A: Similar to the blocking regulations of other jurisdictions, such as the EU or the USA, China’s Blocking Statute aims to protect its citizens, legal entities and other organisations (together, “Chinese Entities") who have been inappropriately or unjustifiably restricted by laws or governmental orders from other overseas jurisdictions from carrying out normal course of trade businesses. As China grows more rapidly in recent years, there have been greater numbers of foreign rules or sanction orders targeting at Chinese business entities, individuals, Chinese products, manufactures, technologies, brands, etc. As a result, China’s Blocking Statute becomes the first legislation, that provides the most comprehensive and powerful legal grounds and other supporting measures that entitles Chinese Entities to disobey unfair foreign restrictive rules.

A: Chinese Entities are bound by the rules of China’s Blocking Statute. A Chinese Entity is obliged to fulfill the reporting obligation to MOFCOM and is entitled to claim for compensation and obtain other remedies on certain conditions pursuant to this statute. Despite lack of explicit rules that interpret the exact scope of Chinese Entities, it could be reasonably inferred from the wordings and the legislative purpose that China-incorporated subsidiaries of foreign companies are within this category.

There are other types of companies or financial institutions which we defined as Quasi-Chinese Entity in this article. China’s Blocking Statute does not touch upon the issue as to whether each type of Quasi-Chinese Entity could be categorised as Chinese Entity for the purpose of China’s Blocking Statute. It is therefore important for a Quasi-Chinese Entity to consult with MOFCOM on a case specific basis as to whether or not certain connection with China could be interpreted as satisfying the definition of Chinese Entities. There could be different answers depending on the distinct corporate and share structure of each individual entity, in particular, for those company who is ultimately controlled by Chinese government. From our perspective, it is doubtful but may be less likely that a foreign subsidiary registered as a limited company in a foreign jurisdiction such as a UK subsidiary of a Chinese financial institution will be recognised as a Chinese Entity. In comparison, an overseas branch of a Chinese financial institution is more likely to fall within China’s Blocking Statute. Ultimately, MOFCOM and the other relevant competent authorities will have the final say following further guidance to be issued.

A: A Chinese Entity who finds its trade businesses have been impacted by foreign laws or sanction orders shall report to MOFCOM within 30 days since then. Failure of reporting in time will trigger administrative penalties against it. Therefore, it is important for Chinese Entities to consult with MOFCOM for further clarification on the triggering point of the calculation of 30 days.

A:

1. Evaluation validation. In terms of deciding whether there are any inappropriate extraterritorial applications of foreign laws and measures, the statute sets out an open-ended and largely undefined list of factors for MOFCOM to consider before granting any injunction. These factors include: whether the law represents a violation of principles of international relations, the impacts on China’s national sovereignty, security and development interests, the effects on the legitimate rights and interests of Chinese Entities and other factors that MOFCOM decides to take into account.

    

2. Issue an injunction. Based on the evaluation result, MOFCOM will grant an injunction on the reporting Chinese Entity. The injunction orders the Chinese Entity not to abide by foreign laws or sanctions. Whereas it seems from the outset that this statute imposes additional reporting and compliance obligations on the Chinese Entities, the rules in effect work as a protection of Chinese Entities because MOFCOM grants them the right to disobey foreign restrictions and meanwhile allow them to apply for suspension or waiver of the injunction at later stages should they consider necessary to do so.

A: In certain situations, some Chinese Entities may wish to follow foreign laws or sanctions in order to comply with their obligations under the existing contract with other parties. In such circumstances, Chinese Entities are entitled to apply for a suspension or waiver of MOFCOM’s injunction. Decision on whether or not to approve the application of suspension or waiver shall be made by MOFCOM within 30 days from the date of receiving the application. In situations where a Chinese Entity have already been in breach of foreign laws or sanctions by following MOFCOM’s injunction and/or not ceasing the existing transaction during the waiting period (30 days or longer if applicable), we would suggest that such Chinese Entity and the relevant counterparties consider in advance and address in the transaction documents how to deal with the uncertainty during the waiting period where MOFCOM’s injunction is still in effect pending decisions for the application.

A:

1. Judicial Remedies for compensation. If a Chinese citizen, legal entity or other organisation has suffered any loss as a result of a Chinese Entity’s conduct in compliance with foreign laws or sanctions, which are associated with MOFCOM’s injunction order, such citizen, legal entity or other organisation is entitled to bring legal proceedings against the breaching Chinese Entity in domestic courts of China for compensation. The court has the power to enforce the assets of such Chinese Entity as well. Despite that there are no precedents indicating the extent of a Chinese Entity’s claim for compensation, it is inevitable that the Chinese Entity and Quasi-Chinese Entity, where relevant, shall be wary of such claims and to apply for exemptions for injunction order as early as possible.

    

2. State support. Where a Chinese Entity fails to comply with the relevant foreign law or sanction in accordance with MOFCOM’s injunction and suffer severe losses as a result, the relevant competent authority in China may, in light of specific circumstances, provide necessary state support. While the nature and scope of such state supporting measures are not yet specified, we understand that it should include certain political, industrial or financial support to an extent that could offset or at least mitigate the losses suffered by such Chinese Entity for not complying with foreign law and to increase the influence of China’s Blocking Statute on global business.

A: Considering that there is no convention or treaty which explicitly provides for recognition and enforcement of Chinese judgments in England, any enforcement of a Chinese judgment would need to rely on common law rules. Where a Chinese Entity wins in a Chinese court proceeding for compensating its losses arising from the defendant e.g. a Quasi-Chinese Entity’s conduct in compliance with foreign sanctions, the defendant has a legal obligation to pay that sum pursuant to Chinese court’s judgment. If the defendant holds certain assets overseas e.g. in England, the claimant may wish to bring an English common law claim to enforce the defendant’s obligation as a debt.

Such judgments may be enforced in England if the following requirements are met: the foreign judgment must be: (i) for a debt or a definite sum of money; (ii) unrelated to taxes, fines or other penalties; (iii) final and conclusive; and (iv) given by a court having competent jurisdiction.

However, in terms of claims arising from foreign law governed transactions which are brought to the proceedings in an overseas country (e.g. disputes on or arising from an English law governed transaction document being brought to an English court), it may be worth taking reference from U.S. courts’ general approach. It is rare for a U.S. court to allow defense on basis of foreign judgment on blocking statute related issues. Equally, for those Chinese Entities (or Quasi-Chinese Entities that are subject to China’s Blocking Statute) who are under the protection of Chinese judgments, they may still have to face the risks of failing to bring China’s Blocking Statute as an effective defense for the claims in other jurisdictions. 

A: Article 9 of China’s Blocking Statute essentially prevents any foreign judgment that is made subject to foreign laws or sanctions, which have been prohibited by MOFCOM’s injunction. It is also provided that for any Chinese Entity who has been requested by the court’s decision to compensate the relevant party but refuses or fails to do so, the relevant party is entitled to request enforcement of the court’s decision. From an alternative perspective, it is unlikely that any Chinese courts will recognise and enforce court’s decisions made by foreign countries relying on foreign laws or sanctions that are prohibited by MOFCOM’s injunction, as this may contradict with the current regime established under China’s Blocking Statute.

A: It is common practice for parties in a transaction document to make representations and undertakings that require compliance with foreign laws as well as sanctions. This effectively leads to a dilemma where a party may be in breach of sanction imposed by another country while complying with the laws applicable to it including China’s Blocking Statute, and vice versa. It is therefore essential for Chinese Entities, Quasi-Chinese Entities and other foreign companies to take consideration of China’s Blocking Statute when reviewing the company’s internal compliance rules, and/or preparing, negotiating and finalising its transaction documents.

A: In general, there is no such universally applicable solution which may effectively solve the aforementioned dilemma as it depends on various factors including but not limited to the parties and/or the products or services concerned, the relevant jurisdictions involved, and any applicable laws and sanctions concerned. One approach could be to include certain conflict of law provisions that address or determine which law, the blocking statute or the sanction order, shall prevail in terms of any conflict. Alternatively, one may consider adding provisions that limit the effect of sanction related provisions to the extent that such provisions do not conflict with any applicable blocking statute such as Anti-Boycott Laws and/or China’s Blocking Statute. Parties can also agree on certain circumstances where sanction related clauses do not apply.

Despite that we introduce multiple ways above that could to some extent effectively mitigate the potential conflicts between blocking statutes and sanction orders, it is important that all such provisions are drafted to work along with each other and be functional in line with the whole context of the agreement. Therefore, parties should have overall consideration of how to protect its best interest and balance the cost from commercial perspective.

A:

1. To carry out comprehensive due diligence

From the perspective of Quasi-Chinese Entities and, in particular, financial institutions, in addition to carrying out due diligence on its counterparty such as the borrower, it is worth checking whether or not the underlying transaction or supply chain is associated with any party who may be concerned with any obligations under China’s Blocking Statute. Circumstances may include, for example, where a branch of a Chinese financial institution in the UK provides loan to its client as the borrower and the purpose of using the loan is for financing its underlying transaction carried out by a Chinese Entity (which may be a company within the borrower’s company group) relating to items on the US sanction list. Under such circumstance, the Chinese Entity may have been granted injunction by MOFCOM and therefore if any relevant party including this financial institution ceases to provide loan due to US sanction, which effectively means it follows US sanctions while breaching MOFCOM’s injunction, this financial institution may be sued for compensation by such Chinese Entity although who may not be the direct client of such financial institution.

2. To negotiate appropriate sanction clause

Companies should tailor the sanction clause in accordance with each transaction. For example, assuming that the London branch of a Chinese financial institution is categorised as Chinese Entity pursuant to China’s Blocking Statute, in a loan transaction where such bank grants a loan to a Chinese borrower for financing its semiconductor business, which bears relatively higher risks of being caught by possible foreign sanctions in the future, the lender may consider incorporating a clause that requires the Chinese borrower to obtain or apply for exemption of MOFCOM’s injunction upon the lender’s request. Such provision may allow the Lender to stop providing the loan to such Chinese borrower if it fails to obtain an exemption of MOFCOM’s injunction. As a result, the Lender may mitigate its risks of breaching foreign sanctions for providing financial assistance to a restricted entity or for carrying out sanctioned business whilst avoiding being claimed against by the Chinese borrower for compensation in China. From Chinese borrower’s perspective, as it definitely does not want to be trapped into the aforementioned dilemma where the lender can call event of default for its breaching foreign sanctions applicable to it whilst the Chinese borrower could bring proceedings against the lender in China pursuant to China’s Blocking Statute for its ceasing to provide the loan on basis of the foreign sanctions. In cases where cross default clause is implemented in other transaction documents entered into by the Chinese borrower, prevention of triggering cross default events becomes even more desperately needed. The Chinese borrower may consider the solutions we propose in answers to Q 10.

For lending transactions to be carried out between companies, provisions could be more flexible and negotiable depending on the bargaining power and commercial drives of the parties concerned. For instance, companies could draft the termination clause to include MOFCOM’s injunction as a termination event so as to avoid any adverse impact of breaching the contract. 

3. Consult the relevant competent authority in China and apply for exemption where appropriate

The exemption mechanism aims to give freedom to Chinese Entities to follow foreign sanctions and cease the restricted activities. MOFCOM will examine the substantial contents of the application and take into consideration of various factors such as the national interest when granting exemptions. As there are no previous cases showing the likelihood of obtaining such exemption, it is therefore inevitable that companies should consult with MOFCOM and the relevant competent authorities in China, as well as their lawyers during the documentation process.