As China implements its new “One Belt, One Road” strategy, Chinese enterprises will continue to go outbound, participating in international commerce and trading with foreign parties. Similarly, despite claims of an economic slowdown, foreign enterprises continue invest inbound to China. In both instances, Chinese and foreign parties may be faced with selecting a forum to resolve their disputes and a law to govern their contracts. Understanding the impact of PRC law on these choices is important to avoid the uncertainty that can result when parties have selected a forum or governing law not permitted by PRC law, or when they have failed to agree on a dispute resolution forum or governing law altogether.

Dispute resolution and governing law clauses in foreign-related contracts

1. Appropriate forum and applicable law in foreign-related transactions where an agreement has been reached

Under PRC law, parties to foreign-related transactions are generally free to select a preferred dispute resolution forum and law to govern their contracts, provided their choice is consistent with PRC law.

A transaction is foreign-related if any one or more of the following elements is present: 

  • at least one of the parties is foreign;
  • at least one of the parties habitually resides outside of China;
  • the subject matter of the transaction is located outside of China;
  • the legal fact that leads to the establishment, change, or termination of the transaction occurs outside of China (e.g. delivery of goods outside of China in satisfaction of a sales agreement); or
  • other circumstances under which the transaction may be deemed foreign-related. [1]

Note that an entity incorporated in China solely or partially by a foreign shareholder, including a wholly foreign owned enterprise (WFOE), Sino-foreign joint venture, or Sino-foreign cooperative enterprise, is considered a domestic entity under PRC law. Accordingly, such an entity will not been deemed as a foreign party and will not be sufficient to render the transaction foreign-related.

A. Choice of court

With respect to choice of court agreements, parties to a foreign-related transaction are generally free to agree to submit their disputes to a Chinese or foreign court, subject to a few exceptions. According to Article 34 of the Civil Procedure Law, the parties may choose a court any of the following locations: 

  • the place where the defendant is domiciled;
  • the place where the contract was signed or performed;
  • the place where the plaintiff is domiciled;
  • the place where the subject matter of the transaction is located; or
  • any other place actually connected to the dispute. [2]

If one of the above places is located outside China, the parties may select a foreign court to resolve their disputes. If they agree that the foreign court has exclusive jurisdiction, a PRC court will not have jurisdiction over their disputes. In the absence of such an agreement, it may be that both the Chinese and foreign court have jurisdiction. 

One key exception, however, concerns disputes arising from the performance Sino-foreign joint venture, Sino-foreign cooperative enterprise, and Sino-foreign cooperative exploration or development of natural resources contracts in China. These types of contracts are subject to the exclusive jurisdiction of PRC courts, should they wish to resolve their disputes in court. [3]

In cases where the parties have agreed to submit their disputes to a Chinese court, their choice must still be consistent with PRC law on jurisdiction. For example, parties may not agree to submit their disputes to an intermediate court that due to the amount in dispute would not otherwise have jurisdiction. Likewise, parties may not avoid or invoke the jurisdiction of special courts established to resolve certain types of disputes, for example courts established to resolve maritime and railway disputes.

B. Choice of arbitration

Parties to foreign-related transactions are also free to submit their disputes for arbitration to be conducted in China or offshore[4]. This is evidenced in Article 128 of Contract Law, which allows "parties to a foreign-related contract to apply to a PRC arbitration institution or another arbitration institution for arbitration", provided they have a valid arbitration agreement. 

Similarly, Article 271 of the Civil Procedure Law provides that parties to a dispute “arising from foreign economic trade, transportation or maritime activities, shall not bring an action in the people’s court if they have agreed in writing to submit the dispute for arbitration to an arbitral institution in the PRC handling cases involving foreign elements, or to any other arbitral institution.” “Other arbitral institution” has been interpreted to include foreign arbitration institutions and offshore ad hoc arbitration tribunals. 

Thus, in cases where the parties have agreed to resolve their disputes by Chinese or foreign arbitration, a PRC court will not have jurisdiction.

C. Choice of law

Consistent with the procedural flexibility afforded when selecting a dispute resolution forum, parties to a foreign-related transaction also have flexibility when it comes to choice of law. Under PRC law, parties to a foreign-related contract are free to choose PRC law or any other law to govern their contract[5], regardless of whether the chosen law has a connection to their transaction. [6]

The same exception concerning a contract for the performance of a Sino-foreign joint venture, Sino-foreign cooperative enterprise, or Sino-foreign cooperative exploration and development of natural resources in China applies to choice of law. These contracts must be governed by PRC law. [7]

Note that the above flexibility concerns choice of law provisions in foreign-related contracts. Parties may not avoid mandatory choice of law rules that apply to determine the law applicable to certain non-contractual matters such as product liability and real estate property right disputes.

2. Appropriate forum and applicable law in foreign-related transactions where no agreement has been reached

In the absence of an agreement on a forum for dispute resolution and applicable law, a Chinese court will look to PRC law to determine the appropriate court and law applicable to a foreign-related dispute.

A. Chinese court jurisdiction

According to Article 23 of the Civil Procedure law, if the defendant is domiciled in China, a Chinese court where the defendant is domiciled or the contract was performed may accept jurisdiction over the dispute[8]

Article 265 of the Civil Procedure Law addresses Chinese court jurisdiction when foreign defendants are involved. Where the defendant is not domiciled in China but the contract was executed or performed in China, the subject of the contract is located in China, the defendant has attachable assets or an agent in China, or a tort has occurred in China, then a court in the place where the contract was executed or performed, where the subject of the contract or the defendant’s attachable assets or agent is located, or where the alleged tort occurred will have jurisdiction over the dispute[9].

B. Applicable law

Where parties to a foreign-related transaction have failed to agree on applicable law, the law governing their disputes will be law of the party whose contractual obligations predominantly reflect the nature of the contract or the law of the place with the most significant connection to the contract at issue[10].

Dispute resolution and applicable law in domestic contracts

While parties to domestic transactions have flexibility to choose between court or arbitration, unlike parties to foreign-related transactions, PRC law requires them to resolve their disputes in China in accordance with PRC law.

1. Choice of court

Like a foreign-related transaction, Article 34 of the Civil Procedure Law allows parties to a domestic transaction to agree to submit their disputes to a court having an actual connection to the transaction. This includes a court in the place where the defendant is domiciled, where the contract was signed or performed, where the plaintiff is domiciled, where the subject matter of the transaction is located, or any other place actually connected to the dispute. Rules governing their choice of court agreements are consistent with those applicable to foreign-related choice of court agreements discussed in Section I above.

2. Choice of arbitration

Parties to a domestic transaction are also free to agree to submit their disputes to arbitration. Article 128 of the Contract Law, which provides the legal basis to submit disputes to foreign arbitration, only concerns foreign-related transactions, potentially leaving open the question of whether parties to a domestic transaction can agree to offshore arbitration. In August 2012, however, the PRC Supreme Court confirmed that there is no legal basis under PRC law for parties to a domestic transaction to submit their disputes to offshore arbitration[11]

Accordingly, enforcement of an offshore arbitration award involving a domestic transaction would likely be difficult to enforce in China. A Chinese court may view the parties’ participation in offshore arbitration as their intent to avoid the application of PRC law and be reluctant to recognize and enforce the award, whether under the New York Convention, bilateral treaty, or arrangement for the enforcement of awards rendered outside of Mainland China. Enforcement of such an award, however, may be possible in other jurisdictions. 

Where parties to a domestic transaction have failed to include a choice of court or arbitration agreement in their contract, Chinese law on choice of forum will apply. This means a Chinese court where the defendant is domiciled or where the contract was performed may accept jurisdiction over the dispute[12].

3. Choice of law

Finally, in contrast to foreign-related transactions, domestic transactions will be governed by PRC law[13]. As noted in Section I above, a contract between a purely Chinese entity and a foreign-invested Chinese entity (eg a WFOE) is considered a domestic transaction for the purpose of choice of law and dispute resolution agreements.

Concluding remarks

With limited exception, parties to foreign-related transactions have broad discretion in choosing a dispute resolution forum and law applicable to their transaction. Parties to transactions with no foreign element, however, should be mindful that their transaction will be considered a domestic transaction under PRC law and must be resolved by a Chinese court or arbitration institution in accordance with PRC law. The consequence of failing to appreciate these distinctions can be significant and can result in parallel litigation, litigation in an unintended forum, and wasted time and expense litigating a dispute that results in a judgment or award that may ultimately be unenforceable.

Chart I: Dispute Resolution of Contracts

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Click here to view the table.