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Home > Export Control
China’s new “Blocking Statute” and the concerns it raised
By Henry Chen & Michael Zolandz | 2021/3/19 21:21:24

An overview 


Drawing inspiration from European Union’s legal practice, China has created a similar legal regime for counteracting the impact of foreign sanctions on Chinese persons. On January 9, 2021, the Ministry of Commerce of the People’s Republic of China (the “MOFCOM”) issued the MOFCOM Order No. 1 of 2021 on Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the “Chinese Blocking Statute”). While the law is effective immediately, it is not yet fully operational. So far, only a basic legal framework has been established in relation to “sanctions” (e.g., by the US), “injunctions” (i.e., by China to counteract the “sanctions”), “exemptions” (from the “sanctions”) and “litigations” (to sue who complied with the “sanctions” or benefited from the “sanctions”). The Order will only become operational when the Chinese government further substantiates it. 


The law is very new and there are no concrete applications of this law on the market. For that reason, in this article, we introduce some significant provisions of the law, and move forward to analyze the provisions in the abstract. 


Notable provisions of the law are set out below:


1. Reporting obligation on a sanction: The Chinese Blocking Statute creates a reporting obligation for Chinese persons and entities impacted by a sanction under extraterritorial foreign regulations. Under the new rules, when “a Chinese citizen, legal person or other organization … is prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations,” the Chinese person or entity is required to report such matters to China’s State Council within 30 days.


2. Implicated foreign laws (or non-Chinese laws): the Chinese Blocking Statute establishes an injunction mechanism for the government to designate specific foreign laws as “unjustified extraterritorial applications,” and subsequently issue injunctions against the compliance with these foreign laws. Under the Chinese Blocking Statute, a “working mechanism” headed by the State Council is charged with assessing and determining whether the foreign sanctions laws constitute “unjustified extra-territorial application of foreign legislation and other measures.” The law sets out an open-ended and largely undefined list of factors for the State Council to consider, including whether the laws represent “a violation of principles of international relations,” impacts China’s “national sovereignty, security and development interests,” or affects the “legitimate rights and interests” of Chinese persons and entities, as well as “other factors that shall be taken into account.” If the working mechanism confirms the existence of an “unjustified extraterritorial application” of a foreign law, it will direct the State Council to issue an injunction prohibiting parties in China from complying with the law.


According to the MOFCOM’s interpretation, the mechanism on injunction only applies to Chinese citizens, legal persons, or other organizations. In other words, only Chinese persons or entities could be subject to the injunction and prohibited from complying with foreign regulations identified by the “working mechanism.”


3. Exemption process: A Chinese person or entity will be able to apply for an exemption from compliance with the injunction by submitting a written application to the State Council. Such request will need to provide the reasons for and the scope of the requested exemption. The State Council will then decide whether to approve such application within 30 days or less. The format for applying for an exemption is not yet clear.


4. Private right of action (or litigation): The Chinese rule creates a private right of action for Chinese persons or entities to seek civil remedies in Chinese courts from anyone who complies with prohibited extraterritorial measures, unless the State Council has granted an exemption to the prohibition order.  


More significantly, the scope of this private right of action seems unbounded. According to the second paragraph of the law’s Article 9, if a Chinese person or entity suffers loss due to a judgement or ruling based on the prohibited foreign regulations, it can pursue a legal action in Chinese courts against parties who benefited from the said judgement or ruling.


5. Consequences for Non-Compliance: A Chinese person or entity who fails to comply with the reporting obligation or the prohibition order may be subject to government warnings, orders to rectify, or fines. The specific criteria for deciding which punitive measures to apply remains unclear.


Comparison with the EU legal regime 


Notably, China did not invent this legal regime. The EU, Mexico, Argentina as well as Canada have similar laws in effect. In advanced jurisdictions such as the EU, the law tends to have more flesh on the bone regarding its application. The EU Blocking Statute, for instance, applies only to a specific set of laws specified in its Annex. Those are largely to do with US’s sanctions on Cuba and Iran. The Chinese government may do the same by adding a list of foreign regulations to be blocked in the near future. Hopefully, the law will become much clearer by then. With respect to the law’s enforcement, EU member states can enforce the Blocking Statute themselves. In several EU states, entities have been threatened with fines, and have even been subjected to mandated specific performance of contractual obligations which may expose them to risk of liability under US sanctions. As for private actions, EU entities are also entitled to sue for damages, including legal costs, arising from the application of the extraterritorial measures (enforcement of which claims may extend to seizure and sale of assets). If China is basing its Blocking Statute on the EU Blocking Statute, likely we will see both administrative actions to enforce the measures as well as private sector suits to compel companies to honor contractual agreements, even if honoring those contractual relations would violate some compulsory compliance obligations. 


Thorny concerns raised by Article 9


Although the above comparison with the EU model adds some predictability, the law’s Article 9 places market participants in a complete legal limbo. What is controversial about the Chinese version is Article 9, which puts the law on a different plane from other versions. It not only contravenes universal legal doctrines but also does not sit well with the existing Chinese legal system.


The first paragraph of Article 9 (or Article 9.1) represents a classic legal nexus that can give rise to a private lawsuit. The underlying legal nexus could be a supplier’s agreement, the breach of which entitles one to sue in court action. For example, a Chinese company A (which could be a joint venture or wholly foreign-owned enterprise of a US company) has an existing agreement with Company B and Company B stops fulfilling its contractual obligation to comply with a sanction under foreign regulation that has been identified by this statute. Company B may find itself subject to a breach of contract lawsuit and the compliance with that identified foreign regulation cannot qualify as force majeure. Additionally, a tort action can also be the basis for a private lawsuit for the purpose of Article 9.1, so if Company B’s compliance with identified foreign regulations infringes the legitimate legal rights of Company A, Company B can be subject to a claim for damage. Notably, according to official interpretation, the infringing company has to be a Chinese entity (which might include foreign companies’ Chinese subsidiaries). In essence, the first paragraph of Article 9 elicited clear existing legal doctrines’ help for the protection of Chinese persons. 


Compared with Article 9.1, Article 9.2 is much more controversial as it establishes that if a foreign regulation is issued, and a Chinese person or entity suffers as a result from a judgement or ruling stemming from the foreign regulation, that Chinese person or entity now has a right of action to sue the benefiting party in a Chinese court. 


This is concerning. This would mean that if a Chinese or non-Chinese entity benefits from a judgement or ruling that is detrimental to Chinese persons or entities, the benefiting entity may then be subject to private lawsuits by that Chinese person or entity. This interpretation of Article 9 is substantiated by MOFCOM’s published interpretation of Article 9 in that a non-Chinese entity could be a defendant under this Article 9.2. However, this interpretation was then quickly taken down and is no longer accessible. It seems that more time is needed to determine exactly which way MOFCOM decides to interpret this clause. 


Article 9 raises an additional question: is the ‘judgement or ruling’ from which the Chinese entity suffers referring to only a judicial ruling? Or can it be interpreted to further encompass decisions made by regulatory or administrative agencies? 


If so, that could open the floodgate for many potentially frivolous lawsuits. Let us suppose: the US Department of Commerce’s Bureau of Industry and Security adds Chinese Company A to its entity list restricting American or Non-American suppliers (who sells controlled-items) from exporting to that company for national security interests. The affected Non-Chinese entities who can benefit from the US’s national interests can include all Americans who have proprietary interests or business operations in China. Under this reading of Article 9, the Chinese company can potentially sue any American who benefited. This is unlikely to happen, but it showcases an extreme consequence of Article 9.


The following scenario can also be relevant. Let us further suppose: the Chinese Company A lost domestic or global market share and suffered a significant loss due to the listing. That market share was soon occupied by a US Company B who obtained a significant gain. Does that US Company B count as a benefiting party for the purpose of Article 9’s second paragraph? How about a Non-US Company C who claimed that market share? Do competitive advantages obtained in this manner count as a “benefit” in the eyes of the law? These questions remain to be answered.


The factors that soften Article 9

The above examples represent extreme cases that could happen under the law. But we have to recognize that this “Blocking Statute” is not statutory in nature – it is merely promulgated by MOFCOM. China’s Law of Civil Procedure (a statutory authority passed by China’s national legislature) requires direct legal nexus (or causation) between the parties for there to be a valid lawsuit. 


Frivolous lawsuits can also be barred by court fees, the amount of which corresponds to the value of the lawsuit. Contrary to the understanding of western people, you have to pay court fees to launch a civil case with disputed value. For a claim of RMB 10 million, RMB 81,800 shall be paid; for a claim of RMB 100 million, RMB 541,800 shall be paid.


On the other hand, Article 9’s second paragraph’s legal basis is difficult to fathom. From its wording, unjust enrichment seems to be the one that it refers to, but it can run into some problems. Unjust enrichment does deal with situations where one’s benefit is gained at the expense of another. This can be the claimant’s own doing or done by third parties. One of the key requirements of unjust enrichment is that there must be a legal causal link between the benefit gained and the loss suffered. So, reflected interest such as market value gain should be winnowed out and presumably the aforesaid “competitive advantage” should also be inadmissible in the eyes of the law. In this sense, those legally “remote” benefiting parties should have their minds at ease. Another requirement for such cause of action to stand is that the benefit gained has no legal basis for it. So if the benefit in question is gained as a result of court judgement or administrative ruling (albeit made by foreign bodies), unjust enrichment seems not a viable cause of action after all. This is even less so in the case of the benefiting Non-Chinese entities not being parties to the judgment or ruling mentioned in the above hypotheses.  


Compliance considerations


Despite the need for further specification and clarity, there are steps that potentially affected parties may consider as part of their compliance strategies. 


First, with respect to compliance with the so called “extraterritorial” applications of laws, companies should evaluate whether they have over-complied regarding the precise terms and reach of such measures. 


Second, with respect to cross-border commercial relations, companies can evaluate if there are actions they can take to reduce the risk of being caught in a conflict of laws. Companies should establish focused internal mechanisms to monitor the actions of the Chinese government in what is likely to be discretionary (or potentially capricious) implementation of the “Blocking Statute.” If there are specific foreign regulations being identified by the “working mechanism,” companies should engage professional lawyers to seek exemptions for compliance after proper assessment being done.


Third, in order to mitigate potential legal or business risks, companies can reexamine their contractual clauses (especially their dispute resolution mechanisms) as well as compliance policies that have been adopted in connection with sanction compliance programs that may have extraterritorial implications to them. This examination should include an assessment as to whether the clauses create potential liability under the new “Blocking Statute,” and whether modifications are warranted. 


Henry Chen, dual qualified in China and the New York State of the US, is a senior partner of Dentons Shanghai Office, before which Henry was AP Compliance Director of Ford Motor Company. Henry’s email is


Michael E. Zolandz is the Chair of Dentons' Federal Regulatory and Compliance practice, and serves as the Managing Partner for Dentons’ Washington, DC office. Michael’s email is

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