NPC promulgates new law on the choice of law for foreign-related civil relationships
17 November 2010
The Law will formally enter into effect on 1 April 2011.
Recent years have witnessed a marked increase in the number of foreign-related civil and commercial cases tried by the PRC courts. According to a recent news report, the PRC courts tried approximately 11,000 foreign-related civil and commercial cases in 2009 alone. However, with rules on the choice of law in foreign-related cases scattered throughout different laws, regulations and judicial interpretations of the Supreme People's Court (SPC), it was not always easy to identify the choice of law principles applying to any given case at hand. The Law therefore represents an attempt to codify (and, where necessary, supplement) existing PRC choice of law principles in a single piece of legislation, drawing together specific rules in respect of property rights, creditors' rights, intellectual property rights, civil capacity, marriage and inheritance. The Law does not, however, replace the specific choice of law provisions contained in existing laws, which shall continue to prevail in the case of any conflict with the provisions of the Law. It is unclear, however, to what extent mandatory provisions on choice of law contained in regulations and judicial interpretations (which are considered of lesser authority than laws) will continue to be effective.
The Law establishes the general principle that the parties to a foreign-related civil relationship may expressly select the law to be applied to their legal relationship, except where otherwise required by mandatory provisions of PRC law (for example, Article 126 of the PRC Contract Law, which makes the application of PRC law mandatory for certain foreign-related contracts). The Law further holds that if each of the parties, the Law and other PRC laws are silent on the law applicable to a specific foreign-related civil relationship, the law having the closest connection to that civil relationship will be applied, provided that where it is deemed that the application of foreign law would harm the Chinese public interest, PRC law must be applied.
In general, these principles are consistent with prior PRC laws and regulations in this area, as well as previous judicial interpretations issued by the SPC. However, the Law fails to offer a clear definition of "mandatory provisions of PRC law". It is therefore unclear, for example, whether judicial interpretations issued by the SPC would constitute "mandatory provisions of PRC law" for this purpose. The Law also fails to clarify the circumstances in which the "public interest" exception can be invoked to override the selection of foreign law by the relevant parties, or to preclude the application of foreign law as the default option.
Specific Areas of Interest
In addition to establishing general principles, the Law also deals with various issues arising in the context of the following specific areas of the law, which are likely to be of particular interest to foreign-invested companies operating in the PRC:
Property Rights In the case of real property, the law of the place where the property is located shall apply. This is in line with international practice. In the case of personal property, the parties shall be entitled to select the applicable law, failing which the law of the place where the relevant facts underlying the legal relationship occur shall apply. The Law also contains special provisions in respect of securities and pledges. In respect of the former, the law of the place where the rights attaching to the security are realised shall be applied, whereas in respect of pledges, the place where the pledge is established shall be applied.
Contracts The Law adopts the standard international approach to the choice of law for foreign-related civil contracts, stating that the parties shall be entitled to select the applicable law, in the absence of which the closest connection principle shall apply. The Law does not provide an exhaustive list of factors to be considered in applying the closest connection principle. In this context, it is worth noting an earlier judicial interpretation promulgated by the SPC in June 2007 (SPC Interpretation  No.14), which provided more specific guidelines in determining the law applicable to foreign-related contracts, including a list of the types of contracts subject to the mandatory application of PRC law. However, it is unclear whether this SPC Interpretation will continue to be effective following the entry into force of the Law.
Protection of Consumers The Law provides that the individual consumer under a consumer contract is entitled to choose between the law of the consumer's regular place of residence and the law of the place where the goods/services are provided. There is a further provision specifically dedicated to cases of product liability, which states that the party whose rights have been infringed is entitled to choose between the law of the party's regular place of residence, the law of the place of the infringing party's principal place of business and the law of the place where the damage occurred. These provisions provide consumers with the opportunity to choose the law most favourable to their interests in any given circumstances.
Intellectual Property Rights Prior to the promulgation of the Law, there were no guidelines under PRC law as to choice of law in cases involving intellectual property rights (IP Rights). Under the Law, the ownership and content of IP rights will be determined in accordance with the law of the place where protection is requested (被请求保护地). Where IP Rights are licensed or transferred, the parties are free to select the applicable law, failing which the rules prescribed in relation to contracts shall apply. In cases involving the infringement of IP Rights, the law of the place where the protection is requested shall apply. Further, the parties may agree between themselves, after the occurrence of the infringement, to apply the law of the place where the court hearing the case is located.
The Law pulls together a collection of legal principles previously scattered throughout various laws, regulations and judicial opinions, thus providing more clarity and shape to an important area of the law. Nevertheless, given the highly general nature of many of the provisions contained in the Law and, more importantly, the fact that the operation of the Law will still be displaced by any contrary provisions of existing laws, the Law will need to be read alongside existing laws, and is likely to be subject to more detailed judicial interpretation in the future.