03 August 2015

Conflict of laws and solutions in One Belt One Road

By Ma Yanhui (Partner), Liu Xiaowen (Senior Associate) and Ian Liu (Associate).

One Belt One Road (Silk Road Economic Belt and 21st-Century Maritime Silk Road) runs through the continents of Asia, Europe and Africa. It aims to create benefits from connectivity of infrastructure as well as to facilitate and liberalize trade, investment and finance. Given the many different and varied legal, political, economic, cultural and religious systems in the districts along the Road, it is inevitable that disputes and conflicts will arise. Laws can serve as good standards in dispute resolution for distinguishing right and wrong and clarifying liabilities. The correct choice and application of the relevant law is a fundamental issue for the proper settlement of disputes. It is also a primary problem in providing judicial services in the process of building One Belt One Road.

Recently, the Supreme People’s Court issued “the Several Opinions on Providing Judicial Services and Guarantee for the Building of One Belt One Road by People's Courts” (No. 9 [2015] of the Supreme People's Court) in order to bring the trial function of the People's Courts into full play and provide effective services and to guarantee the smooth building of One Belt One Road. The Opinions expressly provide that the People’s Courts will apply international treaties and practice. The intention is to ascertain and apply foreign laws so as to increase the international credibility of the judgements of the People’s Courts.

The Supreme People’s Court has also released eight typical cases in which the People’s Courts have provided judicial services and guarantees for the building of One Belt One Road. This article will analyze the potential conflict of laws and how it has been resolved in the building of One Belt One Road by taking the example of a dispute over a contract for the international sale of goods between ThyssenKrupp Metallurgical Products Gmbh (hereinafter referred as “ThyssenKrupp”) and Sinochem International (Overseas) Pte Ltd (hereinafter referred as “Sinochem”) (No. 35 [2013], Final, Civil Division IV, Supreme People's Court). 

Case Summary

On 11th April 2008, Sinochem agreed to buy from ThyssenKrupp 25,000 tons of petroleum coke with a typical “Hardgrove Grindability Index (HGI)” of 36-46. The contract was expressed to be concluded, governed and interpreted in accordance with the law of the State of New York, United States of America. Sinochem made full payment as per the contract. However, upon inspection at the loading port as agreed by both parties, the HGI of the petroleum coke delivered by ThyssenKrupp was found to be merely 32. Accordingly, Sinochem asserted that ThyssenKrupp was in fundamental breach of contract and requested rescission of the contract and that ThyssenKrupp refund payment and compensate Sinochem for its losses.

The principal legal issues in the case were the determination of the applicable law and whether the act of ThyssenKrupp constituted a fundamental breach of contract. At first instance, the High People's Court of Jiangsu Province held that it was a dispute over a contract for international sale of petroleum coke. Although it was agreed that the contract be concluded, governed and interpreted in accordance with the law of New York, both parties chose the United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred as “CISG”) as the basis for defining their rights and obligations and the countries where both parties were located, Singapore and Germany, are both contracting states to CISG. Therefore, CISG applied to the contract. Under the CISG, the HGI of the petroleum coke delivered by ThyssenKrupp was far below the agreed standard so it was unsaleable in China’s domestic market. This substantially deprived Sinochem of what it was entitled to expect under the contract. The court found ThyssenKrupp in fundamental breach of contract and supported all the claims of Sinochem. ThyssenKrupp appealed to the Supreme People’s Court. The Supreme People’s Court held that CISG applied where it could and the American law chosen by both parties applied to issues in relation to which CISG was silent. Under the CISG, the goods delivered by ThyssenKrupp were not in conformity with the contract and this constituted a breach. Since Sinochem was able to resell the goods at a reasonable price, such non-conformity did not constitute a fundamental breach of contract under CISG. Accordingly, the Supreme People’s Court finally decided to set aside the original judgment and ordered ThyssenKrupp to refund part of the payment for the goods and to pay the demurrage charges.

This case demonstrates how the court determines applicable law with foreign parties in strict accordance with conflict of law rules, accurately applies international treaties and supports the applicable law chosen by both parties. It is a precedent for the application of CISG in China’s judicial practice. 

The Conflict of Laws will be a prominent issue in One Belt One Road

As a basic concept in international private law, conflict of laws refers to the conflict in the application, to the same facts, of the different laws prescribed in different countries. As a general concept, conflict of laws also includes the contradictions between laws. Conflict of laws is an inherent problem unavoidable in the dealings of international parties. Legal systems have in place a solution to this problem. The continual building of One Belt One Road is significantly increasing the economic transactions among different countries and this makes it important to agree on how to solve the conflict of laws arising therefrom.

From the perspectives of legislation and the judiciary, the transactions involved in the building of One Belt One Road will be more diverse and the disputes arising more complicated. There will be legislative gaps that may result in more targeted multilateral regulations requiring the use of international conventions and treaties. Countries and districts along One Belt One Road will not only use or amend existing regulations, but also promulgate new laws to deal with the building of One Belt One Road. Regulation will include multilateral and bilateral international treaties and associated domestic laws. Since countries along One Belt One Road belong to different regional international organizations, such as the European Union, the Shanghai Cooperation Organization and the Association of Southeast Asian Nations, their domestic legislative and judicial activities may be limited or otherwise affected by the foundation documents and arrangements of such organizations. This complicates the issue of conflict of laws. 

Judicial Principles for Resolving Conflict of Laws

Resolutions to conflict of laws can be sought at the legislative and judicial levels. The Law of the People's Republic of China on Choice of Law for Foreign-Related Civil Relations (hereinafter referred as “Law on Choice of Law”) and its judicial interpretations sets out basic principles and specific rules for determining the applicable law for foreign-related civil relations. The Sinochem case clarifies the approach and attitude of the People’s Courts when applying these choice of law rules in judicial practice.

First, the Principle of Party Autonomy. Allowing parties to choose the applicable law in the private law area is the embodiment of the principle of party autonomy and also a primary principle for resolving conflict of laws. Article 3 of Law on Choice of Law provides that the parties may explicitly choose the laws applicable to foreign-related civil relations in accordance with the provisions of the law. In the Sinochem case, both courts of first and second instance recognized the laws of New York State chosen in the contract as well as CISG agreed by both parties in the proceedings in accordance with the then General Principles of the Civil Law as set out at the conclusion of the sales contract. It must be noted that the Law on Choice of Law imposes two limitations on the parties’ rights to choose applicable laws. It must be “in accordance with the provisions of law”, which means that the parties are allowed to choose applicable laws in the private law area involved in the building of One Belt One Road, such as trade service contract, tort, agency and intellectual property on the condition that the Chinese laws explicitly allow the parties to choose applicable laws. Additionally, the parties must “explicitly” set out their choice of law.

Second, the Priority Principle of International Treaties. Under the priority principle, where an international treaty is directly applicable, it will prevail over domestic law which will only apply to issues where the international treaty is silent. This principle is the embodiment of the obligation of contracting states under international law and represents a compromise voluntarily made by countries over their state power after considering the overall interests of international society and their own interests. However, most international treaties in the private law area enable the parties to explicitly or by implication exclude the application of international treaties. This is a further reflection of the principle of autonomy in private law. Take CISG as an example, Article 6 states that the parties may exclude the application of the convention or, subject to article 12, derogate from or vary the effect of any of its provisions.

In the Sinochem case, both courts found that the domiciles of the parties, Singapore and Germany, were contracting states to CISG and both parties had agreed in the proceedings to choose CISG as the basis for determining their rights and obligations. Therefore CISG applied and the law of New York only applied where CISG was silent. It should also be noted that the Supreme People’s Court held that the UNCITRAL Digest of Case Law on the United Nations Convention on the International Sales of Goods was not a component of CISG but could be used as reference material for understanding certain provisions of CISG. The court, on one hand, clearly defined the scope of application of CISG, and on the other hand, aligned the specific application of certain CISG provisions with international practice. These findings will facilitate the uniformity and stability of CISG application in Chinese judicial practice.

Third, the Principle of Direct Application of Mandatory Rules. Mandatory rules are those explicitly required by domestic law regardless of the wishes of the parties and will be followed by the court without consideration of conflict of laws rules. Mandatory rules are imposed upon party autonomy and are a prominent manifestation of national interference with social and economic life after considering the public interests of the country. Mandatory rules can be found not only in public law, such as criminal, administrative and economic law, but also in the civil and commercial sphere. Article 10 of Interpretations of the Supreme People's Court on Several Issues Concerning the Application of the Law on Choice of Law provides in an enumerative way that rules relating to the protection of the rights and interests of workers, food or public health safety, environmental safety, financial safety, anti-monopoly, anti-dumping, and similar matters-- are mandatory rules that apply to foreign-related civil relations. A large number of mandatory rules also apply to customs, tax, consumer protection and investment in special areas.

Since the transaction involved in the Sinochem case was an ordinary international sale of goods and the dispute merely over the performance of a payment obligation, it was not regulated by mandatory rules and the parties could agree on the applicable law. However, the economic activities in the building of One Belt One Road involve mostly complicated transactions and multi-level administrative governance and will often require consideration of conflict of law rules. Contracting parties should bear in mind the relevant mandatory rules of the country involved.

In addition to the judicial principles we have discussed, the law on Choice of Law also establishes the principle of closest connection. Where the country’s law contains no provision relevant to the matter then the court may apply the law which is most closely related to the relationship of the parties. 

The Trial Function in Resolving Conflict of Law

The trial by domestic courts of foreign-related civil and commercial disputes involves a re-allocation of the exercise of judicial power, on behalf of the country, to resolve disputes over private rights. The determination of applicable law is the foundation for proper settlement of foreign-related civil and commercial disputes. When determining the applicable law, the courts should give full play to their trial function by correctly establishing and following the judicial principles for resolving conflict of laws as well as establishing factual issues. The Supreme People’s Court’s process for ascertaining and interpreting foreign laws in the Sinochem case is noteworthy for reflecting the attitude of the People’s Courts in determining choice of law.

When applying foreign law in the resolution of disputes it is a prerequisite to ascertain their content. The Law on Choice of Law draws on the continental legal system and the People's Courts, arbitral authorities and administrative organs are responsible for ascertaining the content of the relevant foreign law. As an exception, any party which chooses a specific foreign law must provide that law. Where a party fails to do this within the time limit, or where the court cannot reasonably obtain that foreign law from the parties, or by the methods set out in binding international treaties or from Chinese and foreign legal experts, then the court may decide that Chinese law shall apply. Even when the foreign law has been ascertained, the People's Courts will hear submissions from the parties on its content and application, and if the parties have no objection, the People's Court may confirm the same. If there is an objection, the People's Court will consider it and then determine the applicable law.

The trial function of the courts in cases where foreign law is an issue includes both ascertaining and confirming the content of law. In the Sinochem case both parties agreed to apply the law of New York. ThyssenKrupp submitted the Uniform Commercial Code and related cases during the trial and although Sinochem did not recognize ThyssenKrupp’s interpretation of the New York law, it raised no objection to the law itself and so the Supreme People’s Court confirmed the applicability of the New York law and its content in accordance with the Law on Choice of Law.

The current Chinese legal system does not stipulate the interpretation obligation of the courts towards choice of law, but it is generally recognized that the courts will decide the applicable law in foreign-related cases. In practice, the courts will ask the parties which law they wish to apply. From the perspective of legal theory, the choice of law is a matter of law under the continental legal system underlying China’s Civil Procedure Law, as such it is to be determined by the court. However, to prevent parties being surprised by a judgment, many continental countries have adopted the view that the courts should present their opinions on the law to the parties in advance without undisclosed application of law.

In the Sinochem trial, the Supreme People’s Court held that when considering a contractual dispute, the People’s Courts will decide on the validity of the contract in the first place, whether or not this was disputed by the parties. The court of first instance did not consider the validity of the contract and neither party raised validity as an issue. Despite this, the Supreme People’s Court still ascertained and confirmed the applicability of the law of New York chosen by both parties and used it, since the CISG was silent, to determine the validity of the contract. The court also required the parties to provide the foreign law. By deciding on the applicable law and its interpretation during the trial of foreign-related cases the court takes into account the parties’ expectation that they will be able to follow the reasoning and understand the resulting judgment. This helps prevent the parties continuing to litigate the choice of law issue.

In conclusion, the building of One Belt One Road has imposed new challenges on the People’s Courts in the trial of foreign-related civil and commercial cases. A correct and appropriate way to determine the choice of law is a prerequisite of proper settlement of disputes. Strict compliance with the judicial principles for resolving conflict of laws and full play of the trial function as demonstrated by the Supreme People’s Court in the Sinochem case are important guarantees for establishing a good international judicial image for Chinese courts as well as increasing the international credibility of Chinese judgments. 

This article was originally written in Chinese, and the English version is a translation.

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