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China and Hong Kong have now implemented a new law that allows them to recognize the judgments of each other’s courts in resolving many commercial disputes.

The Mainland Judgments (Reciprocal Enforcement) Bill (the “Ordinance”) came into effect in August this year. The Ordinance implements the "Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and the Hong Kong SAR pursuant to the Choice of Court Agreements between Parties Concerned" (the “Arrangement”) entered into between the Hong Kong Special Administrative Region and the People's Republic of China (the “Mainland”) in 2006.

The new Ordinance is important because China otherwise does not recognize the judgments of most foreign courts. China does, however, recognise and enforce international arbitration awards and international arbitration may continue to be a preferred method of resolving disputes with Chinese parties.

Both the Ordinance and the Arrangement follow recent synchronized announcements made by the Hong Kong Secretary of Justice and the Supreme People's Court in the PRC. We are also anticipating that China’s Supreme People's Court will soon issue a Judicial Interpretation explaining, in more detail, how the Arrangement should be implemented in the Mainland.

Parties entering into certain types of commercial contracts may include an agreement identifying a Mainland court as the exclusive jurisdiction to resolve any contractual disputes; the Ordinance allows the parties to register (and therefore enforce) a Mainland judgment in Hong Kong. The reverse applies in the case of registration, in the Mainland, of a Hong Kong judgment obtained as a result of a similar agreement choosing a Hong Kong court.

Bear two key points in mind:

• This reciprocal enforcement arrangement between Hong Kong and the Mainland only applies when the exclusive choice of jurisdiction agreement was made on or after August 1, 2008.
• The arrangement only applies to contracts other than:
• employment contracts; and
• contracts to which a natural person "acting for personal consumption, family or other non-commercial purposes" is a party.

It is still too early to whether companies will encounter practical difficulties when registering Mainland judgments under the Ordinance (or Hong Kong judgments pursuant to the Arrangement). However, the reciprocal enforcement of judgments arrangement does offer companies doing business in China, or with Chinese companies, the opportunity to take advantage of the Hong Kong judicial system by (a) agreeing to designate exclusive jurisdiction to Hong Kong court to resolve disputes arising from a contractual relationship, and (b) then, if necessary, enforcing any judgments obtained in Hong Kong against the Chinese companies' assets in China.

The new Ordinance is particularly important because China otherwise does not recognize the judgments of most foreign courts. Any foreign judgment obtained against a Chinese company in a court outside of China generally cannot be enforced in China. Foreign litigants may win their case in a court outside China, but then, if they wish to pursue assets held by their Chinese counter-parties inside China, are left with the awkward course of having to re-start their claims all over again in China. This issue may now be avoided through enforcement of Hong Kong judgments in China under the Arrangement.

However, the Arrangement also bears potentially negative consequences for foreign companies. Chinese companies may take advantage of the Arrangement by registering Mainland judgments obtained from "favourable" courts in China, and then seek to have these judgments enforced against Hong Kong assets under the Ordinance. It is also questionable if those judgments can then be registered overseas for enforcement against overseas assets on the grounds that they are now Hong Kong judgments (following registration).

Similarly unclear at the present is whether international arbitration, in a neutral venue such as Hong Kong or Singapore, may provide a better course for international companies seeking to resolve disputes affecting their business in China. International arbitration awards achieved in Hong Kong or Singapore are recognizable and enforceable in the Mainland. Seeking resolution before these venues might presently remain not only an effective but perhaps even a preferable alternative to relying on the Arrangement in the Mainland.

Very clear, however, is that the changes are long overdue and should offer foreign companies an additional way to recover losses and damages awarded in legal disputes with their Chinese counterparts. Time will tell how effectively recovery may be enforced in practice.