9 February 2021
Introduction
On January 9, 2021, the Ministry of Commerce of the People’s Republic of China (MOFCOM) issued the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (the “Blocking Rules”), which came into effect the same day. Article 9 of the Blocking Rules provides that where a PRC Person suffers any loss from unjustified of foreign legislation and other measures, it may seek judicial relief from a Chinese court. On the one hand, this judicial relief procedure provides a way for PRC Persons to safeguard their rights and interests; on the other hand, foreign companies and foreign invested enterprises may be sued in China as a result. In this Article we will discuss this issue from the perspective of PRC civil procedures，taking into consideration European Union Blocking Statute related legislation and practice.
II. Overview of Article 9 of the Blocking Rules
The judicial relief of the Blocking Rules is mainly provided in Article 9 by three paragraphs:
Paragraph one provides that a PRC Person may institute legal proceedings against a “person” that causes any loss to them as a result of complying with unjustified foreign legislation or measures: “where a person complies with the foreign legislation and measures within the scope of a Prohibition Order, and thus infringes upon the legitimate rights and interests of any Chinese citizen, legal entity or other organization (a “PRC Person”), the PRC Person may institute legal proceedings in a people’s court requesting such person to compensate for its losses; unless that “person” has obtained an exemption pursuant to the provisions of Article 8 of these Rules.”
Paragraph two provides that a PRC Person can institute legal proceedings in a Chinese court against a “person benefiting from an unjustified foreign judgment or ruling”, i.e., the beneficiary: “if a judgment or ruling based on foreign legislation that falls under the preview of the Prohibition Order subjects a PRC Person to losses, the PRC Person can institute legal proceedings in a people’s court requesting the person benefiting from the said judgment or ruling to compensate it for such losses.”
Paragraph three makes clear the basis for enforcement of the aforesaid two paragraphs: “Where any ‘person’ as provided in paragraphs one and two of this Article refuses to execute an effective judgment or ruling of the people’s court, the PRC Person can apply to the people’s court for enforcement of such judgment or ruling.”
Through the provisions of Article 9, the Blocking Rules provide a basis for PRC civil subjects whose rights and interests are infringed upon to seek compensation through legal proceedings in China. Accordingly, multinational corporations investing in China should consider their possible risk exposure to civil procedures and claims in China as a result of a violation of the Blocking Rules.
We tend to believe that the Blocking Rules provide a basis for PRC civil subjects to initiate civil proceedings in China for the losses suffered by them as a result of unjustified extra-territorial application of foreign legislation. However, it still needs to be seen whether such civil lawsuits would appear in the near future.
III. Questions
1. Does a “person” include a foreign person?
Is the “person” mentioned in Article 9 only limited to a PRC citizen, legal entity or other organization or can it also include a corresponding foreign person?
As seen from the entire Blocking Rules, the term “person” is not defined and only appears in Article 9. The MOFCOM, in its explanation of the Blocking Rules, also avoided defining the specific objects that would be sued in response to questions from reporters concerning the Blocking Rules.
We are of the view that a foreign person shall not be excluded from the scope of the “person”. Firstly, as mentioned in Article 2 of the Blocking Rules, these Rules are mainly for the purpose of counteracting unjustified restrictions imposed on PRC Persons. Therefore, only by expanding the scope of objects against whom the judicial relief is sought, can the deterrence of the “Blocking Rules” be enhanced to the greatest extent. Secondly, in terms of the written logic, Article 9 only excludes from claim objects PRC Persons that have obtained an exemption; but it cannot be inferred that other “persons” that are not granted an exemption are also limited to PRC Persons. Thirdly, Article 9 defines a person’s act is governed by the Blocking Rules, i.e., “where a person complies with the foreign legislation and measures within the scope of a Prohibition Order, and thus infringes upon the legitimate rights and interests of any Chinese citizen, legal entity or other organization”. Since a person that complies with the legislation and measures of a foreign country within the scope of a Prohibition Order is,most likely a person of the foreign country, we could interpret that such a person shall include a foreign person according to the provisions of Article 9.
We believe，according to the third paragraph of the Blocking Rules, the possibility that foreign companies (especially foreign enterprises that have assets in China) and foreign-invested enterprises may be sued or enforced in China.
2. Does the blocking proceeding fall within the existing PRC tort action mechanism?
The basis of action proposed in Article 9 seems novel, however, we believe that it does not create any new right if we consider it from the interpretation of the meaning of the provisions and from the legal hierarchy of the Blocking Rules, and the litigation basis for PRC Persons is still the existing PRC tort action mechanism.
Article 1164 of the Civil Code (Tort Section) provides that the regulation object of this Section is “civil relations arising from the infringement of civil rights and interests”, therefore, the provisions on “infringing legal rights and interests” and the requirements for “compensation of losses” as provided in paragraphs one and two of Article 9 of the Blocking Rules comply with the method of relief for torts as provided in the Civil Code.
Although there is no cause of action directly corresponding to Article 9 in the Provisions on Causes of Action of Civil Cases (2020) issued by the Supreme People’s Court, given the significance of the Blocking Rules to the market participants of China, the Level Two cause of action for “disputes over tort liabilities” may be applicable to the PRC Persons, and it cannot be ruled out that the Supreme People’s Court would add a corresponding Level Three cause of action later.
Currently, many foreign-related agreements generally will have a “sanction clause” to exempt one party from liability for breach of contract due to compliance with the sanctions of other countries. We are of the view that the tort claims mechanism for PRC Persons as provided in Article 9 has circumvented the contract restrictions on jurisdiction and liability for breach of contract to a certain extent.
In addition, since the tort action does not require the existence of a contract between the subjects, we believe that another kind of subject may be included in the object of the claims action – the “informant”. When the “informant” who has triggered the unjustified application of foreign legislation and extra-territorial measures falls within the scope of “person benefiting from……” as provided in paragraph two of Article 9 of the Blocking Rules, the informant may also become a defendant in China. For example, in the guidance note to the Blocking Statute, the European Union also states that the wording of Article 6 is intentionally prescribed to allow a broader scope of protection to EU operators, and even US government agencies are not clearly excluded from the scope of its application, and the issue of identifying particular defendants in a given case should be left for a decision by a competent court.
3. New questions arising from blocking proceedings under the existing tort action mechanism
We have noticed that the initiation of blocking proceedings based on the existing tort framework will give rise to new questions. For example:
Firstly, different from the general statutory cause of action in tort, a Prohibition Order issued by the working mechanism (as described in the Blocking Rules) may be suspended or revoked according to the practical situation (Article 7 of the Blocking Rules). Thus, once the Prohibition Order is suspended or revoked, will the ongoing proceedings lose its justification? How can this situation be addressed? Can a PRC Person still make a request for relief of the damages caused during the period before the revocation of the Prohibition Order? With regard to the above questions, we understand that the Supreme People’s Court may provide clarity in its judicial explanation or other documents in the future.
Secondly, how can we prove that a person’s withdrawal (from a transaction) is based on policy considerations and not on business considerations? According to Article 9, if a tort claim can be established, the claimant should demonstrate that the withdrawal (from a transaction) of a person is due to “compliance with foreign legislation and measures in a Prohibition Order”, not due to a normal business decision. However, in reality, it is difficult to distinguish between them unless there is clear evidence. For example, Richard Nephew, the former US official who participated in the negotiation of the 2015 Joint Comprehensive Plan of Action (JCPOA) stated that since the EU Blocking Statute does not force enterprises to stay in Iran, many companies can withdraw simply by finding an excuse irrelevant to American sanctions1. Therefore, it remains uncertain how to judge a person’s motivation to withdraw, and what criteria and requirements for evidence a court should adopt.
Thirdly, how do we deal with subsequent issues brought about by the concurrence of a breach of contract claim and a tort claim? If a potential defendant has a basic contractual relation with a PRC Person, the PRC Person can file a lawsuit with the court by choosing between tort action or breach of contract lawsuit in case of a concurrence of a breach of contract claim and a tort claim, in accordance with the provisions of Article 186 of the Civil Code (the former Article 122 of the Contract Law)：If the personal or property rights and interests of the other party is damaged due to the breaching act of one party, the party so damaged has the right to request such party assume the breach liability or tort liability.
We are of the view that the direct consequence of this arrangement would be that more PRC Persons may choose tort action rather than a breach of contract lawsuit, since in a breach of contract lawsuit, a foreign court or arbitration institution may not determine the breach of contract caused by a party’s compliance with foreign legislation and measures as a breach of contract in case of the unjustified extra-territorial application of foreign legislation and measures. Even if a breach of contract determination is made, a party’s liability for breach of contract will be exempt or significantly reduced, and the legal rights and interests of PRC Persons may be unable to be safeguarded, which is also the reason for the enactment of the Blocking Rules. Under such circumstances, it is more likely that PRC Persons would get a favorable judgment if they initiate a tort action in China according to the Blocking Rules. While from the perspective of the defendant, this also means that foreign companies and foreign-invested enterprises are more likely to become objects to be sued in China when they comply with foreign legislation and measures. Therefore, it would become a new challenge for them to counteract and be exempt from compensation liabilities.
Fourthly, how do we settle disputes over the jurisdiction of litigation and arbitration? In terms of the scope of jurisdiction, if two parties have agreed on arbitration if a dispute arises, or even explicitly agreed that a dispute arising from tort shall also be settled through arbitration, then, can an action initiated by a PRC Person directly before a PRC court according to the Blocking Rules be supported by the court? Given the meaning and legislative purpose of the current provisions, we are of the view that a PRC court will consider them to be within its scope of jurisdiction. This is bound to break the dispute resolution mechanism originally chosen by the relevant subjects through “free will”, thus facing more uncertainties.
Finally,, could any prevailing judgment or ruling awarded to a person by a foreign court or arbitration institution as of result of compliance with the unjustified extra-territorial application of foreign legislation and measures be recognized and enforced by a PRC Court? Although the Blocking Rules don't address this, given the legislative purpose of the Blocking Rules is to “block the impact of unjustified extra-territorial application of foreign legislation and measures on China, safeguard China’s national sovereignty, security and development interests, and protect the legitimate rights and interests of Chinese citizens, legal entities and other organizations”, the target of this legislation has actually been raised to the level of safeguarding China’s national sovereignty, security and public interest, and we tend to believe that any foreign arbitral award or court ruling or judgment in violation of the Blocking Rules may be deemed a violation of China’s national sovereignty, security and public interest, and therefore cannot be recognized nor enforced in China. What needs to be considered is that if a PRC civil subject prevails in a blocking proceeding, and the properties of the other party in China are not sufficient to make compensation during enforcement, and the other party also has overseas properties for enforcement, then the PRC civil subject and the PRC court will be faced with the issue of extra-territorial enforcement of their prevailing blocking judgment, which may also invalidate the claims.
IV. Summary: It remains to be seen.
To sum up, in the context of Sino-US trade frictions, the Blocking Rules and the damages claims system provided in Article 9 thereof are China’s new measures to counteract long-arm jurisdiction and unilateral sanctions, which are of important symbolic significance. However, we do need further practice and observation as to how the judicial relief provided in these Rules will affect the blocking proceedings a “person” may encounter in China.
For further information, please contact:
Zou, Weining), Partner, Jun He
zouwn@junhe.com
1.How far can the EU Blocking Statute can go faced with US long-arm jurisdiction,
