ARM signed a technology licensing contract with a local Chinese company. The contract stipulates that "all disputes shall be exclusively submitted to Court in England and governed by English Law". Presently, the Chinese company refused to pay the royalty to ARM. ARM consulted with us on the issue of foreign judgement enforcement in P.R. China, and with a follow-up concern that the rearrangement of contract dispute resolution clause for comprehensive protection of its interest in P.R. China, considering that they have experienced legal team in the field of Common Law.
Analysis & Comments
Main Issues Analysis
In the above case, the main issues are:
1. How to enforce a foreign court judgement in P.R. China;
2. How to apply foreign law in Chinese Court and Arbitration; and
3. Rearrangement of "Choice of Jurisdiction Clause" or "Arbitration Clause"
Enforcement of A Foreign Court Judgment in P. R. China
According to Article 281 of PRC Civil Procedural Law, a claimant may apply directly to a PRC intermediate court having jurisdiction for recognition and enforcement of an enforced foreign judgment. However, Article 282 stipulates that a court can only issue a ruling to enforce a foreign judgement in accordance with an international treaty concluded or acceded to by PRC or under the principle of reciprocity.
Unfortunately, P.R. China has not concluded or acceded to any international convention on recognition and enforcement of foreign courts' judgments. In most cases, foreign court judgement cannot be enforced in China. In the above case, the Judgment granted by English court can hardly be enforced in China.
So far, P.R. China has only signed the Mutual Court Judgement Assistance Treaty or similar agreement with France, Italy, Australia, Russia, Cyprus, Hong Kong and a few other countries and regions. However, when applying particular bilateral treaties in specific cases, the party shall need to look carefully at the terms of the treaty concerned. There are some specific provisions restricting the enforcement of foreign courts' decisions in China.
Take Hong Kong as an example. According to the Arrangement of the Supreme People's Court between the Mainland and the HKSAR on Reciprocal Recognition and Enforcement of the Decisions of Civil and Commercial Cases under Consensual Jurisdiction, ONLY when contractual parties have "written jurisdiction agreement", which is an agreement expressly stipulates in writing that a people's court in the mainland or a HK court has exclusive jurisdiction over any dispute, could the relevant court adopt the enforcement application.
In the above case, due to A and B not having signed the "Exclusive Jurisdiction Agreement" in writing, even if the judgement was granted by a Hong Kong court, it would hardly be enforced in Mainland China.
Applying Foreign Law in Chinese Courts
Article 145 of PRC General Principles of the Civil Law demonstrates that "the parties to a contract involving foreign interests may choose the law applicable to settlement of their contractual disputes, except as otherwise stipulated by law." Article 126 of the Contract Law of PRC also stipulates, "Parties to a foreign-related contract may select the applicable law for resolution of a contractual dispute, except as otherwise provided by law." Whereby, one contractual dispute where the contract is under foreign law can be brought before a Chinese court.
However, the claimant will bear the obligation to provide and explain the foreign law before the corresponding court. In legal practice, according to Article 193 of the Opinions of the Supreme People's Court on Several Issues concerning the Implementation of the General Principles of Civil Law of PRC, the applicable foreign law can also be provided by:
a. Certain organ of the country who has concluded Judicial Assistant Convention with China；
b. Chinese embassy or consulate in the foreign country；
c. the embassy of the foreign country in China；or
d. both Chinese and foreign legal experts.
If the applicable foreign law still cannot be determined through the above method, PRC law may be applied.
Regarding the providing procedure, the applicable foreign law or precedent shall be notarized by relevant foreign authority to prove the validity of the law and go through the authentication process by a Chinese embassy or consulate in that foreign country. Whereafter, the law shall be translated into Chinese by certified translator and the translation shall be notarized by a Chinese notary. After the above process, the bilingual version of foreign law can be submitted to court.
As a part of evidence, the submitted foreign law shall go through evidence exchange, cross-examination, etc., processes after being finally adopted by court.
Applying Foreign Law in Chinese Arbitrations
In light of general principle of Civil Law, "choice of law" and "choice of dispute settlement method" are two different legal issues. Neither the Arbitration Law of PRC nor the Arbitration Rules of China international Economic and Trade Arbitration Commission (CIETAC) forbids applying foreign law in a Chinese arbitration. In this case, foreign law can definitely be applied in a Chinese arbitration.
Considering the difficulties in enforcement of foreign court judgment in P.R. China, we provide A the following suggestions relating to "Choice of Jurisdiction Clause" and "Arbitration Clause" provision.
Choice of Jurisdiction Clause
It is suggested stipulating a "Non-exclusive Jurisdiction Clause" whereby each party is given the option to choose either the foreign state or Chinese court as forum for dispute resolution. Pursuant to a guideline issued by Chinese Supreme Court, where a contract stipulates that the foreign court has a non-exclusive jurisdiction on the subject matter, the Chinese court shall have the right to entertain the same case despite that the foreign court proceedings have started already.
In this case, since B bears with much higher possibility to breach contract comparing to A itself, this non-exclusive jurisdiction clause shall give A the flexibility to choose right court to file litigation. Even if a case has been carried out in a foreign country, A still has the opportunity to file a lawsuit in China relying on the same cause of action.
It will be highly in favor of foreign investors in the situation that the counterpart has executable properties in the foreign country where the litigation takes place.
In addition, if the foreign investors decide to choose home country and specific Chinese Court as forum for dispute resolution, they can choose the people's court (i) at the place of domicile of the defendant, (ii) at the place where the contract is performed or signed, (iii) at the place of domicile of the plaintiff, (iv) at the place where the subject matter is located to have jurisdiction over the dispute (Article 34 of PRC Civil Procedure Law). Importantly, regarding the "actually connected place" stipulated in the Article 34, due to no interpretation issued by the Supreme Court of PRC, local court will not accept case depending upon this term according to our legal practice.
In the situation that the defendant has no domicile within the territory of P.R. China, if the contract is signed or performed within P.R. China, the subject matter of action is located within P.R. China, the defendant has any impoundable property within P.R. of China, or the defendant has any representative office within P.R. China, the people’s court at the place (i) where the contract is signed or performed, (ii) where the subject matter of action is located, (iii) where the impoundable property is located, (iv) where the tort occurs or (v) where the domicile of the representative office is located may have jurisdiction over the action (Article 265 of PRC Civil Procedure Law).
Comparing with litigation, Arbitration is a time saving procedure as the arbitral tribunal shall render an arbitral award within three months from the date on which the arbitral tribunal is formed (Article 56 of PRC Arbitration Law) and an arbitration award is final. After the award is given, either the arbitration commission or the people’s court shall not accept the re-application of the suit concerning the same dispute by any of the parties concerned (Article 9 of PRC Arbitration Law). Instead, in China, normal litigation will go through first instance and second trial which will cause at least one and a half year.
In addition, arbitrators, comparing with normal judge, are all experts in the dispute fields, which means claimant may spend less energy in explaining relevant English Law to them.
Furthermore, in "Arbitration Clause" foreign parties may stipulate that using English as trial language for smooth communication with arbitrator (Article 67 of the Arbitration Rules of CIETAC), which cannot happen in Chinese Court.
The following legal requirements shall be satisfied for establishing a valid "Arbitration Clause" in China.
a) The "Arbitration Clause" must be in writing, and contain (i) the expression of application for arbitration, (ii) matters for arbitration and (iii) the arbitration commission chosen (Article 16 of PRC Arbitration Law).
In practice, the chosen arbitration commission must be existing and unique. Otherwise, the clause shall deem to be invalid (Article 18 of PRC Arbitration Law);
b) Should the contract adopt the "Arbitration Clause", parties cannot stipulate "choice of jurisdiction clause" anymore, which may cause the invalidity of "Arbitration Clause".
From the above discussion, it is concluded that two effective options to construct the dispute resolution clause in the contract, which can ensure the smooth enforcement of corresponding decision or judgement, are (i) "Non-exclusive Jurisdiction Clause" and (ii) "Arbitration Clause".
Whereafter, we provided two samples of the above two clauses respectively:
Non-exclusive Jurisdiction Clause: "All disputes in connection with the Contract or the execution thereof shall be settled through friendly negotiations. In case no settlement can be reached through negotiations, the dispute shall then be submitted to England Court or the court where Contract is performed (or where the subject matter is located, etc.) and governed by English Law."
Arbitration Clause: "All disputes in connection with the Contract or the execution thereof shall be settled through friendly negotiations. In case no settlement can be reached through negotiations, the dispute shall then be submitted for arbitration to Beijing office of China international Economic and Trade Arbitration Commission. The decision rendered by the said Commission shall be final and binding upon both parties. The Arbitration shall use English as official language. Parties reserve the right to claim for prior-arbitration evidence and property preservation before relevant court."