For commercial litigation in a Chinese Court involving a foreign party, a threshold issue is what law the court should apply when delivering its decision. This question involves several different considerations, which include, inter alia: (1) whether the Chinese court could apply foreign law; (2) the factors considered in the determination of governing law; and (3) which law will govern if there is a conflict between the Chinese and foreign law.

 

Under the principle of judicial sovereignty, a court may only apply the law of the forum. However, the emergence and development of conflict of law principles (commonly called “private international law” in China) has provided situations where foreign law could be applied in a domestic court. Debates on the rational grounds for the application of foreign law aside, such application has become a common practice in almost every country in the world. China is no exception.

 

Nevertheless, there is no unified conflict of law legislation in China. The choice-of-law rules are scattered in many laws and regulations. The most important choice-of-law rules are the General Principles of the Civil Law of 1986 and Contract Law of 1999.  The two laws are the major pieces of legislation regulating civil and commercial matters in China and contain special provisions dealing with choice-of-laws in commercial cases with foreign elements. The choice-of-law rules provided in these two laws are the combination of the rules previously used in judicial practice and theories advocated by legal scholars.

 

The Supreme Court’s “Opinions on Several Questions Concerning Implementation of the General Principles of CommercialLaw (Provisional)” in 1988 was another major resource of the choice-of-law rules applied by the courts.  In China, both Principles of the Civil Law  and the Supreme Court’s “Opinions” are regarded as landmarks in the development of Chinese choice-of-law rules. These sources not only offer legitimate grounds for the courts to apply foreign law in a commercial action involving foreign elements, but also provide the mechanisms for determining the applicable law.

 

A number of choice-of-law rules adopted in China are featured with western-styled content as well as internationally accepted principles such as the principle of “Party Autonomy.” Some other rules clearly have their genesis in American conflict of law. The most notable example is the approach of the “closest relationship.” This choice-of-law approach is actually a copy of the doctrine of the “most significant relationship” that is the main theme of the Restatement (Second) of Conflict of Laws.

 

The Chinese Courts have sought to solve the choice-of-law issue in accordance with commonly practiced standards. In Walt Disney Co. v. Beijing Press and Xinghua Bookstores, the defendants published nine fairy tale books that contained the cartoon figure Mickey Mouse between 1991 and 1993. On January 31, 1994, plaintiff filed a lawsuit in Beijing No.1 Intermediate Court for copyright infringement. Defendants asked the court to dismiss the case and argued that plaintiff’s did not have a valid copyright on Mickey Mouse in China under the Copyright Law of China 1990. The court rejected defendants’ argument and held that, although Mickey Mouse was not published in China, it should be protected under the 1992 China-U.S.  Memorandum of Understanding on Protection of Intellectual Property Rights (1992 MOU). According to the Copyright Law of China, any work of a foreigner first published outside the territory shall be protected if the work is eligible for copyright protection under an agreement between China and the foreign country, or under an international treaty to which both countries are party. On that basis, the court applied the 1992 MOU. But in entering its judgment for plaintiff, the court further held that since the 1992 MOU was signed on March 13, 1992, it may only apply to the infringements that occurred after that date, and therefore plaintiff should not be entitled to copyright protection against defendants’ 1991 publication.  

Choice-of-law rules in China emphasize an actual connection or relationship between the applicable law and the nature of the case involved  A closer look at the choice-of-law provisions in the Principles of the Civil Law Supreme Court “Opinions” clearly reveal that the “closest relationship” is the most determinative factor in the choice of law.  This factor applies not only to restrict the parties’ freedom of choice of applicable law, but also to solve the choice of law puzzle posed by the factual complexity of certain cases.  Moreover, the closest relationship test is also the identifier of applicable law when a foreign country, whose law should be applied, has plural legal systems.

 

The choice-of-law rules in both General Principles of the Civil Law and the 1988 Supreme Court “Opinions” are criticized for being incomplete.  Unsatisfied with the scattered choice-of-law legislation, many call for a comprehensive conflict of law code.  In 2000, the China Society of Private International Law published the “Model Law,”  a remarkable attempt to codify the choice-of-law rules. Of the total 166 articles in the Model Law, ninety-four articles directly deal  with the application of law.  There is a wide-range of coverage of choice-of-law matters, including nationality and domicile, capacity, formality of conducts and agency, statute of limitations, personal rights, property rights, intellectual property rights, contract, torts, unjust enrichment and negotiorum gestio (abstract action), domestic relations, inheritance, bankruptcy, and arbitration.

 

Of course, it is necessary to emphasize that China is a country with a typical continental law tradition. In this sense, the courts may only apply the “black letter” rules. Therefore, the Model Law, however significant, may not become applicable unless and until it is adopted by the Chinese legislature. To be clear, the basic choice-of-law rules that the courts currently apply can be summarized from the following perspectives.

 

A.  Lex Personalis-Law Determining Civil Capacity

Lex Personalis, or the law of person, is a recognized choice-of-law principle governing the issues of civil capacity. It refers to both the law of domicile and the law of own country. In general, civil capacity is regarded as a prerequisite for taking commercialactions because it is the matter directly affecting the establishment of the commercialrelations that are involved.

In China, the most notable provision under which the courts determine the law applicable to civil capacity is Article 143 of Principles of the Civil Law . Article 143 provides that if a citizen of China resides in a foreign country, the law of that country may apply to determine his capacity for civil conduct. This provision, however, has been criticized by many private international law scholars because of its inadequacy in handling civil capacity issues. On the one hand, Article 143 only deals with Chinese citizens and does not contain rules that could be generally applied to non-Chinese. Also, there is lacking a provision concerning the determination of civil capacity of a legal persons. Moreover, it is unclear whether the residing country actually means the country of domicile.

 

In 1988, the Supreme Court attempted to overcome the shortcomings of Article 143 by offering more specific guidance in the determination of the law governing civil capacity and status. Indeed, the court afforded several rules that became heavily influential in the practice of the courts. These rules are:

1.The capacity for civil conduct of a Chinese citizen residing in a foreign country shall be determined by Chinese law if such conduct occurs in China. The law of a foreign country in which the Chinese citizen resides may apply if the conduct occurs in such foreign country.

2.If a foreigner who conducts civil activities in China is deemed to have no capacity for civil conduct under the law of his own country but has such capacity under Chinese law, he shall be regarded as having capacity for civil conduct.

3.The capacity for civil conduct of a stateless person shall, in general, be governed by the law of the country where he resides, or the law of the country of his domicile if he does not reside in that country.

4.A legal person’s capacity for civil conduct shall be determined by the law of its own country, which is the country where the legal person is registered.

Another provision concerning civil capacity is Article 97 of the Law of Negotiable Instruments of China 1995. It provides that the obligor’s capacity for civil conduct shall be determined by the law of his own country. If the obligor is regarded to have no capacity or have limited capacity under the law of his own country but has full capacity under the law of place of conduct, the law of place of conduct shall apply.

 

B.  Party Autonomy-Choice of Law in Contract

Similar to most other countries, China adopts the “Party Autonomy” doctrine that allows parties to choose the governing law for their contract.  Both Principles of the Civil Law and Contract Law  stipulate that the parties to a foreign contract may choose the law applicable to settlement of disputes arising from the contract, except as otherwise stipulated by law. In the absence of such a choice, the law of the country to which the contract is most closely related shall apply.

The contractual parties’ freedom on choice of law is limited. First, the foreign law chosen by the parties shall be excluded if its application would harm the social and public interests of China. Second, the choice of law must be expressly made by the parties with mutual consent and may not be implied. Third, the choice shall not be made in violation of the rules mandating application of Chinese law.  The mandatory application mainly deals with the contracts of foreign investment enterprises, such as Chinese-foreign joint ventures and contracts for Chinese-foreign cooperative exploration and development of natural resources. These contracts may only be governed by Chinese law. Also, under the Detailed Rules (as amended 2001) for Implementation of the Law of China on Wholly Foreign-Owned Enterprises (WFOE), a contract between a WFOE and another company, enterprise, other economic organization, or individual shall be exclusively governed by the Contract Law of China.

With respect to the time for the parties to make a choice of applicable law, the Supreme Court took a flexible approach. According to the Supreme Court, the parties may choose the governing law through a choice-of-law clause in their contract or by agreement reached after the contract is made.  The contract disputes for which the parties may choose the governing law include those concerning conclusion of contract, time for the conclusion, interpretation of contract terms, performance of contract, modification, suspension, assignment, dissolution, and termination of contract.

If there is no expressed choice-of-law, the courts will use the “closest relationship” standard to determine which law is to be applied.  This standard focuses on the nature of contract and type of transaction. Though the term closest relationship is neither defined in Principles of the Civil Law  nor Contract Law , in practice, the courts normally follow the guidance set forth by the Supreme Court in 1987.  This guidance provides a list of laws applicable to the different contracts pursuant to the closest relationship test.  For example, under its guidance, absent parties’ choice of applicable law, a contract for the international sale of goods shall be governed by the law of the place of the seller’s business office at the time of contract conclusion. If the contract was concluded at the place of the buyer’s business office, or the contract is made mainly according to the terms and conditions stipulated by the buyer or on the basis of the buyer’s bidding request, or the contract clearly provides that the seller shall deliver the goods at the place of the buyer’s business office, the law of the place of the buyer’s business office at the time of contract conclusion shall apply.

 

Notwithstanding this guidance, a court may apply the law of the place to which the contract was found to be the most closely related. If the law of a party’s business place shall be applied and the party has more than one business office, the courts shall apply the law of the place that is found to be more closely related to the contract.  If there is no such business office, the law of the party’s domicile or residence shall be applied.  It is worthwhile to note that the applicable law, either chosen by the parties or determined by a court, shall refer to the existing substantive law, not including the conflict of law rules nor the procedural law.

 

C.  Lex Delicti-Applicable Law in Torts

The determination of law applicable to torts in the courts is based on the doctrine of lex delicti—the law of the place of tort.  This doctrine is adopted in Article 146 of Principles of the Civil Law . This provision recites three general rules: (1) the law of the place where the tortious conduct is committed shall apply; (2) if both parties involved in the tort are citizens of the same country or are domiciled in the same country, the law of the parties’ own country or domicile may be applied; and (3) if the conduct committed outside the territory of China is not regarded as tortious conduct under the law, such conduct shall not be treated as a tort.

 

In its 1988 “Opinions” on the implementation of Principles of the Civil Law , the Supreme Court further illustrated that the law of the place of tort as provided in Principles of the Civil Law  includes both the law of the place where the tortious conduct is committed and the law of the place where the resultant harm occurs. The Supreme Court also opined that if the place of conduct is different from the place of harm, the courts may at its sole discretion determine the law to be applied.

 

D.  Lex loci rei sitae-Law Governing Real Property

In a lawsuit involving real property, the courts will apply the law of the place of the property—lex loci rei sitae.  Article 144 of Principles of the Civil Law provides that in disputes involving the ownership of real property, the law of the place where the property is situated shall apply. This doctrine also applies to real property in intestate succession.

 

However, Principles of the Civil Law does not make clear what shall be included in the ownership of real property for choice of law purposes, nor does Principles of the Civil Law offer a definition of the term “real property.” According to the 1988 Supreme Court “Opinions,” real property shall refer to land, construction affixed to land, other fixtures, as well as equipment fixed to the construction. The Supreme Court also extended the law of the place of real property to govern the commercial relations concerning the ownership, sale, lease, mortgage, and use of the real property. In addition, as noted above, the law of the place of real property may also apply to a contract for lease, sale, or mortgage of real property.

 

With regard to the question about characterization or classification of real property, there exists no provision in the Chinese laws. A common approach advocated by most Chinese private international law scholars is that the law of the place of property determines the issue of the property characterization.

 

An exception to the doctrine of lex loci rei sitae is presented by property ownership over vessels. In accordance with the Maritime Law of China 1992, the matters concerning the acquisition, transfer, or termination of property ownership over a vessel shall be governed by the law of the vessel’s flag country.

 

E.  Burden of Proof-Determination of Foreign Law

There should be no question about application of foreign law in the courts unless such application would violate the public interest of China or evade Chinese mandatory laws or prohibitive rules.  Difficult issues arise, however, as to how the contents of the applicable foreign law will be determined. The complexity involved in this regard is how the foreign law should be treated; this would also affect who will have the burden to prove the foreign law.

 

Two contradictory approaches have governed the question concerning the determination of foreign law. One is a common law approach, under which foreign law is treated as a matter of fact pleadable as such by evidence supplied by the parties, their attorneys, or experts. The other is a continental law approach, in which foreign law is regarded as a matter of law and the court has the obligation to apply it.

 

The Chinese Courts seem to be positioned between these two extremes. The axiom, as provided in Article 7 of the CCPL, is that in the adjudication of commercialcases, the courts must “base itself on the facts and take the law as the criterion.” Therefore, the courts are required to look into both fact and law in any commercialcase. The underlying notion is that a court shall make every effort to ensure errorless ascertainment of facts and application of law.

Acourt may determine the foreign law through such means as: (1) the parties to litigation; (2) the central authority of contracting country under the agreement of judicial assistance between China and the foreign country; (3) the Chinese embassy or consulate in the foreign country; (4) the foreign country’s embassy or consulate in China; or (5) Chinese or foreign legal experts.

If, however, the foreign law cannot be determined through the above means, Chinese law shall be applied. In addition, should either party disagree with a trial-levelcourt determination on foreign law, the party may appeal to the appellate court for review.