Enforcing Chinese Judgments

“China’s Red Beacon” by Craig Nagy (CC BY-SA 2.0)

It has become routine for courts in the United States to recognize and enforce Chinese judgments, subject to the same limits that are applied to judgments from other countries. Last year, a New York court threatened to upset this positive trend. Relying on U.S. State Department Country Reports noting corruption and lack of judicial independence in the Chinese judicial system, the court held that Chinese judgments could never be enforced because China’s legal system does not provide impartial tribunals or procedures compatible with due process. That decision was swiftly overturned on appeal. But the case raises important questions about whether U.S. courts should assess the adequacy of foreign legal systems when reviewing foreign judgments and how this should apply to China in particular.

The Recognition of Foreign Judgments in the United States

As discussed in TLB’s Primer on Foreign Judgments, the recognition and enforcement of foreign judgments in the United States is governed by state law. State law on foreign judgments is fairly uniform because thirty-eight states have adopted one of two Uniform Acts. These acts establish a presumption that final money judgments from foreign courts will be recognized and enforced unless one of the enumerated grounds for nonrecognition applies. Most of these grounds are case-specific: (1) that the foreign court lacked personal jurisdiction; (2) that the foreign court lacked subject-matter jurisdiction; (3) that the defendant did not receive notice in time to defend; (4) that the judgment was obtained by fraud; (5) that the judgment or cause of action is repugnant to public policy; (6) that the judgment conflicts with another final judgment; (7) that the foreign proceeding was contrary to a forum-selection or arbitration clause; and (8) that jurisdiction was based only on personal service and the foreign court was a seriously inconvenient forum. In the twenty-nine states that have adopted the newer, 2005 version of the act, there are two additional case-specific grounds: (9) that there is substantial doubt about the integrity of the rendering court with respect to the judgment; and (10) that the specific proceeding leading to the judgment was not compatible with due process.

In addition to these case-specific grounds for non-recognition, both Uniform Acts contain one systemic ground for non-recognition: that the foreign judicial system “does not provide impartial tribunals or procedures compatible with the requirements of due process of law.” This ground differs from the case-specific due process ground in the 2005 Uniform Act because it focuses on the foreign judicial system as a whole rather than the proceeding that produced the judgment. If a U.S. court concludes that the foreign judicial system does not provide impartial tribunals or procedures compatible with due process, the court must deny recognition irrespective of whether the procedures in the specific case were fair.

Despite having been part of U.S. law for more than 50 years, courts have almost never relied on the systemic lack of due process exception to refuse recognition of foreign judgments. Only two cases have clearly denied recognition on this ground: Bridgeway Corp. v. Citibank and Chevron Corp. v. Donziger. Another widely cited case, Bank Melli Iran v. Pahlavi, invoked this ground but went on to make a case-specific determination that the former Shah’s sister could not obtain due process in Iran. And in three other cases, decisions to deny recognition based on systemic lack of due process were reversed on appeal—in Osorio v. Dow Chemical Co., in Dejoria v. Maghreb Petroleum Exploration, S.A., and most recently in Shanghai Yongrun Investment Management Co. v. Maodong Xu.

The Shanghai Yongrun Case

The Shanghai Yongrun case involved a business dispute, which was submitted to a Beijing court pursuant to a forum selection clause in the parties’ contract. The defendants were represented by counsel at the trial, and the decision was affirmed on appeal. When it turned out that there were not sufficient assets to satisfy the judgment in China, the plaintiff brought suit in New York state court seeking to enforce the judgment in the United States.

The defendant did not point to any specific defect in the Chinese proceeding but instead argued that the judgment could not be recognized because China’s judicial system lacks impartial tribunals and procedures compatible with due process of law. The New York Supreme Court agreed. Pointing to the State Department’s Country Reports on Human Rights Practices for 2018 and 2019, which noted “limitations on judicial independence” and “rampant” corruption in China, the court held that these reports “conclusively establish as a matter of law that the PRC judgment was rendered under a system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law in the United States.” It did not matter whether there were defects in the specific proceeding, the court reasoned, because the systemic lack of due process ground “addresses the entire system, not just the underlying litigation.”

The Appellate Division reversed in a brief opinion. “The allegations that defendants had an opportunity to be heard, were represented by counsel, and had a right to appeal in the underlying proceeding in the People’s Republic of China,” the court reasoned, “sufficiently pleaded that the basic requisites of due process were met.” The Country Reports “primarily discuss the lack of judicial independence in proceedings involving politically sensitive matters,” the court noted, and therefore did not “refute plaintiff’s allegation that the civil law system governing this breach of contract business dispute was fair.”

The Problems with Systemic Review

In a forthcoming essay, I argue that U.S. courts should stop trying to evaluate the adequacy of foreign legal systems and rely instead on case-specific grounds for nonrecognition. First, U.S. courts lack the institutional capacity to judge the adequacy of foreign legal systems. They are much more capable of determining whether there were serious problems with a particular proceedings based on evidence presented by the parties.

Second, the State Department’s Country Reports cannot fill the informational gap. As the New York’s Appellate Division correctly noted, these reports are prepared with human rights cases, rather than commercial cases, in mind. As Mark Jia has noted, authoritarian legal systems are often bifurcated, with governmental influence in politically significant cases but not in business disputes. Moreover, if U.S. courts were to treat the Country Reports as conclusive evidence that foreign judicial systems are inadequate, it would open the door to similar findings with respect to many countries besides China. An amicus brief submitted to the Appellate Division in the Shanghai Yongrun case noted that Country Reports for 2020 express similar concerns about lack of judicial independence, corruption, or both for 141 other countries.

Third, the consequences of holding that a foreign country’s courts are systemically inadequate are sweeping. Such a holding means that no judgment from that country can ever be recognized and enforced, even if the particular proceedings that produced the judgment were fair. This disadvantages parties that hold untainted judgments from that country. Relying on case-specific grounds for nonrecognition, by contrast, allows U.S. courts to distinguish foreign judgments that are truly problematic from those that are not.

Fourth, there may also be consequences for the enforceability of U.S. judgments abroad. As my essay notes, many countries recognize foreign judgments based on reciprocity. China is one of those countries. China’s courts have already held that reciprocity exists with respect to the United States based on prior U.S. decisions recognizing Chinese judgments, and the Supreme People’s Court has liberalized its policy on reciprocity just this year. Case-specific denials of recognition to Chinese judgments have not threatened the existence of reciprocity, since many countries (including China) have adopted the same case-specific grounds. But a holding that Chinese courts are systemically incapable of producing enforceable judgments would certainly end reciprocity with the United States.

Fifth, the case-specific grounds for nonrecognition (listed above) give U.S. courts sufficient tools to police against unfairness. This is particularly true in the twenty-nine states that have adopted the 2005 Uniform Act, with its new case-specific integrity and due process grounds. Of course, the case-specific grounds require the party resisting recognition to have evidence that something went wrong in its case. But it is not clear why a party that cannot produce such evidence should be allowed to avoid a foreign judgment based on mere suspicion.

Is China Different?

In a paper recently posted on SSRN, Judging China: The Chinese Legal System in U.S. Courts, Donald Clarke, an expert on Chinese law, summarizes the problems he sees in the Chinese judicial system, including lack of judicial independence and favoritism towards local interests. The point, he writes, “is not to suggest that Chinese courts can never provide due process or deliver justice. It is to show that in any given case, regardless of how innocuous or apolitical it may appear, the mechanisms for improper and undetectable interference are present, whether or not they are actually used.”

Clarke examines all the U.S. decisions assessing the adequacy of the Chinese legal system for purposes of forum non conveniens and the recognition of judgments. He argues that U.S. courts should take a harder look at the adequacy of China’s courts in both contexts, although he acknowledges that lack of reliable information makes it hard for U.S. courts to do this at present.

In the context of forum non conveniens, some systemic review of foreign courts seems unavoidable. The federal doctrine currently requires an available and adequate alternative forum, and a U.S. court must necessarily make that determination in the abstract because the foreign court has yet to hear the case. But for foreign judgments the situation is different. Because the foreign court has already heard the case, a U.S. court can consider the question of adequacy in the context of the specific proceeding to see if there are signs of fundamental unfairness.

Unlike Clarke, I am not an expert in Chinese law. But nothing I read in his very interesting paper makes me think that the tradeoff between systemic and case-specific review is different for China than for foreign countries more generally. U.S. courts are just as institutionally incapable of assessing systemic adequacy with respect to China, and the State Department’s Country Reports cannot fill the gap. Determinations of systemic lack of due process for China will have consequences that are just as sweeping as for other countries, negatively impacting both parties who hold untainted Chinese judgments and parties who hold U.S. judgments and cannot enforce them in China for lack of reciprocity, points that Clarke acknowledges. And although the possibility of undetected corruption or unfairness exists, protecting against that possibility does not seem to me to be worth the costs.

Conclusion

Although this post has argued against systemic review of foreign judicial systems, it remains the law on the books in the thirty-eight states that have adopted the Uniform Acts. Ratification of the 2019 Hague Judgments Convention would change this because systemic lack of due process is not found among its grounds for nonrecognition in Article 7. The United States has signed the Convention but the President has not yet submitted it to the Senate for ratification.

In the meantime, U.S. courts should continue their cautious approach to systemic review. They should always consider case-specific grounds for nonrecognition first. And to satisfy the systemic ground, they should demand evidence sufficient to show that a foreign legal system can never produce an enforceable judgment. This was the Appellate Division’s approach in Shanghai Yongrun, which is an important step in the right direction.