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Legal Update - Reciprocal Enforcement: Danger for the Unwary

The New Arrangement

As you may be aware, the Hong Kong and Mainland China Governments recently signed a much debated agreement for reciprocal enforcement of judgments in each others' courts. The arrangement has potentially far-reaching consequences for anyone doing business in Hong Kong and China or with assets here.

Reciprocal enforcement is a two-way street: it will strengthen Hong Kong's position as a regional centre for dispute resolution and in the long-term it is a necessary step towards the ultimate integration of the Hong Kong and Mainland systems. But there will also be potential dangers for the unwary.

What is it?

The Arrangement is called 'An Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters by Courts of the Mainland and of the Hong Kong Special Administrative Region (HKSAR) pursuant to Choice of Court Agreements between Parties Concerned' (Arrangement).

The Arrangement will only become effective when the relevant legislative procedures have been completed in the HKSAR, and the Mainland has promulgated a judicial interpretation to give effect to the Arrangement. It is evident from previous discussions of the LegCo Panel on Administration of Justice and Legal Services that there are a number of concerns regarding the application of the Arrangement in Hong Kong.

How does it work?

As recently announced by the Secretary for Justice, the Arrangement is:-

So, if it is agreed in a commercial contract that Hong Kong is to be the exclusive venue for dispute resolution, a judgment obtained in the Hong Kong court will, after the Arrangement comes into effect, be enforceable through the Mainland courts.

Conversely, a judgment from a Mainland court will also be enforceable by way of the Arrangement through the Hong Kong court.

What does it mean?

The term 'money judgment' will only apply to liquidated sums. A judgment for unspecified damages could not be enforced until such time as the relevant court quantified the damages as a liquidated sum. Equitable judgments for injunctions or specific performance would not be enforceable.

The Arrangement only applies to commercial contracts, which would exclude a broad range of other legal matters such as employment, personal injuries, family law, or insolvency issues. The key difference between these areas and commercial contracts is that the Arrangement should only apply where this is the choice of the parties.

The parties must choose the Hong Kong courts or the Mainland courts as the exclusive forum for disputes arising from their contract.

The Arrangement will only apply to judgments of courts of a specified level. The specified courts in Hong Kong are the District Court and above. Those courts on the Mainland are the Higher or Intermediate People's Court level and above and those Basic People's Courts authorized to exercise jurisdiction over commercial and civil matters involving foreign, Hong Kong, Macao, and Taiwan parties. This would potentially include a huge number of courts on the Mainland.

The judgment must also be a final judgment. Under the civil law system in use on the Mainland, judgments cannot be considered final and conclusive for the purposes of the common law. A trial supervision system will be adopted, such as in use in Germany and France, whereby after an application for enforcement of a Mainland judgment has been filed with an HKSAR court, the case will be brought up for a retrial by a People's Court at the next higher level, and a certificate of final judgment will be issued by the relevant Mainland court.

The time limit for applying for recognition and enforcement of a judgment is one year if one or both of the parties are natural persons; six months if both parties are legal persons 'or any other organizations'.

How does this affect me?

Before the Arrangement it was not possible for a Mainland judgment to be enforced in Hong Kong without commencing a fresh action under the common law. Foreign judgments are enforced in Hong Kong under the Foreign Judgments (Reciprocal Enforcement) Ordinance. This is effected by a simple system of registration. The countries whose judgments are recognised are designated in the Ordinance. A similar system will therefore apply in future to Mainland judgments in Hong Kong.

Currently Hong Kong judgments are not enforceable in the Mainland courts at all. The judgments of foreign courts or arbitration tribunals can be enforced in the Mainland in accordance with international agreements such as the New York Convention, but this ceased to apply after 1997 when Hong Kong was no longer regarded as a foreign country. Hong Kong judgments will therefore be enforceable on the Mainland in future.

What are the concerns?

The concerns stem from the differences in the legal systems of the HKSAR and the Mainland and the quality of decisions rendered by the Mainland courts.

The LegCo Panel had previously urged that the Arrangement should apply only to those regions of the Mainland where there were substantial economic activities involving foreign direct investment such as Tianjin, Beijing, Shanghai and Guangdong as 'trial points' and only be extended to other cities upon the successful implementation of such a trial scheme. However, the Arrangement will apply to the whole of China without a trial period once it becomes law.

The Arrangement will not, at least, have retrospective effect on agreements concluded before its implementation, as originally appeared to be the case.

The main specific concern relates to the risk of inadvertent agreement to the Arrangement.

During earlier discussions, it was proposed that the parties to a commercial contract had to make it an express term of the contract that they agreed that judgments obtained in Hong Kong would be enforceable in the Mainland (and vice versa) before the Arrangement would be applicable to their contract.

Under the Arrangement, which has now been signed, a clause merely specifying the Mainland or Hong Kong as the exclusive court for resolving any disputes will also have the implication that a judgment obtained in that court will be enforceable over the border.

There is therefore a significant risk that parties could become affected by the Arrangement without realising that this is the implication of their choice of court.

The Hong Kong Government nevertheless argues that if the parties to the contract do not wish to have the judgments enforced in both the Mainland and the HKSAR, they should not choose the HKSAR courts or the Mainland courts as the exclusive forum for the settlement of disputes arising from their contracts.

Extreme care will therefore be required to opt in or out of the Arrangement when drafting future contracts.

Viewed from a Hong Kong perspective, much may ultimately depend upon whether adequate safeguards are in place with regard to the enforcement of Mainland judgments here.

The grounds upon which judgments may be refused have been broadened to address earlier concerns that there was insufficient protection against rogue judgments. Having broadened the grounds, of course, the issue may now become that they are too open to challenge! Enforcement can be refused if:-

• The choice of Court agreement is invalid under the law of the place of the court chosen by the parties, unless the chosen court has determined that the choice of court agreement is valid.
• The judgment has been wholly satisfied.
• The court where enforcement is being sought does not have exclusive jurisdiction over the case according to the law of the same place.
• The party did not appear and had not been correctly summoned for the trial or had not been given sufficient time to defend the proceedings according to the law of the place of the trial.
• The judgment has been obtained by fraud.
• There has been a prior judgment or arbitrator's award on the same cause of action and the judgment or award has already been enforced by the same court.
• The Peoples Court considers that the enforcement of the Hong Kong judgment is contrary to the social and public interests of the Mainland, or
• The Hong Kong court considers enforcement of the Mainland court is contrary to public policy.

What will happen?

It is true that in future Hong Kong parties doing business with the Mainland will want to be able enforce judgments against assets located there and may seek to do so by amending their contracts to the exclusive jurisdiction of Hong Kong (if this is feasible). However, if the location of assets is such an important consideration, it is just as likely that they will choose the courts of the place where the assets are located. If a Hong Kong party chooses the exclusive jurisdiction of the Chinese courts because that is where the other party's assets are, it will suddenly find that it has inadvertently exposed its own assets in Hong Kong to judgments of a Mainland court.

Hong Kong and Mainland businesses (and multinationals) have long traded on the basis that cross-border judgments would probably be unenforceable. This is about to change.

What should I do?

• Keep a close eye out for the implementation of the enabling legislation.
• Check your standard contracts and any contracts currently under negotiation to ascertain whether revision is necessary, either to enable reciprocal enforcement, or opt out of reciprocal enforcement.
• From now on, take care to always remember the reciprocal enforcement issue when drafting future contracts.
• Where you are using arbitration clauses, decide whether the courts are now a feasible alternative.