Impact of New Amendment on FIEs and MNCs

A new amendment to the China Civil Procedure Law makes it easier for disputes between Chinese and foreign entities to be heard in Chinese courts. The new law expands scenarios in which foreign-related cases are deemed to be under the “exclusive jurisdiction” of Chinese courts while facilitating proceedings for foreign-related cases, such as gathering evidence and serving litigants that are outside of China. We discuss how these changes may impact foreign companies and how they can mitigate risks.


The Standing Committee of the National People’s Congress (NPC), China’s legislature, has adopted a further amendment to the Civil Procedure Law of the People’s Republic of China (the “Civil Procedure Law”), which will take effect from January 1, 2024.

The Civil Procedure Law, which was last amended in 2021, sets the regulations for civil litigation procedures in the country and “ensures the fair and efficient adjudication of civil cases by the people’s courts”. The Civil Procedure Law importantly also governs litigation procedures between domestic and foreign entities.

The latest amendment mostly focuses on the provisions relating to civil litigation with foreign entities, seeking to tackle unfair treatment of Chinese companies overseas, in particular in matters related to foreign trade and investment. However, this means that the new amendment may have a significant impact on foreign-invested enterprises (FIEs) and multinational companies (MNCs) operating in the country.

Below we look at the changes relating to civil cases involving foreign entities and discuss how they may impact foreign companies.

Background

According to an official explainer on the latest amendment released by the NPC, the latest amendment to the Civil Procedure Law was necessary because current foreign-related civil litigation procedures “are no longer sufficient to ensure justice, efficiency, and convenience in resolving foreign-related civil and commercial disputes and safeguarding the interests of national sovereignty, security, and development.” 

The need for reform in these matters has also become more acute as China’s role in the global trade and investment network has grown, meaning that more Chinese companies are engaged with foreign entities. This in turn has led to a “rapid increase in foreign-related civil and commercial cases” in Chinese courts, which now include cases in over 100 countries and regions.

The revision was based on a comprehensive review of China’s foreign-related civil and commercial trial practices, international treaties, and foreign legislative experiences.

Main revisions to foreign-related civil case procedures

Expansion of Chinese jurisdiction over foreign-related cases

Under Article 272, where a foreign defendant does not have domicile in China, the case will be deemed to be under Chinese jurisdiction if any of the following is within the territory of China:

  • The place where the contract is signed;
  • The place where the contract is performed;
  • The location of the subject matter of the lawsuit;
  • The location of the property available for seizure;
  • The place where the infringement is committed; or 
  • The domicile of the representative office.

The above conditions remain unchanged in the new amendment. However, it adds another clause stating that “Except as provided in the preceding paragraph, foreign-related civil disputes that have other appropriate connections with the People’s Republic of China may be under the jurisdiction of the People’s Court.”

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It is unclear from the text what “appropriate connections” may constitute, but this amendment allows for a certain level of interpretation. Chinese courts could therefore deem that a case is under Chinese jurisdiction under scenarios outside of the six listed above. This could make it easier for Chinese companies operating overseas to convince courts in China that a foreign case falls under Chinese jurisdiction.

A new article, Article 277, states that “If the parties to a foreign-related civil dispute agree in writing to choose the jurisdiction of the People’s Court, the People’s Court may have jurisdiction.” Moreover, any countersuits or responses that are filed to such a civil case will also be deemed to be under Chinese jurisdiction (Article 278).

This would also enable cases that don’t technically fall under Chinese jurisdiction under the provisions of the Civil Procedure Law—to be heard in China—provided that all parties are in agreement (or are deemed to be in agreement in the event of a response or countersuit) to hold it there.

The amended Article 279 expands cases that should be the “exclusive jurisdiction of the People’s Court” from just one type of relationship to three types of relationships, namely:

  1. Litigation initiated due to disputes over the establishment, dissolution, or liquidation of a legal entity or other organization established within the territory of the People’s Republic of China, as well as the validity of resolutions made by the legal entity or other organization (newly added).
  1. Litigation initiated due to disputes related to the review of the validity of intellectual property rights granted in the territory of the People’s Republic of China (newly added).
  1. Litigation filed due to disputes over the performance of Sino-foreign joint venture contracts, cooperative joint venture contracts, and cooperative contracts for the exploration and development of natural resources within the territory of the People’s Republic of China.

The third scenario already existed in the previous version of the law, while the first two are new additions. This again expands the scenarios in which a Chinese company operating in or outside of China can bring a case involving a foreign entity to a Chinese court.

Regulations on jurisdiction in cases involving foreign courts

The new amendment adds new articles (Articles 280 to 282) relating to scenarios in which a Chinese court may hear a case that has also been filed in an overseas court, or where a Chinese court may dismiss or refuse a case where an overseas court is deemed to have jurisdiction.

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The new provisions state that if one party to a dispute files a case in a foreign court while the other party files the case in a Chinese court, or if a party files a suit in both a Chinese and a foreign court, then the Chinese court will be deemed to have jurisdiction and can handle the case.

In the event that both parties have jointly agreed upon the jurisdiction of a foreign court, then the Chinese court may choose not to accept or dismiss the case, provided that it doesn’t otherwise fall under the jurisdiction of Chinese courts as stipulated in the Civil Procedure Law.

If a Chinese court accepts a case under the above circumstances, it may rule to suspend the case if a party involved in the case applies in writing to the Chinese court to suspend the case on the grounds that a foreign court has already accepted the case. However, the court will not dismiss the case if:

  1. The parties involved agree to choose the jurisdiction of a Chinese court, or the dispute falls under the exclusive jurisdiction of a Chinese court (as stipulated in Article 279);
  1. It is obviously more convenient to have the case heard by a Chinese court;
  1. The foreign court fails to take necessary measures to hear the case or fails to conclude the case within a reasonable time limit; in this instance, the Chinese court will resume the proceedings upon the written application of the parties involved.

A Chinese court will not accept a case, or part of a case, that has already received a legally effective judgment or ruling from a foreign court that has been recognized in whole or in part by a Chinese court.

If the defendant raises an objection to the jurisdiction of a Chinese court, the court may rule to dismiss the case and inform a plaintiff to file the case with a more suitable foreign court, if the following circumstances occur simultaneously:

  1. The basic facts in dispute in the case do not occur within the territory of the People’s Republic of China, and it is obviously inconvenient for the People’s Court to hear the case and for the parties to participate in the litigation;
  1. There is no agreement between the parties to choose the jurisdiction of the People’s Court;
  1. The case does not fall under the exclusive jurisdiction of a Chinese court;
  1. The case does not involve the sovereignty, security, or social public interests of the People’s Republic of China; and 
  1. It is more convenient for a foreign court to hear the case.

A Chinese court may still hear a case in this circumstance if the foreign court refuses to exercise jurisdiction over the dispute, fails to take necessary measures to hear the case, or fails to conclude the case within a reasonable time limit, and the parties file a lawsuit with a Chinese court.

Regulations on serving entities without domicile in China

The amended law makes several changes to the methods that Chinese courts may adopt to serve entities that are domiciled outside of China.

Under the amended Civil Procedure Law, Chinese courts can use the following methods to serve court papers to litigants who do not have domicile within China:

  • In accordance with the methods stipulated in an international treaty concluded or jointly acceded to by the country where the addressee is located and China;
  • Through diplomatic channels;
  • Through the Chinese embassy or consulate in the country where the recipient is located for a recipient who is a Chinese national;
  • Through the litigation agent entrusted by the recipient in this case;
  • Through the recipient’s wholly-owned enterprise (newly added), representative office, or branch established within the territory of the People’s Republic of China, or a business agent authorized to accept service;
  • Through mail, if the laws of the country where the recipient is located allow serving court papers through the mail (if three months have passed since the date that the court papers were mailed, and the receipt of the service has not been returned but various circumstances are sufficient to determine that it has been delivered, it will be deemed to have been delivered on the expiration date of the three-month period); and
  • Through electronic means that can confirm receipt by the recipient, unless prohibited by the laws of the country where the recipient is located.

Some of the above seven scenarios have been tweaked slightly but remain largely unchanged from the previous version of the law. However, the new amendment adds the following:

  • In the event that the recipient is a foreigner or stateless person who serves as the legal representative or principal person in charge of a legal entity or other organization established within the territory of the People’s Republic of China, and is a co-defendant with the legal entity or other organization, then the recipient will be served through the said legal entity or other organization.
  • In the event that the recipient is a foreign legal entity or other organization, and its legal representative or principal person in charge is within the territory of the People’s Republic of China, the court papers can be served through its legal representative or principal person in charge; and
  • Serving by other means agreed to by the recipient, except where prohibited by the laws of the country where the recipient is located.

The new amendment also adds a clause stating that if the recipient cannot be served court papers using the above methods, then it will be served through a public notice. The recipient is deemed to have been served 60 days after the date of issuance of the public notice. This period has been shortened from three months in the previous version of the law.

Collection of evidence located outside of China by Chinese courts

The amended law adds a new provision governing the collection of evidence located outside of China by Chinese courts, outlining mechanisms that Chinese courts can employ to gather the evidence.

The new Article 284 states that in the event that evidence collected by the party that has filed a case with a Chinese court is located outside of the territory of China, then the Chinese court can collect the evidence using methods stipulated in international treaties to which both China and the country in which the evidence is located are parties to, or through diplomatic channels.

It goes on to stipulate specific methods that Chinese courts can use to gather evidence (giving exception to where such methods are prohibited in the country in question):

  1. For parties and witnesses that are Chinese nationals, the Chinese embassy or consulate in the country where the party or witness is located may be entrusted to collect evidence on the court’s behalf;
  1. Obtain evidence through instant messaging tools with the consent of both parties; and
  1. Obtain evidence through other methods agreed by both parties.

Provisions on recognizing and enforcing rulings of foreign courts

The amended law outlines scenarios in which a Chinese court can refuse to enforce the ruling of a case by a foreign court if requested to do so.

The newly added Article 300 states that a Chinese court can refuse a request or application from a foreign court to legally recognize or enforce a legally effective judgment or ruling that it has issued against an entity located in China in any of the following circumstances:

  1. The Chinese court finds that the foreign court has no jurisdiction over the case (in accordance with the provisions of Article 301, see below);
  1. The Chinese court finds that the defendant was not legally summoned, or was legally summoned but was not given a reasonable opportunity to make a statement or defense, or the party did not have litigation capacity and was not properly represented;
  1. The Chinese court finds the judgment or ruling was obtained through fraud;
  1. The Chinese court has already made a judgment or ruling on this same dispute, or has recognized the judgment or ruling made by a third country’s court on the same dispute; or
  1. The Chinese court finds that the case violates the basic principles of the laws of the People’s Republic of China or damages national sovereignty, security, and social and public interests.

Meanwhile, the newly added Article 301 states that foreign courts will be deemed not to have jurisdiction over a case when:

  1. The foreign court has no jurisdiction over the case in accordance with the country’s own laws, or if it does have jurisdiction in accordance with its own laws, it has no appropriate connection with the dispute involved in the case;
  1. It violates the provisions of China’s Civil Procedure Law’s provisions on exclusive jurisdiction (under Article 279 discussed above);
  1. It violates an agreement between the parties involved to exclusively choose the jurisdiction of the Chinese court.

If a party applies to a Chinese court to enforce or recognize a ruling made by a foreign court on a certain case, and the Chinese court is currently hearing the same case, then it may move to dismiss the case if it recognizes the foreign court’s ruling. If it does not recognize the ruling, the court may continue to hear the case.

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Parties to the litigation who are unsatisfied with the court’s decision to recognize or not recognize a ruling by a foreign court can apply for reconsideration to a higher-level Chinese court within 10 days of the court’s issuance of the decision.

These amendments may provide much-needed help to Chinese companies that are subject to lawsuits overseas that it deems should not be under the jurisdiction of a foreign court, or where the ruling of a foreign court is unfair. 

However, due to some of the vague wording in the above provisions, such as when a foreign court has “no appropriate connection with the dispute”, as well as its dismissal of foreign laws on jurisdiction, companies involved in disputes may be at risk of being caught in the crosshairs of competing Chinese and foreign legislation. This could potentially complicate legal proceedings and make enforcement of rulings harder for foreign courts and companies.

Civil litigation involving foreign states

Where no provisions exist in relevant laws relating to civil litigation involving foreign states, the provisions of the Civil Procedure Law will apply instead.

This provision was likely added to maintain consistency with the newly ratified Foreign State Immunity Law.

Considerations for foreign entities

The amendments to the China Civil Procedure Law significantly expand the jurisdiction of Chinese courts over foreign-related civil cases, making it easier for Chinese companies to file lawsuits against foreign entities in China. However, there are several measures that foreign companies engaging with Chinese companies can take to prevent unexpectedly being summoned to a Chinese court for dispute resolution.

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First of all, foreign companies are advised to consult international treaties that have been entered into between China and their country of domicile, such as bilateral investment treaties (BITs), free trade agreements (FTAs), as well as multilateral trade and investment treaties. These treaties usually stipulate protections for investors and companies operating in the contracting countries and outline dispute resolution mechanisms, including arbitration in a neutral international court. Moreover, the Civil Procedure Law defaults to international treaties for regulations on matters related to foreign-related civil disputes in multiple instances, where such treaties exist.

Secondly, it is important to ensure robust dispute settlement clauses are set out in any contracts entered into with a Chinese company overseas. This may include agreeing upon the jurisdiction of possible disputes, as well as preferred dispute settlement mechanisms (such as arbitration) in advance. The Civil Procedure Law specifically states that jurisdiction is given to foreign courts if both parties have agreed to this in advance, in most cases.

Note that the circumstances that are deemed to be under the “exclusive jurisdiction” of China cannot be circumvented using these methods, and will always be deemed to be under Chinese jurisdiction. These are disputes related to company establishment and dissolution in China, Sino-foreign joint venture contracts for the exploration of natural resources in China, and the validity of intellectual property rights granted in China.

Lastly, foreign companies and their legal teams should familiarize themselves with the provisions of this law, as well as legislation related to their industry or sector, to ensure compliance. This is particularly important for areas that fall under the “exclusive jurisdiction” of Chinese courts under the Civil Procedure Law.

About Us

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at [email protected].

Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.

 

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