Tuesday, September 13, 2011

Enforcing Chinese Judgments in the U.S.

September 13, 2011

As the first case in history where a Chinese judgment was successfully recognized and enforced in the U.S., Hubei Gezhouba Sanlian v. Robinson is a milestone. Hubei Gezhouba Sanlian Industrial Co., Ltd. and Hubei Pinghu Cruise Co., Ltd vs. Robinson Helicopter Company, Inc. CV-01798-FMC (2009) (U.S. Court of Appeals, 9th Circuit - Case No. 09-56629.

The case involved a lawsuit over an accident in China involving a helicopter manufactured by Robinson Helicopter Company, Inc. (“Robinson Helicopters”) that resulted in the deaths of three people. A judgment in excess of six million U.S. Dollars was entered against Robinson Helicopters by the Shanghai Supreme Court after a lengthy evidentiary hearing before three judges. Robinson Helicopters did not participate in the hearing notwithstanding being served with notice of the hearing.

The United States District Court overcame the absence of any U.S./Chinese treaty for the enforcement of foreign judgments by relying on the California Uniform Foreign Money Judgment Recognition Act (UFMJRA) to enforce the Chinese judgment.

Based on the doctrine of “stare decisis”, which obligates trial judges and lower appellate courts to follow judicial precedent established by the appellate court judgment, creditors from China can, subject to the facts of the underlying case and the circumstances in which the Chinese judgment was obtained, file a civil action in a District Court in the Ninth Circuit for enforcement of the Chinese judgment.

The major issues considered by the District Court and by the Ninth District Courts of Appeal in granting recognition of the judgment against Robinson Helicopters were the following:

    1. The jurisdiction of the Chinese court. The case was originally filed in the District Court in California. The Defendant filed a motion to stay the proceedings based on their argument that the District Court was not the proper court according to the principle of forum non conveniens and agreed to submit to the jurisdiction of the court in China as a condition of the District Court granting the motion to stay the proceedings. Therefore, when the judgment creditor filed the motion to enforce the Chinese judgment, Robinson Helicopters was estopped from arguing the Chinese Court did not have jurisdiction in the underlying case.

    2. Whether the Defendant was denied” due process” in the judicial proceedings in China. Robinson Helicopters argued it was denied its right to due process in the Chinese judicial proceedings. The District Court concluded Robinson Helicopters had actual notice of the judicial proceedings in China and had both sufficient time and the opportunity to participate in the judicial proceedings. The judgment was entered by a panel of three judges after evidence was presented by the plaintiff during the evidentiary hearing. The District Court found the judicial proceedings in the Chinese court were fundamentally fair, did not offend against basic fairness and complied with the concept of “due process” in foreign judicial proceedings as set out in Society of Lloyd’s v. Ashenden, 233 F.3d 473, 476-77 (7th Cir. 2000); Shell Oil Co. v. Franco, 2004 WL 5615657 (C.D. Cal. 2004) (citing Ashenden).

    3. Whether service of process was proper. The District Court determined service of process was made in compliance with the requirements of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (“Hague Convention”).

    4. Whether it would be equitable to enforce the Chinese judgment. The Defendant argued there are neither bilateral treaties nor multilateral international conventions between the U.S. and China with respect to the mutual recognition and enforcement of judgments issued by each country’s courts in civil and commercial matters. The District Court held lack of reciprocity is not grounds for refusal of recognition under the UFMJRA and it’s successor statute.

It is worth noting this case was very fact-specific. The Defendant by filing the motion to stay the action in California based on form non convens consented to jurisdiction over the case in the court in China and could not challenge the jurisdiction of the court in China in subsequent enforcement proceedings in the District Court. In addition, the Plaintiff made sure service of process strictly complied with the Hague Convention; the judicial proceedings in the Chinese court were complete, fair and complied with the U.S District Court’s due process requirements for proceedings in foreign countries; and the statute of limitations was property tolled.

Chinese entities doing business with U.S. persons or entities need to carefully draft their contracts to resolve all issues of jurisdiction, applicable laws, conflict of laws, service of process and enforcement of judgments obtained in China in the U.S. to take advantage of this judicial precedent. Chinese judgment creditors with judgments against U.S. persons or entities proposing to enforce the Chinese judgments in the U.S. who have not previously agreed on all these fundamental issues with the U.S. judgment debtor will have a difficult time fitting within the four corners of this judicial precedent. They may be successfully in enforcing a Chinese judgment in the Ninth District if they can establish the Chinses court was the forum convens, the U.S. defendant was properly served with process and had an opportunity to meaningfully participate in the legal proceedings in China, and the Chinese judicial proceedings conformed to the Ninth Circuit’s definition of due process in foreign judicial proceedings.

Tuesday, April 5, 2011

Laying Off Representative Office Employees in China? Do Yourself a Favor and Do it Legally.

April 1, 2011

Fewer and fewer foreign companies in China are seeing the benefits of having a representative office (“Rep Office”) in China even though Rep Offices were considered at one point to be the most effective and least expensive way for foreign companies to establish a presence in the Chinese market. Some of our clients now want to convert their Rep Office to a wholly foreign owned enterprise (WFOE) because of the greater flexibility a WFOE offers; others want to downsize the Rep Office or shut it down.

Before you downsize or shut down your Rep Office it is in your best interests to comply with all applicable national, provincial and municipal Chinese laws, in particular Chinese labor laws when you lay off your Rep office employees.

Your legal obligations to the employees of the Rep Office arising out of, or relating to, the proposed lay off of those employees depends on how the Rep Office recruited its employees. If the Rep Office recruited its employees through a qualified foreign affairs service, then the relationship between the Rep Office and its employees is a labor relationship and the relevant laws and regulations for the protection of Chinese labor apply to any proposed termination of their employment relationship with the Rep Office.

If any of the following circumstances makes it necessary to reduce the workforce at the Rep Office by less than twenty (20) employees but 10 percent (10%) or more of the total number of the Rep Office’s employees, the Rep Office may reduce the workforce for the following reasons:

  • (1) A restructuring pursuant to the Enterprise Bankruptcy Law;
  • (2) Serious difficulties in production and/or business operations;
  • (3) If the enterprise switches production, introduces a major technological innovation or revises its business method, and, after amendment of employment contracts, still needs to reduce its workforce; or
  • (4) Another major change in the objective economic circumstances relied upon at the time of conclusion of the employment contracts, rendering them non-performable.

However, before the Rep Office can lay off employees, it must follow the following procedures:

  • (1) explain the circumstances to its Trade union or to all of its employees thirty (30) days in advance of the proposed lay off date,
  • (2) consider the opinions of the Trade union or the employees,
  • (3) report the workforce reduction plan to the Human Resources and Social Security Bureau in the city in which the Rep Office is located.

The Rep Office may NOT terminate an employment contract if the employee is a pregnant female employee during her pregnancy, confinement or nursing period unless the pregnant employee has seriously violated the Rep Office’s rules and regulations.

An employee must be paid severance pay based on the number of years worked with the Rep Office at the rate of one (1) month’s wage for each full year worked. For the purpose of calculating the severance pay, monthly wage means the employee’s average monthly wage for the twelve (12) months prior to the termination of his or her employment contract. Any period of employment of not less than six (6) months but less than one (1) year shall be counted as one (1) year. The severance pay payable to an employee for any period of less than six (6) months shall be one-half of his or her monthly wages. The Rep Office may terminate an employment contract by giving the employee thirty (30) days’ prior written notice, or one (1) month’s wage in lieu of notice.

If the Rep Office terminates or ends an employment contract in violation of the Laws of the People’s Republic of China on Employment Contacts, the Rep Office shall pay damages to the employee equal to twice the severance pay due the employee calculated as set out above.

If the Rep Office did not pay social insurance premiums or provide a housing fund for the employee as is required by Chinese law, the employee may report either of these omissions to the local government authority which will require the Rep Office to pay social insurance premiums and provide a housing fund and may also impose a fine on the Rep Office.

Notwithstanding the foregoing, if the Rep Office negotiates a compensation agreement with the employee to be laid off, the amount of economic compensation payable by the Rep Office to the employee is not fixed by law.

If the Rep Office did not recruit its employees through a qualified foreign affair service, the relationship between the employees and the Rep Office is in the nature of a civil service relationship, and labor protection laws do not apply and there are no mandatory civil legal obligations on either the Rep Office or the employees.

Therefore, unless otherwise agreed to by the parties, the Rep Office is not required to pay severance compensation to the employee when the Rep Office terminates the employment contract with the employee. In these circumstances there are no legal restrictions on terminating an employment contract with a pregnant employee.

Furthermore, unless otherwise agreed to by the parties, the Rep Office is not required to pay social insurance premiums or provide a housing fund for their employees.

However, if the Rep Office did not recruit the employees through any foreign affair services, then the hiring is deemed to be in violation of administration rules and the government may impose fines on the Rep Office for illegal hiring. There has not been any clear guidance from either statutes or civil cases regarding the amount of the fine to which the Rep Office may be subject. The normal practice in Beijing, however, is somewhere between ten thousand Renminbi (10,000 RMB) to fifty thousand Renminbi (50,000 RMB).

Even though it appears to be cost effective to recruit employees illegally, when it comes to laying off the illegally hired employees of the Rep Office, you never know what fines or other penalties you may ultimately be subject to when you violate Chinese laws.