The rise of party autonomy

Meanwhile, limitations on party autonomy may be implicated from the provision of Article 3 and found from other related provisions as below:

First, Article 3 literally requires the choice of law be “in accordance with the provisions of the laws,” indicating that the parties may exert their autonomy over the governing law where the Chinese law has expressly bestowed such freedom on the parties or at least has not provided otherwise.

Second, Article 3 requires that the choice of law must be made “expressly”. A common practice is to stipulate the applicable law in the contract. From the perspective of the Chinese court, a choice of law is also expressly made where the parties have cited the law of the same forum and have not disputed the application of such law.

Third, the Chinese mandatory rules, if any, shall directly apply to the foreign-related civil relations (Article 4). For instance, Article 126.2 of the PRC Contract law mandates the application of the Chinese law to the Sino-foreign Equity Joint Venture Enterprise Contract, the Sino-foreign Cooperative Joint Venture Contract, and the Contract for Sino-foreign Joint Exploration and Development of Natural Resources which are performed within the territory of the PRC. Article 126.2 precludes the application of party autonomy to the above contracts.

Finally, the application of foreign law shall not be repugnant to the public policy of the PRC (Article 4), and the applicable foreign law shall not embrace the conflict rules (Article 9).

Civil subjects

Consistent with the general approach by other countries around the world, party autonomy is generally not allowed to resolve disputes in relation to civil subjects in China. According to Articles 11, 12 and 14 of the Application Law, the legal capacity and the capacity to act of the natural person should generally be governed by the law of the habitual residence of the natural person. Similarly, the legal person and its branches should be governed by the law of the place where it is incorporated or the law of its principal place of business. However, when it comes to disputes over principal-agent, trust and arbitration agreements, the parties' autonomy may trump the default rules as set forth by Articles 16, 17 and 18 of the Application Law. Thus, in this context, the parties may select the law that is comparatively well-settled and that they are more familiar with in resolving disputes.

Real rights

The Application Law precludes the application of party autonomy to the real rights in immovables, commercial securities and pledge of rights (Articles 38, 39 and 40). On the other hand, it accords freedom to the parties to choose the law applicable to the real rights in movables and change of real rights in movables in transit (Articles 37and 38). Accordingly, if there is a dispute over the real rights in a piece of immovable property located in China, the applicable law should be the law of the place where such property is located, for example PRC law. When a wholly foreign-owned enterprise (WFOE) sets up a pledge of its share of stock as collateral security in China, PRC law – the country of the law where the pledge of right is set up – should be applied.

Obligations

1. Contracts

The application of party autonomy to foreign-related contracts is a rigid approach in China as Article 41 of the Application Law reinstates the provisions of Article 145 of the PRC Civil Law General Principles and Article 126.1 of the PRC Contract Law. However, in addition to those contracts subject to the mandatory application of the Chinese law (Article 126.2 of the PRC Contract Law), the applicable law to consumer contracts and employment contracts is specified by Articles 42 and 43 of the Application Law. Such arrangement is for the protection of weaker parties in these two international civil relations, such as the consumer and the employee. In the case of consumer contracts, the applicable law should be the law of the habitual residence of the consumer, or the law where the goods or services are provided if the consumer chooses so or the seller does not carry out business in the habitual residence of the consumer. In the case of employment contract, the law of the place where the employee carries out his work or the law of the principal place of business of the employer if the place of work cannot be ascertained, should be applied.

Consequently, not only should the resolution of employment contract disputes between a foreign company and its local employees in China be subject to PRC law, but also the resolution of consumer contract disputes between a foreign company and the purchasers of its products or services in China. In this regard, the foreign employers or the foreign distributors may be subject to the potentially higher standard of liability under Chinese law.

2. Torts

Another notable instance of the extension of the application of party autonomy is its application to torts. Article 44 grants the parties the freedom to choose the applicable law after the tortious act occurs. Nevertheless, the application of party autonomy is partially restrained from product liability (Article 45), as the Application Law merely grants the injured party the right to choose the applicable law as being either the law of the country in which the tortfeasor has its principal place of business or in which the damage occurs. Yet, the application of party autonomy is completely restrained from the liability for invasion of personality rights (Article 46). When the personality rights of a natural person are invaded by someone else by means of the Internet, the law of the habitual residence of the injured party shall solely be applied.

3. Unjust enrichment and Negotiorum Gestio

The legislators had never promulgated any conflict rules governing the resolution of disputes over unjust enrichment or negotiorum gestio prior to the enactment of this Application Law. At this time, the legislators have explicitly applied the parties' autonomy to disputes over unjust enrichment or negotiorum gestio (Article 44), as it has dealt with the tort cases.

Intellectual property

Given the nature of IP law, being territorial, the Application Law is inclined to give greater reign to the parties' autonomy. For instance, the law of the place where protection is claimed is mandatorily applied to disputes about who has the legal ownership of IP rights and what the scope of rights in IP is (Article 48). Further, in the case of an IP infringement dispute, the Application Law limits the parties' autonomy by limiting the parties' choice to the law of the forum in which such dispute is being tried (lex fori). However, if the parties fail to make a choice, the law of the place where the protection is claimed should be applied (Article 50). Thus, when a foreign company seeks to protect its IP rights in China, the scope of protection and the extent of liability arising from the IP infringement shall be determined by PRC law. This is because China is not only the place where protection is claimed, but the place where the dispute is being tried as well. Compared with its national law, the foreign company might find the scope and extent of protection reduced under PRC law.

Exceptional treatment is accorded to the assignment and licensing of IP rights, both of which are contractual in nature. Consistent with the general practice for contracts, the Application Law grants the IP assignment or licensing parties the right to choose the applicable law (Article 49).

A tricky balance

The employment of party autonomy by this Application Law, though with limitations, in essence represents a shift toward a more flexible approach in dealing with foreign-related civil relationships. This benefits the parties of foreign-related civil relations as the results of disputes are comparatively foreseeable as they are able to choose the law familiar to them.

Together with the expansion of party autonomy, the chances of applying a foreign law by the Chinese court have increased correspondingly. Presumably, the large workload for absorbing and applying a foreign law is a big challenge for the Chinese courts. As a result, they might be inclined to apply Chinese law by highlighting the limitations on party autonomy and other related restrictions in order to circumvent the application of the foreign law. Consequently, the balance between party autonomy and its limitations established by the Application Law might be destroyed. How balance is maintained in judicial practice remains to be seen.

Zhang Yan (Partner) and Meng Jin (Associate), Haoliwen PRC Attorneys, Shanghai