Practical View on Cross-border Financing and Investment Disputes - Section II Procedural Issues relating to non-exclusive jurisdiction clauses, the identity of the defendant and parallel litigation
Publication | December 2021
In our previous article, we discussed cross-border security disputes and property preservation measures. In the context of cross-border financial dispute resolution, non-exclusive jurisdiction clauses, the identity of the defendant and parallel litigation are also the key issues in practice. This article will focus on these three issues.
1. Can a creditor commence proceedings against a domestic debtor/guarantor in a court in Mainland China (a “Mainland court”) when the cross-border transaction documents provide for “non-exclusive jurisdiction”?
Many cross-border transaction documents may include non-exclusive jurisdiction clauses, so the parties may reasonably expect to have discretion in their choice of the court and the jurisdiction which deals with the substantial dispute. It is common for the parties to be confused whether disputes arising from the contract containing these jurisdiction clauses can still be litigated in the Mainland courts.
Under Article 12 of the Minutes of the Second National Conference on Foreign-related Commercial and Maritime Adjudication (the “Minutes”),1 these jurisdiction clauses “may be held not to exclude the jurisdiction of the courts of other countries with jurisdiction.” As long as the Mainland courts have jurisdiction over the case in accordance with the relevant provisions of the Civil Procedure Law of the People's Republic of China (the “Civil Procedure Law”), the case can be heard by the Mainland courts. However, the following points should be noted:
- Risk that the jurisdiction clause may be invalidated: The parties may choose to put forth both a non-exclusive jurisdiction clause and an arbitration clause in the transaction documents to preserve the flexibly of choice in any future dispute resolution treatment. However under PRC law, the Supreme Court, in its reply letter No. 19 Min Si Ta Zi ,2 has determined that such a clause is an “either arbitration or litigation” clause referred to in Article 7 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of the Arbitration Law of the People's Republic of China, and the arbitration clause is therefore ineffective. In this case, if the parties have already conducted an arbitration outside the Mainland, they may find that the arbitration award cannot be enforced in the Mainland courts.
- Recognition and enforcement of Hong Kong court judgments in Mainland China: Transaction documents involving parties domiciled in Hong Kong will usually provide the jurisdiction clause as “the courts of the Hong Kong Special Administrative Region shall exercise non-exclusive jurisdiction.” However, under the Arrangement of the Supreme People's Court between the Mainland and the HKSAR on Reciprocal Recognition and Enforcement of the Decisions of Civil and Commercial Cases under Consensual Jurisdiction（”the Arrangement of the Enforcement”）, the Mainland courts may only enforce a “final decision regarding payment with executive force in a civil or commercial case under a written jurisdiction agreement,” and “the written jurisdiction agreement must be the agreement of sole jurisdiction”. Currently, cases involving a non-exclusive jurisdiction clause do not fall within the definition of “civil or commercial case under a written jurisdiction agreement” under the Arrangement of the Enforcement, and a decision will not be recognized and enforced by the Mainland courts.
The most recent Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region signed by the two jurisdictions no longer requires exclusive jurisdiction clauses over effective judgments; however, the new arrangement is not effective until the issuance of a judicial interpretation by the Supreme People's Court and the completion of the relevant internal procedures by the Hong Kong Special Administrative Region, and the effective date will be announced by the Supreme People’s Court and the Hong Kong Special Administrative Region.
2. If the defendant is not PRC-domiciled, can the plaintiff commence proceedings in the Mainland court?
In practice, some debtors or guarantors in cross-border financing transactions are offshore-registered companies, but they hold assets in the Mainland. It is important to know whether creditors can enforce against the mainland assets of these defendants via the Mainland courts. Under Article 265 of the Civil Procedure Law, the plaintiff in contract disputes or other disputes regarding property rights or interests can attempt to commence proceedings against a defendant without a domicile in the Mainland in contract disputes or other property right or interest disputes that meet if the following conditions are met:
- The contract is signed or performed within the Mainland;
- The subject matter of the litigation is located within the Mainland (for example, the subject matter of the litigation in a dispute over the transfer of equity in a foreign-invested enterprise would be the equity in the foreign-invested enterprise);
- The defendant has impoundable property within the Mainland (such as movable property, real estate or securities. The defendant is deemed to have impoundable property if it establishes enterprises in the Mainland which process supplied materials, supplied samples, supplied components or conduct compensation trades; and
- The defendant has a representative office in the Mainland.
The following further points are relevant in proceedings against defendants who are not Chinese entities or citizens:
- The doctrine of forum non conveniens: The defendant will often raise an objection to jurisdiction based on the doctrine of forum non conveniens in the following circumstances:
a. If there is no jurisdictional agreement;
b. if the case does not fall under the exclusive jurisdiction of the Mainland courts;
c. if Chinese law does not apply;
d. if the main facts do not occur in the Mainland; and
e. if the case does not involve the interests of Chinese citizens or organizations.
In practice, the Mainland courts have displayed a cautious attitude in applying this jurisdictional doctrine. Unless a case simultaneously and strictly meets the six conditions set forth in Article 532 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China (the “Interpretation of the Civil Procedure Law”),3 such jurisdictional objections will generally not be upheld. The key point is whether the case is “extremely inconvenient in terms of finding the facts and the governing law.”
For example, in the case of (2019) Zui Gao Fa Min Zhong No. 592, the Supreme People's Court held that disputes arising from the transfer of equity interests in Canadian companies by overseas parties were not governed by PRC law. Finding the facts and the governing law would make it extremely inconvenient for the Mainland court to hear the case, and the court upheld the decision to dismiss the suit of the plaintiff.
A contrary example is seen where the Huiyang District People's Court of Huizhou City, Guangdong Province had dismissed the plaintiff's suit in one of the civil rulings in the case of (2020) Guangdong 1303 Min Chu No. 5052 on the basis that the Mainland court had significant difficulties in finding the facts and the governing law, and that the Hong Kong court had non-exclusive jurisdiction and convenience in hearing the case. However, after the plaintiff's appeal, the Intermediate People's Court of Huizhou City, Guangdong Province, in the (2021) Guangdong 13 Min Xia Zhong No.19 civil ruling, found that there were no significant and obvious inconvenient jurisdictional factors in the case, and therefore there were no significant difficulties in the determination of the facts and governing law. It therefore set aside the decision and ordered that the court of the original instance had jurisdiction.
- The identity of the defendant: According to Article 17(3) of the Minutes, if the plaintiff does not provide proof of the defendant's existence at the time the proceedings are commenced, and if the defendant cannot be served according to the statutory means of service (except for service of process by public announcement) according to the circumstances set forth in the complaint, the plaintiff must provide additional proof of the defendant's existence (such as notarized company registration records or identity registration records) in order to establish the existence of the defendant. Otherwise, the court may determine that there is no clear defendant in the case, and dismiss the suit of the plaintiff according to Article 108(2) of the Interpretation of the Civil Procedure Law.
3. In foreign-related commercial cases in which both Mainland courts and foreign courts have jurisdiction, are the parties entitled to commence litigation in a Mainland court if they have already commenced litigation in a foreign court?
If the assets of the parties are located in different jurisdictions, and the transaction documents agree that jurisdiction is non-exclusive, creditors may commence litigation in China and in other jurisdictions at the same time in the interests of comprehensive asset recovery. Except where the doctrine of forum non conveniens applies, Mainland China does not prohibit the parties from commencing separate litigation in foreign countries and in the Mainland at the same time.4 However, it is important to note that:
- If the cases in the Mainland and foreign courts have identical parties, claims and causes of action, the counterparty may claim that the case is a duplication of litigation and should be dismissed, based on Article 247 of the Interpretation of the Civil Procedure Law5. In practice, to avoid the Mainland court dismissing the domestic case, it is recommended to incorporate distinctions in respect of the parties, causes of action and claims between the Mainland and foreign litigation.
- Under Article 533 of the Interpretation of the Civil Procedure Law:
A. If the causes of action in the domestic and foreign cases go in opposite directions (for example, the plaintiff in the mainland litigation is the defendant in the foreign litigation), and the Mainland litigation has resulted in a valid judgment, any judgment in the foreign litigation cannot be recognized and enforced in the Mainland; and
B. If the judgment or ruling of the foreign court has been recognized by the People's Court, the People's Court will not accept an attempt to commence proceedings in the same dispute with the People's Court.
In subsequent articles, we will focus on substantive law issues regarding cross-border fund investments and corporate control, etc.