Meng Yu’s Speech at the ABLI’s Seminar in Singapore

Tue, 06 Aug 2019 Insights
Editor: C. J. Observer

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On 5 August 2019, Meng Yu and Guodong Du (founders of China Justice Observer), are invited by the Asian Business Law Institute (ABLI) to attend the event of “The Big Deal: Managing Disputes – A Series of Seminars on Effective Dispute Management and Business” held at Maxwell Chambers, Singapore, on the sidelines of the signing of the Singapore Convention on Mediation. Meng is invited to be a speaker on a panel in Session 3, titled “Enforcing the Judgment: Convergence of Asian Business Laws to Facilitate Certainty for Investment and Trade”. 

This session is moderated by Mr. Nish Shetty (Partner, Clifford Chance Asia), and the panelists were: the Honourable Justice Vichai Ariyanuntaka (Senior Judge, Intellectual Property & International Trade Court), the Honourable Justice Anselmo Reyes (International Judge, Singapore International Commercial Court), Mr Philip Jacobs (IANUA Market), Dr Meng Yu (Founder, China Justice Observer), and Dr Adeline Chong (Associate Professor, School of Law, Singapore Management University).

During the session, the panel discussed the hurdles to improving the portability of foreign judgments in the region, highlighted specific improvements that have been made in the region, examined the impact, in economic terms, of not having a harmonized regime for the recognition/enforcement of foreign judgments in Asia, and proposed unique solutions to this problem in Asia. 

Below is the speech given by Meng, which touched upon four topics from China’s perspective, including (1) the China-Japan impasse as an example of problems caused by reciprocity, (2) the Nanning statement and its presumptive reciprocity as an example of solutions, (3) the foreign exchange control and its potential impacts in recognition and enforcement of foreign judgments in China, (4) the Qingdao case and what lessons can be learned from. 

I. The China-Japan impasse as an example of problems caused by reciprocity

The China-Japan deadlock is very much like that two kids just had a fight, blaming each other, saying it’s all your fault, and are not willing to make the first move from conflict to connection.

On China’s side, because Japan did not recognize a Chinese judgment before, China refused to enforce Japanese judgments, on the ground of reciprocity. Years later, on Japan’s side, since China said “NO” to Japanese judgments, Japan said “NO” in return. What’s why China and Japan are deadlocked. 

If we look into the deadlock, the first thing we have to know is how important the reciprocity is in China. Under Chinese law, the precondition to judgments recognition and enforcement is the existence of “either treaty or reciprocity”. In the absence of international treaties (just as the case between China and Japan), a reciprocal relationship is a must. But what is reciprocity? Chinese law does not provide a standard for determining reciprocity.

The whole story of deadlock goes back in 1995, as in the Gomi Akira case, where a Japanese judgment was refused recognition for the first time by a Chinese court, an Intermediate court in Dalian. based on lack of reciprocity. It is also in the case that China’s Supreme Court, in its reply to the local court, set the de facto reciprocity test, (just as Adeline mentioned before), which requires that the Foreign country must have previously enforced a Chinese judgment; otherwise, there is no reciprocity, as in the very case.

The de facto reciprocity test in the SPC’s reply, although it is not legally binding, has later become a practice for local courts. Just as in the year of 2001, in the Shanghai case, an intermediate court in Shanghai refused to recognize another Japanese judgment.

Two years later, in 2003, we move on to Japan’s side. In the Osaka case, the High Court in Osaka refused a Chinese judgment, based on lack of reciprocity. And again, in 2015, the Tokyo High Court refused a Chinese judgment on the same ground. In its reasoning, the Osaka High court held that since China believes, in the Gomi Akira case, that there is no reciprocity between the two countries, and considering the fact China has not recognized Japanese judgments before, Japan cannot be assured that, in comparable circumstances, a Japanese judgment can be enforced in China. 

In the end, it is clear that if either China or Japan would like to make the first move, to recognize the judgment from the other party first, the other party would surely give a positive response, and then we can break the stalemate. But now, it seems, that no one wants to make the first move.

II. The Nanning statement and its presumptive reciprocity as an example of solutions

The Nanning statement is a big step forward for China. Back in 1995 (the time before China-Japan deadlock), China said no to Japan, just because there is no precedent. But now, 20 years later, China would say yes, if there is no precedent of refusal, as proposed in the Nanning statement, 

As we know, the statement is a non-binding consensus adopted by judicial representatives of China and various ASEAN countries. Among others, the seventh consensus is to promote the mutual recognition of civil and commercial judgments and proposes the presumptive reciprocity test.

According to the test, in the absence of international treaties, if you did not refuse my judgment based on lack of reciprocity, or perhaps more often, you have not had any case dealing with my judgment, I can presume there’s reciprocity between us, and accordingly, recognize your judgment first. So, unlike the de facto reciprocity test which requires the actual precedent, this time, the presumptive reciprocity only asks for the fact that there is no precedent of refusal. That is great progress in the sense that China is liberalizing the reciprocity standard.

More Interestingly, the presumptive reciprocity test is very likely to be incorporated in China’s forthcoming judicial interpretation on the recognition and enforcement of foreign judgments, as one of the reciprocity standards, in addition to the de facto reciprocity and the de jure reciprocity. This judicial interpretation is now being drafted by the Supreme People's Court, and will be, if came into effect, the first rules in China to clarify the reciprocity standard.

The next question some might ask is: since the judicial interpretation is not at hand right now, can the Nanning statement play a role in this filed? The answer is yes. It is true that no reported case seems to have applied the "spirit" of Nanning Statement yet. That’s because, since the adoption of the Statement in 2017, Chinese courts have not had a case relating to Statement.

And what if there comes a case one day? I believe that the Nanning spirit will be followed in China, due to various reasons. First, as we know, the de facto reciprocity that China has been adopting for years is not legally binding and does not preclude the existence of a parallel test. Second, to my knowledge, ever since the adoption of Nanning Statement, China has not refused a single foreign judgment based on lack of reciprocity. That’s good evidence of China’s open and positive attitudes in this field. 

On top of that, back in 2015, the SPC’s opinions on BRI[1] has early expressed the same positive view. This judicial policy is enough to guide Chinese courts to follow the Nanning Spirit.   
I am very optimistic that China is waiting for a Nanning Statement case to clarify its position. And this is just the beginning. We also noticed that SPC recently mentioned about ABLI’s foreign judgments project, and proposed, based on this project, signing regional memorandums for Asia, that will be another step forward in promoting an Asia-wide harmonized regime in this field.

III. The foreign exchange control and its potential impacts

As we know, the RMB is not yet fully convertible, we have the foreign exchange (forex) control in China, so some restrictions apply to the purchase and remittance of forex. When it comes to our topic today, the key points are:

First, in terms of foreign exchange control, there are no legal barriers prohibiting the enforcement of foreign judgments in China.

Second, in practice, as in most cases, the control itself does not pose any problems either. It is only in a few cases that the control might result in a delay in the enforcement, and introduce an element of uncertainty in the time of recovery, and eventually leads to uncertainty in the recovery cost.

(Just to be clear, this foreign exchange control is not an issue exclusive to the enforcement of foreign judgments. In other fields, like, the enforcement of foreign arbitral awards, or even, the enforcement of a domestic judgment or an arbitral award in China, as long as the foreign exchange is involved, say, we need to purchase foreign exchange, or remit foreign exchange out of China, the exchange control issue is what we need to pay attention to. )

To be more specific, First, as I said, there are no legal barriers due to the control. In cases of enforcing judicial documents, the purchase and remittance of forex are allowed. This is already confirmed jointly by the Supreme People's Court (SPC) and the State Administration of Foreign Exchange (SAFE) in a document[2] in 2003. The SAFE, as the regulatory authority, will approve the purchase of foreign exchange according to the nature of the original transaction involved in the dispute. At present, our team of lawyers have not encountered any substantial difficulty in helping clients purchase and remit foreign exchange. 

Second, that being said, it is worth noting that in some cases, the enforcement of foreign exchange will be greatly delayed due to the exchange control. In fact, in a case that we did a few years ago relating to the enforcement of a foreign arbitral award, it took us 8 months to complete the process on foreign exchange, which is much slower than the usual period. And that’s all because of a temporary tightening policy on foreign exchange.

There are two underlying causes of the problem.

One cause is relative inexperience of banks and the local Administration of Foreign Exchange ( “AFE”). Most of them, especially those in economically underdeveloped areas, they rarely deal with foreign exchange matters related to court enforcement. This has resulted in a large number of cases, where the court staff need to go there and communicate with local banks and local AFE in order to facilitate the enforcement of foreign exchange.

The other reason is the foreign exchange quota of judgment debtors. This is a bit tricky. Theoretically, the enforcement of foreign exchange should be quota-free. But on one hand, as mentioned earlier, many banks and local authorities are not familiar with this field, and they may object to the enforcement by raising quota reasons. Then, the communication costs between them and the courts would rise. On the other hand, the court and the local authorities are very vigilant to any potential circumvention of controls through false litigation. And this leads to a more cautious review process on foreign exchange, and the period is extended.

In the end, in case of tighter control of capital outflows in China, which is happening now due to the pressure of RMB depreciation and decrease of forex reserves, we should be more aware of the role of exchange control in the recognition and enforcement of foreign judgments. 

IV. the Qingdao case and what lessons can be learned from

The story of China and South Korea is interesting. The series of cases started from the Seol case in 1999, where a local court in Seol, South Korea recognized a Chinese judgment, which could serve as a basis for China to establish reciprocity, theoretically. However, in 2011, based on lack of reciprocity, Shenzhen Intermediate People’s Court refused to recognize a judgment of Seoul East District Court. 4 years later, in 2015, again on the ground of lack of reciprocity, another South Korean judgment was refused enforcement by Shenyang Intermediate People’s Court. 

But, the litigants never give up, do they? Finally, this April, the Qingdao case marks a turning point in the reciprocity between China and South Korea. This time, Qingdao Intermediate People’s Court, by confirming the de facto reciprocity based on the precedent in 1999, recognized a judgment from Suwon District Court, South Korea. 

So, what we can learn from the story? 

First, it is clear that the litigants are playing a positive role here, by bringing test cases to push the development of the law. It is due to continuous efforts made by the litigants that China finally, after 20 years confirmed the reciprocity between the two countries.
 
Second, if we zoom out to see the big picture. The future is bright. It is bright not only in the case for China and South Korea, but also for China and the majority of China’s major trade partners. 

Basically, we can group these countries into 3 groups. For Group One countries, including France, Italy, Spain, Russia, and Vietnam, they have concluded bilateral treaties with China. For Group Two countries, including the U.S., Germany, Singapore and South Korea, their judgments have already been recognized in China based on reciprocity. For Group Three countries, including Australia, Canada, and perhaps, the U.K. (to be confirmed), they have recognized Chinese judgments and are waiting for China to confirm the reciprocity in future cases. 

For the last Group, we need testing cases (just like the Qingdao case) for Chinese courts to confirm the reciprocity, thus opening the door for China to recognize their judgments. And for the first two Groups, apparently the door is already open, what we need to do is to make more cases go through the door. Because if we look at all cases in China in this field (excluding those divorce judgments), it is clear that the sheer size of China’s economy is not matched by the very limited number of cases. To be frank, the number is surprisingly small, no more than 40 cases, according to our study. 

So we need more cases. China needs more cases. And by the same token, Asia needs more cases. We need more cases that the litigants can use to get the door wide open if there is a silver lining, more cases that help the litigants build confidence in courts and have reasonable expectations, and that eventually promote the multilateral trade and investment. 

 

References:
[1] “Several Opinions of the Supreme People's Court on Providing Judicial Services and Safeguards for the Construction of the ‘Belt and Road’ by People's Courts” (关于人民法院为“一带一路”建设提供司法服务和保障的若干意见)
[2] “Notice of the Supreme People's Court on Forwarding the Letter of the State Administration of Foreign Exchange on Issues concerning the Opening of Foreign Exchange Accounts and Handling of Foreign Exchange Receipts and Payments by the People's Courts in Foreign-Related Judicial Activities”(最高人民法院关于转发国家外汇管理局《关于人民法院在涉外司法活动中开立外汇帐户及办理外汇收支有关问题的函》的通知)

 

If you would like to discuss with us about the post or share your views and suggestions, please contact Ms. Meng Yu (meng.yu@chinajusticeobserver.com).

If you need legal services for the recognition and enforcement of foreign judgments and arbitral awards in China, please contact Mr. Guodong Du (guodong.du@chinajusticeobserver.com ). Du and his team of experienced attorneys will be able to assist you.

Contributors: Guodong Du 杜国栋 , Meng Yu 余萌

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