Permission denied: The curious case of exit restrictions in Chinese commercial litigation

Foreign investors often find themselves embroiled in Chinese litigation today – from product liability cases to letter of credit disputes. And while there are many peculiarities with Chinese litigation worth noting, one feature often grabs headlines with the General Counsel's office.

This is the problem of Chinese exit restrictions in commercial cases whereby a foreigner affiliated with a company involved in a Chinese litigation can be prevented from leaving China if he or she is determined to be a so-called “responsible person” at the foreign or foreign-invested company that is involved in the dispute. This feature of the Chinese legal system can be employed against the foreign investor as a form of psychological warfare. The Chinese party to the dispute might petition the court to issue an exit restriction order against a recently arrived Chief Executive Officer, for example, to gain leverage in settlement discussions, and the court may well agree to issue the order thereby putting the General Counsel or Assistant General Counsel in a rather unfortunate predicament.

This article provides an overview of this special aspect of Chinese commercial litigation and identifies certain red flags that may indicate a company's officers, managers, or other deemed “responsible persons” could be vulnerable to an exit restriction attack in a Chinese lawsuit. Some suggestions are then offered for how a foreign company might go about protecting itself from arbitrary exit restriction orders. It concludes by discussing some recent developments.

A questionable legal basis?

The main law governing commercial litigation in China, the PRC Civil Procedure Law (中华人民共和国民事诉讼法), is silent on the question of exit restrictions. Rather, the core provisions for exit restriction orders against foreigners are set out in the Law of the People's Republic of China for the Management of the Entrance and Exit of Foreigners From Chinese Territory (中华人民共和国外国人入境出境管理法) (Exit Restriction Law), a law that was passed by the Standing Committee of the National People's Congress in 1985. This law was then supplemented in 1987 by the Several Provisions on Issues Concerning Restricting the Exit of Foreigners and Chinese Citizens From Chinese Territory (关于依法限制外国人和中国公民出境问题的若干规定). Article 23 of the Exit Restriction Law is the key provision. Article 23 provides in relevant part:

A foreigner who is involved in the following situations is refused permission to leave Chinese territory:

(2) When a people's court has issued a notification that a civil case has not been concluded and therefore the foreigner may not leave Chinese territory.

On its face, Article 23 would appear only applicable to those situations where the foreigner in question was him or herself a party to a pending civil litigation in China. Indeed, a key rationale for the Exit Restriction Law was to prevent foreigners who had been sued in China from skipping out and shirking their obligations in Chinese litigation.

However, as the exit restriction framework developed, it came to take on a broader application. In Chinese courts, the scope of exit restrictions against foreigners was expanded to include not only foreigners who themselves were parties in a civil or commercial lawsuit, but also to foreigners whose employer was. In 2005, the Supreme People's Court formally embraced this practice by including special exit restriction provisions in the important, although not technically binding Minutes of the Second Meeting on National Foreign Related Commercial and Maritime Adjudication Work (第二次全国涉外商事海事审判工作会议纪要) (Second Meeting Minutes). Item 93 of the Second Meeting Minutes details the more robust exit restriction framework:

When foreign-related commercial disputes are handled by people's courts, the courts may adopt exit restriction measures if all of the following conditions are met:

(1) the foreign-related commercial case has not yet been concluded;

(2) the person against whom the restriction would be levied is a party to the case, the legal representative of a party to the case or a responsible person with a party to the case;

(3) there exists the possibility that the party with whom the person is affiliated would evade the litigation or the performance of a statutory obligation;

(4) if the person in question left China the court might have difficulty conducting the trial or enforcing a judgment if levied against the party with whom the person was affiliated.

Item 93.2 of the Second Meeting Minutes expanded the scope of exit restriction applicability to cases where the foreigner in question was a party's “Legal Representative” (fading daibiao ren) or “responsible person” (fuzeren). The expression “Legal Representative” is a term of art under Chinese law and easily determined from a company's business licence or appointment documents (please see the inset box: A note on the term 'Legal Representative'). However, the meaning of the term “responsible person” is far more elusive, one ultimately subject to court discretion.

Who is a “Responsible Person” (fuzeren)?

The Chinese term fuzeren (responsible person, in translation) is not clearly defined under Chinese law. But what does appear clear is that Chinese courts interpret the term to mean something more than a company's chief executive or a person that might be considered a “material witness” to a particular dispute. To be restrained from leaving China, the foreigner does not need to be a senior executive. As experienced before the courts, all that is necessary is that the person be perceived by the court to have a high enough or important enough position in the company to be able to have some impact on the case (for example, some knowledge about the case or some influence on decisions concerning settlement). In a sales dispute, a person with the title of “Sales Director” might be deemed a responsible person by the court and thus subject to exit restrictions.

Cases discussing the term “responsible person” are very rare. The term is used in other laws and regulations, however, and a review of those provisions sheds some further light on what might be meant by the term. For instance, “responsible person” is defined in Article 50 of the PRC Accounting Law (中华人民共和国会计法) as the Legal Representative or the person who is empowered by the law to represent an entity. In a directive issued by the Ministry of Agriculture on November 18 2010, the term “responsible person” is defined to encompass the chairman, general manager, supervisory chairman, and other members of the management team. These examples suggest that to be considered a “responsible person” the person should be either the company's Legal Representative or at least a person who holds a managerial role in the company. Nonetheless, such industry-specific laws and regulations should not be seen as definitive pronouncements as to what the term “responsible person” means in the context of exit restrictions. Based on experience, the courts tend to take a rather liberal approach to the issue and make such determinations on a case-by-case basis.

Procedure for exit restriction measures

As noted in Item 94 of the Second Meeting Minutes, exit restriction measures are typically only adopted after party application and court approval. The timing for the application varies, but plaintiffs often file them together with the initial complaint so that the restraining order can be put in place as soon as possible. The Second Meeting Minutes gives the court discretion to request security from the plaintiff (a bond) before granting an application, and in our experience, courts usually require a bond. The amount of the bond can vary depending on the facts of the case and the leverage the plaintiff has with the court, though often the court requires the plaintiff to post a bond equivalent to the amount of the claim.

After an exit restriction order is entered, the court may attempt to seize and hold the passport of the person subject to the restraining order after notifying them of the order. Practically speaking, however, most exit restrictions are done by simply recording the name and details of the foreigner in the border control database. Unfortunately, a foreign executive is typically unaware of the exit restriction until after he/she attempts to leave China and is prevented from doing so by the border control authority. This can make for a very unpleasant experience.

The easiest way to get an exit restriction measure lifted is to post a bond equivalent to the amount of the plaintiff's claim with the court, as Item 95 in the Second Minute Meetings stipulates. Exit restrictions are also removed after a case settles or a conciliation document (tiaojieshu) is entered and executed by the parties in dispute. In conciliation or settlement documents, it is important to draft the document broadly to cover all disputes between the parties. If the dispute identified is not broadly defined, the foreign investor might find themselves subject to a collateral suit, together with renewed exit restrictions.

There is also a review (fuyi) procedure available in some courts and if a review petition is successful, exit restrictions can be removed through such means as well. While there is no express basis for review procedures in the context of exit restriction under Chinese law, those courts that do allow a one-time review borrow from the review procedures applicable to asset preservation orders. In a review petition, arguments are presented against the adoption of exit restriction measures and a request is made for removal of the restraining order – offering evidence, for example, that the foreign company had significant assets in China and that the person restrained was not a “responsible person” in the context of the particular dispute.

Risk factors and red flags

It can be difficult to determine whether a particular dispute will raise exit restriction concerns. If the court has developed standards for determining whether exit restriction measures are appropriate in a particular case, those standards have not been made public. However, from a review of the Second Meeting Minutes, certain risk factors can be deciphered. A foreign company having limited assets in China is likely to be at increased risk. One reason behind exit restriction measures was the difficulty in collecting judgments from foreign companies and an application for exit restrictions made by a Chinese company against the traveling executive of a US company that did not have assets or investments in China might garner support from the court. A foreign company without an office or presence in China is also likely at heightened risk, with exit restriction measures being designed in part to prevent a foreign company from “evading litigation.” Another risk factor is the importance of the travelling executive to the dispute. If the executive travelling to China can be alleged to have information concerning the dispute, the likelihood the court would agree to implement exit restriction measures against the executive would increase.

There are also more general risk factors worth noting. A foreign company operating outside major Chinese cities, such as Beijing and Shanghai, is likely to face a more challenging litigation environment, including being more prone to arbitrary exit restrictions. Finding yourself in a dispute with a well-connected company, particularly in litigation outside major Chinese cities, can also increase litigation difficulties, including those related to exit restriction measures. It is important to evaluate at the outset of the Chinese litigation whether the case is likely to raise exit restriction concerns and adopt one or more of the countermeasures discussed below.

Adopting protective countermeasures

Certain countermeasures can be adopted to reduce risks associated with exit restriction measures. In many situations, steps can be taken to help lessen the disruption to your operations or Chinese litigation defence.

Before a case is filed, or even before a dispute arises, anticipate problems before they arise:

n Assess your risk profile. Do you have a presence in China? Do you have assets in China? Do you operate in remote parts of China?

n Do you have head office people travelling to China? Do they travel to China frequently?

n Identify risky deals/ high-risk China partners

n Designate someone in-house to become knowledgeable about Chinese litigation basics

n Be able to rapidly respond to a Chinese lawsuit. Have a China litigation counsel list in place – vetted counsel you can trust. Understand what is involved in appointing Chinese lawyers to act as trial counsel

Once you know a dispute is imminent or a case has been filed, consider taking the following countermeasures:

n Identify by name those individuals who might fall within the definition of “responsible person” as applied to the particular dispute. Some of these are fairly obvious (for example, a company's Chief Executive Officer), others would be more case specific

n Identify which of those people might be travelling to China

n Consider sending an “Active Chinese Litigation: Travel Warning” notice to those individuals most susceptible to exit restriction measures

n Avoid unnecessary travel to Mainland China. Consider video conferencing or holding meetings outside of Mainland China instead (for example, in Hong Kong)

n Have specially-appointed China counsel monitor the court file – keeping an eye out for applications for exit restriction measures. Sometimes a Chinese lawyer appointed for the limited purpose of finding out about an exit restriction application (to reduce service risk) can uncover applications while there is still time to warn the executives of the head office who may be travelling to China

n After you are served formal process, consider having your China trial counsel contact the court at the initial stage of the case and request court notification before an exit restriction is put into effect. If the court knows that the company is likely to post a bond, it is sometimes more cooperative in providing the company's China trial counsel advance warning of exit restrictions before they are issued. However, this countermeasure would likely not be available if the application for exit restriction measures had been filed with the initial complaint.

Once an exit restriction measure has been entered, it is often too late. It is very difficult to get the restriction lifted in the absence of posting the full amount demanded in the complaint or settling the case, as discussed above. Sometimes involvement by the relevant embassy or consulate can be helpful, but after the restriction is in place, it is often an uphill battle. Anticipatory countermeasures can be more effective.

Current developments

In December 2010, the Supreme People's Court issued a series of guidelines that address, in part, the question of exit restriction measures in certain types of foreign-related cases. The Guidelines of the Supreme People's Court Concerning Improving Adjudication Work in Foreign-related Civil and Commercial Cases in China's Border Regions (最高人民法院关于进一步做好边境地区涉外民商事案件审判工作的指导意见) (Guidelines) concern exit restrictions against foreigners in the context of what look to be small foreign-related commercial disputes in China's border regions, such as Heilongjiang (Black Dragon River) Province and Inner Mongolia. Article 7 of the Guidelines largely tracks the language of the Second Meeting Minutes, but adds what looks to be some new restraint language:

When in the course of trying cases, the court shall exercise caution when adopting exit restriction measures against a foreigner, and all of the following conditions should be met: 1) the person against whom the exit restriction measures are to be adopted must be a party or the Legal Representative or responsible person of a party to an unconcluded civil or commercial case in China; 2) there is the possibility that the party would evade the litigation or a legal obligation; and 3) it is possible that if exit restriction measures are not adopted it would be difficult to try the case or enforce the judgment.

The language of Article 7 admonishes the courts to “exercise caution” when adopting exit restriction measures, but it remains to be seen whether this change in tone represents a shift in the way the courts intend to deal with applications for exit restriction measures against foreigners. The foreign investment community would certainly welcome a more circumspect approach to this curious aspect of Chinese commercial litigation.

A note on the term 'Legal Representative'