The Homeward Trend in Chinese Choice-of-Law Cases
May 24, 2023
One of the characteristics of transnational litigation is that there is generally more than one forum in which the suit may be brought. Although TLB focuses primarily on transnational litigation in U.S. courts, it can sometimes be useful to look at what is going on in other systems where litigation might instead be filed. A recent article by Professor Dicky Tsang at the Chinese University of Hong Kong provides a fascinating insight into choice-of-law decisions in Chinese courts.
In An Empirical Study on Choice of Law in China: A Home Run?, Tsang looked at 15,755 contracts cases decided during a twelve-year period between 2007 and 2018, finding that 98.10% of the cases applied Chinese law. As Tsang writes “we are looking at probably the largest homeward trend among the economic powers of the modern world.”
China’s Choice-of-Law Regime on Paper
If one simply looks at China’s choice-of-law regime on paper, one would not expect this result. As Tsang recounts, in 1985 China adopted its Foreign Economic Contract Law, which provided in Article 5 that “[t]he parties to a contract may choose the proper law applicable to the settlement of contract disputes. In the absence of such a choice by the parties, the law of the country which has the closest connection with the contract shall apply.” The Supreme People’s Court issued an interpretation in 1987 that borrowed the concept of “characteristic performance” from the EU’s Rome Convention to identify the country with the “closest connection.” This approach was continued in Article 126 of China’s 1999 Contract Law.
In 2010, China adopted a new Law on the Laws Applicable to Foreign-Related Civil Relations (Choice of Law Act). For contracts, Article 41 provides: “The parties may by agreement choose the law applicable to their contract. Absent any choice by the parties, the law of the habitual residence of a party whose performance of obligation is most characteristic of the contract or the law that most closely connected with the contract shall be applied.” Although Article 41 carries forward the principle of party autonomy, the relationship between characteristic performance and closest connection is not clear. It might adopt characteristic performance as the primary rule with a more-closely-connected escape clause. Or it might offer characteristic performance and closest connection as independent tests between which the court has discretion to choose.
The Choice of Law Act also includes several escape devices. Article 4 provides for the application of mandatory rules of Chinese law. Article 5 provides that when the foreign law is prejudicial to Chinese public policy, Chinese law will be applied. And Article 10 provides that when the parties cannot prove the content of foreign law, Chinese law will be applied. But there is no general rule favoring the application of Chinese law that would account for the high percentage of cases applying it.
Extent of the Homeward Trend
Of the 15,755 contracts cases examined, only 300 applied foreign law. (The article looks only at contracts cases because they are significantly more numerous than tort cases.) The homeward trend becomes even more prominent when one looks more closely at the 300 foreign law cases. Eighty-five of them applied treaties as the governing law, including 78 that applied the U.N. Convention on Contracts for the International Sale of Goods (CISG), which is substantively similar to Chinese law. One hundred and seventy-five applied Hong Kong or Macau law, which are treated as foreign under the Choice of Law Act, although Hong Kong and Macau are special administrative regions of China. Only 40 cases out of 15,755 applied some other law: 18 applied English law; three applied U.S. law; and 19 applied the laws of other jurisdictions.
Reasons for the Homeward Trend
The reasons Tsang finds for the homeward trend in Chinese choice-of-law cases are fascinating. He concludes that it is not because Chinese judges are ignorant of choice-of-law issues. Only 1.43% of the total cases contain no choice-of-law analysis. Nor is it because Chinese judges lack sophistication. Highly commercial provinces that are widely regarded as having the best judges, like Fujian, Zhejiang, and Guangdong, apply Chinese law at the same rate or more frequently than less commercial provinces.
An important reason for the homeward trend is party choice. About a third of the total cases had choice-of-law clauses, which overwhelmingly chose Chinese law. In a few cases, the parties agreed to apply Chinese law at trial even though their contract had selected foreign law. Tsang notes that most of the disputes he studied involved relatively small amounts and that introducing questions of foreign law would have significantly raised litigation costs. Tsang also notes the foreign parties working on high-value transactions generally choose arbitration.
In cases without a choice-of-law clause, Tsang found, “Chinese courts tended to ‘cherry-pick’ China-related factors while failing to refer to any foreign-related factor.” In more than a quarter of these cases, Chinese courts announced that China had the closest connection to the contract without mentioning any factors at all. In theory, a characteristic performance approach should limit a court’s discretion and result in greater application of foreign law. But recall that in Article 41 of the Choice of Law Act, the relationship between characteristic performance and closest connection is unclear, allowing Chinese courts to ignore characteristic performance when it would lead to the application of foreign law.
Does a Choice-of-Law Clause Make a Difference?
Of the 15,755 cases studied, 286 involved choice-of-law clauses choosing foreign law. In 24 cases, the parties changed their minds at trial and had the court apply Chinese law instead. The choice of foreign law was denied in 34 cases because of mandatory Chinese rules or public policy. In 42 cases, the court found that the party invoking foreign law failed to prove its content, a practice that Tsang finds troubling because it seems arbitrary. But in 182 cases the Chinese court enforced the choice of foreign law. Although the article does not say how many of these clauses chose Hong Kong or Macau law or the CISG, to which Chinese courts might be more well-disposed, it does appear that Chinese courts will enforce choice-of -law clauses selecting foreign law in more often than not. Omitting a choice-of-law clause, on the other hand, virtually guarantees the application of Chinese law. These are things that U.S. businesses planning for dispute resolution in contracts with Chinese businesses should keep in mind.
More than a decade ago, in my International Business Transactions class, I had a Chinese law professor as an LLM student. I gave him facts involving a contract between a U.S. party and a Chinese party, pointed to Article 126 of China’s 1999 Contract Law, and asked him what law a Chinese court would apply. “Chinese law,” he confidently predicted. “What if the contract has a choice-of-law clause choosing California law?” I continued. “Chinese law,” he said. I pointed out that Article 126 allowed the parties to choose the law applicable to their contract. “Chinese law,” he insisted.
I was looking at the law on paper. My student knew what Professor Tsang has shown empirically—that reality may be quite different.