Foreign-related preliminary questions in cross-border disputes

By Yvonne Lu, Martin Hu & Partners
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In private international law, if resolution of the disputed question is conditional on first resolving another question, the disputed question may be called the “main question” or “principal question”, and the question that needs to be resolved first may be called the “preliminary question”. Judicial adjudication of preliminary questions in China has yet to draw much attention, and its drawbacks in terms of resolution method, procedure, effectiveness, remedies, etc., have hindered judicial practice. In this article, the first part of a series, we will present two examples to analyze foreign-related preliminary questions in cross-border dispute cases.

Yvonne Lu-cutout 2
Yvonne Lu
Counsel
Martin Hu & Partners

Case 1: The Chinese court trying the principal question had no jurisdiction over the preliminary question, so an application was made to suspend the trial. Company ‘A’ was a wholly foreign-owned enterprise (WFOE) established and existing under the laws of China. Its British Virgin Islands (BVI) parent removed ‘S’ (the authorized representative and signatory of the BVI company) by way of a written resolution of the directors of the BVI company (the initial resolution), specifically authorizing a new person to sign for, and on behalf of, the BVI company two letters of removal and appointment, removing ‘K’ (the chairman of the board and legal representative of company A) and director S.

All of the directors who signed the initial written resolution were foreign nationals (certain such persons being US nationals or having permanent residence in the US) and the resolution was signed abroad (in the US and Hong Kong). Subsequently, the members of the new board of directors of company A adopted a written resolution of the board of directors of company A, authorizing ‘D’, the new chairman of the board and legal representative of company A, to hold and use all of company A’s licences, certificates and seals.

In the above case, the principal domestic law questions were: procedurally, did D have the authority to represent company A in instituting a legal action; and, substantively, must S and K return the licences, certificates and seals to company A? The preliminary question in the case was the lawfulness of the initial resolution, this preliminary question being a foreign-related law question.

The resolution of the procedural and substantive principal questions in this case was conditional on the resolution of the lawfulness of the above-mentioned initial resolution. This firm’s client instituted a legal action in a certain court in the US regarding the above-mentioned preliminary question, concerning equitable remedies, declaratory relief, injunctive relief and damages, bringing forward 13 major claims including requesting that the court confirm the initial resolution as being invalid.

The Chinese court did not have jurisdiction over the preliminary question, and even if, for the sake of argument, the Chinese court had jurisdiction over the preliminary question because the principal facts of the dispute did not occur in China, the place of signing of the resolution was outside China and the law governing the resolution was not Chinese law. Therefore a Chinese court would have encountered major difficulties in the finding of facts and determination of the applicable law in trying the case, whereas trial of the case by a US court was much more convenient. Pursuant to paragraph 1(5) of article 136 of the then effective 2007 version of the Civil Procedure Law (now article 150 of the current version of the Civil Procedure Law), where the case in question requires the trial result of another case as a basis, and that case is still pending, the Chinese court that accepted the application is required to suspend the trial of the case in question.

However, as the parties subsequently reached a settlement on the entire cross-border dispute, this case did not become a precedent where the trial result of a case before a foreign court would have served as a basis, requiring the suspension of the domestic trial. Although our client secured a complete victory, the author feels disappointed that this case did not become a precedent.

Case 2: The Chinese court had jurisdiction over the preliminary question, but trial by it would have been problematic, so it rendered a ruling suspending the trial. The plaintiff, Bading, was a WFOE, with its shareholder a Hong Kong company outside mainland China proper. The sole shareholder of the Hong Kong company was a Macau company, which transferred all shares to the later shareholders ‘A’ and ‘B’. Subsequently, the Hong Kong company removed ‘Y’ (the legal representative, executive director and general manager of Bading) and appointed a new legal representative.

The principal question in this case was the lawfulness of Bading’s request for Y to return the company’s licences and certificates, a question that falls within domestic law. The preliminary questions in the case were the lawfulness of the Hong Kong company’s equity transfer and the relevant shareholder resolutions – questions that are foreign-related legal questions, more specifically preliminary questions involving Hong Kong, Macau and/or Taiwan. While the case was pending, the Hong Kong company’s original shareholder, the Macau company, instituted a legal action in the Hong Kong High Court regarding the preliminary questions, requesting confirmation that A and B were not shareholders of the Hong Kong company.

The preliminary questions fall within the category of equity confirmation disputes, and the mainland Chinese court – as the court of the place where the object of the legal action was located – could exercise jurisdiction. Nevertheless, as the determination of the shareholder status and equity shares of the Hong Kong company involved the judicial jurisdiction of the place where the company was registered – i.e., Hong Kong, where the Hong Kong company had carried out the registration of the change in shareholders – there was no assurance that a judgment of the mainland Chinese court would necessarily secure judicial recognition in Hong Kong, and it would also have had difficulties in ascertaining the relevant facts and law.

The case in question had a direct connection with the trial result to be delivered by the Hong Kong High Court with respect to the preliminary questions. Given that the case in question needed to wait for the trial result in the above-mentioned case, it was not possible to first render a judgment. Accordingly, the Chinese court suspended the trial of the case in question in accordance with article 136 of the then applicable 2007 version of the Civil Procedure Law.

In part 2 of this series, we will address foreign-related preliminary questions in cross-border disputes in light of the above-mentioned two real cases, and clarify the circumstances of, method of resolving, and trial steps in foreign-related preliminary questions, and extract the gist of the judgments/rulings.

Yvonne Lu is a counsel at Martin Hu & Partners

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