Suppose that you obtain a judgment against a Chinese business in a court of law located within the United States; what can be done to enforce it? Possibly nothing, especially if the Chinese debtor has no assets outside China. Enforcement of any judgment across state lines is tricky enough in the United States; where courts may enforce a judgment of another court under limited exercise of reciprocity or the extension of full faith and credit to the judgments of sister courts. In practice, this means that an Oklahoma court will agree to enforce a judgment obtained in Wisconsin, provided that Wisconsin recognizes judgment obtained in Oklahoma (and subsequently brought to Wisconsin for enforcement proceedings).
By comparison, it is notoriously difficult to enforce any judgment obtained in the United States (against a Chinese debtor) in China. China has no reciprocity agreement with the any of its major trading partners, including the United States, and the two countries have not yet agreed to extend full faith and credit to the judgments obtained in the other’s country. Other factors include local protectionism, lack of judicial independence in China, the threat of the social consequences of state-owned enterprises becoming bankrupt due to a judgment, as well as the absence of effective laws to discourage debtor fraud as well as laws to facilitate judgment collection. Only recently, April 2006, did China enter into a mutual recognition and enforcement agreement of civil and commercial judgments with Macao.
Because China’s legal system is essentially a civil-law tradition (based upon the Napoleonic Code) it is understandably unfamiliar with the United States’ common-law law tradition (based on the English common law). The common-law interprets a court’s right to exercise general jurisdiction over a person more broadly than the civil law which, generally, dictates that a defendant’s domicile is the only appropriate place where a lawsuit may be tried, regardless of where the action arose.
Additionally, in my opinion, China and the United States seem suspicious of each other’s concepts of Due Process; I suggest that a United States business is likely to feel that it would not get a fair trial in China and, vice versa. The United Sates confronted this issue at home a century ago and, in response, the federal judiciary was conceived; with the principle of establishing uniformity by appointing judges with lifetime tenure to diminish any need to engage in partiality to the citizens of one state over another. Essentially, China and the United States may have to agree on an independent third-party process before either agrees to enforce the judgments of the other. Accordingly, expect a Chinese court to ignore the judgment obtained in the United States and require you to retry the action in China. Efforts to improve the likelihood of success are questionable, but not to be overlooked.
Type of Lawsuit
The analysis begins with an examination of the type of action involved. Is it a contract action or a tort action (injury to person or property)? Historically, a Chinese court will not recognize a judgment obtained in the United States arising in connection with a tort against a business located only in China. One reason is that Chinese officials, understandably, want to ensure that the rights of their citizens are properly protected, preferably pursuant to Chinese Law and before a Chinese judge or jury; and, in this respect both China and the United States interests are seemingly shared.
By comparison, a contract lawsuit involves a situation where it may be presumed that all parties had read and understood the obligations and consequences, and that the agreement itself is the product of good faith negotiations. Notwithstanding these obvious benefits, I am unaware of any reported case where a judgment obtained in the United States in a contract action has been enforced by a Chinese court.
Punitive Damages
Simply stated, while punitive damages are routinely awarded by United States juries in tort and contract actions, the concept of awarding punitive damages is not accepted in China.
Default Judgments
In light of reluctance to enforce any judgments, I can only suspect that a default judgment is the least likely to be recognized by a Chinese court. One reason is because default judgments are judgments not based upon the merits; meaning that the judgment was not the product of a full trial where evidence and testimony was introduced for consideration and determination by the trier of fact (either judge or jury).
Closing Thoughts
You might ask why would any Chinese company defend an action in the United States? One possible reason is that juries often return verdicts in favor of the defendant, giving the matter finality here in the United States; the likelihood of the United States plaintiff retrying the case in China is too remote to consider seriously. Another reason is that a default judgment can occur on the eve of trial; thus, the Chinese business may decide to pursue the defense until it determines that an unfavorable outcome will occur. Another reason has to do with a business’ reputation; no businessman wants to have the reputation of being associated as a defendant in lawsuits.
You might also ask why any United States business would sue a Chinese company in the United States? I believe this article makes a good case that no good reason exist.
