Impact of Art. 9 of Blocking Rules and Art. 12 of Anti-Foreign Sanctions Law

Background

 

On June 10, 2021 the Anti-Foreign Sanctions Law of China (“AFSL”) was promulgated and came into force as law.

 

Earlier on January 9, 2021 the Rules for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures (“Blocking Rules”) was issued by the Ministry of Commerce of China and came into force as a “departmental regulation”, which is in nature a set of administrative measures short of the effect of law.

 

These two instruments, both meant to deal with the undesirable effect of foreign sanctions, are worthy of a comparative study.

 

Differences in Hierarchical Level and Purview of Application

 

In the hierarchy of the Chinese system of laws, the AFSL is a “law” in the strict sense, for it was enacted by the Chinese legislature, i.e. the Standing Committee of the National People’s Congress, and promulgated by the president of the state. As such it can be invoked by the courts to apply to particular cases, both civil and administrative ones.

 

On the other hand, the Blocking Rules is merely a set of administrative rules, or “departmental regulation” as they are called in Chinese legal jargon, to be followed by the various departments of the executive branch of the Chinese government in the performance of their official duties rather than a source of law to be applied to civil cases.

 

In terms of intended situations of application, the AFSL is meant to counteract the consequences of foreign sanctions against China or Chinese parties while the Blocking Rules the consequences of foreign sanctions against third countries or entities which have hit Chinese parties in collateral damages.

 

Purported Empowerment of Civil Suits

 

While authorizing competent departments of the executive branch of the Chinese government to take retaliatory administrative measures, both instruments, i.e. Art. 9 of the Blocking Rules and Art. 12 of the AFSL, purport to empower Chinese private parties to bring civil suits against other parties for damages due to the other parties’ compliance with foreign sanctions.

 

Legal Effect of Art. 9 of Blocking Rules

 

Article 9 of the Blocking Rules provides:

 

“If a person, in complying with the foreign laws and measures specified in the Proscription, injures the legal rights and interests of any Chinese citizen, legal person or other organization, the injured party may sue the person before the people’s court in claim for damages pursuant to law, save that the person has obtained exemption from complying with the Proscription pursuant to Article 8 of the Measures.

 

If a Chinese citizen, legal person or other organization suffers losses by way of any judgment or order made under the foreign law specified in the Proscription, it may bring a claim for compensation of losses before the people’s court against the party who benefits from the judgment or order.”

 

（ Original text: 当事人遵守禁令范围内的外国法律与措施，侵害中国公民、法人或者其他组织合法权益的，中国公民、法人或者其他组织可以依法向人民法院提起诉讼，要求该当事人赔偿损失；但是，当事人依照本办法第八条规定获得豁免的除外。

 

根据禁令范围内的外国法律作出的判决、裁定致使中国公民、法人或者其他组织遭受损失的，中国公民、法人或者其他组织可以依法向人民法院提起诉讼，要求在该判决、裁定中获益的当事人赔偿损失。）

 

As the Blocking Rules is merely a “departmental regulation” short of the effect of source of civil law, it’s unlikely that Chinese courts would cite it as the applicable rule of law in their adjudications of civil cases. It is most likely to be interpreted as a reminder or advocacy of the legal rights and remedies available to Chinese parties under existent Chinese civil law without counting in the Measures itself. Of course, one cannot be 100% sure until Chinese courts have actually ruled on particular cases.

 

Regardless of the dubious legal effect of Art. 9, its purported scope of application is limited to foreign laws and measures specified in the Proscription rather than all foreign sanctions. The Proscription is to be issued by the Ministry of Commerce, and therefore can be adjusted from time to time in the light of current and everchanging situations giving due regard to the needs of expediencies. Besides, Chinese parties can apply for exemption from the Proscription. Therefore, the actual application of Article 9, even if it might be invoked as a source of law, will be rather limited. Such a flexible approach is arguably quite an apt one for the handling of such delicate situations as may be caused by sanctions.

 

Legal Effect of Art. 12 of AFSL

 

Article 12 of the AFSL provides:

 

“No organization or individual shall implement or assist the implementation of the discriminatory restrictive measures taken by foreign states against Chinese citizens or organizations.

 

If any organization or individual injures the legal rights and interests of Chinese citizens or organizations in contravention of the foregoing provision, the injured Chinese organization or individual may bring a suit before the people’s court seeking cessation of injury and compensation of damages pursuant to law.”

 

(Original text: 任何组织和个人均不得执行或者协助执行外国国家对我国公民、组织采取的歧视性限制措施。

 

组织和个人违反前款规定，侵害我国公民、组织合法权益的，我国公民、组织可以依法向人民法院提起诉讼，要求其停止侵害、赔偿损失。)

 

Unlike that of Art. 9 of the Blocking Rules, the scope of application of Article 12 of the AFSL appears sweeping: it’s neither limited by any list to be issued by and adjusted at the discretion of an executive agency nor allows any exemption. Any individual or organization perceived as directly or indirectly acting in compliance with foreign sanctions may be found liable. This may potentially implicate tens of thousands of individuals and companies, both Chinese and foreign, all of whom are caught in a dilemma and have no exemption to resort to.

 

Formidable as it may appear, however, by a closer look, Art. 12 may not turn out as nearly potent as it first appears.

 

One can only think of three categories of situations where foreign sanctions may affect the interests of Chinese parties:

 

1. A tortious situation: where a party (“Perpetrator”) having no contractual relationship with the Chinese party (“Victim”) attaches the property or funds of the Victim in complying with the order of a foreign law enforcement agency or a foreign judgment. A typical example is a bank freezing funds being transferred en route;

2. A pre-contract situation: where the Perpetrator declines to deal with the Victim;

3. A contractual situation: where the Perpetrator terminates or refuses to perform an existent contract with the Victim.

 

The incidence of Situation 1 is obviously rather rare. Besides, Chinese courts did not recognize the legal effect of foreign orders or judgments made under the auspices of foreign unilateral sanctions even without the AFSL, hence Art. 12 does not add anything new to aid suits in this category of situations.

 

Situation 2 may be the most common type in the context of sanctions. However, it would be unimaginable that Chinese courts would entertain suits brought in this situation. First of all, in such a situation the Victim has no legal right or interest that it can claim has been injured by the Perpetrator in declining to do business with it. Under Chinese law, except for public carriers, nobody has a legal duty or obligation to do business with another. The wording of Art. 12 does not look like it intended to create and impose such an aberrant legal duty on people all over the world. Further, the status of the AFSL, being merely a second-tier law enacted by the standing committee of the NPC instead of the full house NPC, does not empower it to create a novel category of civil rights and duties. To couple with the alleged “legal duty to do business with anybody”, there must be a civil right of any party to demand entering into business relationships with anybody. No such civil right exists under the Civil Code of China. Secondly, it would be simply impossible to grant damages to a Victim who sues the Perpetrator for declining to do business with it: there is no fair and sensible way to quantify the damages. Therefore Situation 2 is all but off the table.

 

In Situation 3, a contract is usually already enforceable against the breaching party without the invocation of the AFSL, save for the operation of a contractual force majeure clause which specifies foreign sanctions as a force majeure event. With the aid of the AFSL, potentially speaking, if the contract is governed by PRC law, such a clause runs the risk of being stricken out as invalid. However, this may not be the right outcome if the existent Chinese law is strictly followed. Under the Civil Code, a contract is either invalid in its entirety or carries some invalid clauses that may be stricken out individually. A contractual clause can be invalid either 1) in the case of a form contract, because it, being part of a form contract, unfairly excludes or attenuates the liabilities of the party who proffered the form contract in the first place, or aggravates the liabilities of the counterparty or restricts or excludes the fundamental rights of the counterparty (Art. 497 of Civil Code), or 2) in the case of a disclaimer clause, when personal injury is caused, or when property or economic losses are caused due to willful or grossly negligent conduct (Art. 506 of Civil Code). In all other situations a contract is either valid or invalid in its entirety. A force majeure clause is in nature a disclaimer, but foreign sanctions obviously do not fall within the purview of Art. 506 of the Civil Code. Therefore the force majeure clause cannot be stricken out as an invalid clause without the whole contract being held as invalid in its entirety.

 

If the whole contract is held as invalid, then the ensuing liabilities on the part of both parties would be restitution. No liability for damages would arise. This outcome is not desirable to the Victim and apparently not contemplated by Art. 12.

 

On the other hand, if the contract has a governing law clause which designates a foreign governing law, there is no applicable legal rule under Chinese law which may operate to override the designation and apply Chinese law to the contract instead. This would render the application of the AFSL groundless.

 

So, in summary, how Art. 12 would be applied to Situation 3, or any other conceivable situations for that matter, is rather nebulous. It simply doesn’t fit squarely into the Chinese system of laws. It is so lacking in operability that it’s rather unlikely to be applied by Chinese courts in actual cases until the Supreme People’s Court (“SPC”) issues a judicial interpretation of it. One can picture the grimace of the professional jurists at the SPC when they chew this hard piece of cake. It’s highly uncertain whether a judicial interpretation would be issued at all. In this regard the impact of Art. 12 would be arguably rather limited.