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CHINA: Comments on the first Chinese Court decision recognizing and enforcing a foreign judgment on a franchise case on the grounds of reciprocity.

Foreign franchisors have expressed concern about the recognition and enforcement of foreign judgments in China.

Paul JONES - 15.04.21
Country expert

In April 2020, the Shanghai No.1 Intermediate People’s Court (the “SIPC”/上海市第一中级人民法院) issued a decision on a recognition and enforcement action ((2019) Hu 01 Xie Wai Ren No. 17/(2019) 沪01协外认17号), recognizing and enforcing a judgment made by the Seoul Southern District Court (the “SSDC”) in South Korea regarding a franchisor-franchisee dispute. This is the first time a Chinese court has recognized and enforced a foreign judgment in a franchise case on the ground of reciprocity. On the one hand, this decision indicates that Chinese courts are more open to foreign judgments, on the other hand, however, it is still advisable that foreign franchisors strategically choose the governing law of the franchise agreement and the dispute resolution forum, especially where there is no treaty or history on the mutual recognition of court decisions.

 

I. Background

The franchisor-applicant, BIGTO MISULO Co., Ltd., is a company incorporated in Seoul, South Korea and the franchisee-respondent, Shanghai Chuangyi Baby Education Management Consulting Co., Ltd./上海创艺宝贝教育管理咨询有限公司, is a company incorporated in Shanghai, China.

In April 2007, the applicant entered into a licensing agreement with the respondent, in which the applicant granted the respondent an exclusive right to use the “Misulo Program” courses with the copyright and trademark owned by the applicant and the relevant technical know-how, to open a franchise and sell the branded products within China, in consideration for licensing fees paid by the respondent. Thereafter a dispute over the enforcement of the agreement arose between the two parties and the applicant sued the respondent before the SSDC.

In February 2019, the SSDC issued a civil decision (No. 2011 Gahap 6992) against the respondent, ordering, among others, that: (1) the respondent shall make a payment of US $840,000 and interest to the applicant; (2) the respondent shall not use the applicant’s trademark, the “MISULO PROGRAM Logo, in the operation of its business; (3) the respondent shall remove the “MISULO PROGRAM” LogoS from its official website, business signages, brochures and advertisements. This judgment came into force in March 2019.

Later, the applicant brought a recognition and enforcement action before the SIPC, seeking to recognize the above-mentioned South Korean judgment and enforce the first (the payment of the interest excluded) and third order. The SIPC accepted this case in August 2019 and made a decision In April 2020.

The SIPC reasoned that, pursuant to Article 282 of the Civil Procedure Law of the PRC/中华人民共和国民事诉讼法, the case at bar shall be decided based on the principle of reciprocity, given the lack of a bilateral treaty between China and South Korea or a multilateral treaty to which both countries are a party. The court further confirmed the reciprocal relationship between China and South Korea on the ground of a South Korean judgement issued in November 1999 (No. 99 Gabhab 26523; the “1999 Decision”), where the South Korean court recognized and enforced a Chinese civil decision issued by the Weifang Intermediate People’s Court of Shandong/山东省潍坊市中级人民法院 ((1997) Wei Jing Chu Zi No. 219/(1997) 潍经初字219号). In addition, the court held that the legalization certificate of the SSDC’s judgment submitted by the applicant was sufficient to prove that the judgement was authentic and had come into force. Therefore, the court upheld the applicant’s claims to recognize the SSDC’s judgment and enforce the first (the payment of the interest excluded) and third order.

 

II. Analysis

Several issues involved in this case are noteworthy:

First, this case indicates a change in Chinese courts’ attitude towards the recognition and enforcement of foreign judgments based on reciprocity, which is consistent with some other decisions made by Chinese courts in recent years. For instance, in Mar 2019, the Qingdao Intermediate People’s Court of Shandong/山东省青岛市中级人民法院, for the first time, recognized and enforced a South Korean Judgment (No. 2017 Gabdan 15740) in China, which was decided on the same ground, i.e. the reciprocal relationship between China and South Korea established by the 1999 Decision. This is regarded as an important turning point, as it opened the door to the recognition and enforcement of South Korean judgments in China, particularly given that Chinese courts had previously refused to recognize and enforce Korean judgments twice in 2011 ((2011) Shen Zhong Fa Min Yi Chu Zi No. 45/(2011) 深中法民一初字第45号and 2015 ((2015) Shen Zhong Min Si Te Zi No.2/(2015) 沈中民四特字第2号) despite the 1999 Decision.

Second, in this case, the SPIC recognized and enforced both monetary judgment, i.e. payment of US $840,000 (the first order), and non-monetary judgment, i.e. removal of the “Misulo Program” Logo (the third order), without additional analysis. In common law jurisdictions such as Canada, the traditional position is that only monetary and final and conclusive judgments issued by foreign courts are recognizable and enforceable. Although this restriction has been loosened by the Supreme Court of Canada in Pro Swing Inc v Elta Golf Inc, 2006 SCC 52, the enforcing courts still need to consider extra factors when deciding whether to recognize and enforce a non-monetary judgment, as opposed to a monetary one. In this respect, recognition and enforcement actions in China may be easier for the judgment creditors. However, it is also worth noting that prior to this case, almost all of the foreign judgments that have been recognized and enforced by Chinese courts are monetary judgments. Therefore, how a Chinese court will treat non-monetary judgments remains uncertain.

Third, this case does not depart from the approach Chinese courts have adopted to determine whether a foreign judgment could be recognized and enforced based on reciprocity, that is, a reciprocal relationship exists between a foreign jurisdiction and China if the courts in that jurisdiction has recognized and enforced Chinese judgments before. Otherwise, Chinese courts have been reluctant to take the initiative to recognize and enforce foreign judgments. For instance, in a case heard by the Beijing No.2 Intermediate People’s Court/北京市第二中级人民法院 in 2004 ((2004) Er Zhong Min Te Zi No. 928/(2004) 二中民特字第928号), the court refused to recognize and enforce a UK judgment on the ground of lack of a relevant international treaty and reciprocity between the UK and China. Given that the Queen’s Bench Division (Commercial Court) of the High Court of Justice in the UK recognized a Chinese judgment in 2015 ([2015] EWHC 999 (Comm)), a similar case arising in the future may have a different result. However, this is not guaranteed – considering the above-mentioned two cases where Chinese courts refused to recognize and enforce Korean judgments despite the 1999 Decision.

 

III. Conclusion

This case reflects the growing tendency of the Chinese courts to recognize and enforce foreign judgments. For franchising-related dispute matters, because of the lower amount involved and the territoriality of IP rights, it is still often recommended that foreign franchisors use Chinse courts for franchise disputes occurring in China.

 

Paul Jones, IDI Country Expert for franchising in China

Yuxiao Zheng

Xin (Leo) Xu

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