Choice of Law in China Cross-Border Contracts: Party Autonomy and the Law on Application of Laws

Introduction

The governing-law clause is often the last clause anyone negotiates and the first one that matters when the deal goes wrong. In a contract with a China connection, the applicable law is determined by the Law on the Application of Law for Foreign-related Civil Relations of the PRC (中华人民共和国涉外民事关系法律适用法; the English name is an unofficial translation), adopted on 28 October 2010 and effective since 1 April 2011. It survived the entry into force of the Civil Code and remains China's central conflict-of-laws statute. This guide walks through the two-step test it applies, the limits on party autonomy, and how to draft a choice that a Chinese court will actually respect.

The two-step test: autonomy first, then connection

The statute gives parties to a foreign-related contract the first word. Article 3 states the general rule that the parties may, in accordance with the law, expressly choose the law governing a foreign-related civil relation, and Article 41 applies it to contracts: the parties may agree on the law applicable to the contract. Only if they have not chosen does the fallback operate — the law of the habitual residence of the party whose performance best characterises the contract, or the law of the country otherwise most closely connected with the contract. Article 2(2) supplies a general closest-connection rule as a backstop for anything the rest of the statute does not cover.

Mandatory rules and public policy: where autonomy stops

Party autonomy is not unlimited. Two provisions trim it. Article 4 provides that where PRC law contains mandatory provisions on a foreign-related civil relation, those provisions apply directly — they are not displaced by the parties' chosen foreign law. Article 5 provides that if the application of a foreign law would harm the social public interest of the PRC, Chinese law applies. The Supreme People's Court's Interpretation (I) (amended 2020, effective 1 January 2021) gives Article 8 as the list that defines Article 4's mandatory rules: protection of workers' rights; food and public-health safety; environmental safety; financial safety including foreign-exchange control; anti-monopoly and anti-dumping; and other situations. The same interpretation's Article 9 adds that a party cannot evade these mandatory rules by manufacturing a connecting factor.

The contracts that must use Chinese law

One category of contract leaves no room for choice at all. Article 467(2) of the Civil Code provides that Sino-foreign equity joint venture contracts, Sino-foreign contractual joint venture contracts, and contracts for Sino-foreign cooperative exploration and development of natural resources, performed within the territory of the PRC, are governed by PRC law. This rule was carried over from the old Contract Law and remains mandatory. A practical nuance: the Foreign Investment Law, effective 1 January 2020, repealed the three foreign-investment-enterprise laws, so new foreign-invested companies are governed by the Foreign Investment Law and the Company Law, and the first two contract categories now rarely arise for new projects — the surviving field is mainly Sino-foreign cooperative exploration and development of natural resources.

Choosing, changing and implying a choice

The Supreme People's Court's rules fill in the mechanics. Interpretation (I) Article 5 says a choice of law cannot be defeated by arguing the chosen law has no actual connection with the dispute. Article 6 allows the parties to choose or change the governing law up to the close of first-instance court debate — and provides that if the parties both invoke the law of the same country and neither objects, they are treated as having chosen it. The practical point: a choice is flexible, but an implied choice can also bind you, so silence in the face of the counterparty's citation of a foreign law is itself a signal.

Ascertaining foreign law

Choosing a foreign law only matters if the court can find out what it says. The Supreme People's Court's Interpretation (II) on the ascertainment of foreign law (effective 1 January 2024) is China's first dedicated set of rules on the subject: it allocates the duty of ascertainment between the court and the parties, requires a party that relies on foreign law to produce it, lists the recognised channels for ascertainment, and provides that where the foreign law cannot be ascertained, Chinese law applies. A party that wants a foreign governing law should come prepared to prove its content, not just name it.

Drafting a clause that survives

• State the choice expressly and name the jurisdiction's law precisely, including how it handles mandatory rules and public policy.
• Check whether the contract falls within Civil Code Article 467(2) — if it does, no choice can displace Chinese law.
• Separate the governing-law clause from the forum and arbitration clauses; they answer different questions.
• For contracts touching workers' rights, food or health safety, environment, foreign exchange, antitrust or anti-dumping, assume Chinese mandatory rules will apply whatever the clause says.
• Be ready to prove the content of any foreign law you choose, in line with the 2024 ascertainment rules.

Practical checklist

• Confirm the contract is "foreign-related" so the Law on Application of Laws governs at all.
• Decide whether you want party autonomy, the characteristic-performance test, or the closest-connection rule to determine the law.
• Map the Article 8 mandatory-rule categories against the deal before relying on a foreign law.
• If the deal is a Sino-foreign natural-resources exploration contract, plan on Chinese law.
• Document any agreed choice — and any later change — before the close of first-instance court debate.