When negotiating a contract in China, one of the major concerns will be the governing law of the contract if a foreign party is involved as rights and obligations under the contract would be interpreted differently by different governing laws. In 2011, the “PRC Law on the Application of Laws to Foreign-Related Civil Relations” (“Law”) was promulgated to provide for what the applicable laws should be when foreign-related civil relations are involved. The definition of “foreign-related civil relations”, however, is not specifically set out in the Law.
Recently, to supplement the Law and inter alia, to clarify the definition, the PRC Supreme People’s Court promulgated the “Interpretation on Certain Issues Concerning PRC Law on the Application of Laws to Foreign-Related Civil Relations” (“Interpretation”), which came into effect on 7 January 2013.
Previous Interpretations on Foreign-Related Civil Relations
To apply the Law and use a foreign governing law, some kind of “foreign-related civil relations” should be involved.
Prior to the promulgation of the Interpretation, the definition of “foreign-related civil relations” was based on Article 178 of the “Opinion on Questions in relation to the Implementation of the General Principles of Civil Law” issued by the Supreme People’s Court in 1998 and its No 22 judicial interpretation of the “PRC Civil Procedure Law” in 1992. These interpretations provide that where (i) either party of a civil relation is a foreigner, person without nationality, or foreign legal person; (ii) the subject matter of a civil relation is located in a foreign country; or (iii) the legal facts that the civil rights or obligations are established, changed, or eliminated in a foreign country, such civil relation shall be a foreign-related civil relation.
Further Elaboration on Foreign-Related Civil Relations
The Interpretation provides for additional elements for the definition of foreign-related civil relations. According to Article 1 of the Interpretation, the following situations will be deemed “foreign-related civil relations” :-
(i) a party or both of the parties concerned is/are a foreign citizen(s), a legal person(s) or other organization(s) in a foreign country or a person(s) without nationality;
(ii) the habitual residence of a party or both of the parties concerned is outside the territory of the PRC;
(iii) the subject matter is outside the territory of the PRC;
(iv) the legal facts that establish, change or eliminate the civil relations occurred outside the territory of the PRC; or
(v) other situations that may be recognized as foreign-related civil relations.
Items (ii) and (v) above are newly added situations as compared with the earlier PRC laws.
Article 15 of the Interpretation provides that where a natural person has already resided at a place continuously for at least one year and that place is his living centre when the foreign-related civil relation is established, changed or eliminated, such place may be recognized/accepted by the People’s Court as the habitual residence of such natural person under sub-paragraph (ii) above. However, it will not apply if the place of any one-year stay is due to medical treatment, labour dispatch or business.
According to Article 10 of the Interpretation, the parties cannot exclude the application of the PRC laws and the PRC mandatory provisions shall apply if the subject matter is in relation to the following :-
(i) protection of the interests of labour(s);
(ii) food or public health safety;
(iii) environmental safety;
(iv) financial safety such as foreign exchange administration;
(v) anti-monopoly or anti-dumping; or
(vi) other situations that should be recognized as mandatory provisions.
Invalidity of Applying Foreign Laws
According to Article 11 of the Interpretation, where one of the parties concerned intentionally creates a connection point in a foreign-related civil relation so as to avoid being subject to the PRC mandatory laws and administrative regulations, the People’s Court shall determine that foreign laws cannot be adopted.
It remains to be seen how this Article would apply to contracts where a foreign company (which may be the investor of a PRC enterprise) is also a party to the contract between the PRC subsidiary and another PRC company.
Selection of Foreign Laws
It is provided in Article 41 of the Law that the parties concerned may choose the laws applicable to a contract by mutual agreement. Article 7 of the Interpretation further elaborates that where one of the parties claims that the selection of the law under a contract should be invalid on the ground that such law is not actually associated with the foreign-related civil relation at issue, the People’s Court shall not uphold the claim. Therefore, it is not necessary that the governing law agreed in a contract is connected to the civil relation in dispute. For example, a French company and a PRC company can, if they wish, choose Hong Kong law as the governing law of the contract between them. This Article provides parties with more flexibility in deciding which applicable governing law for a contract between them.
If you have any questions on the above or other issues regarding doing business in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.