Overseas companies doing business in China are inevitably concerned about the ability of the Chinese judicial system to safeguard their legitimate rights. To many foreign businessmen, the Chinese judicial system  are mysterious, particularly when dealing with international commercial litigation, even though the fact that China has been opening up to the outside world for more than thirty years.

There is no special  law or regulation that  governs international commercial litigation in China. The major piece of legislation applied to international commercial litigation is Part Four of the

Generally speaking, the Chinese Courts are comprised of  four different tiers: trial courts (basic level); intermediate courts; higher courts; and the Supreme Court. Special courts, such as maritime courts, railway courts, and military courts, also exist.

Under the CCPL, judicial proceedings occur in two instances, ie. trial and appeal. A decision made by an appellate court is final, and no appeal therefrom is available. If, however, the appellate decision was in error, a retrial may be requested through the trial supervision procedure.Typically, these proceedings begin in the trial courts, which exercise general trial competence. But, under the CCPL, a higher court, including an intermediate court, higher court, or even the Supreme Court, may hear a case in the first instance if the case has a significant impact in the areas of their respective jurisdictions. International commercial litigation in particular normally begins at the intermediate level, though it may commence at the trial level. This is because most, if not all, cases involving foreign elements are regarded as major cases having significant impact. Therefore, the trial of such cases in the first instance rests with the competent intermediate court. In the Judicial Opinions on CCPL, the Supreme Court defines a major case involving foreign elements as a case in which the dispute involves a large amount in controversy, complicated facts, or in which a large number of parties reside abroad.

Within the courts at the intermediate or higher level, there are special divisions that deal with international commercial litigation.When hearing a case in accordance with the CCPL, the court shall form either a collegial panel conprised of an odd number of both judges and judicial assessors (jurors) or judges alone, except for hearings under summary procedures in which a single judge presides. During a trial involving foreign elements, the foreign party may represent itself, be represented by a foreign agent ad litem, or a foreign lawyer present at the trial as a non-lawyer. The CCPL requires that if a foreigner, stateless person, foreign enterprise, or organization needs a lawyer when litigating in a court, the lawyer must be Chinese.

During the past several years, the Chinese Courts have heard greater number of cases involving foreign elements, and this trend definitely will continue.This increase is attributed to at least two aspects. First, China’s fast-growing economy has dramatically enhanced China’s presence in the world market and thus significantly generated more transnational business transactions and foreign investment. As a result, the number of commercial/civil disputes inevitably increased. Furthermore, the Chinese Courts positioned themselves to deal with litigation involving foreign parties. One particular issue arising is whether to treat both Chinese and foreign parties equally in litigation.  The public image desired by the courts is one of competence in handling cases involving foreign elements fairly and justly. To that end, the Supreme Court repeatedly asked all courts to exercise jurisdiction over cases involving foreign elements in strict accordance with existing law, treaty, and private agreement.

 Despite the efforts of the Supreme Court to improve the Chinese judicial system and the success of foreign parties in the courts,  many foreign parties are still skeptical about litigating in Chinese courts. This reluctance is rooted in the fear that China is short of the rule of law in general and is lacking an independent judicial system. Nevertheless, foreigners and foreign companies doing businesses in China are subject to the jurisdiction of the Chinese courts. Therefore, a better understanding of the Chinese judicial system and Chinese court proceedings in international commercial litigation is essential to effectively protect foreign business interests.

International Commercial Litigation Jurisdiction

The courts’ commercial jurisdiction stems from both the Chinese Constitution (as amended 1999) and the CCPL. These documents empower the courts to adjudicate cases arising from disputes concerning property and personal relations between or among citizens, legal entities, or other organizations. With regard to commercial litigation involving foreign elements, the jurisdiction of the courts is governed by both general and special provisions of the CCPL. In addition, the Supreme Court plays an important role in determining the lower courts’ jurisdiction pertaining to a particular type of case. For example, the Supreme Court requires that first instance cases involving patent disputes be adjudicated by an intermediate court appointed by the Supreme Court.

Under the provisions of the CCPL, the jurisdiction of the Chinese Courts is divided generally into four categories– tier jurisdiction, transferred jurisdiction, designated jurisdiction, and territorial jurisdiction.In addition to proper subject matter jurisdiction, the court must also meet both the tier and territorial requirements.

Tier jurisdiction  means the jurisdiction of the courts at each level, and dictates the level at which a particular case shall be filed in the first instance. Since in any given case there is only one appeal available under the “two-instance trials system,” it is important that the case start at the correct level. For a case involving foreign elements, commencing it at a higher level court is desirable given that most lower courts are inexperienced in handling international commercial litigation.

On April 9, 1999, the Supreme Court issued a “Notice on Taking of Cases Concerning Civil and Commercial Disputes at Higher Court of Provinces for the Trial of First Instance.” According to this Notice, a first instance case involving foreign elements may be initiated at a higher court if the amount in controversy meets minimum requirements. This jurisdictional amount requirement varies depending on the location and the cause of action, as well as whether a property-related or business dispute is at stake. In Beijing, Shanghai, and Guangzhou, for example, the amount in controversy requirement in a business dispute case is RMB 80 million (about U.S. $9.76 million). In provinces such as Gansu, Guizhou, Xing Jiang, Inner Mongolia, Qinghai, Ningxia, Yun Nan, and Tibet, the amount is reduced to RMB 8 million (about U.S. $976,000) for a similar case. In property-related cases, the Supreme Court set a ceiling for the number of cases per year that the higher courts may take in the first instance in addition to the amount in controversy requirement. An approval must be obtained from the Supreme Court if a higher court wants to take a first instance case on the ground of “significant impacts” when the case lacks the required jurisdictional amount, or the total number of cases taken exceeds the ceiling.

Transferred jurisdiction is analogous to a venue transfer and deals with the transfer of a case from a non-competent court to a competent court.Under Article 36 of the CCPL, if a court finds that it has taken a case without  jurisdiction, it shall transfer the case to the court that is competent. If the court to which the case is transferred believes that it also lacks jurisdiction, it shall refer the case to a higher court for designation of jurisdiction. In accordance with the CCPL, for transferred jurisdiction to be valid three conditions must be met: (1) the case must have been taken; (2) the transferring court must lack jurisdiction; and (3) the case must be transferred to a competent court. The jurisdiction of the transferring court shall be determined from the record as of the time the transferring court accepts the case.

Designated jurisdiction occurs when a higher court orders a lower court to exercise jurisdiction that it would otherwise lack. Pursuant to the CCPL, jurisdiction may be designated to a lower court if: (1) the case is transferred to a court that lacks jurisdiction; (2) the court that is competent could not exercise its jurisdiction due to some special reasons, such as natural disaster or on the legal grounds of recusal; or (3) more than two competent courts are in dispute over their jurisdiction on the case and the dispute cannot be solved by an agreement between the disputing courts.

The most important feature of the courts’ jurisdiction is territorial jurisdiction. Questions of territorial jurisdiction in the courts are typically determined by reference to the relations between the forum and the parties, disputes, or factum jurisdicum (legal facts). To be precise, territorial jurisdiction determines venue, personal jurisdiction, and jurisdiction over property. As noted, with regard to cases involving foreign elements, the CCPL contains both general and special rules determining the courts’ jurisdictional competence. The factors determining territorial jurisdiction are domicile, place of business, conduct, location of property, and party consent. Based on the difference of these factors, territorial jurisdiction can be further divided into general territorial jurisdiction, specific jurisdiction, consensual jurisdiction, and exclusive jurisdiction. Note that China does not follow the practice of some continental law countries, such as France, in which nationality serves as an important basis for a court to assert its jurisdiction.

A. Defendant Domicile-General Territorial Jurisdiction

General territorial jurisdiction is determined by the defendant’s domicile.The courts may exercise jurisdiction over a given defendant who is domiciled, resides, or conducts business within the territorial boundary of the court, regardless of the defendant’s nationality. According to the CCPL, a commercial lawsuit generally shall be brought in the court at the place of the defendant’s domicile. If a defendant has both a domicile and a habitual residence, jurisdiction is proper in the venue of the defendant’s habitual residence. When there are several defendants who are domiciled or reside in two or more jurisdictional territories, the courts in those territories shall all have jurisdiction. In this circumstance, the CCPL allows a plaintiff to choose one of the competent courts. If the plaintiff files a lawsuit with two or more competent courts, the court with which the lawsuit was first filed shall exercise jurisdiction. 

The defendant’s domicile-based jurisdiction rests with the jurisdiction doctrine commonly characterized as “plaintiff’s accommodating defendant.” An exception to this doctrine applies, however, when the personal status of the parties is involved. Under the CCPL, if a commercial lawsuit concerning personal status is brought against a person not residing in China, the court of plaintiff’s domicile or habitual residence shall have jurisdiction.According to the Supreme Court, a Chinese plaintiff may sue his or her spouse in a court of his or her domicile for divorce if the spouse resides in a foreign country.

B.  Conduct and Property-Specific Territorial Jurisdiction

In international commercial litigation, many cases involve a foreign defendant not domiciled or residing in China. In such a case, the  court has jurisdiction if the defendant has established certain connections with China. It is of importance to note that “mere presence” in China does not constitute a basis on which a court may exercise jurisdiction. Therefore, for jurisdiction purposes, the connection must be meaningful, providing a “sufficient ground” warranting the exercise of the courts’ judicial power.

Thus, the CCPL specifically grants the courts jurisdiction over international commercial actions founded upon claims arising out of a foreign defendant’s conduct or property. Under Article 243 of the CCPL, certain specific jurisdiction rules shall apply to actions involving contract disputes or other disputes over property rights against a non-resident defendant. According to these rules, if the contract is concluded or performed in China, a court at the place of contract or the place of performance shall have jurisdiction. If the subject matter of the claim is located in China, the jurisdiction shall rest with the court where the subject matter of the claim is located. If the defendant has attachable property in China or has a representative office in China, the defendant shall be subject to the jurisdiction of the court at the place of such property, or the place of the representative office. In a tort action, the place of tort shall be the determinative factor for jurisdiction.

A contract or tort action requires further attention. In a contract dispute, parallel jurisdiction would exist between the court of locus contractus (the place of a contract) and the court of locus solutionis (the place of a contract performance), if these jurisdictions are different. In this situation, the plaintiff may choose either one of these courts for litigation. In a business contract, if the name of the contract does not match the substance of contractual obligations contained therein, the place of contract performance shall be determined with reference to the substance. If it is difficult to tell the nature of a contract on the basis of its substance and if the name of the contract matches part of the substance, the name of the contract shall be used to determine the place of contract performance. As far as a tort action is concerned, jurisdiction shall be asserted by the court where the cause of action arose or the place of defendant’s domicile.The place of tort is interpreted by the Supreme Court to include both locus delicti commissi (place where a tort is committed) and the place where harms have occurred. Once again, the plaintiff may choose among these venues.

On November 22, 2000, the Supreme Court issued an “Interpretation on Matters Concerning Application of Law in the Trial of Cases Involving Computer Network Copyright.” In this Judicial Interpretation, the Supreme Court expanded the place of tort to include the location of the computer equipment, such as the server or network terminal, where the tortious act is committed. The Supreme Court was also of the opinion that in a tort action concerning computer network copyright where both the place of the tort and the place of defendant’s domicile could not be determined, the place of the network terminal equipment where the tortious contents were found may be deemed as the place of the tort.

For cases arising from other causes of action, jurisdiction is determined with reference to other provisions of the CCPL. For example, under Article 26 of the CCPL, a case involving insurance contracts shall be adjudicated by the court at the place of defendant’s domicile or the place where the insured object is located. According to Article 27, jurisdiction over disputes concerning negotiable instruments is proper at the place where payment was due.

C.  Exclusive Jurisdiction

The CCPL expressly excludes foreign courts from exercising jurisdiction over certain commercial actions over which the Chinese Courts shall have exclusive jurisdiction.The most prominent commercial actions subject to the exclusive jurisdiction of the courts are disputes arising from contracts of foreign investment enterprises (FIEs). Article 246 of the CCPL explicitly provides that the courts of China shall have exclusive jurisdiction over disputes concerning the performance within China of contracts of Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures, or Chinese-foreign cooperative exploration and development of natural resources.

In addition, certain actions shall be under the exclusive jurisdiction of a particular Chinese Court. In accordance with Article 34 of the CCPL, if: (1) a lawsuit involves a dispute over real estate, the court of the place where the real estate is located shall have jurisdiction; (2) a lawsuit involves a dispute over harbor operations, the jurisdiction shall rest with the court of the place where the harbor is situated; and (3) a lawsuit arises out of the dispute over succession, jurisdiction is proper where the decedent was domiciled upon his death, or where the major estate is located.

D.  Parties’ Choice or Consent-Consensual Jurisdiction

The CCPL allows litigants to choose a court through mutual agreement. Therefore, the courts’ jurisdiction could also be established by consent of the parties. However, under Article 244 of the CCPL, such choice is subject to three conditions: (1) the agreement must be made in writing; (2) the court chosen must have an actual connections with the dispute; and (3) the dispute must involve foreign contracts or foreign property rights.Article 244 further requires that the parties’ choice of court be made without violating the provisions of the CCPL concerning tier and exclusive jurisdiction if a Chinese Court is chosen.A similar provision is found in Article 25 of the CCPL, which applies to domestic commercial cases.It provides that parties to a contract may choose, in their written contract, to be subject to the jurisdiction of the court at the place of defendant’s domicile/ residence, contract performance, contract conclusion, or subject matter of the claim. Again, the choice of jurisdiction shall not violate the provisions of the courts’ tier and exclusive jurisdiction.

In cases involving foreign elements, a non-resident defendant may stipulate to the jurisdiction of a court by consent. The consent need not be specifically made in writing, but may be assumed by the court through the defendant’s filing of an answer to the complaint. The defendant’s failure to object is essential in defendant’s consent to the court’s jurisdiction.Article 245 of the CCPL provides that if the defendant raises no objection to the jurisdiction of a court and files its answer to the complaint in a commercial action involving foreign elements, the defendant shall be deemed to have accepted the court’s jurisdictional competence.

Since the defendant’s failure to object constitutes consent to jurisdiction, it is imperative that defendants, foreign defendants in particular, raise a timely jurisdictional objection. Under Article  of the CCPL, if a party to a commercial action objects to the jurisdiction of a people’s court, the objection must be raised within the time period prescribed for the filing of answers. According to Articles 113 and 248, defendant shall have fifteen days, or thirty days if residing outside the territory of China, to file his answer upon receipt of plaintiff’s complaint. Thus, if a defendant wants to challenge the court’s jurisdiction, he must do so within this statutory fifteen-day or thirty day period. According to the Supreme Court, a third party to the litigation may also challenge the jurisdiction of a court if the third party has an independent claim. Once the jurisdiction is challenged, the court shall have fifteen days to review the challenge and make a decision in the form of a court order. A court order on jurisdictional matters is appealable.

A number of Chinese scholars have strongly advocated introducing the doctrine of forum non-conveniens into the Chinese courts. In August, 2000, the China Society of Private International Law published the “Model Law of Private International Law ” . Article 51 of the Model Law states that a Chinese Court may, at the request of a defendant, decline its jurisdiction over a commercial action, which is lawfully under the jurisdiction of the court, if the court believes that the exercise of the jurisdiction will result in obvious inconvenience to the parties and another court would be more convenient.

It seems in practice that the forum non-conveniens doctrine has gained some judicial recognition in the courts. This recognition, however, is limited.On April 17, 2000, the Supreme Court issued a “Notice on Several Questions in Adjudication and Enforcement Concerning Civil and Commercial Cases with Foreign Elements” to urge the Chinese Courts not to give up jurisdiction without reasonable cause. According to the Notice, it is required that the courts strictly follow the jurisdiction provisions of the CCPL, and shall carefully review all jurisdictional matters in each case brought before them. It is further required that acourt shall neither delay nor decline exercising judicial power over the case under its jurisdiction as provided by law. But, if the parties to a commercial litigation are all non-Chinese enterprises and the disputes have no practical connection with China, a court may advise the parties to choose alternative courts in other countries.In this case, litigation in the court would be deemed unrealistic in terms of the determination of evidence and enforcement of judgments.

One important aspect concerning jurisdiction of the courts is the arbitration clause or agreement. Under Article 257 of the CCPL, the court’s jurisdiction is excluded in disputes arising from foreign economic, trade, transport, or maritime activities if there is an arbitration clause in such contract, or if the parties to the contract have subsequently reached an arbitration agreement for dispute settlement. Furthermore, pursuant to Article 259, a court shall have no jurisdiction over a case in which an award has been made by a foreign arbitration body. However, these restrictions do not apply if the arbitration clause or agreement is found invalid or the arbitration award is set aside by court order.

Another factor affecting the courts’ jurisdiction over foreign defendants is service of process. It is critical to note that service of process in China is deemed judicial conduct, and therefore only the court may serve process. The CCPL provides six methods of service, which include: (1) personal service upon defendant (also called direct service); (2) service left at the defendant’s residence; (3) entrusted service through the court of the place where defendant resides; (4) service by mail; (5) service forwarded to defendant by defendant’s work unit or authority; and (6) service by public notice. Under the CCPL, a receipt of service signed by the receiving person is required except for service made by pubic notice.

If a defendant resides outside China, the extraterritorial service shall be made through either: (1) the means as provided for by international treaties to which both China and the foreign country are members; (2) the methods permitted by bilateral agreements for judicial assistance between China and the foreign country; or (3) diplomatic channels.

The Chinese Courts’ jurisdiction can also be excluded by a statute of limitations. According to

General Principles of the Civil Law of 1986, except where otherwise provided by law, the limitations period for commercial actions is two years from the date when plaintiff knows or should have known that his rights have been infringed. Under Article 136, the period is one year for actions involving: (1) personal injury; (2) sales of qualitatively substandard goods without proper notice; (3) delays in paying rent or refusal to pay rent; or (4) loss of or damage to property left in the custody of another person. Pursuant to the Contract Law of 1999, the time limit for actions concerning disputes over contracts for international sales of goods and import or export of technology is four years. In all others cases, the maximum time period is twenty years from the day on which the infringement occurs.

II.  Applicable Law and its Determination in International Commercial Cases

For commercial litigation in a Chinese Court involving a foreign party, a threshold issue is what law the court should apply when delivering its decision. This question involves several different considerations, which include, inter alia: (1) whether the Chinese court could apply foreign law; (2) the factors considered in the determination of governing law; and (3) which law will govern if there is a conflict between the Chinese and foreign law.

Under the principle of judicial sovereignty, a court may only apply the law of the forum. However, the emergence and development of conflict of law principles (commonly called “private international law” in China) has provided situations where foreign law could be applied in a domestic court. Debates on the rational grounds for the application of foreign law aside, such application has become a common practice in almost every country in the world. China is no exception.

Nevertheless, there is no unified conflict of law legislation in China. The choice-of-law rules are scattered in many laws and regulations. The most important choice-of-law rules are the General Principles of the Civil Law of 1986 and Contract Law of 1999.  The two laws are the major pieces of legislation regulating civil and commercial matters in China and contain special provisions dealing with choice-of-laws in commercial cases with foreign elements. The choice-of-law rules provided in these two laws are the combination of the rules previously used in judicial practice and theories advocated by legal scholars.

The Supreme Court’s “Opinions on Several Questions Concerning Implementation of the General Principles of CommercialLaw (Provisional)” in 1988 was another major resource of the choice-of-law rules applied by the courts.  In China, both Principles of the Civil Law  and the Supreme Court’s “Opinions” are regarded as landmarks in the development of Chinese choice-of-law rules. These sources not only offer legitimate grounds for the courts to apply foreign law in a commercial action involving foreign elements, but also provide the mechanisms for determining the applicable law.

A number of choice-of-law rules adopted in China are featured with western-styled content as well as internationally accepted principles such as the principle of “Party Autonomy.” Some other rules clearly have their genesis in American conflict of law. The most notable example is the approach of the “closest relationship.” This choice-of-law approach is actually a copy of the doctrine of the “most significant relationship” that is the main theme of the Restatement (Second) of Conflict of Laws.

The Chinese Courts have sought to solve the choice-of-law issue in accordance with commonly practiced standards. In Walt Disney Co. v. Beijing Press and Xinghua Bookstores, the defendants published nine fairy tale books that contained the cartoon figure Mickey Mouse between 1991 and 1993. On January 31, 1994, plaintiff filed a lawsuit in Beijing No.1 Intermediate Court for copyright infringement. Defendants asked the court to dismiss the case and argued that plaintiff’s did not have a valid copyright on Mickey Mouse in China under the Copyright Law of China 1990. The court rejected defendants’ argument and held that, although Mickey Mouse was not published in China, it should be protected under the 1992 China-U.S.  Memorandum of Understanding on Protection of Intellectual Property Rights (1992 MOU). According to the Copyright Law of China, any work of a foreigner first published outside the territory shall be protected if the work is eligible for copyright protection under an agreement between China and the foreign country, or under an international treaty to which both countries are party. On that basis, the court applied the 1992 MOU. But in entering its judgment for plaintiff, the court further held that since the 1992 MOU was signed on March 13, 1992, it may only apply to the infringements that occurred after that date, and therefore plaintiff should not be entitled to copyright protection against defendants’ 1991 publication.  

Choice-of-law rules in China emphasize an actual connection or relationship between the applicable law and the nature of the case involved  A closer look at the choice-of-law provisions in the Principles of the Civil Law Supreme Court “Opinions” clearly reveal that the “closest relationship” is the most determinative factor in the choice of law.  This factor applies not only to restrict the parties’ freedom of choice of applicable law, but also to solve the choice of law puzzle posed by the factual complexity of certain cases.  Moreover, the closest relationship test is also the identifier of applicable law when a foreign country, whose law should be applied, has plural legal systems.

The choice-of-law rules in both General Principles of the Civil Law and the 1988 Supreme Court “Opinions” are criticized for being incomplete.  Unsatisfied with the scattered choice-of-law legislation, many call for a comprehensive conflict of law code.  In 2000, the China Society of Private International Law published the “Model Law,”  a remarkable attempt to codify the choice-of-law rules. Of the total 166 articles in the Model Law, ninety-four articles directly deal  with the application of law.  There is a wide-range of coverage of choice-of-law matters, including nationality and domicile, capacity, formality of conducts and agency, statute of limitations, personal rights, property rights, intellectual property rights, contract, torts, unjust enrichment and negotiorum gestio (abstract action), domestic relations, inheritance, bankruptcy, and arbitration.

Of course, it is necessary to emphasize that China is a country with a typical continental law tradition. In this sense, the courts may only apply the “black letter” rules. Therefore, the Model Law, however significant, may not become applicable unless and until it is adopted by the Chinese legislature. To be clear, the basic choice-of-law rules that the courts currently apply can be summarized from the following perspectives.

A.  Lex Personalis-Law Determining Civil Capacity

Lex Personalis, or the law of person, is a recognized choice-of-law principle governing the issues of civil capacity. It refers to both the law of domicile and the law of own country. In general, civil capacity is regarded as a prerequisite for taking commercialactions because it is the matter directly affecting the establishment of the commercialrelations that are involved.

In China, the most notable provision under which the courts determine the law applicable to civil capacity is Article 143 of Principles of the Civil Law . Article 143 provides that if a citizen of China resides in a foreign country, the law of that country may apply to determine his capacity for civil conduct. This provision, however, has been criticized by many private international law scholars because of its inadequacy in handling civil capacity issues. On the one hand, Article 143 only deals with Chinese citizens and does not contain rules that could be generally applied to non-Chinese. Also, there is lacking a provision concerning the determination of civil capacity of a legal persons. Moreover, it is unclear whether the residing country actually means the country of domicile.

In 1988, the Supreme Court attempted to overcome the shortcomings of Article 143 by offering more specific guidance in the determination of the law governing civil capacity and status. Indeed, the court afforded several rules that became heavily influential in the practice of the courts. These rules are:

1.The capacity for civil conduct of a Chinese citizen residing in a foreign country shall be determined by Chinese law if such conduct occurs in China. The law of a foreign country in which the Chinese citizen resides may apply if the conduct occurs in such foreign country.

2.If a foreigner who conducts civil activities in China is deemed to have no capacity for civil conduct under the law of his own country but has such capacity under Chinese law, he shall be regarded as having capacity for civil conduct.

3.The capacity for civil conduct of a stateless person shall, in general, be governed by the law of the country where he resides, or the law of the country of his domicile if he does not reside in that country.

4.A legal person’s capacity for civil conduct shall be determined by the law of its own country, which is the country where the legal person is registered.

Another provision concerning civil capacity is Article 97 of the Law of Negotiable Instruments of China 1995. It provides that the obligor’s capacity for civil conduct shall be determined by the law of his own country. If the obligor is regarded to have no capacity or have limited capacity under the law of his own country but has full capacity under the law of place of conduct, the law of place of conduct shall apply.

B.  Party Autonomy-Choice of Law in Contract

Similar to most other countries, China adopts the “Party Autonomy” doctrine that allows parties to choose the governing law for their contract.  Both Principles of the Civil Law and Contract Law  stipulate that the parties to a foreign contract may choose the law applicable to settlement of disputes arising from the contract, except as otherwise stipulated by law. In the absence of such a choice, the law of the country to which the contract is most closely related shall apply.

The contractual parties’ freedom on choice of law is limited. First, the foreign law chosen by the parties shall be excluded if its application would harm the social and public interests of China. Second, the choice of law must be expressly made by the parties with mutual consent and may not be implied. Third, the choice shall not be made in violation of the rules mandating application of Chinese law.  The mandatory application mainly deals with the contracts of foreign investment enterprises, such as Chinese-foreign joint ventures and contracts for Chinese-foreign cooperative exploration and development of natural resources. These contracts may only be governed by Chinese law. Also, under the Detailed Rules (as amended 2001) for Implementation of the Law of China on Wholly Foreign-Owned Enterprises (WFOE), a contract between a WFOE and another company, enterprise, other economic organization, or individual shall be exclusively governed by the Contract Law of China.

With respect to the time for the parties to make a choice of applicable law, the Supreme Court took a flexible approach. According to the Supreme Court, the parties may choose the governing law through a choice-of-law clause in their contract or by agreement reached after the contract is made.  The contract disputes for which the parties may choose the governing law include those concerning conclusion of contract, time for the conclusion, interpretation of contract terms, performance of contract, modification, suspension, assignment, dissolution, and termination of contract.

If there is no expressed choice-of-law, the courts will use the “closest relationship” standard to determine which law is to be applied.  This standard focuses on the nature of contract and type of transaction. Though the term closest relationship is neither defined in Principles of the Civil Law  nor Contract Law , in practice, the courts normally follow the guidance set forth by the Supreme Court in 1987.  This guidance provides a list of laws applicable to the different contracts pursuant to the closest relationship test.  For example, under its guidance, absent parties’ choice of applicable law, a contract for the international sale of goods shall be governed by the law of the place of the seller’s business office at the time of contract conclusion. If the contract was concluded at the place of the buyer’s business office, or the contract is made mainly according to the terms and conditions stipulated by the buyer or on the basis of the buyer’s bidding request, or the contract clearly provides that the seller shall deliver the goods at the place of the buyer’s business office, the law of the place of the buyer’s business office at the time of contract conclusion shall apply.

Notwithstanding this guidance, a court may apply the law of the place to which the contract was found to be the most closely related. If the law of a party’s business place shall be applied and the party has more than one business office, the courts shall apply the law of the place that is found to be more closely related to the contract.  If there is no such business office, the law of the party’s domicile or residence shall be applied.  It is worthwhile to note that the applicable law, either chosen by the parties or determined by a court, shall refer to the existing substantive law, not including the conflict of law rules nor the procedural law.

C.  Lex Delicti-Applicable Law in Torts

The determination of law applicable to torts in the courts is based on the doctrine of lex delicti—the law of the place of tort.  This doctrine is adopted in Article 146 of Principles of the Civil Law . This provision recites three general rules: (1) the law of the place where the tortious conduct is committed shall apply; (2) if both parties involved in the tort are citizens of the same country or are domiciled in the same country, the law of the parties’ own country or domicile may be applied; and (3) if the conduct committed outside the territory of China is not regarded as tortious conduct under the law, such conduct shall not be treated as a tort.

In its 1988 “Opinions” on the implementation of Principles of the Civil Law , the Supreme Court further illustrated that the law of the place of tort as provided in Principles of the Civil Law  includes both the law of the place where the tortious conduct is committed and the law of the place where the resultant harm occurs. The Supreme Court also opined that if the place of conduct is different from the place of harm, the courts may at its sole discretion determine the law to be applied.

D.  Lex loci rei sitae-Law Governing Real Property

In a lawsuit involving real property, the courts will apply the law of the place of the property—lex loci rei sitae.  Article 144 of Principles of the Civil Law provides that in disputes involving the ownership of real property, the law of the place where the property is situated shall apply. This doctrine also applies to real property in intestate succession.

However, Principles of the Civil Law does not make clear what shall be included in the ownership of real property for choice of law purposes, nor does Principles of the Civil Law offer a definition of the term “real property.” According to the 1988 Supreme Court “Opinions,” real property shall refer to land, construction affixed to land, other fixtures, as well as equipment fixed to the construction. The Supreme Court also extended the law of the place of real property to govern the commercial relations concerning the ownership, sale, lease, mortgage, and use of the real property. In addition, as noted above, the law of the place of real property may also apply to a contract for lease, sale, or mortgage of real property.

With regard to the question about characterization or classification of real property, there exists no provision in the Chinese laws. A common approach advocated by most Chinese private international law scholars is that the law of the place of property determines the issue of the property characterization.

An exception to the doctrine of lex loci rei sitae is presented by property ownership over vessels. In accordance with the Maritime Law of China 1992, the matters concerning the acquisition, transfer, or termination of property ownership over a vessel shall be governed by the law of the vessel’s flag country.

E.  Burden of Proof-Determination of Foreign Law

There should be no question about application of foreign law in the courts unless such application would violate the public interest of China or evade Chinese mandatory laws or prohibitive rules.  Difficult issues arise, however, as to how the contents of the applicable foreign law will be determined. The complexity involved in this regard is how the foreign law should be treated; this would also affect who will have the burden to prove the foreign law.

Two contradictory approaches have governed the question concerning the determination of foreign law. One is a common law approach, under which foreign law is treated as a matter of fact pleadable as such by evidence supplied by the parties, their attorneys, or experts. The other is a continental law approach, in which foreign law is regarded as a matter of law and the court has the obligation to apply it.

The Chinese Courts seem to be positioned between these two extremes. The axiom, as provided in Article 7 of the CCPL, is that in the adjudication of commercialcases, the courts must “base itself on the facts and take the law as the criterion.” Therefore, the courts are required to look into both fact and law in any commercialcase. The underlying notion is that a court shall make every effort to ensure errorless ascertainment of facts and application of law.

Acourt may determine the foreign law through such means as: (1) the parties to litigation; (2) the central authority of contracting country under the agreement of judicial assistance between China and the foreign country; (3) the Chinese embassy or consulate in the foreign country; (4) the foreign country’s embassy or consulate in China; or (5) Chinese or foreign legal experts.

If, however, the foreign law cannot be determined through the above means, Chinese law shall be applied. In addition, should either party disagree with a trial-levelcourt determination on foreign law, the party may appeal to the appellate court for review.

III.  Enforcement of Judgments in China

In a broad sense, enforcement of judgments in international commercial litigation embraces two aspects. The first aspect is to enforce the judgment entered by a domestic court of a country, and the second involves recognition and enforcement of foreign judgments. In many cases, it also involves enforcement of foreign arbitral awards. More importantly, given the nature of judicial sovereignty, a judgment of one country’s courts does not automatically gain extraterritorial recognition and enforcement in another country. This matter may only be resolved through a special channel, which is commonly called “international judicial assistance.”

A.  Enforcement of Courts’ Judgments

The CCPL provides a number of devices by which a court judgment may be satisfied. In general, the enforcement is divided into (a) enforcement against property, and (b) enforcement against required activities. Enforcing a judgment against property is called execution. Under the CCPL, the available means for execution include inspection, freezing, and transfer of judgment debtor’s deposits, withholding and withdrawal of judgment debtor’s income; sequestration, seizure, freezing, public auction, and sale of judgment debtor’s property;and eviction and return of land. The enforcement against required activities involves forced delivery of specified value instruments or certificates, and forced performance of acts as specified in the judgment.   Additionally,  for purposes of enforcing judgments, the CCPL also provides certain protective measures, which include search, issuance of certificates for the transfer of property rights, as well as monetary penalties for delayed payment.

There are two ways to initiate the process of enforcement in the courts. The first, and more common, one is the “enforcement by petition” made by the judgment creditor. If the judgment debtor refuses to satisfy the court judgment, the judgment creditor may file a petition for enforcement of the judgment with a competent court. The enforcement petition may be made in writing or orally if the petitioner has difficulty writing. When making the petition, the petitioner provides the court with documents stating the reasons and items for enforcement, as well as a copy of the court judgment. The petitioner may also need to furnish information about the financial status and property of the judgment debtor. The time limit for the judgment enforcement petition is one year, if at least one party is citizen, or six months, if all parties are legal persons or other organizations.

Enforcement may also be triggered by referral of the judge in the case, which is called “judge-referred enforcement.” The enforcement under the judge’s referral, however, is limited to legal documents such as judgments, orders, and mediation papers made by the court only. In 1998, the Supreme Court adopted the “Rules (Provisional) on Several Matters Concerning Enforcement Work in the courts.” Under these Rules, a judge may refer for enforcement: (1) judgments for child support, alimony, pension, medical expenses, and salaries; (2) legal documents made by the courts in criminal proceedings containing property-related commercialjudgments, orders, and mediation papers; (3) court orders pertaining to attachment and advance execution; (4) court decisions on fines and detention; and (5) commercial  judgments and orders made by the court concerning major interests of China.

In the courts, enforcement of a judgment is executed by an enforcement officer.Many courts have formed an enforcement division in charge of judgment execution. Upon receipt of a petition or judge referral for enforcement, the enforcement officer or division sends the execution notice to the judgment debtor, instructing him or her to comply with the judgment within a specified period of time. If the judgment debtor fails to comply, the enforcement officer may explore other enforcement devices to compel the debtor to satisfy the judgment.

However, if the judgment debtor or their property is not within the territory of China, the judgment creditor may directly apply to a competent foreign court for enforcement. If necessary, the court may also send the enforcement request to a foreign court under the provisions of bilateral or international treaties to which both China and the foreign country are members. Absent these treaties, the request may be made on the basis of reciprocity If required by a foreign court, the court may issue a certificate of judgment to the judgment creditor.

B.  Recognition and Enforcement of Foreign Judgments and Arbitral Awards

Articles 267 and 268 of the CCPL provide the process to enforce foreign judgments by the court.There are two alternatives to start the process: (1) the foreign judgment creditor may file a petition directly with the competent court for recognition and enforcement of the judgment; or (2) the foreign judgment court may make a judgment recognition and enforcement request to the competent court. Note that the foreign court request in this regard shall be directed to the competent court through the means provided in the treaties to which both China and the forum country have joined, or on the basis of reciprocity. If neither treaty nor reciprocity exists, a diplomatic channel is usually employed. For purposes of the recognition and enforcement of a foreign judgment, the competent court shall be the intermediate court of the place where the judgment debtor resides or his property is located.

Upon receipt of the judgment recognition and enforcement petition or request, the intermediate court shall examine and review the foreign judgment on the basis of international treaties to which China is a member, the principle of reciprocity, or relevant Chinese law.The examination and review, however, is limited to the formality of the foreign judgment without questioning the merits of the foreign court’s determination of facts and application of law.After the examination and review, the court may issue an order of recognition or a writ of enforcement provided the foreign judgment does not contradict basic principles of Chinese law nor violates Chinese sovereignty, public security, or social interests.

The CCPL does not dictate the conditions under which a court may refuse to recognize and enforce a foreign judgment. In practice, however, the courts may strike down a petition or request for recognition and enforcement if the foreign judgment is found to have one of the following defects:

(1)the foreign judgment was made by an incompetent foreign court according to relevant provisions of international treaties and Chinese laws,

(2)the foreign judgment has not taken effect or has no effect at all under the law of such foreign country,

(3)the defendant was not given adequate notice for the proceedings, or was not properly represented by a guardian if lacking legal capacity,

(4)an effective judgment has been made by a court for the same cause of action between the same parties, or the case was in the middle of trial in acourt and the trial had begun before the proceedings in the foreign court started, or

(5)recognition and enforcement of the foreign judgment would cause harm to Chinese sovereignty, security, and public order.

On December 1, 1992, the Supreme Court issued its “Opinions on Relevant Questions Concerning Courts’ Handling Petition for Recognition of Divorce Judgment Made by a Foreign Court.” These Opinions specifically address the recognition of foreign divorce judgments sought by Chinese citizens as well as foreigners. The Supreme Court emphasizes that a court should not decline to take action on the recognition petition submitted by a Chinese citizen even though the marriage was concluded outside China. But, if the judgment was made in default, the petitioner shall provide the court with evidence that the defendant was properly notified of the divorce action. According to the Supreme Court, a court may deny a foreigner’s petition for recognition of their divorce judgment if their spouse is not a Chinese citizen.

With respect to a foreign arbitral award, Article 269 of the CCPL provides a similar procedure to that for the recognition and enforcement of foreign judgments. A major difference is that only the parties to the arbitration may initiate the process by submitting the petition directly to the intermediate court of the place where the award debtor resides or property is located. In addition, since China is a member state to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), in nearly all cases recognition and enforcement of foreign arbitral awards are subject to the conditions set forth in the Convention.

C.  Practical Concerns in Seeking Enforcement of Judgments in the courts

The enforcement of court judgments in China is difficult. Each year a considerable number of court judgments or orders are not enforced. It is obvious that this sluggishness in enforcing judgments, including arbitral awards, in China has become a major concern for many foreign companies. Though the Supreme Court is under tremendous pressure to resolve this problem, the result still is far from optimal. Partly because of this reason, during the past two general sessions of the National Congress, the Supreme Court barely survived approval of its working report to the Congress.

It is unfair, however, to blame the Supreme Court alone on this matter, and many factors attribute to the problem of enforcement difficulty. Local protectionism is the main obstacle to enforcement. As noted, since China adopts a two-instance system of adjudication, a majority of cases conclude in intermediate courts situated at the level of prefecture between county and province. The enforcement of domestic judgments normally rests with the trial courts, county courts in many cases, unless an intermediate court conducts the first instance trial. When a commercial case involves different counties or prefectures, the trial court encounters local government influence driven by local interests such as the desire or policy to protect local industries or businesses. The more local interests are involved, the more difficult it is to enforce a judgment against a local party. In case of enforcing foreign judgments against a local party, such protection could become more dominant.

A second factor hindering enforcement is government interference in favor of state-owned enterprises (SOE). If a SOE is a judgment debtor, the enforcement of a judgment may be halted if such SOE is financially unable to satisfy the judgment or the enforcement would threaten the survival of the SOE. The interesting phenomenon is that many SOEs in China are both creditors and debtors. More importantly, a SOE may not sell or be forced to sell its assets to satisfy a court judgment.

The third factor is a lack of credit-checking and asset-tracking systems. In many cases, it is very difficult, if not impossible, to obtain a judgment debtor’s financial and asset information, especially for a foreign judgment creditor. Under the CCPL, a request for recognition and enforcement of a foreign judgment shall be submitted to the intermediate court of the place where the judgment debtor resides or his property is located. Quite often, however, the judgment debtor disappears in order to evade the judgment, and his assets, including bank accounts, are all transferred to an undisclosed place.

The fourth factor is the lower court’s abuse of discretion. For example, when recognition and enforcement of foreign arbitral awards are requested, lower Chinese courts often arbitrarily decide to set aside the awards. In order to curb this practice, the Supreme Court established a pre-reporting system under which a decision on whether an arbitral award is to be recognized and enforced shall be reported to the Supreme Court for review. No decision shall be made before the Supreme Court review is complete.

The language barrier might be another factor. For a foreign judgment to be enforced in China, it is required that the judgment be translated to the Chinese language. Therefore, any mistranslation in the parties’ name or address may result in a failure of recognition and enforcement because it could constitute a ground on which the judgment debtor denies the judgment.

IV.  Judicial Independence

A fundamental issue that affects international commercial litigation in China is the lack of judicial independence. This issue not only troubles foreign  businessmen, but also becomes a popular concern among Chinese nationals. Despite the increasingly strong voice calling for an independent judicial system, the courts still seems to face impassable hurdles to exercising their judicial power independently.

Indeed, it is fair to say that judicial independence is a recognized principle in the Chinese Constitution and laws. In 1954, when the first Constitution was adopted,it provided that the courts shall adjudicate cases independently and abide by law. Article 126 of the current Constitution, adopted in 1982 (as amended 1999), further provides that the courts shall exercise judicial power independently according to stipulation of law, free of any interference by administrative agencies, social organizations, or individuals. Similar provisions are also embodied in the 1979 Organic Law of the courts (as amended 1983),the 1995 Law of Judges (as amended 2001), as well as the CCPL.

Therefore, literally speaking, the courts are granted an independent judicial power under the Chinese Constitution and laws. The problem, however, is that the judicial power may not be exercised independently in practice. Even the Supreme Court’s activities are not completely free from interference. The cause is the inherent defects existing in the current judicial system. China is a communist-party-dominated socialist country, and separation of powers is not a dominant theme. The Congress is the basic organization of the nation’s political power.According to the 1982 Constitution (as amended 1999), the National Congress (NPC) is the highest body of state power. But this body is required to be under the leadership of the communist party. The Supreme Court, though defined as the nation’s top judiciary body, is required to report to the NPC. Under the NPC, there are local congresses at the province and county level to which the lower courts at corresponding level are responsible.

Additionally, there are several system defects. The first one is the current organizational structure of the judicial system, which makes judicial independence extremely difficult. As noted, China has a unitary judicial system with four levels, from the Supreme Court to the county trial courts. The Supreme Court, however, has no control over any of the lower courts except for work connections. All judges at the lower court are selected and appointed by the local congress, which is heavily influenced by the local communist party chief and government heads. More importantly, the operating expenses, including salaries of the judges, are provided from the local government budget. In addition, Chinese judges do not have a life term, and any of them could be replaced or removed at anytime by the local congress. It is, therefore, quite common for local judges to follow instructions and opinions from the local government on particular cases, since government and judicial powers are usually intertwined.

The second aspect that affects judicial independence is the lack of professional ethics and judicial corruption. In China, personal relationships or “back-door” connections play significant roles in every corner of society. This scenario is often seen in the adjudication of cases. Many Chinese lawyers spend much of their time trying to find easy access to the presiding judge in lieu of traditional legal analysis.

A third shortcoming involves the internal managerial system of the courts. Within the courts, the president of each court is both the chief judge and the chief executive. The president has the power to influence the promotion and demotion of any particular judge in the court, and to supervise all judges through a reporting system. In most cases, the local court president is a political appointee by the local government.  In addition, though cases are tried by a collegial panel, the panel’s decision is subject to review by the trial committee consisting of the president, vice presidents, and division directors. Thus, the ability of the judge or collegial panel to reach an independent decision on a case is considerably limited.

Furthermore, the professional quality of judges is often very poor. Among the presidents and vice-presidents of the courts, only 19.1% received a bachelor degree or higher. This ratio is down to 15.4% among the judges in the lowest courts. For those who have received a college degree, many of them have not graduated from law school. For the few who have received a law degree, a substantial number did so through continuing education. Ironically, the reality is that in many local courts there are no law school graduates, and most judges are military veterans.

It is true that the Law of Judges is expected to help improve the quality of judges in the courts.There is, however, doubt that the Law of Judges may achieve its goal of improving the quality of judges to a highly professional standard. The primary concern is that the professional requirements for a judge, as set forth in the Law of Judges, are too low because a law degree is not a minimum requirement. Also, even though formal college education is required, this requirement does not apply to those who became judges before the Law of Judges took effect on July 1, 1995. 

Based on International Civil Litigation in China: A Practical Analysis of the Chinese Judicial System by  Mo Zhang
Editor/Compiler: Shanghai International Lawyers