Legal issues of general application

Government permission

What government approvals are required for typical project finance transactions? What fees and other charges apply?

All fixed-asset investment projects must obtain project approval by the NDRC or its local branch. A number of permits and licences will be required for a construction project, including approval of an environmental impact assessment report, planning approval, a land certificate and a construction permit. Foreign investors need to incorporate a project company in China to hold the assets and licences. The incorporation of a project company usually does not require approval other than corporate registration, unless it is in an area under the negative list for foreign investment and a special approval is required. Domestic lending does not require government approval, while under cross-border lending to a project company in China, a foreign debt quota needs to be obtained based on the project company’s net asset value. The permits and licences for operating a project depend on the nature of the project; for public utility and infrastructure projects, a concession agreement with the government is required. Remittance of a dividend and loan interest to foreign investors is permitted as long as the applicable withholding tax is paid.

Registration of financing

Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

Freedom of contract is recognised under Chinese law, so that the parties are free to write and negotiate civil and commercial contracts between them. There is no requirement for contracts to be written in Chinese, but Chinese translation should be provided if the contract is presented to a Chinese court for enforcement. Notarisation is not required when signing contracts; however, when incorporating a project company in China, or when pursuing legal actions in China, a foreign investor should have its incorporation documents and the relevant power of attorney notarised in its home country and legalised by the Chinese embassy or consulate in that country.

Cross-border loan documents and guarantee documents are required to be registered with SAFE, which monitors China’s foreign debt exposure, and the registration is necessary to ensure that proceeds in renminbi can be converted into foreign currency and remitted to foreign investors, which is subject to the supervision of SAFE.

Arbitration awards

How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?

China is a member of the New York Convention and the ICSID Convention. China made the following reservation in its accession to the New York Convention:

  • China only applies the New York Convention on the recognition and enforcement of arbitral awards made within the territory of another contracting state to this convention on a reciprocity basis; and
  • China only applies the New York Convention on the disputes arising from contractual and non-contractual commercial legal relationship identified by the law of China.

Pursuant to the PRC Arbitration Law, the following disputes are not arbitrable:

  • disputes concerning marriage, adoption, guardianship, alimony and inheritance; and
  • administrative disputes that shall, in accordance with the law, be dealt with by administrative bodies.

Foreign arbitration is permitted only in contracts or commercial relationship with a foreign element. The following are considered foreign elements: one of the parties being a non-China citizen, resident or legal entity; the subject matter of the dispute being located outside of China; or the facts that causes the civil relationship to occur, change or extinguish occur outside of China (such as performance under a contract).

A foreign arbitration award against a Chinese party, while meeting the above requirements, can be brought to the local court of where the Chinese obligor is located for recognition and enforcement, in accordance with the New York Convention.

If the dispute is between a foreign investor against the Chinese government as the hosting country for the investment, it should be brought to ICSID in Washington, DC without using the dispute resolution clause agreed in the applicable contract.

Law governing agreements

Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?

The choice of foreign law as governing law to a contract also requires a foreign element (see question 22). As a result, if all parties to a project agreement or a financing agreement are registered within China and it does not involve performance outside of China (which would usually be the case for development of a project in China), it must be governed by Chinese law. For cross-border financing agreements, such as a cross-border loan provided by a foreign party to the project company in China, as well as a cross-border guarantee, the choice of foreign governing law is permitted, because of the existence of foreign element or elements.

Notwithstanding the above, contracts for Sino-foreign joint venture, and contracts for Sino-foreign joint exploration and extraction of natural resources must be governed by Chinese law. Contracts involving real property located in China, such as transfer of ownership and mortgage over real property, are also required to be governed by Chinese law.

The following matters are considered involving public interest, and, therefore, the applicable mandatory requirements under Chinese law must be applied and complied with, regardless of the choice of governing law under the contract:

  • labour protection;
  • food or public health safety;
  • environmental safety;
  • foreign exchange control and other financial security matters;
  • anti-monopoly or anti-dumping matters; or
  • other circumstances that should be determined as mandatory provisions under law.
Submission to foreign jurisdiction

Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

Submission to foreign court jurisdiction is not common in contracts of projects in China, because China’s recognition and enforcement of foreign court judgment is based on the principle of reciprocity, which has not been fully established by Chinese courts in respect of major western countries, except if there is a bilateral civil and commercial law judicial assistance treaty between China and that foreign country. China has signed such bilateral treaties with about 35 countries, including Italy, Spain, France, Singapore and South Korea, but not including the United States, the United Kingdom, Germany and Japan.

There have been reported cases in recent years that the courts in the US and China have both recognised and enforced judgments rendered by courts in the other country, which show that there is a tendency that reciprocity may now exist between the two countries, although it is not fully established.

China signed the Hague Convention on the Choice of Court Agreements on 12 September 2017, which is yet to be ratified by the PRC National People’s Congress in order for it to become effective and binding on China.

China adopts the doctrine of ‘absolute immunity’ and does not allow a waiver of immunity enjoyed by the state. There is no domestic law on sovereign immunity and its waiver. SOEs are typically considered as separate from the state, particularly when they are engaged in commercial activities. A waiver of immunity clause in a commercial contract with an SOE is usually effective, by providing express confirmation that the SOE is not acting in a sovereign capacity, and unequivocal waiver of immunity covering all of its assets.