Summary of the Rules
Blocking orders
Where a citizen, legal person or other organisation of China (Affected Person) is prohibited or restricted by foreign legislation or measures from engaging in “normal economic, trade and related activities” with another state or region, or its citizens, legal persons or other organisations, the Affected Person can report the matter to the relevant Chinese authorities within 30 days of the situation arising (Article 5).
MOFCOM will take the lead in establishing a government working task force, comprising the National Development and Reform Commission and other central government ministries, to assess the extraterritorial application of such foreign legislation or measures, and in doing so will take into account (Article 6):
- whether “international law or the basic principles of international relations” have been violated;
- the potential impact on “China’s national sovereignty, security and development interests”;
- the potential impact on the legitimate rights and interests of China’s citizens, legal persons and other organisations; and
- any other relevant factors.
Where it is determined that the extraterritorial application of the foreign legislation or measure is unjustified, MOFCOM will issue a blocking order to prohibit its application (Article 7).
Under the Rules, an Affected Person may apply for exemption from compliance with a blocking order issued by MOFCOM, but foreign companies may not apply for any exemption to the blocking order (Article 8).
Seeking compensation via court proceedings
Where a person complies with any foreign legislation or measure that is prohibited by a blocking order, and thus infringes upon the “legitimate rights and interests of a citizen, legal person or other organisation of China”, the latter may bring legal proceedings and seek compensation from the person, except in situations where the person was granted an exemption in accordance with the Rules (Article 9(1)). Similarly, where a judgment or ruling made in accordance with foreign legislation that is subject to a blocking order causes losses to a citizen, legal person or other organisation of China, the latter may bring legal proceedings in the Chinese courts and seek compensation from the person who benefitted from the said judgment or ruling (Article 9(2)).
Provision of guidance or support in China and consequences of non-compliance
Further, while the government working task force will provide “guidance and service” (Article 10), the relevant authorities may provide “necessary support based on specific circumstances” to the citizens, legal persons or other organisations of China that suffer “significant losses” resulting from the non-compliance of any foreign legislation or measure in adherence to the blocking order (Article 11).
Where a citizen, legal person or other organisation of China fails to truthfully report as required or fails to comply with a blocking order, the relevant authorities may issue a warning or an order for rectification, and may concurrently impose a fine (Article 13).
Lastly, it is noted that the Rules do not apply to any foreign legislation or measures that are provided for in treaties or international agreements to which China is a party (Article 15).
Implications for non-Chinese companies
Below are three of our main observations regarding the implications for non-Chinese companies:
- As the Rules have recently come into force, it is currently unclear how legal proceedings may be brought against foreign entities in courts in China pursuant to the Rules. Article 9 states that citizens, legal persons and other organisations of China may instigate legal proceedings against relevant “person[s]” to seek compensation. If legal proceedings may be brought against foreign companies in China, those with assets in China may be affected directly.
- The scope of application of the Rules is currently unclear. For example, although the Rules apply in situations of “extraterritorial” application of unjustified foreign legislation and measures, it is unclear whether the Rules would apply if the relevant foreign law or measure affected transactions between entities (whether Chinese or foreign) within China, for example, due to import/export controls in the foreign country.
- In the case of a foreign entity which has a presence in China and carries out business transactions with Chinese companies, it would be advisable to conduct due diligence of its business partners, as dealing with a sanctioned party may place the entity in a dilemma, since it might face issues in either the foreign country or China as a result of its non-compliance with the foreign country’s laws or Chinese blocking orders. Sanctions and blocking orders would inevitably be in conflict and the entity may very well find itself in a difficult situation.
Conclusion
While the exact effect of the Rules remains to be seen, it is clear that blocking orders may have far-reaching consequences and parties are advised to keep closely updated on any developments, to see how the Rules will be applied and enforced in practice.
Client Alert 2021-020
