At present, investing in Mainland China is a double-edged sword, primarily because the potentially substantial economic opportunities can be offset by the practical obstacles resulting from rule of law issues when deals go bad. However, a recent agreement between the courts of Hong Kong and Mainland China to reciprocally enforce one another’s judgments could provide a significant boost to investor confidence in the region.

On July 14, 2006, representatives of the Hong Kong Special Administrative Region government and the Supreme People’s Court of China signed "The Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Cases by Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Forum Agreements between Parties Concerned" (the "Arrangement"). The Arrangement will permit a party to a commercial contract action to obtain a money judgment in either of Mainland China or Hong Kong (provided that jurisdiction was selected by contract as the exclusive forum) and have it enforced against the judgment debtor’s property in the other jurisdiction. Given the considerable difficulties many parties have had enforcing contractual rights in Mainland China, on one hand, and the well-established legal system in Hong Kong, on the other hand, the Arrangement may prove to be significant to commercial parties seeking to enforce their rights under a contract.

Although investors should be enthusiastic about the Arrangement, certain qualifying factors should be noted. For example, the Arrangement will only become effective after the Hong Kong SAR government completes the relevant legislative procedures, and after the Supreme People’s Court of China has promulgated a judicial interpretation giving effect to the Arrangement. No timeline has been set for these actions. Additionally, implementation of the Arrangement will create some uncertainty given the differing legal traditions of the two signatories. Furthermore, the Arrangement’s 19 Articles, which have yet to be published, may contain limitations and conditions that could allow one jurisdiction’s court to avoid enforcing the other’s judgment in individual cases.

In spite of these unanswered questions, the Arrangement appears to be a definite step toward bridging the "one country, two systems" divide in the People’s Republic of China. However, the enforceability of foreign arbitration awards in Mainland China may continue to make arbitration the dispute resolution vehicle of choice.

Authored by:

Edward H. Tillinghast, III

(212) 332-3529