Litigation in China : Choice of Chinese courts no longer requests actual connection with China

Tag:dispute-resolution-and-litigation-commercial-disputes

The Decision of the Standing Committee of the National People's Congress to Amend the Civil Procedure Law of the People's Republic of China (“PRC”) will come into force on January 1, 2024. This amendment to the PRC Civil Procedure Law will significantly change the addressing of foreign-related commercial cases, making it crucial for multinational enterprises and Chinese companies with cross-border transaction business to pay close attention to and to make preparations in advance. We will introduce, through a series of articles, the impact of the amendments to the Civil Procedure Law on the jurisdiction of international commercial cases and cross-border litigation, assisting enterprises in achieving a smooth transition between the changes. This series has already published Litigation in China (I): Expansion of the jurisdiction of Chinese courts over foreign-related cases.

Consensual Jurisdiction: is it no longer limited to the requirement of actual connection?

In contrast to the PRC Civil Procedure Law (2021 Amendment), the PRC Civil Procedure Law (2023 Amendment) has added a separate provision on consensual jurisdiction in the Foreign-Related Civil Procedures Part. Currently, the discussion on the above amendment mainly focuses on: where the foreign-related civil dispute has no actual connection with China, can the parties still agree on the jurisdiction of Chinese courts?

The supporting view is that Article 276 does not expressly provide that the place of jurisdiction must have an “actual connection” with the dispute, so the agreement is permissible.

The opposing view is that the PRC Civil Procedure Law (2023 Amendment) deleted the wording in the Draft version of allowing the parties to choose a Chinese court “when the place actually connected with the dispute is out of the PRC territory”. Therefore, according to Article 35 of the PRC Civil Procedure Law (2021 Amendment), the requirement of “actual connection” still binds the agreement on the jurisdiction of foreign-related disputes.

In practice, the prevailing view is that the PRC Civil Procedure Law (2023 Amendment) has eliminated the requirement of “actual connection”. The reasons are as follows:

First, the “actual connection” restriction no longer meets the practical needs of foreign-related civil and commercial transactions in China. If both parties are foreign but voluntarily choose a Chinese court for jurisdiction, Chinese courts do not have to impose restrictions. Otherwise, it would be conducive to the creation of a fair, convenient and legalized international business environment. In the past judicial practice, there were many jurisdictional agreements deemed invalid due to a lack of actual connection with the court's location. For example, in Shandong Jufeng Network Co., Ltd. v. Korea MGAME Corporation [Case No. (2009) Civil III panel Final No. 4], a South Korean company and a Chinese company agreed in their contract to resolve disputes in the Singaporean court to avoid local protection. However, when the Chinese company sued in a Chinese court and then the South Korean company raised an objection to jurisdiction, the court decided the agreement to be invalid due to the lack of actual connection between the dispute and Singapore. In this case, the parties had reasonable commercial reasons for choosing the jurisdiction of the Singaporean court but ultimately failed to realize the agreement due to the restrictions of Chinese law, resulting in objectively insufficient protection of the contract and the parties' expectations.

Second, from the perspective of the literal interpretation, the understanding of Article 276 of the PRC Civil Procedure Law (2023 Amendment) should not be combined with Article 35 of the PRC Civil Procedure Law (2021 Amendment). Article 35 stipulates that the jurisdiction agreement shall not violate the provisions of the Law regarding hierarchical jurisdiction and exclusive jurisdiction. However, if the foreign-related consensual jurisdiction is also applicable to Article 35, given that the foreign parties may not be familiar with the PRC's hierarchical and exclusive jurisdiction system, it may easily cause the jurisdiction agreement to be invalid. Therefore, the foreign-related consensual jurisdiction should follow an independent system instead of simply applying Article 35, which will limit the effectiveness of foreign-related jurisdiction agreements. In the Foreign-Related Civil Procedures Part of the PRC Civil Procedure Law (2021 Amendment), Article 266 provides that “The provisions of this Part shall apply to foreign-related civil actions within the PRC territory. Where this Part is silent, other relevant provisions of this Law shall apply.” Thus, as a special provision of the foreign-related part, Article 276 should be applied independently without combination with the application of Article 35. In fact, Article 8 of the PRC Special Maritime Procedure Law has already stipulated that if the foreign parties have agreed to choose the jurisdiction of a Chinese court, there is no requirement for an actual connection with the Chinese court, which was not the original of the PRC Civil Procedure Law.

Finally, in the process of considering the Amendment Draft to the PRC Civil Procedure Law, the NPC Constitution and Law Committee publicized the results of its deliberations and explained the changes in viewpoints from the amendment draft to the official version. [1] In this report, the Constitution and Law Committee did not mention any opposition to the cancellation of the “actual connection” in the draft, nor did it explain that the deletion of “where the place actually connected with the dispute is out of the PRC territory” in the official version represented a change in views. Therefore, the difference in wording between the draft and the official versions does not necessarily indicate a change in viewpoints.

Enterprises FAQ: Since January 1, 2024, is it possible for the parties of a foreign-related civil dispute without actual connection to China to choose a Chinese court?

This question will have the greatest impact on the design of dispute resolution clauses for companies, and many of them may consider adjusting the standard terms of their contracts as a result of this amendment.

Article 276 of the PRC Civil Procedure Law (2023 Amendment) does not restrict “actual connection” in its terms, but there is uncertainty as to whether Article 35 of the PRC Civil Procedure Law (2021 Amendment) will apply to foreign-related cases. Our view is that in line with the overall trend of Chinese courts expanding their jurisdiction to cope with foreign “long-arm jurisdiction”, the provisions of Article 276 of the PRC Civil Procedure Law (2023 Amendment), which do not require an “actual connection” or restrict hierarchical jurisdiction, is an intentional amendment and should not be affected by Article 35 of the PRC Civil Procedure Law (2021 Amendment), which will soon be clarified through judicial practice. Before the judicial practice is clearly defined, companies can first evaluate whether there is any disadvantage in applying the statutory jurisdiction. If there is no risk, the companies could agree on the jurisdiction of Chinese courts. Moreover, since there is no restriction on the hierarchical jurisdiction in foreign consensual jurisdiction, companies can even agree on a specific financial court or intellectual property court to enhance the professionalism of dispute resolution and the predictability of the outcome.

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