[Dr. Edward Lestrade, Law Contributor, first published in European Newsletter, Thomson/ Reuters, October 2008]
The states of the European Union (‘EU’) comprise China’s biggest commercial partner and trade between it and the EU states is continuing upward. However, recent times have brought about an increasing number of commercial cross-border disputes between the Chinese business domiciles and traders in the EU states. As such, this commentary is to give business people and lawyers an overview of the recognition and enforcement of the judgments of EU states/ foreign courts by Chinese courts. The commentary also looks at the relative risks and the issues involved for EU traders in judgments enforcement in China.
EU Trade with China – opportunities and issues
According to the China’s People Newspaper, since 2004, the EU has been China’s biggest commercial partner. Furthermore, the EU regards China as its second biggest trading partner which, coincidentally, enjoys the fastest growing export market in the world. The importance of China for the EU is borne out by it being the EU’s most significant source of technology imports and an important source of foreign direct investment. In 2007, bilateral trade between China and the European Union reached 356.15 billion USD which represents increases of more than 20 percent per annum since 2003.
The increasing incidence global trade and the massive growth of EU investments and trade with China have brought about a corresponding increase in cross-border litigations involving EU states’ foreign judgments upon Chinese domiciles.
Many of these cross-border disputes are decided by arbitration in accordance with the New York Convention, to which most EU countries and China are signatories. However, even though agreements have arbitration clauses, a local (Chinese) national court may still have to deal with questions concerning the extent of their coverage. In that respect, increasingly, for foreign parties engaged in disputes with Chinese domiciles, a major problem is to secure the recognition and enforcement of an EU court’s decision by a Chinese court in respect of distress upon assets located and held in China. The main reason for the problem is that China has signed only a few treaties concerning judicial-assistance/ recognition and enforcement of foreign court judgments and does not otherwise readily recognize such judgments. Therefore for foreign parties wishing to claim against Chinese domiciles, commencing proceedings in a foreign court/ their home court would not appear to be good decision especially where the assets of the Chinese party are located in China. However, ever where a Chinese court grants recognition and enforcement of a foreign court’s decision, there would still be severe hurdles to overcome to achieve the actual recovery of the judgment debt – these are addressed later on in this article.
Generally, due to the above factors, the enforcement of foreign judgments in China appears to have been very difficult in the past few years. Corruption/ transparency issues, inadequate, or non-existent statistics on the matters and the absence of a case-reporting system in China has made it even more difficult for foreigners to appreciate the scale of the risks upon them in dispute scenarios involving foreign judgments upon Chinese parties.
From the informal reports of lawyers and business people involved in disputes with Chinese domicles, it would seem that a significant number of judgments (including domestic ones) are never enforced. The factors affecting this appear to be:-
1) a judiciary that is not independent and aspects of state interference in the judicial process;
2) the nature of protectionism in China – the prevalence of the State’s involvement in commercial undertakings;
3) inefficient judgment enforcement/ collection systems;
4) lack of understanding of foreign legal systems by Chinese courts. For example, EU judgment creditors would be unwise to take for granted that Chinese law protects their interests in the same manner as EU law. The reality is that most will face an unreceptive, or uninformed Chinese court when applying for recognition of the EU state’s judgment in China. It would be quite customary for the Chinese court to decide that there was no personal jurisdiction over the judgment debtor and/ or that the compensation awarded by the
foreign court was excessive.
Chinese Foreign Judgments Enforcement Law and Application Procedure
Foreign judgments enforcement law in China is principally governed by its Law of Civil Procedure (‘CPL’), Ch.XXIX of which the principal Articles are: 267,268 and 269.
By Art.267 a legally effective judgment or ruling made by a foreign court requires the Chinese court to recognise and effect it. Applications for enforcement may be made by an applicant direct to a relevant intermediate people’s court, or by a foreign court according to treaty requirements, or on the basis of reciprocity.
Art.268 provides that applications that do not contradict Chinese law, or its sovereignty, security, social and public interests will be recognised and validated for enforcement in China.
Art.269 covers the general principles for the recognition of foreign arbitral awards which have similar provisions to Art.268. In addition to the provisions of the CPL, the recognition and enforcement of foreign judgments are also governed by its Supreme People’s Court’s Opinion on the Application of the Civil Procedure Law of the People’s Republic of China (‘Opinion on CPL’) which guides lower courts on enforcement matters.
In accordance with Arts.267 and 268 of the CPL generally, applications are normally initiated in an intermediary court where the judgment debtor has a permanent residence, or where their assets are located. But, there is no clear guidance on this procedure by either the CPL, or the Opinion on the CPL.
By Art.318 of the Opinion on CPL, where there is a common international treaty in place by the People’s Republic of China and country of the foreign court, or where the principle of reciprocity between these two countries exists, the application for recognition and enforcement of the foreign judgment must be directed to the intermediate court of the People’s Republic of China which has jurisdiction over the case. In the alternative, diplomatic channels must be used for the applications, or the applicant can apply to the relevant intermediary court for case to be started afresh and then the intermediary court will decide on the merits in accordance with Chinese law. Where neither treaty, nor reciprocity aspects are present, diplomatic channels fail and the applicant does not pursue the restarting of the case in the relevant intermediary court, the application will be rejected by the intermediary court.
General Grounds for Refusal of Enforcement
The foreign judgment will be normally refused by the Chinese court where:-
1) Recognition and enforcement of the foreign judgment would cause harm to Chinese sovereignty, security, and/or public policy. Neither the CPL nor the Opinion on CPL, defines “security” or “public policy.” However, there have been no studies that have indicated that this provision has been used unfairly by the Chinese courts in respect of foreign judgment enforcement matters;
2) Where the intermediary court considers that the foreign judgment is made by an incompetent foreign court as judged under relevant international treaties and local laws;
3) The foreign judgment is ineffective under the law of the foreign country;
4) The defendant was not properly served;
5) A judgment of a Chinese court is in effect, or process concerning the same cause of action
between the parties.
Chinese Execution of Foreign Judgments
For the foreign creditor’s judgment to be enforced by the Chinese intermediary court, the judgment must be deemed by that court to have been given by a competent foreign court. That is to say, a foreign court that had proper jurisdiction over the proceedings involving the Chinese judgment debtor.
China is a civil law country which follows the same pattern of legal systems obtaining in most European Union states. However, due to the ascendency of European Union law in respect to the national laws of the EU states which process involves many facets unfamiliar to a pure civil systems (eg., the precedentiary and overriding legal effect of decisions of EU courts/ EU primary law, etc., aspects of a common law system (bearing in mind the memberships of the countries of the United Kingdom), familiarity on the part of the Chinese court cannot be assumed. As such a long, comprehensive and tedious presentation may be need to be made to the Chinese court to explain why it should accept that the system of law obtaining in the EU would give an EU state’s court competency to decide the matter.
Generally, for the foreign applicant, the CPL’s Ch.2 (2) “Territorial Jurisdiction,” sets out some rules concerning jurisdiction and forum, but does not give complete guidance on the matter. However, by the CPL’s Art.24 up to Art.33, generally, a Chinese court will accept personal jurisdiction over a foreign party who is a Chinese domicile, or foreign country resident, where the defendant is a Chinese domicile. Where an applicant brings proceedings in a forum other than the defendant’s domicile or residence, the Chinese court will look for some connection between the dispute and the forum and if there is none, will be likely to reject the application.
Enforcement/ Collection of Judgment Debts in China
Foreign judgments tend to be executed in the same way as domestic judgments as this aspect is not specifically covered by the CPL, or the Opinion of CPL. Execution Officers, operating under the administrative processes established by the courts as part of the enforcement regime, are principally responsible for the enforcements/ collections. As such, they send notices of execution etc., ordering judgment debtors to comply with the judgment.
Non-compliance after the specified time results in the intermediary court compelling the required compliance which can be achieved as follows:-
1) Execution officers may direct inquiries to the debtors’ bank and freeze and transfer the balance of the bank accounts;
2) The Execution Officers may also garnish the debtors’ income, or confiscate and subsequently auction the judgment debtors’ assets, bar certain exemptions (eg., basic personal items). However, by the CPL and Opinion on CPL, any judgment, or the start of the execution process does not establish any charge, or lien on the judgment debtor’s assets.
3) Penalties are also levied on the judgment debtors in accordance with the CPL where money is not paid up voluntarily in the specified time of the intermediary court’s order of enforcement. These penalties are normally double the accrued interest of the unpaid amount.
The time limit to apply for execution of a domestic judgment is normally one year. It is six months for matters between commercial enterprises and those time limits are usually non-negotiable from the intermediary court’s perspective. The CPL and Opinion on CPL does not provide for time limits for foreign judgment enforcement applications and it can be taken that the same rules that apply for domestic judgments obtain for foreign judgments.
Generally, the Chinese legal system provides very little help in enabling the collection of judgment debts where a foreign judgment is recognised and ordered for enforcement by it. For example, no assistance by the court is given to the process in terms of assisting the collection of the judgment debts by enabling searches, etc. for the assets of the judgment debtor. Applicants and their lawyers are effectively locked out of the judgment enforcement/ collection process which is essentially court-driven. The Chinese judge or the execution officer is exclusively authorised by law in respect of the serving of notices, identifying and locating the judgment debtor’s property and distressing
The problem in respect of enforcement/ collection in China is further compounded by execution officers and the courts being often impeded in the carrying out of their responsibilities by high workloads, lack of money and resources, poor working conditions and also the lack of economic, or other incentives to do their work efficiently. Despite that, judgment creditors or their lawyers, without specific permission of the Chinese court, which is not normally given, have no legal right to take any action outside those taken by the execution officer and the Chinese court to pursue the judgment debt.
In particular, there are no provisions under Chinese law for fraudulent conveyance. So where a judgment debtor sells off assets so as to frustrate the collection process, nothing as such can be done by the applicant, or their lawyers. Secondly, the aspect of the ‘piercing of the corporate veil’ whereby the foreign judgment creditor could pursue others, such as a parent company, or those who may be using a business entity as a shield to perform illegal, or fraudulent activities. As such the collection of judgment debts is tortuous processes which in many cases end up with the judgment debtor having spent considerable sums to get the judgment awards and then ending up with nothing
in their pocket to show for that.
China, as an important trading nation for the EU, needs to empower its courts and laws to provide adequate protection for its trading partners. It needs to establish a judgment debt collection regime that will give its trading partners more confidence in dealing with Chinese traders by allowing them more rights to pursue those involved in fraudulent trading where they have been negatively affected.
Its failure to do so, allows a situation that is likely to get seriously out of hand and create unsustainable trading relations with the EU in the long run.
Generally, it is not sufficient for the state to have laws that permit the execution or punishment of those guilty of criminal conduct which result in trading losses for foreign traders. Foreign traders want confidence that if they lose money by bad deals with Chinese traders and are awarded compensation by a court under due process, they will be entitled to realistic and effective assistance of the Chinese courts so as to achieve their compensatory awards awarded properly by a competent court in their home state. Such a regime will also send a serious deterrent message to fraudulent, or non-conforming traders that their defaults not only harm them in the long run, but do major harm to Chinese as a major emerging and important world trading nation.
Although China has agreed with some EU countries, such as France and Romania for the mutual recognition and enforcement of judgment by way of ‘judicial assistance’ treaties, the essence of the problem is realistic enforcement – collection of the judgment debt. That is the essential matter which it needs to deal with right now.
Currently, the situation is unsatisfactory as a Chinese defaulting trader can dissipate assets to avoid the judgment debt with no redress available for the EU applicant trader/ judgment creditor.
The process towards legal modernisation of the foreign judgment recognition, enforcement and collection regime in China has started though and bearing in mind China’s world trading ambitions, is likely to continue at a brisk pace. For example, China has now acceded to the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters. The convention though, does not involve recognition and enforcement of foreign judgments, however, it gives an excellent boost to its enforcement regime for the enforcement of foreign judgments as it permits the serving of process concerning foreign judgments on relevant Chinese domiciles which is an important part of the recognition of foreign judgments process in China. Secondly, China is a member of Hague Private International Law Conference and is currently participating in the drafting of the Convention on Jurisdiction and Enforcement of Foreign Judgments in Civil and Commercial Matters which is projected to become effective soon. This convention when effected and if accepted by the major trading nations will establish a uniform and efficient way for the recognition and enforcement of the commercial judgments in the contracting states.
[This article is based on the law and regulatory scene obtaining in 2008. It is not intended to provide legal advice and should not be relied upon as such]