The Shanghai Financial Court recently ruled that a foreign plaintiff has rights to sue in a Chinese court:
- on the basis of an asymmetric jurisdiction clause, provided that it is a non-exclusive jurisdiction clause; and
- where there is parallel litigation (ie, there is lawsuit filed at both a Chinese and a foreign court), as long as the foreign court's judgment has not been submitted to a Chinese court for recognition (and enforcement) in China, or unless applicable bilateral judicial treaties provide otherwise.(1)
Usually, an asymmetric jurisdiction clause provides that a party has rights to sue its counterparty in more than one competent jurisdiction, as long as these jurisdictions have a legal connection. However, the other party can only sue in one competent jurisdiction. This can be seen in some transactions where the favoured party requires more protections than the other party due to the asymmetric economic nature of a transaction.
In the case at hand, the disputes arose from bank loans and guaranty agreements, where a Hong Kong bank (the lender) and a Hong Kong company (the borrower) entered into two loan agreements in 2015 and 2016, supported by guaranty agreements. The loans were guaranteed by a Hong Kong individual (the individual guarantor) and a subsidiary of the borrower in mainland China.
The loan was issued, but the Hong Kong borrower failed to repay it.
The bank loan agreement set out that the governing laws were those of Hong Kong, and that the forum was the competent Hong Kong court, with non-exclusive jurisdiction on the bank loan itself. Both guaranty agreements explicitly provided the Hong Kong lender with a guarantee that entitled it to sue both guarantors in any jurisdiction, at its discretion and for the purpose of claiming the bank loan. On the other hand, the guarantors did not have such rights.
In this sense, the jurisdiction was asymmetric between the Hong Kong lender and the guarantors.
While the Hong Kong lender filed a lawsuit against the Hong Kong borrower and the individual guarantor in a Hong Kong court, it also filed a case in mainland China – a "foreign" jurisdiction from a judicial perspective.
The Shanghai Financial Court faced issues regarding whether it had jurisdiction over:
- the guaranty agreement, including the asymmetric jurisdiction clause; and
- a parallel litigation in Hong Kong.
According to the applicable Chinese laws, the Shanghai Financial Court reasoned and ruled that:
- if the contracting parties in the cross-border transaction had provided in writing that a Chinese court would be the forum – giving it a legal connection to the dispute – they would be entitled to make a forum agreement, electing a foreign court or a Chinese court on non-exclusive basis;the Chinese court was the competent court regarding the guaranty agreements because both the defendants and the guarantors had assets in mainland China, which provided the Chinese court jurisdiction in the matter;(2)
- as the asymmetric jurisdiction clause neither excluded the Chinese court nor gave exclusive jurisdiction to a Hong Kong court, it was not in violation of Chinese laws and, therefore, it should be deemed effective; and
- even though there was ongoing litigation in a foreign jurisdiction, as there was no judgment or ruling by a foreign court in the same dispute and the case had never been recognised by a Chinese court, the Chinese court in question could still trial the case (provided that it had jurisdiction under Chinese laws).(3)
This case gives foreign parties clarity on certain aspects of cross-border litigation that involves mainland China:
- The use of asymmetric jurisdiction clauses, which usually give the party more bargaining power and the flexibility to sue in a convenient forum, has been upheld by a Chinese court.
- Parallel litigation has been recognised in China and should be considered if a foreign plaintiff eventually enforces the Chinese defendant's assets in China.
Recognising and enforcing a foreign judgment in China usually takes longer and entails more challenges than a domestic Chinese judgment. Further, the defendant may dispose of its assets while the lawsuit in the foreign jurisdiction evolves.
In some cases, if the enforceable assets are in China, suing in mainland China first, either as a standalone action or in parallel to a foreign lawsuit, should be considered as an overall strategy.
For further information on this topic please contact Tim Yimin Liu or Sybil Xueting Yuan at Global Law Office by telephone (+86 21 2310 9598) or email ([email protected] or [email protected]). The Global Law Office website can be accessed at www.glo.com.cn.
(1) (2019) Hu Min Chu No.127 and (2021) Hu Min Zhong No. 473.
(2) Article 23 and 265 of the China Civil Procedure Law.
(3) The Supreme People's Court's interpretation of article 533 of the Civil Procedure Law.