“One China, two systems”

In the United States, we tend to take for granted the Constitution’s Full Faith and Credit Clause. The concept is simple: any valid judgment issued by one state is fully enforceable in another state. Unfortunately, international civil litigation is not that simple and as a result the designated jurisdiction in your contract may affect the success of your claim.

Under certain circumstances the P.R.C. permits parties to apply foreign contract law when enforcing the terms of business agreements. But generally, difficulties arise when attempting to enforce foreign court judgments in the P.R.C. However, Hong Kong judgments are an outlying exception.

In 2006, China and Hong Kong implemented a special reciprocity arrangement for enforcing monetary judgments in commercial disputes. Hong Kong maintains a common law legal system and relatively sophisticated courts. What this means is that Hong Kong more closely resembles both the British and American systems of jurisprudence. If jurisdiction can be obtained, litigation in Hong Kong may be viable and advantageous option for dispute resolution. To ensure protection under the Hong Kong S.A.R. (Special Administrative Region) you must first establish qualified jurisdiction and understand the steps of enforcement.

Only some categories of agreements may apply Hong Kong law. Actions brought on disputes arising from the performance of contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures or Chinese-foreign cooperative exploration and development of P.R.C. natural resources exclusively fall under the jurisdiction of the People’s Courts of the P.R.C.

In addition to the substantive terms of your agreements (e.g., defining the product, payment schedule, quality assurance) the handling of claims and disputes is just as important. Arguably, the most important contractual term in your agreement is the exclusive choice of court provision. You MUST expressly (in writing) agree to designate either the Mainland or a Hong Kong Court to have exclusive jurisdiction for dispute resolution. To quote the H.K.S.A.R.’s press release on the Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters, “the Arrangement is only applicable to money judgments on disputes arising from commercial contracts where the parties concerned, on the basis of freedom of contract, have made an agreement in writing in which a court of the Mainland or court of the H.K.S.A.R. is expressly designated as the court to have sole jurisdiction for resolving the dispute concerned.” See http://www.info.gov.hk/gia/general/200607/14/P200607140166.htm.

“Should I designate Hong Kong or the P.R.C. as my choice of jurisdiction?”

At first glance, applying Hong Kong law may seem like the more attractive option. The reason being that most Western businesses are more familiar with basic legal terms of the common law system (for example, common law contracts require offer, acceptance and consideration; whereas P.R.C. may only require mutual assent). But difficulties may arise when your supplier or associate operates only within the Mainland.

As mentioned above, you may be able to secure a money judgment in Hong Kong and enforce it against a P.R.C. entity, but you will NOT be able to obtain an injunction in a Hong Kong court enforceable in the P.R.C. An injunction differs from a final money judgment. If your business partner breaches a non-compete agreement, and decides to become your competitor, the issuance of a preliminary injunction (in the form of a cease and desist order) could save you invaluable time and money. This is a crucial factor that you must consider when weighing your options.

Another practical consideration is the fact that P.R.C. attorneys practice mainly within the P.R.C. Although not a general rule, most P.R.C. attorneys are more comfortable and proficient with Mainland Chinese civil law. Absent any special requirements or client preference, the default rule is to apply P.R.C. to all contracts. The final decision will likely rest with your own business needs.