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How Will Chinese Courts Review Investment Contracts After the 2019 Foreign Investment Law

Sun, 31 May 2020
Categories: Insights

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In Mar. 2019, China promulgated the Foreign Investment Law (“the Law”), which restructured the regulatory system of foreign investment in China. After the Law came into force, most of the foreign investment will no longer be subject to the approval by or the filing with the Chinese government.

To adapt to this change, China’s Supreme People’s Court (SPC) promulgated the Interpretation on Several Issues Concerning the Application of the Foreign Investment Law of the People’s Republic of China (关于适用〈中华人民共和国外商投资法〉若干问题的解释) on 16 Dec. 2019. The SPC tries to clarify in this judicial interpretation how Chinese courts will review foreign investment contracts thereafter.

Judge Wang Shumei (王淑梅), Director of the SPC’s Fourth Civil Division, Judge Gao Xiaoli (高晓力), Deputy Director of the SPC’s Fourth Civil Division, published an article titled “Understanding and Application of the Interpretation on Several Issues Concerning the Application of the Foreign Investment Law” (<关于适用外商投资法若干问题的解释>的理解与适用), which gave explanations of the judicial interpretation and was published in the “People’s Judicature” (人民司法) (No. 4, 2020). This post will introduce the viewpoints of the said article.

1. How does the court determine the validity of the investment contract?

Since the reform and opening up, foreign investment contracts have to be approved by the Chinese government before taking effect. Without such approval, the court may find the contract invalid.

In 2016, China amended the relevant laws on foreign investment, which stipulated that the foreign investment contracts only needed to be filed with the Chinese government as long as they did not fall under the Negative List. Even if it is not filed, the court can still find the contract valid.

In 2019, the Law further canceled the filing requirement. Foreign investors are subject to the same supervision as domestic investors, as long as their investment does not fall under the Negative List. This means that in most cases, the investment contracts do not need to be approved or filed, and therefore, the court will not find these contracts invalid.

However, in specific areas, where the domestic investment contracts need approval or filing, foreign investors shall be bound by similar regulations as well. In this case, the court will find the contracts invalid if they do not meet such conditions.

2. How is the validity of the contract if the foreign investment falls under the Negative List?

The Negative List includes prohibited areas and restricted areas.

Foreign investors are not allowed to invest in the prohibited areas in the Negative List. For the restricted areas, the foreign investment shall satisfy specific conditions, such as complying with the Special Administrative Measures for Restricted Access (“the Measures”) required by the List.

Therefore, if a foreign investor invests in a prohibited area and the party concerned claims that the investment contract should be invalid, the court shall uphold the claim.

If a foreign investor invests in a restricted area, but fails to comply with the Measures, and the party concerned claims that the investment contract should be invalid on the ground that the investment violates the Measures, the court shall uphold the claim.

However, the court shall find the contract valid if the foreign investment, which originally belonged to prohibited areas or violated the Measures, but then falls out of the adjusted Negative List before the judgment is made.

3. Problems to be solved

According to the authors, there are still many problems yet to be studied and solved by the SPC, though some of them are not so important at present, and some of them do not have a proper solution yet. Therefore, these problems are not covered by the judicial interpretation. In the future, the SPC may formulate new judicial interpretations for these unsolved problems.

For example, previously, disputes related to foreign investment contracts should be exclusively under the jurisdiction of Chinese courts and should be governed by Chinese law. After the Law came into force, the SPC has not yet made it clear whether such disputes will be handled according to the previous practice. It is certain the SPC will adhere to the previous practice for now.


Photo by Markus Winkler(https://unsplash.com/@markuswinkler) on Unsplash

 

Contributors: China Laws Portal Team

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