On Jan. 9, 2021, the Chinese Ministry of Commerce (MOFCOM) issued the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the Rules). The Rules became effective upon issuance and are intended to establish a mechanism aimed at counteracting the “unjustified extraterritorial application of foreign legislation” which has the effect of prohibiting or restricting a Chinese citizen or legal person “from engaging in normal economic, trade and related activities” with parties of a third country or region.
The Rules bear resemblance to the EU’s Blocking Regulation, which was introduced in 1996 in response to U.S. sanctions relating to Cuba, Iran, and Libya. Although MOFCOM did not specifically mention the United States, various commentators have speculated that the Rules may represent a reaction to the recent blacklisting of several Chinese companies by the Trump administration.
This GT Alert highlights the basic parameters of the Rules.
What do the Rules require?
Article 2 of the Rules provides that the Rules are applicable to “situations where the extraterritorial application of foreign legislation and other measures, in violation of internal law and the basic principles of international relations, unjustifiably prohibits or restricts” Chinese citizens, legal persons, or other organizations (Chinese Person) from “engaging in normal economic, trade and related activities with a third state.” In such situations, the Chinese Person has a mandatory obligation to report the situation to MOFCOM within 30 days (Reporting Window). The Rules require MOFCOM to maintain the confidentiality of the report, if requested by the reporting party.
In assessing whether there exists an unjustified extraterritorial application of foreign legislation or other measure, the Rules require that the following factors be considered:
- 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 the citizens, legal persons, or other organizations of China; and
- Other, unspecified factors.
Where a determination has been made that foreign legislation or other measure is “unjustified,” MOFCOM may issue a prohibition order to prevent a Chinese Person from accepting, executing, or complying with the foreign legislation or measure. The Rules provide that a Chinese Person may seek an exemption from complying with a prohibition order by submitting a written application stating reasons in support of the exemption and the scope of the exemption requested.
Penalties and enablement of third-party cause of action
The Rules, at Article 9, provide that except in instances where an exemption has been granted, where a person complies with a foreign legislation or measure in contravention of a prohibition order and thus infringes upon the legitimate rights and interests of a Chinese party, the injured party may file a civil lawsuit in a Chinese court and claim compensation. In addition, if a party benefits from a judgment or ruling made based on a foreign law or measure which is the subject of a prohibition order, and such judgment or ruling causes losses to a Chinese party, the injured Chinese Party may claim compensation against the party benefitting from the foreign judgment or ruling in a Chinese court.
A party failing to report within the Reporting Window will be subject to MOFCOM penalties, including administrative fines, an order to cure the violation, or citations.
Potential impact on foreign invested entities
While many facets of how the Rules will be implemented remain unclear, the wording of the Rules is sufficiently broad that foreign invested entities (FIE) incorporated under Chinese law fall within the definition of Chinese Person. As such, the Rules require FIEs to report to MOFCOM if they are subject to an “unjustified extraterritorial application of foreign legislation” which have the effect of prohibiting or restricting the foreign invested entity from engaging in “in normal economic, trade and related activities” with parties of a third country or region, including legislation of their home countries. FIEs may find it prudent to enhance compliance monitoring, especially the monitoring of home country sanctions and other laws which impact international business transactions. In addition, many FIEs incorporate language into their business contracts the ability to discharge performance on the basis of sanctions or export control regulations. The enforceability of such provisions may be impacted by the Rules and therefore, FIEs may wish to reassess standard contract provisions.