing and enforcing the U.S. Judgment.

4.        Implications for Parties Seeking to Enforce Foreign Judgments

The Wuhan Decision opens the door for the first time to the realistic possibility that parties may be able to enforce their U.S. judgments in the PRC without needing to re-litigate the underlying merits of the dispute. Although the Wuhan Decision does not have precedential effect as a matter of PRC law, it will provide parties a basis to argue before other PRC courts that the principle of reciprocity has been established with respect to U.S. court judgments.

The Wuhan Decision is a promising development for parties that have obtained favorable U.S. judgments against PRC defendants with limited or no assets in the U.S.  While, as a practical matter, the defendants’ lack of U.S. assets makes these favorable U.S. judgments unenforceable in the U.S., the Wuhan Decision suggests that seeking to enforce these judgments in the PRC may not be a fruitless exercise. Given that fact, it may no longer be safe for PRC parties to assume that contractual provisions calling for dispute resolution before U.S. courts are mere “paper tigers” that would only result in a court judgment ultimately unenforceable in the PRC.

Of note, both the Robinson Helicopter and the Wuhan cases involved default judgments. PRC courts do exercise a degree of procedural review when considering foreign court judgments, including requiring proof that the foreign court had legally summoned the parties. Accordingly, before deciding to enforce the U.S. Judgment, the Wuhan Court evaluated and credited the plaintiff’s evidence showing that the Los Angeles Superior Court had duly summoned the two defendants through service by mail and publication in newspapers. The fact that the Wuhan Court ultimately decided to enforce the U.S. Judgment, notwithstanding the fact that it was a default judgment, will require PRC parties without assets in the U.S. to think twice before deciding not to appear and defend when duly served in a U.S. court proceeding.

While it remains to be seen whether other PRC courts will adopt the Wuhan Court’s approach and recognize U.S. judgments based on reciprocity (especially because the Wuhan Decision involved a PRC plaintiff seeking to enforce a judgment against two PRC defendants), it is apparent that PRC courts have shown increased willingness recently to recognize and enforce foreign judgments based on reciprocity. Late last year, for example, the Nanjing Intermediate People’s Court similarly recognized and enforced a Singapore court judgment based on reciprocity in the absence of a treaty for mutual recognition and enforcement of judgments between the PRC and Singapore. This development is worth monitoring further.

5.        Conclusion

The Wuhan Decision is a welcome development for parties (especially U.S. parties) doing business in the PRC and may produce positive effects for the future mutual recognition and enforcement of judgments between the U.S. and the PRC. Nevertheless, the principles of reciprocity remain vague, and there can be no certainty that other PRC courts will follow the approach of the Wuhan Court in considering whether to enforce judgments issued by U.S. courts (especially U.S. courts from states other than California). For that reason, until such time as the U.S. and the PRC conclude a bilateral or multilateral treaty governing mutual enforcement of civil judgments, it remains strongly advisable for parties handling PRC-related contracts to elect arbitration as a dispute resolution mechanism where permissible. This will enable parties to benefit from the New York Convention’s guarantees regarding the recognition and enforcement of awards in other Convention states, including the PRC.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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