AN EMPIRICAL STUDY ON CHOICE OF LAW IN CHINA: A HOME RUN?

• Author: Tsang, King Fung

INTRODUCTION 341 I. BACKGROUND TO CHINESE CHOICE OF LAW 346 A. The Old Regime 346 B. The New Regime 349 1. Goals 350 2. Party Autonomy 352 3. Closest Connection 353 4. Escape Devices 355 C. Key Observations on The New Regime 356 D. Methodology 358 II. FINDINGS 360 A. Is there a Homeward Trend? 360 B. Why is There a Homeward Trend? 363 C What should China do with the current choice-of-law regime? 378 1. Does China have a choice-of-law system ? 378 2. What exactly is the choice-of-law system in China? 379 D. Is this de facto lex fori approach satisfactory? 382 1. The Stated Purposes 382 2. Justifications beyond certainty? 383 a. Does China have a choice-of-law system ? 383 b. Institutional justification 384 c. National interest 385 d. Forum shopping 386 E. What willl China do with the de facto lex fori approach in the future? 387 1. Moving on 387 2. Staying home 388 CONCLUSION 389 INTRODUCTION

One of the most important issues in international commercial litigation is determining which country's law governs the dispute. This choice-of-law question can be outcome determinative. Chinese courts have long been said to display a "homeward trend" in applying Chinese law, the lex fori, instead of foreign law in foreign-related civil litigations. (1) Coined by Nussbaum in 1932, (2) the term "homeward trend" refers to "a tendency to arrive, if possible, at the application of domestic law" in the courts' judicial search for the applicable legal system. (3) This homeward trend is frequently criticized by commentators, (4) who regard it as a form of local protectionism. (5) It damages the credibility of Chinese courts and erodes the confidence of foreign investors. (6) In addition, it encourages forum shopping and causes unfairness to defendants. (7) Crities believe that a modern choice-of-law system should allow parties to choose the law governing their relationship. (8) When there is no such choice, courts should decide the case according to the law of the country with the closest connection to the transaction. (9) These are known as the doctrines of party autonomy and closest connection respectively, (10) and have been widely adopted by many countries, particularly in choice-of-law rules in contractual disputes. (11) The homeward trend that sees Chinese courts applying lex fori indiscriminately is therefore contrary to these modern conflict doctrines.

On the other hand, the homeward trend may have already faded in light of the choice-of-law reform more than a decade ago, with the promulgation of the Act on the Application of Laws over Foreign-related Civil Relationships (the "Choice of Law Act") in 2010. (12) The Choice of Law Act was touted as a "great achievement" (13) and a "historic event," (14) indicating that "a socialist legal system with Chinese characteristics had been successfully achieved." (15) It certainly plays a key role in China's modernization of its conflict of laws, particularly in regard to choice of law. (16) With a renewed emphasis on modern choice-of-law doctrines such as party autonomy and closest connection, (17) the choice-of-law rules therein are generally impartial. Particularly on the choice of law in contracts, where most conflict cases arise, (18) the Choice of Law Act does not, on the surface, favor the application of Chinese law over foreign law. (19) Further, since the One-Belt-One-Road initiative in 2013, (20) the Supreme People's Court ("SPC") appears to have adopted a more open mind toward conflict-of-law matters. (21) It is thus counterintuitive that the homeward trend, at least at any large scale, survives to this day. In addition, China's increasing volumes of international trade suggest that it is in its national interest to adopt a modern choice-of-law regime to facilitate international dispute resolution. (22) The contrasting views presented by the conventional perception of the homeward trend and the impartial rules of the Act present a significant puzzle for academics and lawyers alike advising clients doing business in China.

Even assuming that there is a homeward trend, its exact degree of influence needs to be clarified. Not surprisingly, most courts around the world are said to favor the application of their laws in conflict disputes to some extent. (23) For example, Ehrenzweig, who was a key figure of the lex fori school of modern conflict scholars, (24) observes that "American courts have in fact nearly always given preference to their own laws in the decision of conflicts cases." (25) After all, judges are the experts on these laws and such expertise promotes timely and cost-efficient dispute resolution. (26) Thus, a more precise question is probably not whether the label of homeward trend fits China, but the extent of such local favoritism. In order to answer this, the author decided to conduct this empirical review of the frequency with which Chinese courts apply Chinese law to conflict cases involving foreign-related contractual disputes. This would provide such necessary data to assess the extent of the homeward trend. However, the analysis should not stop there and must proceed to examine the reasons contributing to the homeward tendency.

Commentators have traditionally provided two broad explanations for the homeward trend: first, the choice-of-law rules in China are flawed and thus fail to provide clear guidelines for judges, allowing them to abuse their discretion under the law; (27) second, the quality of judges, despite constant improvement, still leaves a lot to be desired. Choice-of-law issues therefore present serious challenges to them, with regard to the law's inherent difficulty and the heavy dockets of Chinese courts depriving them of sufficient time and energy to engage in a complicated choice of law analysis. (28) The first explanation highlights the shortcomings of the legislation's design, while the second underscores the institutional shortcomings of the judiciary. On the other hand, while these explanations appear to hold a certain truth, they are also too convenient. The conflict history of modern China is indeed relatively young, but the key framework of contract choice-of-law rules has been in place since the 1980s. (29) One might expect significant flaws in the law to be either remedied by legislation over time or at least mitigated to an extent by judicial practice. Judges should also have plenty of experience and training to apply choice of law rules properly over such a long period of time. The traditional explanations therefore need to be reexamined with empirical data derived from cases.

A final question that should be asked is, with these contributing factors in mind, what should be done about the homeward trend? Given the negative views on the homeward trend, Chinese scholars generally believe that the current regime must be improved both in terms of the legislation and the judicial institution that implements the legislation. Thus, they advocate for the Choice of Law Act to be further clarified in the form of a new Supreme People's Court Interpretation, (30) as well as for further training for Chinese judges on conflict of laws. (31) However, apart from these traditional proposals, are there other alternatives? This article tests these propositions by utilizing empirical data.

In summary, this article endeavors to answer three important questions regarding the current choice-of-law regime in China:

1. To what extent is there a "homeward trend" in the application of law by Chinese courts in foreign-related cases?

2. If the "homeward trend" does exist to an extent, what factors have contributed to its formation?

3. With these factors in mind, what should be done with the current choice-of-law regime in China?

   These questions will be examined with reference to empirical research conducted on 15,755 contract cases, all with foreign elements, decided by Chinese courts in the 12-year period between 2007 and 2018. (32) This article will proceed as follows: Part II provides a brief introduction to the past and current choice of law regimes, divided by the passing of the Choice of Law Act. In particular, the section outlines the background, goals, and contractual choice of law rules of the Act. Part III sets out the methodology of the empirical research. Part IV details the various findings of the research, particularly the extent of the "homeward trend," and the possible reasons for that trend, backed up by data derived from the research. Part V assesses the problems and merits of the current choice of law regime in China and the direction of reform, if any, that China will make. Part VI concludes the article.

   1. BACKGROUND TO CHINESE CHOICE OF LAW

   There are plenty of excellent academic works discussing the developments of the Chinese choice of law, especially around the time of the enactment of the Choice of Law Act. (33) However, some brief introduction to the developments is still necessary to frame the research questions.

   1. The Old Regime

      The history of private international law in modern China is closely linked to its economic development. It all started when the government adopted the "open-door policy" and invited foreign parties to invest in China. (34) At that time, China did not even have its own domestic contract law. (35) The need to trade with the rest of the world called not only for contract law, but also conflict-of-laws regulations, so that contracting with foreign parties would be viable. Thus, unsurprisingly, the first piece of legislation in China that deals with conflict of laws sets forth contractual choice-of-law rules: the Law of the People's Republic of China on Foreign-related Economic Contracts ("Foreign Economic Contract Law"). (36) This commerce-driven approach to conflict of laws is not unique to China. (37) It is the experience of its counterpart in the West as well. Justice Story explained in his famous Commentaries that commercial interest is the driving force of conflict of laws:

      Indeed, in the...