21 September 2017

The Choice of Court Agreement and Its Implications on China

This article was written by Guan Feng (Partner) and Tang Lu (Associate).

Recently, represented by Ken Wu, Chinese Ambassador to the Netherlands, China officially signed the Hague Convention of 30 June 2005 on Choice of Court Agreements (“the Convention”). The Convention is an international treaty that legally binds contracting parties to a uniform set of rules relating to civil and commercial matters. It currently has 33 Contracting Parties, mostly EU member states (excluding Denmark). Ukraine, the U.S. and China have not yet ratified the Convention under domestic law. We are still waiting for China to announce whether it has reservations about any of the provisions.

The Convention established three main rules: 

  • An exclusive choice of court agreement (“ECCA”) – in the form of a forum selection clause. The clause is silent as to whether the jurisdiction of the chosen court is exclusive; 
  • An exception to the ECCA (the “null and void” exception), where the decision on jurisdiction in an agreement is subject to the law of the chosen court instead of the court seised; and 
  • An ECCA judgment from a court in a Contracting State shall be recognised and enforced in other Contracting States except where there are grounds for refusal.

Exclusive choice of court agreement

ECCA is defined by Article 3(b) of the Convention: 

“a choice of court agreement which designates the courts of one Contracting State or one or more specific courts of one Contracting State shall be deemed to be exclusive unless the parties have expressly provided otherwise;” 

Article 6 states that courts in Contracting States shall hear ECCA disputes, while non-designated courts in Contracting States shall suspend or dismiss proceedings to which an ECCA applies. There is no expressive provision on ECCA in Chinese law. But Chinese law states that a Chinese court may accept cases that are under non-exclusive jurisdiction. Consequently, case law from the Supreme People’s Court of China has established the ECCA rule. Therefore, the ECCA is consistent with judicial practice in China and supplements Chinese law.

The “null and void” exception

Article 5 states that: 

“The court or courts of a Contracting State designated in an ECCA shall have jurisdiction to decide a dispute to which the agreement applies, unless the agreement is null and void under the law of that State.” 

This is another key provision in the Convention. It creates an exception to the ECCA, also known as the “null and void” exception. The core issue is how the phrase “law of the State” is interpreted and its subsequent impact on decision making.

1. “Law of the State” 

The context of the Convention suggests that “law of the State” refers to the law in the State where the court is situated, not of the court seised. We reviewed discussions during negotiations about the Convention and the Explanatory Report and found that: 

  • “Law of the State” refers to the domestic law in the State of the designated ECCA court, including its dispute resolution (??) processes; and
  • The “null and void” exception only applies when there has been a material flaw, for example, fraud, mistake duress or lack of capacity. It does not cover formal flaws (those in written form).

Neither the Convention nor the Explanatory Report specify whether “law of the State” refers to substantive or procedural law. We believe it refers to substantive law (in the State of the chosen court). The true intentions of the parties are paramount when deciding whether to invoke the exception. A null and void decision arising solely from the Convention’s procedural provisions and ignoring the true intentions of the parties, would result in a meaningless ECCA.

2. “Law of the State” in relation to China

The aim of reducing negative impacts of procedural provisions will restrict Chinese courts from becoming chosen courts and from applying Chinese procedural law to the foreign-related jurisdiction clause. This is especially so for the mandatory provisions on actual connections and competent court determination under Chinese procedural law. The Convention mirrors the New York Convention in that it allows the parties to agree to use a court without an “actual connection” – in other words, a “disinterested court”. There are two types of actual connection - limited and protected jurisdiction.

2.1 Chinese court as a disinterested court

If a Chinese court is chosen as a disinterested court, it will only examine material flaws under substantive law leading to the Court’s exclusive obligation in foreign cases without any actual connections. Article 19 (Declarations limiting jurisdiction) states that:

“A State may declare that its courts may refuse to determine disputes to which an ECCA applies if, except for the location of the chosen court, there is no connection between that State and the parties or the dispute”. 

Article 19 limits jurisdiction by giving courts the right to refuse to determine a foreign case by declaration.

2.2 Foreign court as a disinterested court

When a foreign court is chosen as a disinterested court, the Convention will not allow a Chinese court (as the court seised) to apply the actual connection rule. This is in conflict with judicial practice in China. Also, it will restrict the jurisdiction of Chinese courts in cases with actual connections. It is still in doubt whether Article 19 (Declarations limiting jurisdiction) will achieve the desired balance between the application of the Convention and the protection of jurisdiction. Our view is that the Convention will not achieve this balance and will limit jurisdiction. It is doubtful that the Convention will protect the jurisdiction of Chinese courts from manifest injustice. In fact, it is likely to result in outcomes contrary to Article 6(c) of the Convention (regarding public policy).

Recognition and enforcement of foreign judgments

The third goal of the Convention is the recognition and enforcement of foreign judgments. Article 8 states that: 

“a judgment given by a court of a Contracting State designated in an ECCA shall be recognised and enforced in other Contracting States in accordance with this Chapter. Recognition or enforcement may be refused only on the grounds specified in this Convention”. 

Article 9 lists seven grounds for refusal. Three pertinent points are:

1. The effect of “public policy”

Article 9(e) states that: 

“recognition or enforcement would be manifestly incompatible with the public policy of the requested State, including situations where the specific proceedings leading to the judgment were incompatible with fundamental principles of procedural fairness of that State”. 

“Public policy” encapsulates violations of procedural fairness that also violate public policy. The Convention cannot determine the meanings of terms such as “public policy”, “reservation of public order” or “public interest of society”. There is no international or uniform definition of “public policy” and the concept changes over time.  This makes it impossible to predict how Chinese courts will interpret the term in practice or its effect on parties to the Convention.

2. Inconsistent judgments

Article 9(f) states that: 

“the judgment is inconsistent with a judgment given in the requested State in a dispute between the same parties”. 

This appears to contradict the ECCA requirement to recognise and enforce judgments. The Explanatory Report states that an “inconsistent judgment” must have identical parties but is not required to have identical causes of action. It includes default judgments. This contradicts the concept of an “exclusive judgment” because a court can refuse to recognise and enforce a foreign judgment under Article 9(f). The Convention prioritizes judgments from courts in requested countries, in breach of the “court first seised rule”.

3. Limiting declarations 

An issue related to the actual connection principle is whether a court in the requested country, as a “disinterested court”, is obligated to recognise and enforce foreign judgments. Article 20 states that: 

“A State may declare that its courts may refuse to recognise or enforce a judgment given by a court of another Contracting State if the parties were resident in the requested State, and the relationship of the parties and all other elements relevant to the dispute, other than the location of the chosen court, were connected only with the requested State”. 

This applies to the same subjects as Article 1. Article 20 cases are not “international cases” so may fall outside of the Convention’s jurisdiction. If a “disinterested court” establishes jurisdiction but disregards the Convention, the requested countries’ can refuse to recognise and enforce the judgment in domestic cases. This protects the requested countries’ judicial sovereignty over actual connection and domestic cases.

Analysis and Suggestions

The Convention is almost identical to the New York Convention in regards to the recognition and enforcement of arbitrary awards. International commercial arbitration’s predominant advantage in international dispute settlement may be compromised. It is the first multilateral convention on jurisdiction and enforcement to which China is a party. The Ministry of Foreign Affairs has officially stated that the government will speed up ratification. The Convention will be legally binding on China. We conclude with some suggestions for entities in different regions: 

  • For entities in Hong Kong, Macau and Taiwan - in addition to existing legal assistance agreements, it is unclear whether the Convention has jurisdiction in these regions. This remains to be clarified by the Chinese government.
  • For foreign entities whose counterparties are in China - parties can agree on a foreign court for complex disputes. Judgments will be recognised and enforced by Chinese courts provided they comply with the Convention. Remedies are limited to effective judgments. Procedural remedies such as property preservation will not be available.
  • The possible implications of Brexit (opting out of the Convention) should be taken into account when deciding whether or not to choose a British court.
  • Chinese entities may choose a Chinese court for exclusive jurisdiction. They can then take advantage of both the low cost of litigation in China and the legally binding recognition and enforcement of decisions by foreign courts under the Convention.

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