13 Oct 2017

PRC Law Update

First Time Recognition by a PRC Court of Enforcement of a U.S. Commercial Judgment

Recently, the Wuhan Intermediate People’s Court (“Wuhan Court”) recognized and enforced a commercial judgment awarding damages entered by the Los Angeles County Superior Court, California, USA (“CA Court”).

Case Background

Wuhan Court Verdict: (2015) 鄂武汉中民商外初字第00026号
(http://wenshu.court.gov.cn/content/content?DocID=498d1508-6e7a-4f61-9a54-a7b6012dafaa&online: KeyWord=2015)

The applicant and the respondents agreed that the respondents would transfer to the applicant a 50% equity interest held in an American corporation for USD 125,000. After the consideration was paid, the respondents absconded with the money and the applicant sued the respondents in the CA Court. CA Court sided with the applicant and ordered the respondents to refund the sum of USD 125,000 with interest. As the respondents were domiciled and had assets available for enforcement in Wuhan, the applicant filed the case in Wuhan Court.

Held:

Procedural

A certified copy of the U.S. judgment and its Chinese translation were submitted by the applicant.

Substantive

Under Article 282 of Civil Procedural Law of the People’s Republic of China, PRC courts shall rule on recognition and enforcement if the PRC court “concludes, upon examination and pursuant to an international treaty which includes the People’s Republic of China or in accordance with the principle of reciprocity, that the basic principle of the laws of the People’s Republic of China or the sovereignty, security or public interest of the State is not violated”,

Pursuant to Article 282, Wuhan Court issued the decision on the following grounds:
1. China and USA have not reached any international treaty relating to the recognition and enforcement of court judgments.
2. There is a precedent of U.S courts recognizing and enforcing civil judgments rendered by PRC courts. Therefore, Wuhan Court held that there is a reciprocal relationship between China and the U.S in respect of mutual recognition and enforcement.
3. The CA Court’s judgment intended to resolve a dispute arising out of an equity transfer agreement between individuals. As a result, such judgment is not in violation of PRC principles.

However, there is no clearly established definition under PRC law regarding reciprocity. Therefore, PRC courts have discretion, albeit limited, to determine what constitutes reciprocity and whether there is a reciprocal relationship in a case. Unlike courts under the common law legal system, a judgment made by local courts is not binding on lower courts in China.

The U.S court judgment acted as a precedent in this case which was not based on the reciprocity principle, but on the Uniform Foreign Money Judgments Recognition Act. The lesson is that it is still worth spending time and effort to review a dispute resolution clause very closely.