Rulings by Chinese courts more and more common in cross-border disputes
As the People’s Republic of China becomes an increasingly stronger player on the international scene, it is no surprise that rulings by Chinese courts are being issued more frequently in disputes arising out commercial cooperation with Chinese counterparties. This phenomenon will only grow in importance for European lawyers.
One country, two legal systems
The legal system of the People’s Republic of China (PRC) combines Chinese legal traditions, socialist law and elements of Continental European civil law (mainly German). It is a system of positive law, where the judiciary is subordinated to political authorities.
In line with the slogan of “one country, two systems” (i.e. communist and capitalist), announced by Deng Xiaoping in the 1980s, separate legal systems operate in the special administrative regions of Hong Kong (deriving from the English common-law system) and Macau (based on the Portuguese civil-law system). Under this doctrine, Hong Kong will ultimately be merged with continental China in 2047 and Macau in 2049. Until then, these two regions will maintain their separate legal status patterned on capitalist systems, and European-style jurisdictions separate from the jurisdiction of China.
It should be pointed out that Taiwan (the Republic of China—RoC) and Tibet (the Tibet Autonomous Region) are not regarded by the PRC as separate regions under Deng Xiaoping’s doctrine, which means that the PRC applies its law in matters connected with those regions. (The RoC is not recognised by most of the international community, as under the “one China” policy maintaining diplomatic relations with one of the Chinese states is tantamount to failure to recognise the other. As of 2016, diplomatic relations with Taiwan were maintained by the Vatican and 20 UN member states, mainly from Central America, the Caribbean, Oceania and Africa. Tibet enjoyed de facto independence from China in 1912–1950, but its independence has not been recognised internationally.)
Thus when a Polish company enters into a commercial agreement with a Chinese counterparty, it should check where the counterparty has its registered office, and, absent a choice of law by the parties, whether the law of Poland, the People’s Republic of China, Hong Kong or perhaps Macau will apply.
Choice of law and jurisdiction of Chinese courts
Suppose a European company and a Chinese company include a clause in their commercial contract providing for exclusive jurisdiction of the courts of the place where the European party has its registered office and a choice of the substantive law of the European party’s country. Under PRC law, will such a clause be deemed valid if the Chinese party submits a dispute to a Chinese court?
Chinese law is not indifferent to or tolerant of such clauses if the transaction includes a Chinese element.
Art. 34 of the PRC Civil Procedure Code provides that the parties may select the jurisdiction of the PRC courts in the form of a written clause if China is the location of:
- The residence or registered office of the defendant
- The place of conclusion or performance of the contract
- The residence or registered office of the plaintiff, or
- The subject of the dispute.
However, such provision for the jurisdiction of the Chinese court must not violate Chinese regulations on instances of jurisdiction or exclusive jurisdiction.
If any of the places listed in the foregoing points is located outside the PRC, the parties can choose the jurisdiction of foreign courts. If that location is in Hong Kong or Macau, the parties may choose the jurisdiction of the courts of that Chinese region.
However, there are certain exceptions to this rule. It is mandatory for disputes to be adjudicated by the PRC courts when they arise out of Sino-foreign joint-venture contracts, contracts for a Sino-foreign cooperative enterprise, or contracts for Sino-foreign cooperative exploration and development of natural resources.
If a party to one of these types of contracts files suit in the competent court in the PRC, that court will be proper to resolve the dispute because under Chinese law such contracts are governed by the substantive law of the PRC and the PRC courts have jurisdiction to decide disputes arising out of such contracts even if the contracts themselves include a choice of another law or jurisdiction.
For these reasons, it cannot be ruled out that even if a sale contract between a Polish seller and a Chinese buyer provides for the jurisdiction of the Polish court for the place of the seller’s residence, the Chinese court will be able to adjudicate the case if the buyer files suit against the seller at the buyer’s place of residence in China. From the perspective of the Chinese court, such a dispute will have a “true link” (shiji lianxi) with China.
Such a judgment by a Chinese court can be enforced in Poland after obtaining a finding of enforceability pursuant to the bilateral agreement between the PRC and Poland on legal assistance in civil and criminal matters, signed in Warsaw on 5 June 1987, if the Polish party does not allege violation of the choice of law and court by the Chinese court, and thus violation of the public policy of the Republic of Poland.
Can the Chinese court be found not to have jurisdiction?
Can a Chinese court be persuaded not to take up a case, and leave it to be decided by the foreign court chosen by the parties?
The case law from the PRC courts reveals a trend among the Chinese courts to hear all cases with a “true link” to China. Only if the enforceability in Chinese territory of a ruling by a foreign court has been upheld by a PRC court will a Chinese court be required to reject another claim in the same matter and refuse to issue its own ruling.
In Chinachem Financial Services Ltd v Century Acquisition Corp. (Minsi zongzi 2014 no. 29), the Supreme People’s Court of the PRC held that the fact that a court in Hong Kong had accepted a case for consideration and issued a ruling in the case had no influence on the PRC court in its decision to accept the claim submitted to it and to issue its own judgment, based on its own determination of whether the problem of forum non conveniens (bu fangbian guanxia) arose in the case.
It should be pointed out here that the PRC courts and foreign courts apply different rules for addressing the issue of forum non conveniens, not necessarily leading to the same conclusions. That happened in the Chinachem case, where the Supreme People’s Court found that a PRC court (the Beijing High People’s Court) was more proper to resolve the case than the Hong Kong court. In turn, the Hong Kong court refused to accept this ruling and refused to stay the proceeding there under the forum non conveniens doctrine (ruling of 8 January 2015 by the High Court of the Hong Kong Special Administrative Region, Court of First Instance, High Court Action no 410 of 2013).
Against a Chinese contractor in a Chinese court
If there is a “true link” (shiji lianxi) with China, the Chinese courts will generally not refuse to consider the case, even if in the contract the parties agreed in writing on a non-Chinese court.
The PRC courts display a willingness to accept disputes submitted to them by either of the parties and to issue a ruling in the case if the case presents a Chinese element. This should be borne in mind when entering into any of the indicated types of contracts with a commercial partner from the People’s Republic of China.
Harald Marschner, Dispute Resolution & Arbitration practice, Wardyński & Partners
