Chinese Court Upholds Arbitration Agreement over Foreign Default Judgment: Sunvalley Solar Inc. v. Baoding Tianwei Solarfilms Co. Ltd. (2019) Ji 01 Xie Wai Ren No. 3

<center><span class="news-text_italic-underline">Sunvalley Solar Inc. v. Baoding Tianwei Solarfilms Co. Ltd. (2019) Ji 01 Xie Wai Ren No. 3</span></center>

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In January 2011, Sunvalley, a U.S. solar company, entered into a procurement contract with BTS, a Chinese manufacturer of solar panels. The contract included an arbitration clause requiring disputes to be resolved by the China International Economic and Trade Arbitration Commission (“<span class="news-text_medium">CIETAC</span>”).

After alleging losses caused by defective equipment supplied by BTS, Sunvalley filed proceedings before the Superior Court of California, County of Los Angeles. On 7 September 2017, that court rendered a default judgment awarding USD 4.86 million in damages to Sunvalley, following BTS’s failure to appear. In 2019, Sunvalley sought recognition and enforcement of this judgment before the Hebei Court in China.

Court’s Reasoning

The Hebei Court refused enforcement, addressing three key points:

1. <span class="news-text_medium">Validity of the Arbitration Clause:</span> The contract specified California law as governing the contract but did not expressly designate the law governing the arbitration agreement. The Court applied Chinese law as the law of the seat of arbitration and found the clause valid under Article 16 of the PRC Arbitration Law.
2. <span class="news-text_medium">Effect of BTS’s Default:</span>  The Court held that BTS’s non-appearance in the U.S. proceedings did not amount to a waiver of the arbitration agreement. Citing Article II(1) of the New York Convention, Article 5 of the Arbitration Law and Article 278 of the Civil Procedure Law (CPL), the Court emphasised that arbitration agreements exclude court jurisdiction unless expressly waived by both parties. Silence or inaction cannot be interpreted as consent to foreign court jurisdiction.
3. <span class="news-text_medium">Indirect Jurisdiction of the Foreign Court:</span> Under Article 289 of the CPL, only judgments of competent foreign courts may be recognised. Since the California court exercised jurisdiction despite the arbitration clause it was deemed incompetent, and its judgment did not meet the threshold for recognition and enforcement.

Accordingly, the Hebei Court rejected Sunvalley’s application.

Comments and Broader Context

The case demonstrates the weight Chinese courts attach to arbitration agreements, even when a foreign judgment is otherwise final. While the reasoning seems straightforward, it intersects with legislative debates surrounding the 2023 Civil Procedure Law (“<span class="news-text_medium">CPL</span>”) Amendment.

A draft version of the CPL had included arbitration agreements as one of the jurisdictional filters for determining the competence of foreign courts. However, the provision was ultimately removed. The NPC’s Constitution and Law Committee explained that if a foreign court had already found an arbitration agreement invalid, Chinese courts should not override that finding.

This leaves open questions under the current Article 301 CPL. Today, Chinese courts apply a hybrid test: the foreign court must have jurisdiction under its own law and maintain a proper connection with the dispute. But where a foreign default judgment ignores an arbitration agreement, it remains unclear whether Chinese courts should reassess the arbitration agreement’s validity under Chinese law or defer to the foreign court’s silence.

This ambiguity means the Sunvalley case remains highly instructive, as future courts may need to refine their approach to balancing arbitration agreements against recognition of foreign judgments.

Key Takeaways for Foreign Parties

• <span class="news-text_medium">For businesses:</span> Chinese courts will strictly uphold arbitration agreements and may refuse to enforce foreign court judgments that disregard such agreements, even where defendants default abroad.
• <span class="news-text_medium">For counsel:</span> Failure to appear in foreign proceedings does not waive the right to arbitrate under Chinese law. Explicit waiver must be proven.
• <span class="news-text_medium">For legislators and practitioners:</span> The case illustrates ongoing uncertainty in how Chinese courts assess indirect jurisdiction under the 2023 CPL, especially when arbitration agreements clash with foreign default judgments.