The title of a law is always the “label" of the main purpose of the law. The word “anti" in the title of AFSL clearly indicates that the primary legislative objective is countering, retaliating against, and opposing so-called “unilateral sanctions" imposed against China by foreign governments. It by nature is a “defensive measure to deal with and counter the suppression against China by certain Western countries", and not aggressively waving the stick of sanctions. This is consistent with China’s long-standing commitment to the peaceful foreign policy and an exemplification of the legal theory in Chinese traditional culture, namely, to gain mastery by striking the enemy only after he has struck.

Albeit the AFSL is a framework legislation that was drafted, read, and enacted in a relatively short period of time, it contains a broad range of provisions on the scope, targets and obligatory subjects of countermeasures as well as the consequences of violating AFSL, thereby providing a flexible “policy toolbox" for leveraging the power of countermeasures.  

The AFSL establishes a countermeasure target management system based on an anti-sanction list. According to Articles 3, 4, and 5 of the AFSL, the individuals or organizations that may be added to the anti-sanction list include: (1) the individuals and organizations who are directly or indirectly involved in the formulation, decision-making, and implementation of the discriminatory restrictive measures against Chinese citizens or organizations; (2) spouses and immediate family members of the aforementioned individuals; (3) the organizations in which the aforementioned individuals serving as the senior management or actual controllers; and (4) the senior management or actual controllers of the aforementioned organizations.

According to Article 6 of the AFSL, countermeasures that can be taken by the relevant departments of the State Council, depending upon their respective responsibilities and divisions, include: (1) refusal of visa application, denial of entry, cancellation of visas, or expulsion; (2) attaching, seizing, or freezing the movables, immovables, and other types of assets of such individuals and organizations that are located within the territory of the PRC; (3) prohibiting or restricting organizations and individuals within the territory of the PRC from engaging in relevant transactions, cooperation, or other activities with such individuals and organizations; (4) other necessary measures.

Notably, Article 6 of the AFSL merely sets out the general principles governing the countermeasures that the relevant departments of the State Council may announce, and further clarifications are expected to be made through more extensive supplementary regulations and rules. For instance, doesdenial of entry under Article 6(1) of the AFSL apply to Hong Kong Special Administrative Region (“Hong KongSAR") and Macao Special Administrative Region (“Macao SAR")? How would the countermeasures be made effective in Hong Kong SAR and Macao SAR? Would its legal effect be achieved by adding the AFSL into Annex III of the Basic Law of Hong Kong SAR and Macao SAR or by making the specification on its applicability to Hong Kong and Macao on a case-by-case basis when the relevant departments announce the specific countermeasures? For instance, among the sanctions placed on relevant UK individuals and businesses issued by the Ministry of Foreign Affairs on March 26, 2021, the sanction of denial of entry expressly states that it covers Hong Kong SAR and Macao SAR[3]. Besides, another key issue is how the terms “transaction" and “cooperation" would be properly defined under Article 6(3) of the AFSL—will “all and any" financial transactions and “all and any" types of cooperation fall within the scope of the countermeasures?

The AFSL defines the obligatory subjects and consequences of violations from three aspects: (1) organizations and individuals within the territory of China shall implement the countermeasures taken by the relevant departments of the State Council (Article 11); (2) no organization or individual may implement or assist in the implementation of the discriminatory restrictive measures of any foreign state against Chinese citizens or organizations (Article 12); (3) any organization or individual failing to implement or cooperate with the implementation of countermeasures shall bear legal liabilities in accordance with the law (Article 14). Although Article 14 of the AFSL does not expressly specify the “legal liability" of such violations, it is certain that Article 14 leaves space for the extraterritorial application of the AFSL, and both domestic and foreign organizations and individuals will face direct liability for violations of the AFSL and the relevant laws if failing to implement or cooperate with the implementation of countermeasures.

Besides the aforesaid provisions, Article 13 of the AFSL contains authorizing provisions on administrative regulations and departmental rules that “in addition to the provisions of AFSL, the relevant laws, administrative regulations, and departmental rules may stipulate the adoption of other necessary countermeasures". Before the enactment of the AFSL, the Ministry of Commerce of the PRC (the “MOFCOM") promulgated the Provisions on the Unreliable Entity List and the Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures in September 2020 and January 2021 respectively. In this regard, Article 13 of the AFSL provides a clearer and more solid legislative authority for these two MOFCOM regulations and addresses the want of countermeasures against foreign sanctions under these two regulations.

Based on China’s important position in international economic and trade activities, Chinese elements are gaining increasing presence in international commercial arbitration. In light of preceding events, such as the Chinese Ministry of Foreign Affairs’ sanctions against Essex Court Chambers, and the United States and European Union's sanctions against Russia and Iran, the writer takes the view that in the international commercial arbitration cases where the Chinese countermeasures are involved, the AFSL may have a significant impact on the commencement of arbitration proceedings, the composition of the arbitral tribunal, the hearing, the recognition and enforcement of the arbitral awards, and etc.

The first issue is the impact of the countermeasures on the validity of arbitration agreements. Arbitration agreements are the corollary of the parties’ autonomy.  Meanwhile, arbitration has been widely acknowledged and accepted by the international community as a common method of dispute settlement, and China has always maintained a pro-arbitration attitude and position. In the light of these, unless otherwise provided by applicable laws, the writer believes that the countermeasures taken by relevant Chinese authorities according to the AFSL in principle will not affect the validity of the arbitration agreement signed by the targets of countermeasures.

Notably, while countermeasures may not impact the arbitral agreement’s validity in principle, they may inevitably hinder the parties’ willingness and determination to commence the arbitration proceeding. For example, in a case handled by our team involving a company from the mainland of China against an Iranian company in a dispute of international sale of goods and the arbitration is to be conducted in Hong Kong, after weighing the impact of the United States sanctions against Iran on the arbitration proceedings and especially the subsequent application for recognition and enforcement of the arbitral award in Iran, the company from the mainland of China finally decided to suspend the initiation of arbitration against the Iranian company.

Secondly, countermeasures may affect the arbitral institutions’ registration and administration of arbitration cases. As mentioned above, because the connotation and denotation of the terms “transaction" and “cooperation" under Article 6(3) of the AFSL are ambiguous, it is unclear whether an arbitration institution’s acceptance of arbitration claims and charging of arbitration fees from the relevant parties who are on the countermeasures list will be regarded as “transaction" and “cooperation" under Article 6(3), and it is possible for an arbitral institution to refuse an arbitration application or adjourn an arbitration application pending on the grant of permission by the relevant authority. For example, a survey conducted by the Russian Arbitration Association in 2016 on more than 160 lawyers and arbitrators around the world shows that in the arbitration cases where the sanctioned subject is a party, 5% and 17% of the interviewees respectively have encountered refusal or adjournment of the arbitration applications by the arbitral institutions.

Thirdly, countermeasures may affect the payment of arbitral fees. If a party to the arbitration is the target of countermeasures, the bank’s handling of the payment of arbitration fees may constitute a “transaction" or “cooperation" prohibited or restricted by Article 6 (3) of the AFSL, and thus it will not be a surprise that the bank may decline or withhold such transactions.[4] It is worth noting that, in this regard, the AFSL has no exemption provisions for countermeasures, and it is unclear whether supplementary complementary provisions or specialized countermeasures will allow leeway for countermeasure targets to apply for “being exempted" to participate in necessary legal activities. For instance, in the case concerning EU sanctions against Russia, if the sanctioned party in Russia intends to initiate arbitration with ICC, SCC and other arbitration institutions headquartered in the EU, it may apply to the relevant EU authorities for exemptions, and the arbitration institutions will also provide the parties with the necessary information to assist the sanctioned party in applying for exemption.[5]

If the Chinese authorities place a party to an arbitration on the countermeasures list, the arbitrator may be unwilling to accept the party's nomination or may resign from the position of arbitrators on their own initiative. Obviously, the arbitrator may have at least two concerns: (1) whether the charging of arbitration fee by the arbitration tribunal constitutes a “transaction" under Article 6(3) of the AFSL; (2) whether the arbitral tribunal’s administration, management, adjudication and participation in the arbitration process, including convening procedural meetings, soliciting the parties’ opinions on the arrangement of arbitration procedures, and organizing court hearings etc., will be construed as “cooperation" under Article 6(3) of the AFSL. If these activities are defined as “cooperation" or “transaction", the arbitrator is bound to face a dilemma: if the arbitration continues, he will violate the AFSL and be held for legal responsibility; if to comply with the AFSL, he shall resign. For instance, in arbitration cases involving sanctions against Russian subjects by the United States or the European Union, some arbitrators will refuse the appointment of the parties or resign halfway when the parties become the subject of sanctions.

Compared with the sanctions imposed on the parties to the arbitration, the sanctions imposed on the arbitrators and their institutions may be relatively rare. However, if the arbitrators and their institutions directly or indirectly participate in the formulation, decision-making and implementation of discriminatory sanctions against Chinese individuals and organizations, they may also become the targets of China's countermeasures. In that case, the parties may request the replacement of the arbitrator after the constitution of the tribunal, and the arbitration institution may refuse to confirm the arbitrator nominated by the parties. For example, in an ICC arbitration case in which Essex Court Chambers attorneys served as the sole arbitrator, the Chinese party challenged the arbitrator on the grounds of China's relevant sanctions. Although the arbitrator changed his email from the work email with the domain of Essex court chambers to his private email, and stated that the remuneration paid by ICC could be directly remitted to his personal account, ICC still decided to replace the arbitrator. Even if the arbitrator is not replaced, he may be unable to attend the hearings held in the mainland of China due to relevant countermeasure such as “denial of entry" etc., unless he obtains the authorization of the competent authority or “being exempted" to participate in the arbitration proceedings.

In addition, countermeasures under the AFSL may also have an impact on the participation of other arbitration participants in the arbitration proceedings. For example, the provision of legal services by lawyers, the provision of document translation services or courtroom translation services by translators, the provision of courtroom space by hotels, etc., may all be considered as “transactions" or “cooperation" under the AFSL.

Can an arbitral award be enforced in China should it conflict with the countermeasures announced under the AFSL (Conflicting Award), say, an award for a party to pay the contract price to a target of the countermeasures? According to Article 5 of the Convention on the Recognition and Enforcement of Foreign Arbitration Awards (New York Convention), Article 274 of the PRC Civil Procedure Law, and other relevant provisions, the possible grounds for refusal of enforcing the Conflicting Awards principally lies with the non-arbitrability and the public policy.

With regard to whether the subject matter of a Conflicting Award is arbitrable, according to Article 3 of the Arbitration Law of the PRC, the non-arbitrable matters include: (1) disputes concerning marriage, adoption, guardianship, custody and support, or inheritance; and (2) administrative matters that should be settled by relevant administrative institutions. However, for contract disputes and other property rights and interests disputes between civil entities, it is unlikely that the arbitrability will be lost if one party becomes the target of the countermeasures under AFSL, unless the countermeasures announced by the relevant authorities explicitly exclude the right of the parties to submit to arbitration the disputes relating to the targets of the countermeasures.

With regard to whether a Conflicting Award would violate Chinese public policy, although there is no clear definition of “public policy" in China’s legislation and relevant judicial interpretations, Chinese courts have taken a very prudent and modest position on refusing the enforcement of arbitral awards on the grounds of violating “public policy". Only in the case of the infringement upon the fundamental legal principles, fundamental social interests, the national sovereignty, the judicial sovereignty, good customs, or the jurisdiction of Chinese courts, can public policy be applied to refuse enforcement of an arbitration award. From the legislative purpose of Article 1 of the AFSL, the relevant countermeasures are aimed at safeguarding national sovereignty, security, and development interests and protecting the legitimate rights and interests of our citizens and organizations; and to strengthen the enforcement and deterrent effect of countermeasures and reflect the nature of sovereign acts of the state. In addition, Article 7 of the AFSL stipulates that the countermeasures taken by the relevant departments of the State Council shall be final. Accordingly, the countermeasures to a certain extent reflect the national sovereignty and have the attribute of public policy. As such, it is possible that an application for enforcement of Conflicting Award will be refused by Chinese courts on the ground of public policy.

However, it should be noted that due to the broad definition of the countermeasures under the AFSL, the content, severity, and duration of different countermeasures announced by relevant departments of the State Council may vary significantly (for example, prohibiting the countermeasure target’s entry and exit of the territory of the PRC but not transactions or cooperation with it). The courts are expected to continue its prudent and modest stance on determining the alleged violation of public policy based on case-specific analysis instead of a one-size-fits-all approach. In specific, the courts should consider the specific content of the countermeasures involved in the arbitration award, accurately identify the types of interests it protects, and specifically determine whether and to what extent the arbitration award violates the countermeasures, and whether such violations necessarily constitute a violation of public policy. The Supreme People’s Court has yet to give additional clarity in this regard in the further rulings, to standardize the implementation of the law and stabilize the expectations of domestic and international arbitration practitioners.

In addition, even if the arbitration award can be recognized and enforced, its enforcement may be hindered by the relevant countermeasures. For example, if the asset of the person subject to enforcement in China is attached, seized, or frozen in advance by the relevant authorities according to the AFSL, the enforcement procedure may fall into the embarrassment of “no enforceable property".

To effectively address the possible impact of the AFSL on international commercial arbitration, ensure the efficient conduct of the arbitration amid the AFSL and to avoid the risks of possible legal liability for ignoring or disregarding the AFSL, our advices are as follows.

First of all, arbitration parties should pay close attention to the development of anti-sanction legislation in China. The parties may first through due diligence work or other appropriate means identify whether the other party, arbitrators and/or other relevant parties in the arbitration are on the anti-sanction list announced under the AFSL, and if so, it is necessary to further assess the compliance risks and proactively address compliance requirements, such as challenging the nominated arbitrator and etc.

Secondly, the arbitrators should also beware of whether any parties to the arbitration are subject to the countermeasures before accepting the appointment. In the event that the arbitration involves the countermeasures, the arbitral tribunal should pay attention to whether and to what extent the countermeasures apply to the cases, as well as their impact on the arbitration proceedings and the subsequent recognition and enforcement of the award. Other arbitration participants, such as the legal representatives, factual witnesses, and expert witnesses, shall likewise pay attention to the sanctions imposed on the parties to the arbitration parties to avoid the ethical risks.

Furthermore, arbitration institutions, particularly those having arbitral activities in China, should also pay close attention to changes in China’s anti-sanction laws and regulations, carefully evaluate potential impact of relevant countermeasures on the registration and administration of arbitration cases, and establish necessary communication and coordination mechanisms with relevant authorities in China. In addition, arbitration institutions may also publish practice guides or reports to address the arbitration practitioners’ concerns over the countermeasures and assist to the administration and/or management of those sanction-related arbitration cases.