By Richard W. Wigley and Xu Jing King & Wood’s Dispute Resolution Group

The means available for effective enforcement of settlement agreements associated with litigation is an issue which is often raised by litigants in the P.R.C.  Specifically, it is often asked, what is a party’s recourse should the other party breach a private settlement agreement, but where the breach occurs after the Appeal in the litigation at issue has been withdrawn? As P.R.C. law is a civil law system based upon the statutory law, there is no equivalent to the case precedent system of common law countries, such as the United States, Australia, and the U.K.  There is relevant statutory law as provided in the Civil Procedure Law of the P.R.C., but there exist certain legal issues which may require additional clarification beyond the statutory law.  With this in mind, as per the Article 1 of the Supreme People’s Court’s Provisions on Case Guidance (“Provisions“), the Supreme People’s Court does on occasion publish what it sees as “indicative” cases, where the decisions reached in the cases are deemed to be used as guidelines in relevant judicial review by the lower courts.[1]

Furthermore, Article 7 of the Provisions notes that said indicative cases are released so that “People’s Courts at all levels should refer to the indicative cases …. when reviewing similar  cases at trial”.[2]   The Supreme People’s Court, in a recent statement during a press conference noted that such “indicative” cases should be “refer[red] to” by the lower courts in “similar cases”, but that it is not an absolute requirement that the lower courts cite the “indicative” or guideline case. [3]  In addition, during said press conference, the Supreme People’s Court noted that High People’s Courts may release “reference cases” which are “representative and instructive”, but that “such cases should not be named as “indicative cases and should not be quoted in the verdict”.[4]   Such establishes a hierarchy for case guidance to the lower courts, including the statutory law, the “indicative cases” of the Supreme People’s Court, and “reference cases” of the High People’s Courts.  Recently, the Supreme People’s Court published an “indicative” or guideline case which provides the lower courts with guidance on the above-noted issue, as follows.

The case at issue involved a contract dispute whereas Plaintiff, Wu Mei (a scrap paper collection company) sued Defendant, Xicheng Paper Co., Ltd. (hereinafter referred to as “Xicheng”) in the People’s Court of Dongpo District, Meishan City (hereinafter referred to as the “First Instance Court”) in Sichuan Province over contract breach of a sales/purchase contract between the parties, alleging that Xicheng had breached their contract by failing to provide payment for the scrap paper provided.[5]    The Defendant appealed to the Intermediate People’s Court, but the Appeal was later withdrawn after the parties had reached a settlement privately, without the Appellate Court’s mediation.  Subsequent to the settlement agreement being signed and the Appeal being withdrawn, Wu Mei alleged that Xicheng had breached the settlement agreement and, as such, Wu Mei applied to the First Instance Court for enforcement of the First Instance Judgment, but Xicheng applied to the Intermediate Court to challenge the enforcement of the Judgment.[6]   It was noted by the Appellate Court that the settlement agreement at issue was not reached through the Court’s mediation, that this agreement established new rights and obligations upon the parties, and, also, that this agreement stipulated that the parties gave up the right of appeal.[7]

The key issue which was considered by the Appellate Court and which the Supreme People’s Court believed warranted clarification is whether if one party does not fulfill its obligations under a private settlement agreement which includes a withdrawal of an Appeal, should the First Instance Court upon application enforce the First Instance decision?  Relevant law can be found in Article 207 of the Civil Procedure Law of the P.R.C. which states that “….[i]f one party fails to fulfill the settlement agreement, the People’s Court may, at the request of the other party, resume the enforcement according to the original and effective legal document.”[8]   It is worth noting, however, that the settlement agreement in Article 207 refers to a settlement agreement reached as part of the Court enforcement procedures and, therefore, it is not applicable to the case at issue, which involved a private settlement. However, as per the rationale prescribed in said Article, it can be deduced that breach of a private settlement agreement (i.e. a settlement reached without the Court’s mediation) can be grounds for a First Instance court to enforce its decision which, in the absence of an Appeal, was a final and effective decision, as was the argument of the Plaintiff in this case. 

In addition, Article 212 of the Civil Procedure Law of the P.R.C. notes that “… [a]ll parties shall comply with a mediation agreement or other legal documents that are to be enforced by a People’s Court.  If a party refuses to comply, the other party may apply to the People’s Court for enforcement.”[9]    Please note, however, in regards to Article 212, this only references a “mediation agreement or other legal documents that are to be enforced by a People’s Court” and does not make specific reference to a private settlement agreement reached outside the auspices of the Court’s mediation.

Two points stand out in the Appellate Court’s ruling the guideline case.  Firstly, the Court was clear that this applied to cases, such as this, where there was no mediation by the Court in the settlement agreement and, secondly, this applied to cases, such as this, where the rights and obligations of the parties were changed relative to the original contract in dispute.  As stated by the Appellate Court (with Chinese language to English language translations provided herein):

“The party should have known the consequence of withdrawing the appeal in the Second Instance of Trial in that, upon the approval of withdrawal of the Appeal by the Second Instance Court, the judgment rendered by the First Instance Court is a final judgment and shall be binding and enforceable. Though the parties reached a settlement agreement, said agreement reached between parties without the People’s Court’s confirmation and issuance of the Court’s mediation order.  As such, said private settlement agreement can not be the basis to request the Court to enforce. The party breaching this private settlement agreement violates the principal of acting in good faith. Therefore, the request of the breaching party of not enforcing the First Instance Judgment due to the conclusion of the private agreement shall not be supported by the Court.[10]

Such private settlement and changing of duties/obligations is not uncommon in contract dispute settlements between parties, but, when choosing to take such a course of action, parties should understand the associated consequences.   Consideration should be given in regards to the advantages/disadvantages of both private settlement negotiations and mediation by the Court, as well as the impact of the imposition of new duties and obligations upon the parties to the settlement agreement.  In regards to the former issue (i.e. court mediation), if a court-mediated settlement is reached, as per Article 212 noted above, a court could directly enforce the settlement agreement.  In cases such as the guideline case, private settlements outside of the court’s mediation cannot be directly enforced by the court and will have to be dealt with as a separate contract dispute if breach should be claimed.   In regards to the latter issue of the imposition of new duties and obligations upon the parties in the settlement agreement, the Appellate Court is making clear that the Court is not in a position to enforce a settlement agreement where new duties/obligations beyond the scope of those described in the contract in dispute are imposed upon the parties as said agreement is “not relevant to the litigation” .

As such, parties must weigh the certain advantages of settlement agreements reached through the mediation of a dispute by the court (including but not limited to the direct enforceability of a settlement agreement) with the possible limitations of scope of rights and obligations which may apply to a potential settlement agreement.   The Supreme People’s Court, by providing the above “indicative” or guideline case, is making clear its position on the matter and, as such, relevant contract dispute settlements under P.R.C. law will be expected to comply with the associated guidelines.

Note: this publication is for informational purposes only and it does not in any way constitute a legal opinion.

[1] Art. 1 of the Supreme People’s Court’s Provisions on Case Guidance Work (released November 26, 2010), found at http://vip.chinalawinfo.com/newlaw2002/slc/slc.asp?db=chl&gid=143870 (last visited on January 6, 2012) (English language Translation).

[2] Id. at Art. 7.

[3] Law-star.com, posted December 22, 2011, referencing statements made on December 20, 2011, found at http://www.law-star.com/cacnew/201112/1545074371.htm (last visited on January 6, 2012) (English language translation).

[4] Id.

[5] Wu Mei v. Xicheng Paper Co., Ltd.  Fa(2011)No. 354    法〔2011〕354号
Found at http://www.chinacourt.org/html/article/201112/21/472159.shtml (last visited on December 27, 2011) (English language translation).

[6] Id.

[7] Id.

[8] Art. 207 of the Civil Procedure Law of the People’s Republic of China, promulgated and effective on April 9, 1991, Amended on October 28, 2007 (English language translation).

[9] Id. at Art. 212.

[10] Supra at 5.