California Supreme Court Reverses Court of Appeal Decision Barring Consensual Service by Mail on China-Based Parties

Key Takeaways

• A 2018 decision of the intermediate appellate court in California held that a defendant located in mainland China could not be held to an agreement to accept service of process in a manner inconsistent with China’s objection to the article permitting optional service of process through postal channels under the Hague Service Convention.
• Based on that decision, parties had to either resort to service under the Convention in China — which is slow and unreliable — or agree to somewhat complicated workarounds such as having the Chinese company appoint a domestic agent for service of process.
• This month, however, the California Supreme Court reversed the Court of Appeal, such that, at least in California, parties can now agree to resolve their disputes in court or arbitration here and that service of process can be accomplished by a method spelled out in the contract, without the need to resort to the Convention.
• We anticipate that this ruling will lead to more expeditious resolution of litigation and arbitration where one party is located in mainland China.
  
   

Background

On April 2, 2020, the California Supreme Court issued an opinion in Rockefeller Technology Investments (Asia) VII v. Changzhou SinoType Technology Co., Ltd.,¹ a much-anticipated decision on consensual service of process in China. The court held that parties could agree in a pre-dispute agreement to waive formal service of process and accept a summons by mail, notwithstanding China’s objection to service through postal channels under the Hague Service Convention. Rockefeller Technology significantly increases the certainty that contracts with counterparties located in mainland China with no physical presence in the U.S. will be enforceable in practice in domestic courts.

Rockefeller, a U.S.-based investment fund, secured a $414 million default arbitration judgment against Changzhou SinoType, a China-based graphic design company. Changzhou tried to vacate the award based on lack of service. But the superior court in Los Angeles rebuffed that effort because Changzhou SinoType had consented to resolve disputes in a JAMS-administered arbitration (in Los Angeles), and consented to receive “service of process” (here, the notice of arbitration), by Federal Express (“FedEx”).

On appeal, Changzhou SinoType argued that it was not properly served under the Hague Service Convention. The 1965 treaty contains a number of optional articles, including Article 10, which permits service through postal channels. But China objected to Article 10 when it ratified the convention. Rockefeller, for its part, argued that Changzhou SinoType waived formal service in the contract.

California’s intermediate Court of Appeal reversed the trial court, ordering the award vacated.² According to that court, the Hague Service Convention is the exclusive method of serving parties abroad. Thus, domestic laws permitting waiver of service are preempted. Consequently, because Changzhou is located in China and subject to Chinese domestic law, and because China objected to Article 10, FedEx service on Changzhou at its notice address in the contract was inadequate for the arbitrator to obtain jurisdiction over Changzhou. Effectively, the Court of Appeal opinion in Rockefeller prohibited the parties from contracting around China’s objection to Article 10 to consent to service via any alternative channel.

That caused concern from many businesses with similar arbitration, service of process and forum-selection clauses in contracts with China-based counterparties. China’s Central Authority — its official channel for service under the Convention — is its Ministry of Justice. The Ministry of Justice has, on occasion, refused to conduct service on political³ or hyper-technical⁴ grounds. And even when ultimately effected, in recent years, as a backlog of requests has grown, service via the Ministry of Justice can take many months. Recent judicial opinions reveal U.S. courts complaining about service requests via the Ministry of Justice that have been pending for 12,⁵ or even 18 months.⁶ Consequently, many U.S. businesses with counterparties in China — and indeed, many Chinese companies seeking to reassure their business partners that they would comply with their contracts — agreed to avoid these delays in dispute resolution by entering into arbitration and service agreements similar to Rockefeller and Changzhou SinoType.

Last week, in a unanimous decision, the California Supreme Court overturned the Court of Appeal’s decision in Rockefeller and reinstated the arbitral award.⁷ The thrust of the court’s opinion was that the law of the forum — California law — governed whether service abroad was necessary in the first instance. Under the law in California, and essentially all domestic jurisdictions, a party to a contract can consent to jurisdiction and service even when the circumstances might not otherwise satisfy statutory or constitutional requirements. As the parties in Rockefeller did just that, formal service in China was thus unnecessary under domestic law. And because the Hague Service Convention only applies to formal service of documents abroad, resort to its procedures were unnecessary for the arbitrator to exercise jurisdiction and enter a default judgment against Changzhou SinoType.

Conclusion

The California Supreme Court’s decision should reinstate confidence that California arbitration, service of process and forum-selection agreements will be enforced to provide for a speedy and efficient resolution of cross-border disputes. It reduces the need for complex and unnecessarily expensive workarounds such as requiring counterparties to retain a domestic agent for service within the U.S. And it reaffirms the importance in international business transactions of including clear arbitration or forum-selection provisions that account for procedural considerations such as service of process and submission to jurisdiction. Absent well-drafted provisions governing these procedural aspects of disputes, parties bear risk that procedural complications could interfere with their ability to obtain a judgment on an arbitral award and execute on a judgment.

As an aside, when no applicable agreement waives formal service of process, some parties have still had success arguing for alternative service under Fed. R. Civ. P. 4(f)(3), which permits service by any means not prohibited by an international agreement “as the court orders,” or its state equivalents. As judges have grown impatient with delays at the Ministry of Justice, many have come around to permitting service via alternative channels to hale China-based defendants before the courts. These methods have included service on agents such as attorneys in the U.S. and service on subsidiaries in the U.S. More controversially, some courts have held that email, facsimile and online message systems do not constitute “postal channels” under the Hague Service Convention and thus are not prohibited by an international agreement. Other courts have disagreed.⁸ Until that split of authority is resolved, parties should ensure that their contracts provide for both venue and service adequate to ensure a domestic court or arbitral forum for any commercial dispute with a China-based entity.

^{1. --- Cal. 5th ---, No. S249923, 2020 WL 1608906 (Cal. Apr. 2, 2020).↩}

^{2. Rockefeller Technology Investments (Asia) VII v. Changzhou SinoType Technology Co., Ltd. (2018) 24 Cal.App.5th 115, review granted Sept. 26, 2018, S249923.↩}

^{3. See Jian Zhang v. Baidu.com Inc., 293 F.R.D. 508, 514–15 (S.D.N.Y. 2013).↩}

^{4. Micron Tech., Inc. v. United Microelectronics Corp., No. 17-CV-06932-MMC, 2018 WL 6069646, at *2 (N.D. Cal. Nov. 20, 2018)↩}

^{5. Meemic Ins. Co. v. Vertical Partners W., LLC, No. 18-CV-11603, 2019 WL 4928806, at *3 (E.D. Mich. Oct. 6, 2019).↩}

^{6. Fundamental Innovation Sys. Int'l, LLC v. ZTE Corp., No. 3:17-CV-01827-N, 2018 WL 3330022, at *5 (N.D. Tex. Mar. 16, 2018).↩}

^{7. Rockefeller, 2020 WL 1608906, at *10.↩}

^{8. Meemic, 2019 WL 4928806, at *3; In re GLG Life Tech Corp. Sec. Litig., 287 F.R.D. 262 (S.D.N.Y. Nov. 9, 2012) (“[T]he length of time required for service under the Hague Convention [in China], approximately six to eight months, may unnecessarily delay this case . . .”); Fundamental Innovation Systems International, 2017 WL 5664284.↩}