China signed the New York Convention on international arbitration. Therefore, international disputes referred to arbitration can in theory, be enforced in China under Chinese legislation. DLA Piper says that has not been the case for court judgments. "China has no such treaty with any common law country."
In that respect, Hong Kong has an advantage. Its independent legal system has fair courts. Foreign parties often use Hong Kong as the default jurisdiction for contracts involving mainland Chinese organisations. The REJA means that Hong Kong judgments are enforceable in China.
The enforcement has been shown to work. In November 2010, a Shanghai Court recognised a Hong Kong judgment for the first time. Later, subject to judicial review, the judgment was upheld and enforced.
A Case under the REJA
DLA Piper China partner Nicolas Groffman takes up the story: "The case turned around a promissory note related to a debt owed by a Chinese entity to an international company. The international company believed the debt would be unenforceable in China, and thought the Chinese company was unlikely to pay. So we provided for exclusive jurisdiction of the Hong Kong courts. The Chinese entity believed that as it had no assets in Hong Kong, it could simply ignore the promissory note - and indeed it did so.
"In 2009, we served a summons on the debtor in China. To do this, the Hong Kong High Court issued a summons through the Shanghai High Court. We knew the debtor would try to prove service of the summons had been ineffective, but there had been a recent ruling from the Supreme People's Court recognising service on housemaids or other people at the recipient's address. The legal team used this ruling. We proceeded to court in Hong Kong on behalf of the client. The defendant did not attend, and the client won.
"In 2010, I attended two hearings at the Shanghai No 1 Intermediate Court to argue for China to recognise the judgment under the REJA. Both hearings were contested by the defendant.
"Later in 2010, the Shanghai No 1 Intermediate Court issued a decision to acknowledge and enforce the award. Despite a judicial review prompted by the defendant and there being no right of appeal, the judgment's enforcement began. Enforcement was delayed because there were criminal charges against the defendant's entity and its management. The police seized relevant assets. We argued that 'seizure by turn' provisions should be applied to criminal seizure. Thus, when the criminal process was completed, the client had its turn at the remaining assets. At the completion of criminal proceedings (2012), enforcement began again. The judicial review was defeated in late 2012, and the debt finally paid."
The REJA in Real Life
There are limits to the REJA. It applies only to commercial contracts (not consumer or employment). The contract must be subject to the exclusive jurisdiction of Hong Kong courts. If the contract has an arbitration clause, the REJA cannot be invoked. If enforcement would go against mainland China public policy, it may be difficult.
The burden is on the party that lost in the Hong Kong court to show why the mainland court should not enforce the judgement. To do so, that party can use the points above to form an argument, or else argue that procedure was not followed correctly (e.g. the serving of the summons).
The experience of DLA Piper, and others, using the REJA shows that both the REJA and arbitration are useful tools. The REJA's great advantage is that the local court cannot ignore the judgment.
So if you are a New Zealand company, seeking a way to enter into commercial contracts in China, consider expert legal advice direct from the region on the kinds of contracts which may bind. There are ways to make legal agreements work, but inside knowledge is the best avenue for success.
Martin Thomson and Terence Ng are partners in DLA Phillips Fox. Contributions to this article were also from Nicolas Groffman, DLA Piper (China)
