China Contracts with Hong Kong Jurisdiction: No, No, No

Hong Kong courts are world class and most companies would rather have their disputes against their Mainland China counter-parties resolved in Hong Kong instead of in Wuxi or Harbin. Hong Kong as jurisdiction of choice is alluring. But for all sorts of reasons, it’s a trap.

Let me explain.

In 2008, China and Hong Kong entered into a reciprocal enforcement agreement to make judgments from Hong Kong courts enforceable in China, and vice-versa. Foreign lawyers (usually those not experienced with China contracts or China courts) see this and think that having their clients’ disputes resolved in Hong Kong is the way to go. But as is so often true of China, what is on paper does not correspond well with the real world and resolving disputes with Mainland Chinese companies in Hong Kong will usually be a terrible idea.

Consider a contract between a Canadian technology company and its PRC licensee. The Canadian company seeks to avoid Chinese law by providing for English as the contract language, Canadian law as the applicable law, and enforcement in a Canadian court. The Chinese side refuses and insists on the opposite: Chinese language, Chinese law and enforcement in a Chinese court. As a compromise, the Canadian side proposes the following: English language, Hong Kong law and enforcement in a Hong Kong court. The Chinese side readily agrees and the contract is signed.

The Chinese side likely agreed to this “compromise” because it knows this creates the worst possible situation for the Canadian company. The contract is NOT enforceable against the Chinese company, so the Chinese company is off the hook for any liability. On the other hand, the contract IS enforceable against the Canadian company, giving the Chinese company substantial power in the event of a dispute. The Canadian company has placed itself in the worst possible position. I have Chinese lawyer friends who brag about using this “trick” against foreign lawyers.

There is though a chance both parties will be disappointed because there is a risk the Hong Kong court will refuse to hear the case because the matter has no connection to Hong Kong. Remember that Hong Kong is an entirely separate jurisdiction from China. For this reason, a contract between Canadian and Mainland Chinese companies regarding conduct in the PRC has no connection to Hong Kong. It is therefore possible the Hong Kong court will refuse to allow this unrelated case to crowd its docket and will simply refuse to hear it.

But let’s assume the Hong Kong court hears the case and renders a judgment. What then will happen? If the Chinese company is the plaintiff and if it prevails, its judgment against the Canadian defendant will be easily enforceable in Canada against the assets of the Canadian company. Hong Kong is a common law country with laws and legal procedure based on the laws of England. Canadian courts regularly enforce such common law judgments and the odds are overwhelming they would do so in this situation as well

But If the the Canadian company is the plaintiff and it prevails in the lawsuit and then seeks to enforce its Hong Kong judgment in the PRC, the situation will be quite different. On the surface, it appears enforcement of the judgment should not be an issue under China and Hong Kong’s  reciprocal enforcement agreement of 2008 which on its face makes judgments from Hong Kong courts enforceable in China. However, Chinese courts regularly ignore this statute by not enforcing Hong Kong judgments.

Chinese courts avoid enforcement in two ways. Sometimes they simply refuse to act. They do not openly reject the demand for enforcement. They instead accept the demand and then do absolutely nothing. This is the most common technique.

The other approach is to find technical reasons to reject the demand for enforcement. Usually the Chinese court will reject the Hong Kong judgment based on a claim that the award was based on grounds that violate Chinese public policy. Since Chinese civil law and Hong Kong common law come from an entirely different legal background and legal procedure, it is generally easy for a Chinese court to find a public policy issue.

Often, the Chinese party will not appear in the Hong Kong action. In this case, the Canadian side will obtain a default judgment. Like pretty much all courts, Chinese courts are reluctant to enforce any form of default judgment. When the default judgment is from a foreign jurisdiction, the likelihood of enforcement is even less. Knowing this, good Chinese lawyers instruct their Chinese clients not to appear when sued in Hong Kong.

As noted above, a contract between Chinese and Canadian entities has no factual or legal connection with Hong Kong. Chinese law allows the parties to a contract to chose the applicable law, but when the parties choose a law with no connection to the underlying transaction, Chinese courts typically deem this to violate public policy.

Whether the Court issues a written ruling or simply does nothing, the effect is the same: there is a good chance of no enforcement of the Hong Kong judgment against the Chinese party defendant.

So what this all means is that by writing a Hong Kong jurisdiction provision into the Canadian company’s contract with its Chinese counter-party, the Canadian company has placed itself in the worst of all positions. First, it must convince a skeptical Hong Kong court to hear a case with no connection to Hong Kong. Then it must wait as the Hong Kong court takes what can be a substantial period of time to render judgment when the facts and parties are all foreign to Hong Kong. If and when the Canadian company finally receives its Hong Kong judgment, it will likely learn the hard way that its judgment has no value since it is not enforceable in China. Or even worse, the Chinese party prevails on its counterclaim and the Chinese party is free to enforce its judgment against the Canadian company in the United States.

Hong Kong as the jurisdiction for disputes with Chinese companies? Great on paper, but not so great in real life.