On January 9, 2021, the Ministry of Commerce (“MOFCOM”) promulgated the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (“Rules”) with immediate effect. This represented China’s first major attempt in the field of blocking legislation aiming at safeguarding China’s national sovereignty, security and public interests, and protecting the legitimate rights and interests of Chinese citizens, legal persons or other organizations. In enacting such legislation, China joined the ranks of Canada, the 27 member states of the EU, the UK and a number of other countries. We compare the EU and China approaches below to show that 4 key elements can be found in both the China and EU approaches and that China and the EU appear to be in agreement both on the principle that such US statutes should be nullified as far as possible and also how best to take such steps. The Canadian and UK approaches are not analysed but both contain the same 4 key elements.

The history of blocking legislation seems to be comprised entirely of countries protecting themselves, their citizens and companies from the extraterritorial effect of certain US laws. The first blocking leghislation appeared in the 1990s in response to the US enacting the Helms-Burton Act which took steps against companies both within the US and elsewhere that invested in Cuba. However, both European and Canadian companies sought to maintain their diplomatic and commercial ties with Cuba. This resulted in both Canada and the EU enacting blocking legislation to minimize the effect of the US statutes in Canada and the EU. The EU statute is examined in more detail below.

This territorial overreach by the US has proven to be extremely unpopular even with its close allies. EU countries such as the UK that traditionally had a close relationship with the US were surprisingly supportive of the EU blocking legislation and in the UK’s case even maintained its blocking regulations against the US after leaving the EU. Other traditionally close US allies such as Canada have also enacted their own blocking legislation. The EU, Canada and the UK have all said that they regard such laws with extraterritorial effect to be contrary to international law. By enacting its own blocking legislation, China has joined this growing list of countries

In response to the increasingly prominent problem of the extraterritorial effect of particular US laws in international economy and trade, especially the reckless “long-arm jurisdiction” practiced by the US against Chinese citizens, legal persons or other organizations (“Chinese Entities”) in the fields of trade and technology, the Rules establish a blocking mechanism from the aspects of information reporting, issuance of injunction, application of exemption and judicial remedy, etc., and provide effective remedy channels for Chinese Entities which are improperly prohibited or restricted from conducting normal economic, trade and related activities with any third country (region) or its citizen, legal person or other organization as a result of such extraterritorial application of foreign laws and measures violating international laws and basic principles of international relations. The four key elements of the Rules are set out below.

When encountering circumstances where any foreign laws and measures prohibit or restrict Chinese entities from conducting normal economic, trade and related activities with any third country (region) or its citizens, legal persons or other organizations, Chinese Entities must accurately report the relevant information to MOFCOM within 30 days. A violation of this will incurr a warning, an order to rectify within a specified period of time or a fine depending on the severity of the circumstances. The reporter may request MOFCOM to keep the details confidential.

Considering the Rules do not clearly specify the list of foreign laws and measures to be blocked, whether certain foreign laws and measures need to be reported shall be decided at the discretion of the relevant Chinese Entities. According to the Rules, the members of working mechanism which comprises relevant Chinese ministries under the leadership of MOFCOM shall provide guidance and services for Chinese Entities in response to the improper extraterritorial application of foreign laws and measures. Therefore, the relevant Chinese Entities are suggested to timely consult, communicate and report to the competent commerce department if they cannot decide whether certain circumstances constitute improper extraterritorial application of foreign laws and measures.

The Rules set forth several factors to be considered by the relevant department in determining whether foreign laws and measures have been improperly applied extraterritorially, such as the potential violation of international law, impact on China’s sovereignty and national security, and impact on Chinese Entities, etc. Depending on the assessment result, MOFCOM will issue an injunction (“Injunction”) against recognition, enforcement or compliance with such foreign laws and measures that involve improper extraterritorial application. Unless duly exempted from compliance, Chinese Entities must strictly abide by the Injunction or face a possible warning, an order to rectify, or a fine.

Under certain circumstances it may be difficult or uneconomic to comply with the Injunction. For example, where compliance with the Injunction risks violating the foreign law or measure which may in turn result in severe economic sanctions overseas, while non-compliance with the Injunction may expose the entity to administrative penalties on the one hand, and possibly civil liability of compensation on the other in China. In this case, Chinese Entities may apply to MOFCOM for exemption from complying with such Injunction.

Whether the Injunction could apply to any entities resident in third countries or regions remains to be clarified. In addition, since the Rules apply to extraterritorial application of foreign laws and measures that improperly prohibit or restrict Chinese Entities from conducting normal economic, trade and related activities and relevant activities with “any third country (region) or its citizen, legal person or other organization”, there arises another question of whether a domestic market entity in China subject to such foreign laws and measures within the scope of the Injunction would be required to abide by the Injunction. 

According to the Rules, if a party complies with a foreign law or measure within the scope of an Injunction, resulting in infringement upon the legitimate rights and interests of Chinese Entities, the Chinese Entities may, in accordance with the law, commence proceedings in the people’s court to obtain compensation from another party for its losses. According to a reply in response to the public’s consultation on the official website of MOFCOM, such “party” does not include entities of a third country or region. Although this is not a legally binding official interpretation of the Rules, it can be referenced in applying the relevant clause in practice.

If a judgment or ruling made in accordance with a foreign law within the scope of an Injunction causes Chinese Entities to suffer losses, the Chinese Entities may also, in accordance with the law, commence proceedings in the people’s court seeking compensation or damages from the party concerned who has benefited from the judgment. And the “party concerned” under this circumstance include entities of a third country or region, according to the reply to the public’s consultation as published on the website of MOFCOM. If the party concerned refuses to perform the effective judgment or ruling made by the people’s court, the Chinese Entities may, in accordance with the law, apply to the people’s court for enforcement.

In addition to the above 4 elements, the Chinese Rules also state that if the Chinese Entities, in accordance with an Injunction, fail to comply with the relevant foreign laws or measures and thereby suffers great losses, supporting measures will be provided by the relevant governmental department in light of the specific circumstances.

The EU has always maintained the position that it does not recognise the extraterritorial application of laws adopted by third countries and considers such efforts to be contrary to international law.

The EU blocking legislation is found in Council Regulation (EC) 2271/96 and was created in response to US laws having extraterritorial effect in relation to Cuba, Iran and Libya. The regulation works by nullifying the effect of foreign legislation specified in the Annex. In the 25 years since it became law, only legislation enacted by the US has been specified within the Annex, specifically legislation relating to Cuba, Iran and Libya.

The regulation protects EU based individuals and other entities (EU operators) engaged in lawful commercial activities from the extra territorial effect of legislation listed in the Annex.

The elements already identified in the Chinese legislation can also be found in the EU legislation:

• Information Reporting: EU operators whose economic and financial interests are affected by the listed laws must inform the Commission within 30 days. This is narrower in scope than the Chinese equivalent rule which applies to all foriegn legislation, not just those listed in the Rules.

• Injunctive effect: nullification of the effect in the EU of any foreign court  ruling based on the foreign laws listed in its Annex; prohibits compliance by EU operators with any requirement or prohibition based on the listed laws.

• Exemption effect: EU operators who consider that non-compliance will seriously damage their interests or the interests of the EU can apply for permission to the Commission for an authorisation to comply with those laws.

• Judicial effect: EU operators can bring private civil claims for damages against any natural or legal person or any other entity causing the damages by the application of laws specified in the annexe.

In summary, the Rules are still very generic and much of the implementation of the Rules remains to be clarified. However, China clearly shares many of the same concerns about blocking legislation as the EU and have adopted many of the same remedies. As such, many EU, UK and Canadian companies and others may already have procedures in place for identifying obligations such as reporting but these will need to be refined to meet the Chinese laws. However, companies that have no such procedures in place should be aware that the Rules may give rise to legal liability on parties of international economic, trade and related activities.

The exact scope and impact of the blocking legislation remains to be seen. China may take the same approach as the EU and use the existence of this blocking legislation when negotiating with the US. However, until a formal agreement as to the application of those extraterritorial statutes between China and the US is negotiated, companies should take steps to protect themselves.

We recommend that Chinese Entities, as well as multinational companies and foreign entities engaged in transactions with Chinese Entities, take appropriate steps to ensure they have sufficient compliance rules and measures in place to proactively carry out risk prevention and control. Firstly, commercial contracts with Chinese Entities ought to be carefully reviewed and updated to ensure that any termination rights based on compliance of export controls and other applicable laws of foreign jurisdictions will not violate an Injunction or trigger legal proceedings in a People’s Court in China against such terminating party. Secondly, self-examination can be conducted to determine whether their business falls within the scope of application of the Rules, especially direct or indirect transactions between Chinese Entities and third country entities that may involve export controls or economic sanctions from other countries. Finally, enterprises are suggested to develop internal compliance practices to avoid unnecessarily triggering the reporting obligations under the Rules which might result in additional operational burdens for the enterprise.