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China: New Rules for Foreign-related Litigation

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On 1 September 2023, the Standing Committee of China’s National People’s Congress released the amendments to the PRC Civil Procedure Law (“2021 CPL“) which will take effect from 1 January 2024 (“2024 CPL“). Among these amendments, there are considerable changes in respect of foreign-related litigation, including the PRC courts’ jurisdiction over foreign-related disputes, parallel proceedings, service of process, nationality of arbitral awards and recognition and enforcement of foreign judgments.

Wider scope of PRC courts’ jurisdiction

The 2024 CPL extended the jurisdiction of the PRC courts over foreign related civil disputes in the following aspects:  

Expanded scope of disputes. Under the 2021 CPL, when the defendant does not have a domicile in China, the PRC court can only exercise jurisdiction over a foreign-related dispute if it is of a contractual nature or relates to property rights and interest. The 2024 CPL, however, allows PRC courts to hear all foreign related disputes with the only exception being identity relationship disputes.

Relaxed requirement for jurisdiction nexus. Under the 2021 CPL, a PRC court has jurisdiction only if the defendant is domiciled in China, or the contract was signed or performed within China, or the subject matter of the lawsuit is within China, or the defendant has property that can be seized in China, or the tort was committed in China, or the defendant has a representative office in China. The 2024 CPL has added a “catch-all” clause to cover other scenarios where the abovementioned connections cannot be established. Specifically, if a foreign-related civil dispute has other proper connections with the PRC, a PRC court may have jurisdiction over such dispute.

Free choice of PRC court in contract. Under the 2021 CPL, the parties can choose a PRC court as the dispute resolution forum only when China has an actual connection with the dispute. For example, the parties can choose a PRC court at the place where the plaintiff or defendant is domiciled, or where the contract is signed or performed, or where the subject matter is located. Otherwise, the parties’ choice of a PRC court will be deemed invalid. The 2024 CPL no longer has such a requirement, and the parties are free to choose a PRC court as the dispute resolution forum in their agreement even when the dispute has no connection with China. 

Extended exclusive jurisdiction of PRC court. According to the 2021 CPL, the exclusive jurisdiction of the PRC courts in foreign-related disputes is limited to disputes arising from Sino-foreign equity joint venture contracts, Sino-foreign cooperative joint venture contracts and Sino-foreign cooperative contracts for the exploration and exploitation of natural resources in China. The 2024 CPL has expanded the exclusive jurisdiction to two other types of disputes, namely (i) the formation, dissolution, liquidation or validity of a resolution of a legal entity or any other organization in China, and (ii) the validity of IP rights granted in China.

Clearer guidance on parallel proceedings

The 2024 CPL continue the previous legislative and judicial practice of allowing parallel litigation in China, i.e., PRC courts has jurisdiction over disputes which are pending before foreign courts.

In addition, the 2023 Amendments provide further guidance and rules on how the parallel litigation should be dealt with, including:

  • Refusal to exercise juristdiction. PRC court will refuse to exercise jurisdiction if the litigation is against a judgment or ruling recognized by a PRC court.
  • Suspension of parallel proceedings in China. A party can request a PRC court to suspend the other party’s parallel litigation in China if (i) the foreign court has accepted jurisdiction over the dispute before the application to the PRC court, or (ii) a party has already applied to a PRC court for the recognition and enforcement of the foreign judgment in the same dispute.
  • Resumption of the suspended proceedings. If litigation in China is suspended due to a foreign court’s earlier acceptance of the same, a party can request a PRC court to resume parallel litigation through written application if (i) the foreign court fails to take the necessary measures, or (ii) the foreign court fails to conclude the case within a reasonable time period. If the litigation is suspended due to an application for the recognition and enforcement of a foreign judgment in China, a party can apply to resume the proceedings if the application has been rejected by the PRC court.

Nationality of arbitral awards

The dilemma under the 2021 CPL. It has long been a focus of dispute as to whether foreign arbitration institutions can administer arbitration in China. The controversy has led to uncertainty regarding the enforceability of such awards. The uncertainty is caused by the different criteria provided in the PRC domestic laws and New York Convention to determine the nationality of an arbitral award.  Specifically,

  • Under the 2021 CPL, a foreign award is referred to as an award issued by a foreign arbitration institution.  This means that the nationality of the award is decided by the location of the arbitration institution.  As such, presumably an award issued by a foreign arbitration institution should be considered a foreign award even when the seat of the arbitration is China.
  • Under the New York Convention, a foreign award is an award made in the territory of a state other than the state where the recognition and enforcement of such award are sought.  This means that the nationality of the award is determined by the place of the arbitration.

With respect to an arbitral award made by a foreign institution in China, if such award is considered a foreign award as provided under the 2021 CPL, then there will be a question as to whether it can be enforced pursuant to the New York Convention which applies only to an award made in a foreign state. 

Clarity under the 2024 CPL. The 2024 CPL revises the previous position and makes it clear that the nationality of the arbitral award shall be determined by reference to the seat of the arbitration. This means that an arbitral award rendered by a foreign arbitration institution with the place of arbitration being in China will be considered a Chinese award and hence should be enforced pursuant to PRC law rather than New York Convention.

Recognition and enforcement of foreign judgments and rulings

According to the 2021 CPL, the PRC court will refuse to recognize and enforce a foreign judgment if the judgment or ruling (i) violates the basic principles of PRC law, or (ii) is against PRC’s sovereignty, security or public interests.

However, the 2024 CPL have expanded the grounds for non-recognition and non-enforcement to include the following circumstances:

  • The respondent was not properly summoned or was properly summoned but was not given a reasonable opportunity to present or argue their case, or a party without the capacity to conduct litigation in their own name was not properly represented;
  • the judgment or ruling was obtained by fraud;
  • a judgment or ruling made or recognized by a Chinese court relating to the same dispute exists;
  • the foreign court has no jurisdiction under its laws or has no proper connection with the dispute,
  • the judgment or ruling violates the exclusive jurisdiction rules of PRC Law;
  • the judgment or ruling violates the parties’ exclusive jurisdiction agreement.

Notwithstanding the above, it is worth noting that the grounds enumerated above for refusing to recognize and enforce foreign judgments are not entirely consistent with the bilateral treaties concluded by China with various countries. For example, the bilateral treaty between China and Italy does not provide for fraud as a ground to refuse the recognition and enforcement of a foreign judgment. Therefore, it remains to be seen how the PRC court will reconcile the relationship between the 2024 CPL and the bilateral treaties.

Immunity of foreign states

The 2024 CPL provides that the PRC laws in relation to the immunity of foreign states apply to litigation involving a foreign state. On 1 September 2023, the Standing Committee of the National People’s Congress promulgated the PRC Law on the Immunity of Foreign States which will take effect on 1 January 2024 (“Immunity Law“).

The Immunity Law deviates from the previous “absolute” doctrine of immunity adopted by China and now applies the “restrictive” approach to foreign state immunity. This means that under certain circumstances, foreign states will not enjoy immunity from suit or mandatory measures (e.g., enforcement) in China.

Immunity from suit. A foreign state will not enjoy immunity from the jurisdiction of the PRC courts in the following circumstances.

  • Express waiver: a foreign state will not be immune from suit if it expressly waives its immunity in writing pursuant to an international treaty, a written agreement, or written documents either submitted to a PRC court or submitted to China through diplomatic channels, or otherwise expressly accepting the jurisdiction of the court.
  • Implied waiver: a foreign state will be deemed to have implicitly accepted the jurisdiction of a PRC court if it commences a lawsuit or participates in a lawsuit as a defendant and raises a substantive defence or counterclaim before a PRC court.
  • Commercial activity exception: a foreign state is not immune from the jurisdiction of the PRC courts for disputes relating to commercial activities between the foreign state, one of its organizations or an individual of the foreign state that take place in China or produces “direct influence” in China even if the activities do not take place in China.
  • Exception of immunity in certain types of dispute: a foreign state will not enjoy immunity from suit if the claim arises from any of the following: certain types of labour or service contracts that are wholly or partially performed in China; personal injury and property damage caused by acts that have taken place in China; damage to moveable or immoveable property located China; the donation, bequest or inheritance of movable or immoveable property by the foreign state, the management of trust property or bankruptcy property; and certain types of intellectual property cases.

Immunity from mandatory measures. A foreign state’s acceptance of the jurisdiction of the PRC courts does not necessarily mean that it has waived immunity from mandatory measures. In other words, the circumstances where a foreign state is not immune from mandatory measures are narrower than exceptions to immunity from suit, which include:

  • the foreign state expressly waives immunity from judicial mandatory measures through international treaties, written agreements, or the submission of written documents to the PRC courts;
  • the foreign state has already allocated or specially designated assets for the enforcement of judicial compulsory measures;
  • the mandatory measures are taken for the purpose of enforcing PRC court judgments or rulings against foreign state property which is located within China, used for commercial activities, and connected with the litigation.

Conclusion

It is evident from the recent amendments to the Civil Procedure Law that China on the one hand endeavors to align with best international practice while on the other hand aiming to afford the PRC courts with as many powers and discretion as possible. For example, it will be subject to the PRC courts’ discretion to determine whether there is a “proper connection” so as to exercise jurisdiction over foreign-related disputes. Parties who wish to litigate a dispute outside China may consider to choose arbitration or the exclusive jurisdiction of a foreign court.

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Simon Hui leads the Firm's Investigations, Compliance & Ethics and Dispute Resolution team in Shanghai. With more than 25 years of practice experience, he has in-depth experience in handling dispute resolution as well as compliance/regulatory matters including anti-bribery/anti-corruption, unfair competition and supply chain management related risks and issues. Simon is a skilled investigator and has conducted complex internal investigations for a large number of multinational companies across a range of industries. He also has experience in dealing with PRC judiciary bodies and regulators such as SPC, SAIC and SAFE. He assists various multinational companies with conducting due diligence, risk assessment and compliance system structuring, and provides training to their management and business teams on anti-corruption, anti-bribery and cybersecurity related issues. From 2016 to 2023, Simon was recognized as the "Tier 1 Leading Individual" in the field of Regulatory & Compliance and Dispute Resolution in China by Legal 500 for eight consecutive years. In 2022 and 2023, Simon earned the recognition of the "Leading Individual" in Corporation Investigations/Anti-Corruption by Chambers Greater China. In 2022, He was awarded "Regulatory & Compliance Lawyer of the Year" by China Law & Practice (CLP) and "A-List: China's Elite Lawyers" by China Business Law Journal (CBLJ). Simon is also an arbitrator of the Shanghai Arbitration Commission and an arbitrator of the Shenzhen Court of International Arbitration (formerly known as the "South China International Economic and Trade Arbitration Commission" the "Guangdong-Hong Kong-Macau Greater Bay Area International Arbitration Center" and the "Shenzhen Arbitration Commission"). Simon's practice focuses on commercial and insurance litigation, international arbitration, and regulatory and compliance.

Author

Hailin Cui is a counsel of Baker McKenzie FenXun's Investigations, Compliance & Ethics and Dispute Resolution Practice Group. She has over nine years of professional experience in international arbitration. Her practice focuses on China-related arbitration including both international and domestic commercial arbitration. She has extensive experiences representing clients in various forums including HKIAC, ICC, CIETAC, SHIAC, and SCIA. She is a regular contributor to Baker McKenzie FenXun’s International Arbitration Year Book (China Chapter). Hailin is very familiar with Chinese arbitration laws and has been speaking at various seminars and workshops regarding arbitration related legislative and judicial developments in China.

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