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Do Chinese Courts Favour State-Owned Enterprises in Enforcing Foreign Judgments?

Sat, 03 Dec 2022
Categories: Insights

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Key takeaways:

  • In respect of the recognition and enforcement of foreign judgments, China’s Supreme People’s Court (SPC) has been implementing a new policy since 2022, further weakening the localization of judicial power. This ensures that no local competitive enterprises, including SOEs, gain any unjustified advantages.
    The new policy prevents local courts from being unreasonably influenced in the cases of recognition and enforcement of foreign judgments through the ex ante internal approval and ex post filing procedures.
  • The adoption of ex ante approval depends on whether the court examines the application based on treaty or reciprocity. Ex ante approval is a must for those based on reciprocity. By contrast, such approval is not required for those based on a pertinent treaty.
  • The ex post filing procedures apply to all cases of foreign judgments recognition and enforcement, be it the case is examined in accordance with international and bilateral treaties or based on reciprocity. All local courts shall, after making a ruling on recognition or non-recognition, report to the SPC for filing.

Do Chinese courts favour state-owned enterprises (SOEs) in enforcing foreign judgments?

Very unlikely. This is because the new policy on recognition and enforcement of foreign judgments issued by China’s Supreme People’s Court (SPC), which has been implemented since 2022, will discourage local courts from doing so.

I. Will State-owned Enterprises Be Favoured?

Under Chinese statutory laws, SOEs do not receive any additional protections in judicial proceedings. In fact, Chinese law has affirmed the principle of “Competitive Neutrality”.

In practice, if the SOE is occasionally better protected, it will only have something to do with its own competitiveness and the better legal resources it gets, which may sway the local courts.

As a matter of fact, any competitive enterprise, be it state-owned, privately owned, or owned by foreign investors, is likely to gain such comparative advantage.

Such advantage, however, is limited to local courts where the enterprise is located. The farther away the court is from the place where the enterprise is located, the harder the court is to be influenced.

The SPC has also noticed this problem. Its judicial reform, which began in 2014, is intended to address the localization of judicial power. (See an earlier post ‘Why Is the Judicial Accountability System the Cornerstone of China’s Judicial System Reform?’)

In respect of the recognition and enforcement of foreign judgments, the SPC has been implementing a new policy since 2022, further weakening the localization of judicial power.

This ensures that no local competitive enterprises, including SOEs, gain any unjustified advantages.

To be more specific, the new policy requires local courts, when accepting cases concerning recognition and enforcement of foreign judgments, to report the cases level by level to the SPC for filing. Upon approval from the SPC, the local courts can render rulings for certain cases.

It means that if a foreign company applies to a local court in China for recognition of a foreign judgment and wants to enforce an SOE’s property, it will be hard for the SOE to gain favor by influencing the local court under the new policy. Because it is ultimately up to the SPC to decide how local courts make their judgments.

II. What is this new policy like?

The SPC prevents local courts from being unreasonably influenced in the cases of recognition and enforcement of foreign judgments through the ex ante internal approval and ex post filing procedures.

These procedures are derived from the Conference Summary of the Symposium on Foreign-related Commercial and Maritime Trials of Courts Nationwide” (hereinafter the “2021 Conference Summary”, 全国法院涉外商事海事审判工作座谈会会议纪要) promulgated at the end of 2021.

1. Ex ante internal approval mechanism

It is through the ex ante internal approval mechanism that the SPC limits the discretion of local courts in cases of recognition and enforcement of foreign judgments. Although this mechanism impairs, to some extent, the independence of local courts, it will in practice greatly improve the success rate of recognition and enforcement of foreign judgments.

(1) The adoption of ex ante approval depends on whether the court examines the application based on treaty or reciprocity

i. No ex ante approval required for applications based on pertinent treaties

If the country where the judgment is rendered has concluded relevant international and bilateral treaties with China, the local court accepting the application can examine the case directly based on such treaties.

At this point, the local court does not need to report to its next higher level court for approval before making a ruling.

ii. Ex ante approval required for applications based on reciprocity

If the country where the judgment is rendered has not concluded relevant international and bilateral treaties with China, the local court accepting the application will examine the case based on reciprocity.

At this point, the local court shall, before making a ruling, report its handling opinions level by level for approval, and the SPC shall have a final say on the handling opinions.

(2) How is ex ante approval carried out?

Specifically:

Step 1: the local court accepting the application shall, after deciding to make a ruling, request its next higher-level court, i.e., the high people’s court of the same jurisdiction, to conduct a preliminary examination of its proposal. If the high people’s court disagrees with the proposal, it will require the local court to make revisions.

Step 2: if the proposal of the local court accepting the application is approved by the high people’s court, the proposal will be further reported to the next higher-level court, i.e., the SPC. Therefore, the SPC has a final say to the proposal.

(3) Why does the approval procedure vary depending on the examination basis

In our view, the core reason is that the SPC is not fully confident in the ability of local courts to handle such cases, and is worried that some may unreasonably refuse to recognize and enforce foreign judgments.

i. Case examination based on treaties

Since the examination requirements are detailed in the treaties, local courts only need to conduct the examination according to such explicit requirements. In this situation, the SPC is relatively less worried about local courts making mistakes in such cases.

ii. Case examination based on reciprocity

The SPC is not fully confident in the ability of local courts in determining the reciprocal relationship between China and the country where the judgment is rendered. Well, we have to admit that this worry is reasonable to some extent.

Because if local courts want to make such a determination, they need the ability to ascertain and fully understand the law of the country where the judgment is rendered; which, however, is something that some local courts are not very capable of. As a result, they may not be able to fully understand the situation and make reasonable judgments accordingly.

(4) What does ex ante approval mean?

This, in most situations, means an increase in the success rate of recognition and enforcement of foreign judgments.

If the local courts need the approval of the SPC before making a ruling, this means that the view of the SPC will directly affect the outcome of each case.

So, what is the view of the SPC?

Judging from the judicial policies of the SPC since 2015 and the outcome of local courts hearing such cases under the guidance of these judicial policies, the SPC hopes that more foreign judgments can be recognized and enforced in China.

The latest evidence of this judgment is that the 2021 Conference Summary has further relaxed the criteria on reciprocity, so as to avoid foreign judgments being refused for recognition and enforcement in China due to the previous strict reciprocity criteria.

Therefore, we believe that the SPC’s ex ante approval intends to improve the success rate in the recognition and enforcement of foreign judgments.

In fact, the SPC has also designed an internal report and review mechanism to ensure that foreign arbitral awards are treated reasonably by local Chinese courts. Although the said mechanism is slightly different from the ex ante approval, their purposes are basically the same.

2. Ex post filing of the SPC

For any case of recognition and enforcement of foreign judgments, whether it is examined in accordance with international and bilateral treaties or based on reciprocity, the local court shall, after making a ruling on recognition or non-recognition, report to the SPC for filing.

For cases examined based on international and bilateral treaties, local courts are not subject to the SPC’s ex ante approval mechanism, but they still need to report to the SPC for filing afterwards. This means that the SPC hopes to have a timely knowledge of local courts’ handling of such cases.

Why is the ex post filing required? We believe that:

From a macro perspective, the SPC hopes to have a comprehensive knowledge of the recognition and enforcement of foreign judgments in China, so as to facilitate itself to adjust China’s overall policy in this field.

From a micro perspective, the SPC also hopes to understand the problems encountered and solutions adopted by local courts in each case. If the SPC believes that the practices of the local courts are inappropriate, it may, through relevant mechanisms, make the local courts adopt more reasonable practices on these issues in the future.

III. What else does the new policy say about foreign judgment enforcement in China?

The 2021 Conference Summary, a landmark judicial policy issued by China's Supreme People's Court (SPC), has been implemented since January 2022. The 2021 Conference Summary makes it clear for the first time that applications for enforcing foreign judgments will be examined subject to a much more lenient standard.

Since 2015, the SPC has consistently disclosed in its policy that it wishes to be more open to the application for recognition and enforcement of foreign judgments, and encourages local courts to take a more amicable approach to foreign judgments within the scope of established judicial practice.

Admittedly, the threshold for enforcing foreign judgments was set too high in the judicial practice, and Chinese courts have never elaborated on how to enforce foreign judgments in a systematic manner.

As a result, despite the SPC’s enthusiasm, it is still not attractive enough for more applicants to file an application for recognition and enforcement of foreign judgments with Chinese courts.

However, such situation is now changed.

In January 2022, the SPC published the 2021 Conference Summary with regard to cross-border civil and commercial litigation, which addresses a number of core issues concerning the recognition and enforcement of foreign judgments in China. The 2021 Conference Summary manifests the consensus reached by representatives of Chinese judges nationwide at the symposium on how to adjudicate cases, which will be followed by all judges.

For more information about this 2021 Conference Summary, please read ‘Breakthrough for Collecting Judgments in China Series’. 

 

 

Photo by Shawn Flynn Wang on Unsplash

 

Contributors: Guodong Du 杜国栋 , Meng Yu 余萌

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