Among the many legal drafts reviewed and adopted at the recently concluded session of the Standing Committee of China’s top legislature, the National People’s Congress, was the Law on Foreign State Immunity. On September 1, the concluding day of the session, the NPC Standing Committee adopted the bill, and the law is scheduled to come into force on January 1, 2024. It joins a line of foreign policy-affecting legal changes introduced at the NPC in the past few months, such as the Foreign Relations Law enacted in June.
The draft text adopted at the recent session was the second of its kind. The first was submitted for review by the State Council at the NPC Standing Committee session in December 2022.
What makes this legislation interesting? It is accepted as a principle of customary international law that sovereign states and their properties are immune from the jurisdiction of national courts of other states. This is also enshrined in the 2004 United Nations Convention on Jurisdictional Immunities of States and Their Property. But this does not mean that the Convention lays down an “absolute” model of sovereign immunity, which stipulates that all activities of “states” (as defined across four parameters in Article 2(b) of the Convention) are immune from the jurisdiction of foreign courts. There are some exceptions to such immunities – meaning that the Convention lays down a “restrictive” model of sovereign immunity.
China signed the Convention in 2005, but has not yet ratified it, and has, for the longest time, maintained a stance that the country follows the absolute model of sovereign immunity. This meant that Chinese courts did not exercise jurisdiction over other states, nor did China accept the jurisdiction of foreign states’ courts and tribunals.
But with the adoption of the new legislation, China’s long-held stance has changed. Under this new Foreign State Immunity Law, China has laid out several exceptions where foreign states will have to cede immunity and their activities will be subject to the jurisdiction of Chinese courts.
An exception of note is a situation where “commercial activities” conducted by a foreign state and its natural/legal persons take place in China’s territory or have a direct impact on China if conducted outside; and a situation of “territorial torts,” where actions of a foreign state cause personal injury or death, or damage to movable or immovable property within China’s territory. Immunity for foreign states in either of these cases is waived automatically, unless there are exceptions within each of these categories as well – for example, property of foreign states used in “commercial activities” will still remain immune in case it belongs to their diplomatic and special missions or to their central banks, or is of a military character. Other exceptions include situations where a foreign state and its natural/legal persons expressly waive immunity in a case, submit a defense or counterclaim in a case being tried before Chinese courts, or engage in any issue pertaining to intellectual property rights where Chinese courts may have the right to exercise jurisdiction.
Ceding Immunity of Commercial Transactions
The waiver of immunity in the case of “commercial activities” is particularly important. The legislation defines the term as “any transaction of goods, services, investment or other acts of a commercial nature otherwise than the exercise of sovereign authority.” In determining whether such an activity is subject to immunity or not, Chinese courts are required to consider both the “nature” and “purpose” of the activity.
The difference between “nature” and “purpose” is defined in the Draft Articles on Jurisdictional Immunities of States and Their Property, adopted by the U.N. International Law Commission in 1991. It argues that the practice of distinguishing between the two terms while determining the immunity of a transactional activity is essential, because while the nature of the activity (such as purchasing food supplies from a foreign state) may appear commercial, the purpose may indicate its non-commercial nature (such as using said food supplies to relieve a famine). That the Chinese law has made room for both interpretations (even though a similar law in the United States has not), means that it is extending on the provisions of the abovementioned U.N. Convention.
At the same time, through the “reciprocity clause” enshrined in Article 21 of the Chinese law, China is making sure that if another country does not grant it the same stature of immunity as its own law does (such as the United States’ Foreign Sovereign Immunities Act, or FSIA, which does not look at the purpose of commercial activities), China can forego any benign considerations and waive immunity solely on the basis of the “nature” of the transactional activity.
Going forth, interesting case law may emerge on how Chinese authorities answer the “military question” under commercial activities. There is a debate within the U.S. legal system on whether military purchases from other countries constitute “commercial activities” that are not immune to the jurisdiction of foreign courts.
On the one hand, the Fourth Circuit Court of Appeals in the United States has argued that the purchase of military weapons from a foreign country constitutes a unique sovereign contract that cannot be executed by private parties, and hence, does not constitute a “commercial activity” as understood by the FSIA. However, the Fifth, Eighth, Ninth, and Eleventh Circuits have held that such a transaction constitutes a “commercial activity” as it is a purchase of goods by a state and/or its natural/legal persons.
In the context of Chinese law, it remains to be seen whether consideration of the “purpose” of such military transactions (such as if a remote sensor is procured to upgrade an existing weapons system, or for public use, to detect weather anomalies), might add legal weight to a decision on immunity.
Implications for India
Countries that have not enacted individual legislation on foreign state immunity usually have provisions on the same enshrined in their civil law. In India’s case, such provisions can be found in Section 86 of the Code of Civil Procedure, which lays out similar exceptions for sovereign immunity as the Chinese law, including “trades” made by foreign states under the ambit of Indian courts, and cases against a foreign states’ immovable property.
With the enactment of China’s new law, India may be subject to suits pertaining to infringement upon the free and open conduction of Chinese “commercial activities” within the country. For example, a part of “commercial activities” as understood by Article 7 of the new Chinese law is investments made between a foreign state and China. If India chooses to restrict domestic investment opportunities for Chinese state-owned enterprises amidst heightened tensions in bilateral relations, the Indian government may be subject to a civil suit filed by concerned SOEs in Chinese courts.
Similarly, China will study whether a commercial activity between two different foreign states has an impact on the territory of China, as well as the “purpose” of such an activity. This could mean that commercial transactions of military equipment between India and the United States, conducted specifically with the purpose of countering Chinese aggression, can be viewed as a commercial transaction impacting Chinese national security and thereby not immune from the jurisdiction of Chinese courts.
Overall, the goal of this legislation, as stated during the official interview following its enactment, is to safeguard Chinese national sovereignty, and the legitimate interests of its citizens and legal entities. The foundation for this law comes from a bill submitted to the NPC in 2020 by Ma Yide, an official of the legislature and a legal researcher, to counter “malicious litigations” being filed by U.S. lawmakers against China’s response to COVID-19.
Now that the newly adopted law gives full consideration to the evidence provided by the Chinese Foreign Ministry on core issues concerning foreign affairs, it has the potential to become a tool to attack foreign state immunity on multiple fronts including commercial transactions and IPR, especially against rival states like India and the United States.