Allens Arthur Robinson – Commercial Litigation – Mutual Recognition Of Judgments

In brief: Last year, we reported on a groundbreaking agreement signed in July 2006 by the governments of the Hong Kong Special Administrative Region and the People’s Republic of China to implement laws to recognise the judgments of each other’s courts. Legislative changes are now underway in Hong Kong to implement this arrangement. Partner Simon McConnell (view CV) , Senior Associate Mun Yeow and Lawyer Amanda Andreazza look at the Mainland Judgments (Reciprocal Enforcement) Bill and its implications.

Scope of the Bill
The Bill sets out the proposed new system for registering judgments of the People’s Republic of China (the PRC) in the High Court in Hong Kong, which will then be able to be enforced within Hong Kong Special Administrative Region (HKSAR). This is a significant development because, at present, no PRC court judgment has been registered and enforced in Hong Kong.

Under the proposed law, there are a number of prerequisites to meet before the High Court in Hong Kong will allow a PRC court judgment to be registered. These include:

Monetary judgments only

The Bill only applies to judgments that order the payment of a sum of money. Judgments for specific performance or an interlocutory injunction cannot be registered. However, the Bill provides for the registration of part of a judgment so that judgments for both money and other non-money relief may be registered to allow enforcement of the monetary obligation.

Designated courts

The judgment must be given by a designated PRC court, which includes the Supreme People’s Court, Higher People’s Courts, Intermediate People’s Courts and specific Basic People’s Courts.

Exclusive choice of court agreement required

The judgment must be based on a dispute arising from a contract made on, or after, the date of the legislation’s commencement and which the parties have agreed will be determined exclusively by a designated PRC court.

One of the issues currently being considered is whether you can specify that ‘Hong Kong courts’ or ‘PRC courts’ have exclusive jurisdiction in your written contract – or whether you need to specify the particular court or courts. The common view – and what appears to be the only sensible approach – is to refer to the Hong Kong or PRC courts. Each court level has different monetary jurisdictions. It would be impossible for parties to foresee their disputes and the amount of money in dispute – at the time of signing their written agreement.

This exclusive choice of courts requirement is, however, fraught with danger. No one can ‘oust’ the jurisdiction of the Hong Kong courts, nor can anyone direct the Hong Kong courts that they have jurisdiction to hear a particular dispute. It is possible, therefore, that:

even though the parties agree in their original contract that PRC courts will exclusively resolve any relevant dispute, an application to the Hong Kong courts could still be entertained – resulting in two sets of proceedings in two jurisdictions; and

even if the parties agree in their original contract that the Hong Kong courts will exclusively resolve the dispute, it may be that the Hong Kong courts decide that they do not have jurisdiction – resulting potentially in the aggrieved party having no court system available to obtain a remedy.

Judgment must be ‘final and conclusive’

The PRC court system has a mechanism called ‘Procedure for Trial Supervision’, which allows for the reopening of cases on a wide range of grounds. It is, therefore, difficult to show that a PRC judgment is ‘final and conclusive’. The Bill seeks to overcome this problem by deeming the following judgments ‘final and conclusive’:

judgments of the Supreme People’s Court;
first-instance judgments given by a Higher People’s Court, an Intermediate People’s Court or a recognised Basic People’s Court, where no appeal is allowed from the judgment according to PRC law or the time limit for such an appeal has expired without an appeal having been filed; and
judgments given in a retrial by a People’s Court of a level higher than the original court, unless the original court is the Supreme People’s Court.
This is one of the most difficult aspects the negotiators of the mutual recognition arrangement, and the drafters of the Bill, have had to deal with. It is also one of the primary issues being considered by the Bill’s Committee – chaired by legislator and barrister Margaret Ng. There is concern that PRC court judgments may be registered in Hong Kong and enforced, but subsequently reviewed and over-turned by the PRC courts. Time will tell whether this concern is realised.

Judgments/choice of court agreement made after commencement of new legislation

The Bill applies only to judgments given and choice of court agreements made after the commencement of the new legislation. Thus, even if the judgment is obtained after the commencement of the new legislation, it will not be registrable if the exclusive jurisdiction agreement to which the judgment relates was made before the commencement of the Hong Kong legislation.

Effect of registered judgment

The Bill provides that a registered judgment will have the same force and effect as if the judgment had been originally given in the Hong Kong Court of First Instance and entered on the day of registration. A registered judgment will be recognised as conclusive to prevent subsequent proceedings in Hong Kong founded on the same cause of action.

Registered judgments can be set aside

There are, however, a number of grounds on which applications may be made to set aside a registered judgment, including:

the judgment is not a PRC judgment that satisfies the PRC judgment requirements;

the judgment has been registered in contravention of the new legislation;

the choice of PRC court agreement pursuant to which the judgment was given is invalid under PRC law (unless the original court has determined that the agreement is valid);

the judgment has already been wholly satisfied in the PRC;
the courts in Hong Kong have exclusive jurisdiction over the case according to the law of Hong Kong, despite the written contract between the parties;

the judgment was given in the absence of the judgment debtor or the judgment debtor was not given sufficient time to defend his case;
the judgment was obtained by fraud;

a judgment on the same cause of action between the parties has been given, or recognised, by a court in Hong Kong;

the enforcement of the judgment is contrary to public policy; and
the judgment has been reversed under PRC law.

The scope of these grounds will not be clear until there is a body of case law dealing with applications made under this section. In particular, it will be interesting to observe the types of judgments Hong Kong courts may find to be ‘contrary to public policy’. Similarly, it will be interesting to see when parties find this a viable argument to seek to avoid their written agreement. The PRC equivalent of ‘public policy’ is being ‘contrary to the social and public interests of the Mainland’, which seems to be a broader concept. The PRC courts may, therefore, be more prepared not to register a Hong Kong judgment in the PRC. This remains to be seen. Less certain in Hong Kong is the situation regarding judgments that affect ‘domestic social and public interests’.

Registering Hong Kong judgments in the PRC

The reciprocal arrangement requires the Supreme People’s Court to issue a Judicial Interpretation that will set out the procedure for registering a Hong Kong judgment in the PRC. The Bill provides for a compulsory first step in the process, which is the need for a certified copy of the Hong Kong judgment before making an application to register it in the PRC. Perhaps the PRC will use the Bill as a guide in the drafting of its Judicial Interpretation, together with its own procedure for enforcing judgments generally, but to date there has been no signal from the PRC as to what those procedures will be.

Currently, enforcing judgments in the PRC is a protracted and difficult process. Applications to enforce judgments must first be made to an appropriate Intermediate People’s Court. Concern has been expressed by some that these courts do not enforce judgments as fully or quickly as could be the case. In an effort to improve this situation, the Supreme People’s Court recently issued a new set of regulations, which, among other things, sets a time limit of six months for executing judgments involving property. While this demonstrates that the PRC is aware of problems with enforcement of its judgments, this practical aspect will be a major commercial factor in parties deciding the best way in which they can structure their transactions, to take account of the possibility that something may go wrong.

What does this mean now?

Until the Supreme People’s Court issues its Judicial Interpretation and both governments announce the date on which the reciprocal arrangement will come into effect and be implemented, businesses cannot make use of these proposed new laws. To date, the PRC has not indicated when the Judicial Interpretation is likely to be issued.

However, while the Bill is designed for future disputes rather than current ones and although it has not yet taken effect, it is important that businesses plan for the contents of their contracts in light of the opportunities the arrangement will offer. One of the primary legal and commercial decisions to be made is whether the common current practice of utilising arbitration as the means of dispute resolution in commercial contracts associated with the PRC should convert to court litigation as the resolution method. This is a serious issue that we will monitor and address in a subsequent publication. For example, the reciprocal arrangement will be particularly advantageous for financial institutions lending to PRC borrowers, knowing that they will have recourse against the borrowers’ PRC assets in the event of default.

At this preliminary stage, it is difficult to predict how utilised and effective the new legislation will be. On the one hand, the Bill solves the problem of the need for a ‘final and conclusive’ PRC judgment currently faced by parties that would like to enforce those judgments in Hong Kong. On the other side of this coin, as is the case currently with arbitral awards and despite the new arrangement, it is likely that procedural hurdles will continue to be faced by parties trying to enforce any judgment in the PRC. In these circumstances, businesses should begin thinking about their preferred choice of law and jurisdiction clauses and whether a conversion to litigation, rather than arbitration, best suits their commercial needs and circumstances.

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