Briefing
China Issues Blocking Rules
On Saturday, 9 January, China’s Ministry of Commerce (MOFCOM) issued the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the Blocking Rules), with the rules coming into effect immediately.
The Blocking Rules are designed to protect against and counteract the effects of the extraterritorial application of foreign law where such law, in China’s view, harms the interests of China or those of its nationals and companies. This is the latest legal tool that China has rolled out in recent months to protect its companies from sanctions, export controls or other restrictive measures imposed by foreign countries, principally the United States.[1]
The Blocking Rules resemble in some respects the EU Blocking Regulation, which has been in place since 1996 in response to the US embargo of Cuba and was updated in 2018 following US sanctions targeting Iran.[2]
What foreign laws may be blocked?
In broad terms, the Blocking Rules apply where the extraterritorial application of a foreign law and measure “violates international law or the basic principles of international relations”, and “unjustifiably prohibits or restricts normal economic, trade and related activities” between citizens, legal persons and other organisations of China (Chinese parties) and a third country (or region) or its citizens, legal persons or other organisations.
To determine whether the extraterritorial application of a foreign law or measure is “unjustified”, the following factors will be taken into account:
• Whether international law or the basic principles of international relations are violated;
• Potential impact on China’s national sovereignty, security and development interests;
• Potential impact on the legitimate rights and interests of Chinese parties; and
• Other (unspecified) relevant factors.
The factors are worded broadly, which effectively grant the authorities considerable discretion in determining what foreign laws and measures to block.
Issuance of Blocking Order
If the authorities consider that a foreign law or measure is unjustifiably applied extraterritorially (in China or in any other jurisdiction where a Chinese party is impacted), MOFCOM may issue a blocking order to refuse to recognise, execute, and comply with the foreign law or measure (the Blocking Order). MOFCOM may, based on specific circumstances, suspend or revoke a Blocking Order.
What judicial remedies are available?
The Blocking Rules provide two mechanisms for Chinese parties to seek judicial remedies:
• Recovery of damages: If a party complies with a foreign law or measure targeted by a Blocking Order without a valid exemption, and causes harm to a Chinese party, the injured Chinese party can claim for compensation from the party before the PRC courts for harm suffered.
• Compensation for losses arising from foreign court decisions: If “a party” benefits from a judgment or ruling made based on a foreign law or measure which is targeted by a Blocking Order, and such judgment or ruling causes losses to a Chinese party, the injured Chinese party can claim for compensation from the PRC courts against the party who benefitted from the foreign judgment or ruling.
There are some uncertainties over the cause of action which an injured Chinese party can rely on in order to bring a claim for recovery of damages or compensation for losses under the civil law regime, and whether the PRC courts can exert jurisdiction over a foreign party. The issue may be further complicated, if there is an underlying commercial contract between the parties and this contains a choice of forum clause in favour of a foreign court or arbitration, or a choice of law clause in favour of a foreign law as the governing law of the contract.
An analysis will need to be made on a case-by-case basis in light of what is required by the foreign law targeted by a Blocking Order, the civil laws and laws of civil procedures of China, and how a Blocking Order which “refuses to recognise, execute, and comply with the foreign law” will impact on the business between the parties (for example, whether it triggers a termination of contract/material adverse change/force majeure/change of circumstances clause).
Who is the implementing authority?
Under the Blocking Rules, China will establish a working mechanism (Working Mechanism), led by MOFCOM and consisting of various central-level governmental authorities, including the National Development and Reform Commission (NDRC), to take charge of implementing the Blocking Rules. MOFCOM and NDRC are two of China’s most important authorities. They are responsible for, amongst others, administering China’s national security review regime. It remains to be seen how the various authorities will in practice coordinate within the Working Mechanism.
Obligation to report laws subject to the Blocking Rules
A Chinese party caught in a position where a foreign law or measure prohibits or restricts its normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organisations has an obligation to report this to MOFCOM within 30 days. MOFCOM shall keep the information confidential if so requested by the Chinese party.
The reporting obligation does not seem to extend to a non-Chinese party, but may potentially cover Chinese subsidiaries of multinational corporations.
What are the penalties for non-compliance?
A Chinese party which fails to comply with its reporting obligation or fails to comply with a Blocking Order will be subject to a warning, an order to rectify within a specified period, and/or a fine.
The Blocking Rules do not expressly grant the Working Mechanism power to impose administrative penalties on foreign parties, but as mentioned above, foreign parties may face private actions in the Chinese courts.
Can companies obtain a license or authorisation to comply with the blocked law?
A Chinese party may seek an exemption from the Blocking Order by submitting a written application to MOFCOM, stating its reasons and the scope of exemption requested. MOFCOM will decide whether to grant an exemption within 30 days, or a shorter period under urgent circumstances.
The Blocking Rules do not expressly give a foreign party the right to apply to MOFCOM for an exemption. It remains to be seen whether a foreign party will have an option, in practice, to proactively seek an exemption to avoid enforcement risks.
What other support can Chinese parties receive from the government?
If a Chinese party suffers “significant loss” from complying with a Blocking Order (for example, by refusing to comply with the blocked foreign law), the Chinese government may provide “necessary support” based on the specific circumstances. The Blocking Rules however do not elaborate on what types of support can be provided.
In addition, the Blocking Rules also provide that the Chinese government may, depending on the specific circumstances, take other counter measures in response to the “unjustified extraterritorial application” of a foreign law or measure.
What should companies do?
It remains to be seen whether the Blocking Rules will function more as a political statement like in some jurisdictions with similar blocking statutes, or will create serious operational and legal difficulties for companies, forcing them to choose between two legal systems which are conflicting, and both of which demand compliance.
Pending greater clarity, multinational companies are advised to take the following initial steps to reduce their risk profile under the Blocking Rules:
• Assess risks: assess any current or future decision to terminate or modify business dealings in order to comply with foreign laws prohibiting or restricting dealings with Chinese parties, and the risk of such foreign law being subject to a future Blocking Order in China;
• Weigh up the risks: weigh up the risks associated with breaches of the foreign law (notably US sanctions and export control laws in the current geopolitical climate) against the risks arising from the enforcement of China’s Blocking Rules, including potential damages claims before the PRC courts, in light of the nature and scope of the company’s business, consequences of breaches, and internal policies, protocols and business plans;
• Be thoughtful about the paper trail: where a decision is made to terminate or modify business dealings, be circumspect about how the decision is justified and documented internally, and in how it is communicated externally with the Chinese party. Such documents may serve as evidence in a future law suit brought challenging the justification for the termination or modification decision.
• Monitor: the law and practice in this area continues to change and evolve rapidly. Companies should monitor the existing legal and enforcement landscape and be quick to respond if new precedents or information come to light (particularly in relation to US extraterritorial sanctions laws or China’s Blocking Rules enforcement activity).
In addition, Chinese parties (including the Chinese subsidiaries of multinational companies) should be mindful of their obligation to report to MOFCOM if they are impacted by the extraterritorial application of foreign laws. They may also consider how the Blocking Rules could be used as a legal tool which helps to protect their interests, and which may provide them with negotiation leverage, depending on the circumstances. If Blocking Orders are passed, they should also carefully consider if they need to seek an exemption and if so, they should comply with the application requirements under the Blocking Rules.
Footnotes
[1] China promulgated the “Unreliable Entities List” regime on 19 September 2020 (see our client alert here) and the Export Control Law on 17 October 2020 (see our client alert here).
[2] See our client alert relating to the EU Blocking Regulation which protects EU-Iran business from renewed US sanctions here.
