Governing law clauses and dispute resolution clauses are often equally weighted during contract drafting. However, unlike litigation, which gives due attention to the protection of public interest, commercial arbitration respects the principle of privity both in terms of the arbitration clause and the contract as a whole. Therefore, parties’ agreements on the choice of foreign law are upheld more often in arbitration than in litigation.
This article examines the enforceability of foreign law clauses and the ascertainment of foreign laws in practice.
ENFORCEABILITY
Article 18 of the Law on the Application of Foreign-related Civil Legal Relations (application law) stipulates that parties may choose the applicable law for the arbitration agreement. Otherwise, laws local to the arbitration institution or the place of arbitration shall apply.
Article 41 provides that parties may choose the law applicable to the contract. Otherwise, the laws local to the habitual residence of the party whose performance of obligations best reflects the characteristics of the contract, or other laws most closely related to the contract, shall apply.
So, foreign laws are generally applied by the agreement of the contract parties, while the arbitral tribunal may also do so under the “closest connection” principle.
In practice, disputes usually focus on whether the parties have made an agreement on the application of foreign law, and which laws apply under the principle of closest connection. Prominent focus is given to accurately interpreting the parties’ agreement.
This brings a series of sub-questions, such as:
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- Whether the parties are allowed to agree on the application of law by implied means;
- The relationship between the parties’ agreement on the application of foreign law and the unilateral conflict norms; and
- Whether the agreement on the application of a country’s law excludes the relevant international conventions.
According to academic statistics, among foreign-related maritime litigation cases heard by Chinese courts from 2015-2020, nearly 26% concluded that the parties had implicitly chosen Chinese law, thus excluding the application of foreign laws.
Many Chinese courts also apply article 4 of the application law, which stipulates that “where the law of the People’s Republic of China has mandatory provisions on foreign-related civil relations, such provisions should be directly applied”, thus having more foreign-related contracts governed by Chinese law.
Rules stipulating that parties’ agreement on the application of law does not exclude international conventions were not established until the Supreme People’s Court (SPC) issued its guidance case No. 107, in 2019.
Therefore, parties in foreign commercial transactions should make an accurate, clear and complete agreement on the application of foreign law, avoiding ambiguous wording. Where possible, it is also advisable to choose commercial arbitration as the dispute resolution method, to maximise the realisation of contractual intention.
ASCERTAINMENT
Article 10 of the application law stipulates: “foreign laws applicable to civil relations with foreign elements shall be ascertained by a people’s court, an arbitration institution or an administrative organ. A party choosing to apply a foreign law should provide the laws of the foreign country. If the laws of a foreign country cannot be ascertained or there are no provisions in the laws of that country, the laws of the People’s Republic of China shall apply.”
According to article 8 of the SPC’s Provisions on Certain Issues Concerning the Establishment of International Commercial Tribunals, promulgated in 2018, foreign laws to be ascertained may be provided by:
- The parties concerned;
- Chinese or foreign legal experts;
- Legal ascertainment service providers;
- Expert members of the international commercial expert committee;
- Central authorities of jurisdictions with which China has concluded an agreement on judicial assistance;
- Chinese embassies and consulates in the counterparty country;
- Embassies and consulates of the counterparty country in China; or
- Other reasonable means.
In judicial practice, foreign laws are usually provided by the involved parties on their own initiative, or ascertained by the court, the arbitration institution or arbitral tribunal.
With an increasing number of enterprises “going out” with the Belt and Road Initiative, services by foreign law ascertainment institutions are being more often called on to settle foreign-related disputes. According to academic statistics, up to 31 August 2021 there were 45 court judgments that specified the use of professional organisations to ascertain foreign laws. In most cases, the foreign law ascertainment organisations were engaged, either directly or indirectly, by the courts.
In arbitration, compared to litigation, foreign laws are more often provided by the parties themselves. However, the services of foreign law ascertainment agencies are still often relied on in foreign-related cases.
For example, in a recent commercial contract dispute between a Chinese company and an Italian company handled by the Shanghai International Arbitration Centre, the parties agreed in the contract that “arbitrators shall act according to the applicable procedure and shall decide through the application of provisions of Italian laws”.
Towards the ascertainment of the Italian laws, the respondent Italian company engaged three Italian legal experts from the Italian office of an international law firm. The claimant Chinese company sought the services of the Benchmark Chambers International & Benchmark International Mediation Centre to ascertain the Italian laws through the SPC’s Platform for the Ascertainment of Foreign Laws. The centre issued an ascertainment report through Italian legal experts that it subsequently engaged. The case is still in hearing.
CONCLUSION AND OUTLOOK
Whether in foreign-related arbitration or litigation, the enforceability and ascertainment of foreign laws represents an important step to the realisation of the autonomy of the parties’ will, a fundamental principle. With the continual strengthening of China’s discourse over foreign-related legal issues, it is foreseeable that litigation or arbitration cases applying foreign laws will continue to increase, as will the demand of parties, courts and arbitration institutions for the ascertainment of foreign laws.
Li Tingwei is a senior manager of the research department at the Shanghai International Arbitration Centre
