China Releases Rules To Address Extra-Territorial Applications Of Foreign Laws

In Short

The Development: China's Ministry of Commerce ("MOFCOM") released Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Laws and Other Measures ("Rules") on January 9, 2021. Effective immediately, the 16-article Rules are aimed at safeguarding China's national sovereignty, security, and development interests, and protecting the legitimate rights and interests of Chinese citizens, legal persons, and other organizations ("Chinese Persons").

The Significance: Following a wave of export controls, sanctions, and other trade restrictions in Western countries targeted at Chinese-controlled entities, the Rules are read by many as a countermeasure put into effect by China. Companies with operations in China or doing business with Chinese entities should pay close attention to the implications of the Rules.

Looking Ahead: It remains to be seen how the Rules will be enforced in practice and how they may affect the business operations of both multinational and Chinese companies.

Applicable Situations and Working Mechanism

The Rules apply to situations where the extra-territorial application of non-Chinese laws and other measures ("Foreign Laws and Measures") are determined to violate "international law and basic principles of international relations," and "unjustifiably prohibit or restrict Chinese Persons from engaging in normal economic, trade and related activities." The Rules do not purport to apply to the extra-territorial application of non-Chinese law and measures as provided in international treaties and agreements to which China is a party.

To implement the Rules, the Chinese government has designated a joint committee called the "Working Mechanism," which will comprise relevant Chinese ministries and be chaired by MOFCOM. MOFCOM, the National Development and Reform Commission ("NDRC"), and other Chinese government ministries are responsible for handling specific matters under the Rules.

The Rules obligate Chinese Persons to report breaches of the Rules to MOFCOM within 30 days, although further clarification is needed on the trigger for the start of this prescribed time frame.

Evaluation of Foreign Laws and Prohibition Orders

The Rules provide for the following specific considerations as to whether the extra-territorial application of reported Foreign Laws and Measures are justifiable:

• Whether international law or the basic principles of international relations are violated;
• The potential impact on China's national sovereignty, security, and development interests;
• The potential impact on the legitimate rights and interests of Chinese Persons; and
• Other factors that should be taken into account.

MOFCOM may issue a prohibition order ("Prohibition Order") to the effect that a Foreign Legislation or Measures shall not be accepted or observed, after the Working Mechanism has considered the relevant factors. The Rules leave room for entities affected by a Prohibition Order to seek a potential exemption from compliance from MOFCOM.

Suits for Compensation in Chinese Courts and Support for Noncompliance

The Rules provide that where a person complies with foreign laws and measures prohibited by a Prohibition Order, "and thus infringe upon the legitimate rights and interests" of Chinese Persons, the affected Chinese Persons may file a civil lawsuit in the Chinese courts, and seek compensation, absent the granting of an exemption to the complying entity.

Additionally, where a judgment or ruling made in accordance with foreign laws within the scope of a Prohibition Order results in injury to Chinese Persons, they may file a civil lawsuit in the Chinese courts to claim compensation from persons who benefit from that judgment or ruling.

Assessment of Relevant Risks from a Multijurisdictional Perspective

There are some similarities between the approach taken in the Rules and the positions taken by other jurisdictions faced with similar situations. For example, the European Union and United Kingdom have taken steps to strengthen their existing "blocking regulation" in respect of the impact of U.S. extraterritorial sanctions relating to Iran and Cuba (for more information, see our Alert, "EU Takes Steps to Counteract U.S. Withdrawal from Iran Nuclear Deal"). The ability to apply to the Chinese authorities for a waiver and the ability of Chinese Persons to seek damages or compensation in China may well raise similar opportunities and challenges for multinational companies in considering the Rules, as we have seen in Europe under the blocking regulation.

The Rules have certain features suggesting they could be categorized as a "blocking law." Businesses that have entered into agreements or business relationships involving China should therefore consider the impact of the Rules, together with the impact of similar rules in other jurisdictions, on any related commitments or representations.

Three Key Takeaways

1. The Rules apply when the extra-territorial application of non-Chinese laws and other measures violate "international law and basic principles of international relations," and "unjustifiably prohibit or restrict Chinese Persons from engaging in normal economic, trade and related activities."
2. According to the Rules, if a person complies with foreign laws and measures prohibited by a Prohibition Order, the affected Chinese Persons may file a civil lawsuit in the Chinese courts and seek compensation, absent the granting of an exemption to the complying entity.
3. There are some similarities between the approach taken in the Rules and the positions taken by other jurisdictions faced with comparable situations, which may provide some guidance to affected multinational organizations.