Foreign companies uncomfortable with resolving disputes with their Chinese business partners in the unfamiliar Chinese courts can now bring their lawsuits in the Hong Kong courts which follow common law principles and conduct most proceedings in English. Hailed as a major legal development with far-reaching implications for foreign companies doing business in Greater China, the reciprocal enforcement of qualified civil judgments between China and Hong Kong will take effect on August 1, 2008.

At present, there is no meaningful reciprocal mechanism for recognizing and enforcing court judgments between Hong Kong and China — a Hong Kong civil judgment is not recognized and cannot be enforced in China and a Hong Kong judgment creditor has to start a fresh legal proceeding in China based on the Hong Kong judgment and vice versa.

Under the Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the HKSAR pursuant to Choice of Court Agreements between Parties Concerned entered into between China and Hong Kong in July 2006 (the "Arrangement"), if a commercial contract designates Hong Kong as the exclusive forum for resolving disputes arising from the contract, a judgment obtained in Hong Kong will be recognized and can be enforced in China by means of registration if the judgment debtor has assets there and vice versa.

The legal instruments to implement the Arrangement have now been put into place in both China and Hong Kong and are set to take effect on August 1, 2008. Key features of the Arrangement include:

  • The Arrangement only applies to enforcement of money judgments regarding disputes arising out of commercial contracts (but not in respect of payment of tax, fine or penalty). Non-commercial contracts such as employment and matrimonial contracts cannot be enforced via this new mechanism. Sino-foreign joint-venture contracts will also be excluded because they fall within the exclusive jurisdiction of Chinese courts.
  • The judgment to be enforced must be final and conclusive and is rendered on or after August 1, 2008.
  • The underlying commercial contracts shall contain an exclusive choice of court agreement, i.e. a "choice of Hong Kong court agreement" or "choice of Mainland court agreement". Such provision has to be made on or after August 1, 2008.
  • Money judgments must be issued by a designated court — Hong Kong judgments issued by the District Court or above will be recognized in China; only judgments issued by Chinese courts at Intermediate People's Court or above or by specially designated Basic Level People's Courts will be recognized in Hong Kong.
  • The limitation period for making an application to register a judgment shall be 2 years running from the date on which the judgment should have been performed or takes effect.
  • A registered judgment may be set aside on a number of prescribed grounds; e.g. the choice of court agreement is invalid; the judgment has been fully satisfied; the Hong Kong / Chinese courts have exclusive jurisdiction over the matter; the judgment was obtained by fraud; the enforcement of the judgment is contrary to public policy.
  • The arrangement for mutual enforcement of arbitration awards has been working smoothly between China and Hong Kong since early 2000. Upon implementation of the Arrangement, it is hope that civil litigation in Hong Kong will provide a viable and effective alternative mode of dispute resolution for foreign companies doing business with entities in China.

In view of the above, companies doing business in China may consider taking advantage of the reciprocal civil enforcement arrangement by including suitably worded choice of court clause in their new agreements as appropriate, such as when they are contracting with Chinese parties or parties having assets in China, and by updating its standard form contracts used in their business dealings in Greater China where reciprocal enforcement may be desirable.