The People’s Supreme Court issued a Judicial Interpretation on December 28, 2012, made effective on January 7, 2013, regarding the application of the Law of the People's Republic of China on Application of Laws to Foreign-Related Civil Relationships (the “Law on Application of Laws”, or the “Law”). The Law determines the rules of the application of foreign laws under different scenarios as well as when Chinese law, as opposed to foreign law, applies to specific disputes.

The Judicial Interpretation’s twenty-one articles offer rather straightforward clarifications regarding the major questions raised by the implementation of the Law on Application of Laws since its promulgation in April, 2011. Among other questions, the Judicial Interpretation primarily answers: (1) how to define “foreign-related civil relationships”; (2) how to deal with the difference between the law and the choice of law rules existing in other laws; (3) when, in what manner, and within what scope can the parties choose the applicable law; (4) under what circumstances are PRC laws mandatory; (5) how to determine the applicable law by which the validity of the arbitration agreement is verified; (6) how to define a natural person’s “habitual residence” and a legal person’s “registered place”; and (7) how to define “foreign laws unable to be ascertained”, and how to determine the content and context of the foreign law.

I. “Foreign-Related Civil Relationships”

What are considered “foreign-related civil relationships” and what are not has always been the fundamental issue in the application of the Law because it permits only parties in a “foreign-related civil relation” to select a foreign law. Before the Judicial Interpretation came into effect, the commonly used definition of “foreign-related civil relationships” was set forth in article 178 of the Supreme Court’s [1988] No.6 judicial interpretation of the PRC General Principles of the Civil Law and its [1992] No.22 judicial interpretation of the PRC Civil Procedure Law, both of which provide that where i) either party of a civil relationship is a foreigner, stateless person, or foreign legal person; or ii) the subject matter of a civil relationship is located in a foreign country; or iii) the legal fact that the civil rights or obligations are established, changed, or terminated in a foreign country, such civil relationship shall be a foreign-related civil relationship. If any of these three elements exists, the civil relationship is considered foreign-related.

On the basis of the above three elements, the Judicial Interpretation of the Law includes a fourth element—where the regular residence of either party or both parties of a civil relationship is outside the territory of the PRC, such civil relationship shall be foreign-related.. Thus not only the nationality of the parties but also their residence determines whether foreign elements are involved. The Judicial Interpretation further clarifies that a “regular residence” is “where a person had resided for a consecutive year or more at one place and such place had served as the center of his living at the time the civil relationship established, changed or terminated, such place shall be deemed as his regular residence under the Law of Application of Laws, except in the case of medical treatment, labor dispatch, business affair, etc.”

II. When Do International Treaties and Practice Apply

The Law of the Application of Laws does not specify the application rules of international treaties and international practice. The rules are scattered among Article 142 of the General Principles of the Civil Law, Article 95 of the Law on Negotiable Instruments, Article 268 of the Maritime Code, and Article 184 of the Civil Aviation Law. In short, if any international treaty concluded or acceded to by the PRC contains provisions differing from those in the civil laws of the PRC, then the provisions of the international treaty shall prevail and apply, unless such provisions are ones on which the PRC has announced reservations. Additionally, where neither PRC law nor any international treaty concluded or acceded to by the PRC has any provisions regarding a matter, international practice may apply.

Articles 4 and 5 of the Judicial Interpretation refer to the above rules. However, not all international treaties will prevail over PRC laws. For example, instead of directly applying the TRIPS Agreement, China adopts the “conversion mode” which requires the provisions contained in the treaty to be recognized by PRC legislation before application. Because international treaties other than TRIPS commonly provide minimum protection standards without setting forth unified rules, in the intellectual property field, international treaties do not necessarily prevail over PRC law. The Supreme Court specifically addresses this issue in the Judicial Interpretation by adding the adversative sentence to the end of Article 4 that “however, this Article shall not apply where the international treaty in the intellectual property field has been converted into domestic law or is in need of conversion”.

III. Selection of Applicable Law by Parties

Before the Judicial Interpretation was promulgated, in practice, there had been confusion as to whether the selected law should be in any way related to the disputed civil relationship (e.g., whether a U.S. entity and a Chinese company can choose the law of Hong Kong to govern their contract). The Interpretation clarifies this issue and answers “yes”—Article 7 states, “where one party claims the selection of law invalid on the ground that there is no actual connection between such selected law and the disputed civil relationship, the People’s Court shall not rule to support such claim”.

The Interpretation also provides when and how the parties may choose the applicable law in Article 8. The parties may select or change the applicable law before the end of the debate proceeding in the court of first instance. Where the parties quote the same law of one country and neither of the parties raises any objection to the application of such law, it is deemed that they have chosen such law as the applicable law.

IV. When Does PRC Law Mandatorily Apply?

The Interpretation sets forth five circumstances where PRC law mandatorily applies regardless of agreement of the parties. These circumstances include: i) protection of employees’ benefits; ii) food safety or public health & safety; iii) environmental safety; iv) foreign exchange control and other financial safety; v) anti-trust and anti-dump; and vi) other circumstances under which PRC law shall mandatorily apply.

As revealed by the spokesperson of Supreme Court’s Fourth Civil Division, the same Division that was in charge of the promulgation of this Interpretation, there will be more judicial interpretations to come regarding the Law of Application of Laws in the future.