Member Article

On 14 July 2006, the Hong Kong and Mainland China Governments signed a ground-breaking agreement, rather lengthily entitled "An Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region pursuant to Choice of Court Agreements between Parties Concerned" (Arrangement), under which they agreed to recognise and enforce judgments made in each others courts. Legislative changes will be made in Hong Kong and the Mainland in order to implement the Arrangement. Described by the Vice President of the Supreme People's Court as "a landmark", the Arrangement has important consequences for anyone doing business in the Mainland or with Mainland persons. If a commercial contract designates Hong Kong as the exclusive forum for resolving disputes arising from the contract, a judgment obtained in Hong Kong will be recognised and enforced in the Mainland if the judgment debtor keeps his assets there. The reverse will also apply. Robert Clark, a Litigation partner at leading Hong Kong law firm Deacons, said today, "I see this as a very significant moment in the development of the legal relationship between Hong Kong and China. It will give litigants access to a judicial system which they know and trust, which is built and modelled upon the English common law, and a direct right of enforcement of judgments (produced under the rule of law of which Hong Kong is rightly proud) in China; where the common law as we know it in Hong Kong does not exist." The Existing Position (a) Enforcement of Mainland Judgments in Hong Kong The Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap 319) (Ordinance) provides a mechanism for enforcing civil and commercial foreign judgments in Hong Kong, by means of a simple and quick registration procedure. The Ordinance designates those foreign jurisdictions whose judgments the Hong Kong Courts will enforce. Such designation is based on whether that foreign jurisdiction allows the reciprocal enforcement of Hong Kong judgments, hence the term "reciprocal enforcement." Mainland judgments are not enforceable in Hong Kong by registration under the Ordinance. To enforce Mainland judgments in Hong Kong, the Mainland judgment creditor has to start a fresh action in Hong Kong under the common law, based on the Mainland judgment. (b) Enforcement of Hong Kong Judgments in the Mainland At present, it appears that Hong Kong judgments cannot be enforced in the Mainland at all. The Mainland does not have a rule similar to Hong Kong's common law rule on recognition and enforcement of foreign judgments. The Mainland's Civil Procedure Law provides that foreign judgments may be enforced in accordance with international agreements to which the Mainland is a party or in accordance with reciprocity. However, post-1997, Hong Kong, can probably no longer be considered a "foreign" country. A Hong Kong judgment creditor has to initiate fresh legal proceedings in the Mainland, but the Hong Kong judgment may be used as evidence in support of the claim. The Position under the Arrangement The Arrangement will initially only apply to "money judgments of commercial cases given by specified courts of either the Mainland or Hong Kong made pursuant to a valid exclusive choice of court agreement in writing". Accordingly, the Arrangement will only apply to: • money judgments. So, for example, orders for specific performance or injunctions will not be covered; • commercial cases. This means cases based on contracts in which the parties are acting for the purposes of their respective trade or professions, excluding contracts relating to matrimonial matters wills and successions, bankruptcy and winding up, employment and consumer matters etc; • judgments of specified courts. In the case of Hong Kong, it is to apply to judgments of the District Court and above. In the case of the Mainland, it is to apply to courts at the Intermediate People's Court level or above and to those Basic Level People's Courts designated to have jurisdiction over civil and commercial cases involving foreign parties (42 in various provinces and municipalities); • if the parties concerned have expressly agreed in writing to designate a Mainland or a Hong Kong Court to have exclusive jurisdiction for resolving any dispute; • "legally enforceable final judgments." There is to be a special procedure under the Arrangement for determining whether a judgment is final. Under the Arrangement, there will be safeguards whereby either jurisdiction can refuse to enforce a judgment of the other, based on the following grounds: i. the jurisdictional agreement (choice of court clause) is invalid in accordance with the law of the place where enforcement is sought; ii. the judgment has been fully executed; iii. the court of the place where enforcement is sought has exclusive jurisdiction over the case according to its law; iv. the losing party has not been given sufficient time to defend his case; v. the judgment has been wholly obtained by fraud; vi. the court of the place where enforcement is sought has made a prior judgment on the same cause of action; vii. in the case of the People's Court of the Mainland, it considers that the enforcement of the Hong Kong judgment is contrary to the social and public interests of the Mainland; viii. in the case of the Hong Kong court, it considers that the enforcement of the Mainland judgment is contrary to public policy of Hong Kong. Arbitration Arbitration awards rendered in Hong Kong and recognised arbitration commissions in the Mainland have been mutually enforceable since February 2000. From our experience, the arrangement for mutual enforcement in both places is working smoothly. When the Arrangement for reciprocal enforcement of judgments is implemented, litigation can be considered as a real and viable alternative to arbitration. Practical Implications of the Arrangement for foreign companies doing business in China • Existing standard form contracts should be reviewed to determine whether they require revision. • In cases where a foreign business is contracting with parties who have assets in the Mainland, they will probably want to be able to enforce judgments in the Mainland. In such case, a suitably worded clause should be included in the contract. • In any cases where reciprocal enforcement is not desired, alternatives should be considered. • If a standard contract contains an arbitration clause, consider whether to change it to litigation. • A monetary judgment obtained in a third country, which is not enforceable by registration in Hong Kong (but is enforceable by registration in the Mainland) could be registered in the Mainland and then subsequently re-registered in Hong Kong. In a recent Hong Kong case, the Court held that registration of "second hand judgments" in this way, although undesirable, is permissible under the Ordinance. The judgment in question simply has to meet the pre-requisites for registration under the Ordinance and it matters not that the judgment resulted from reciprocal registration of a judgment in another jurisdiction. In England, a new section has been added to the English Foreign Judgments (Reciprocal Enforcement) Act 1933 (on which the Ordinance was modelled), which prevents the registration of "second hand judgments", but until any such amendment is made to the Ordinance, it appears from the recent Hong Kong judgment, that registration of "second hand judgments" will be allowed. For further comment please contact Robert Clark Partner, Commercial Litigation Deacons, Hong Kong Phone: +852 2825 9268 Email: [email protected] Alex Lai Head of Litigation Department Deacons, Hong Kong Phone: +852 2825 9259 Email: [email protected] Joseph Kwan Partner, Commercial Litigation Deacons, Hong Kong Phone: +852 2825 9324 Email: [email protected]