Conflict Rules under Chinese Law
5.1 Conflict Rules prior to the Conflicts Act
Under the Chinese scholarship,property is the right to possess,use,and enjoy a determinate thing,excluding others from interference.Prior to the enactment of the GPCL in 1986,China had no conflict rules concerning property rights.However,Chinese judicial practice and private international law scholars invariably subscribed to the principle of lex situs as determining the governing law,for both movables and immovables.Accordingly,the principle of lex situs determines the way the property may be acquired or disposed of,as well as the substantive proprietary rights which may flow therefrom.
Article 144 of the GPCL reaffirmed the principle of lex situs with respect to the “ownership” of “immovables” which provided that “in disputes involving the ownership of immovables,the law of the place where the property is situated shall apply”.[3]
It should be noted that Article 144 confined the application of the lex situs to the “ownership” of “immovables.” This is a narrow application of the principle compared with general international practice as it was silent on the principle’s application to movables.Moreover,Article 144 spoke only of the “ownership” of immovables.If literally interpreted,this would result in the exclusion of its application to property interests other than ownership in immovables.11 Additionally,this article failed to spell out what shall be included in the ownership of immovables for choice of law purpose,nor does it offer a definition of the term “immovables.”
Given the above article as well as others in the GPCL contained a number of problems,the Supreme People’s Court issued “Opinions on Application of the General Principle of Civil Law” in 1988 to provide concrete explanations on the abstract or ambivalent articles of the GPCL and to create new provisions to close the legal loopholes left by it.Under Article 186 of this judicial interpretation,the law of the place of immovables governs the civil relations concerning the ownership,sale,lease,mortgage,and use of the immovables; Moreover,immovables shall refer to land,construction affixed to land,other fixtures as well as equipment fixed to the construction.12
Obviously,the Supreme People’s Court improved Article 144 of the GPCL in two aspects: first,it offers a definition of immovables; second,it extends the law of the place of immovables to govern,in addition to ownership,sales,lease,mortgage and use of immovables.After the implementation of the Civil Code in 2021,the above articles were repealed.
An exception to the doctrine of lex situs is presented by property ownership over vessels and aircraft.In accordance with Chinese Maritime Act13 and Civil Aviation Act,14 the matters concerning the acquisition,transfer,or termination of property ownership over a vessel and an aircraft shall be governed by the law of the vessel’s flag country and the law of the aircraft registration country.
5.2 Conflict Rules under the Conflicts Act
As analyzed above,before the enactment of the Conflicts Act,the existing Chinese legislation contained but one article (Article 144 of the GPCL) dealing with the law governing the “ownership” of “immovables.”[4]In comparison,the Conflicts Act establishes a relative elaborate framework to regulate the choice-of-law issues of various categories of property,including movables,immovables,res in transitu,securities and pledges over rights.[5]As the Conflicts Act follows the universal principle that the lex situs governs the real rights in immovables,15 the analysis of this section will focus on the distinction between movables and immovables as well as the choice-of-law rules for movables,res in transitu,securities and pledges over rights.
5.2.1 The Distinction between Movable and Immovable Property
Pursuant to the current Chinese law,rights over immovables are determined by the law of the situs; rights over movables are not necessarily governed by that law.Therefore,the first task of the Chinese court in a foreign related case when required to decide some question of a proprietary or possessory nature is to decide whether the item of property which is the subject of the dispute is movable or immovable.
However,under Chinese conflicts law,it is still questionable which law should determine whether the subject matter is movable or immovable.Pursuant to Article 8 of the Conflicts Act of 2010,classification should be governed by the lex fori.Therefore,some Chinese authors advocate that the lex fori should determine whether a particular thing is movable or immovable in a foreign-related dispute.16
Nonetheless,the author does not favor such a view,as it is universally accepted that if there is a conflict between the lex situs and the lex fori as to whether a particular thing is movable or immovable,the situs at the decisive moment must control.The reason for this rule no doubt is the paramount importance of reaching a decision consistent with what the lex situs has decided or would decide,since in the last resort only the lex situs has effective control over the thing.Hence,if Chinese courts determine whether the property is movable or immovable under the lex fori,instead of the lex situs,the purpose of conflicts law,i.e.,decisional harmony may be frustrated.
For example,if A dies intestate,having been habitually resident in Beijing but leaving a house and antiques in London,then,if dispute arises with regard to the succession to the antiques,Chinese court may treat it differently from English court as well as courts in other jurisdictions which follow the lex situs to classify property into movables and immovables.In China,the court would characterize the antiques separated from the house as movable property under the lex fori,i.e.,Chinese law; therefore,they will be inherited by whoever is entitled to them in Chinese law,since intestate succession to movables is governed by the law of habitual residence of the deceased at the time of his/her death under Article 31 of the Conflicts Act.But,in England,the antiques are classified as “fixtures” under common law which entail the same legal recognition as in the case of the whole even when the fixtures are separated.Hence,they will be descended to whoever is entitled by English law,since the lex situs governs the question of intestate succession to immovable property under the English conflicts law.Therefore,classifying property into movables and immovables by the lex fori is likely to encourage forum shopping which is the very thing that conflicts law is devoted to preventing.
In this light,the author suggests that Chinese courts should not strictly follow Article 8 of the Conflicts Act when required to determine whether a particular thing is movable or immovable; instead,the classification between movables and immovables should be governed by the self-regulated rule of the lex situs.
5.2.2 Movables
One of the most striking features of the Conflicts Act is that party autonomy has been introduced into the field of movables,insomuch as Article 37 provides that the parties may choose the law applicable to the real rights in movable property; in the absence of such choice,the lex situs at the time that the legal fact occurred applies.17
The above article indicates that Chinese conflict law has deviated from the universally accepted principle of the lex situs.Under the new rules,party autonomy has been established as the basic principle to determine the law applicable to movables; in comparison,the lex situs has been reduced to a rule of secondary importance which plays a role but in the absence of parties’ choice.Although China is not the first country to incorporate party autonomy into the conflict rules for movables,the Conflicts Act is “revolutionary” in that it elevates party autonomy to the basic principle to determine the law applicable to movables,and that it imposes no limit at all on the parties’ choice.Literately interpreted,the parties may choose a law that has no material relation with the movables,they may choose a law applicable not only to the acquisition and the loss of real rights in movables,but also to the content and the exercise of such real rights; furthermore,they may even choose a law which is injurious to the interest of a third party.
So far,the Chinese legislators have not provided a convincing explanation for such a “brave” innovation,some Chinese conflicts scholars suggest that the legislative intent of introducing party autonomy to movables is to solve the complexity of choice of law issues when the transfer of the movable property is made by contract.They go on to specify that the parties usually transfer the property by contract,and that it is often the case the parties agree in their contract that all disputes in connection with the contract shall be governed by the law that they choose.Hence,allowing the parties to choose the law over movables has various merits.
First,applying the law chosen by the parties is in conformity with the parties’ expectations or intentions,as it is unrealistic to assume that the non-lawyers understand the distinction between contract and property.Even if this distinction were appreciated,it is also inconceivable that the parties would expect another law to apply to the movable property which arises out of the contract,and they may well have relied on the assumption that the same law covers both types of rights.
Second,applying the law chosen by the parties to the contract to the movable property can increase uniformity of decisions.Since party autonomy is a universally accepted principle in the field of contract,the same law will be applied regardless of whether an issue which arises out of a contractual relationship is characterized as one of contract or property.Hence,the introduction of party autonomy to movable property,to some degree,represents the tendency of modern conflicts law.18
Though the above arguments sound good,it is submitted that the application of party autonomy to movables by such a liberal approach,as reflected in Article 37 of the Conflicts Act,may have gone too far.
First,the legislative intent to promote predictability and efficiency by introducing party autonomy into the field of movable property cannot always be accomplished in practice.In the practice of international business,it is by no means rare that the parties fail to choose a law to govern the disputes between them which arise in connection with the contract either because of ignorance or lack of consensus.In such cases,allowing the parties to choose the governing law over movable property will not lead to the consequence that the same law applies to both the contract and the movable property transferred by it.
Second,as reiterated above,the principle that rights over property,movables or immovables,is governed by the lex situs is generally accepted by all legal systems.Two decisive considerations are,firstly,that the country of the situs has the effective power over the property,secondly,that the exclusive application of the law of the situs alone can fulfill the need for security in international transaction.Nonetheless,the application of party autonomy to property lacks solid ground.Moreover,switching the universally accepted principle to party autonomy which has not been accepted internationally will create the conflict of choice-of-law rules,which,in turn,will undermine decisional harmony.
Last,property and contract are,after all,two distinct and independent causes of actions; therefore,it is unjustified to subject them to the same law.A contract creates obligations between the parties only which,usually,will not influence the interest of a third party; however,property is the rights against the entire world whose influence goes far beyond the parties themselves.Hence,allowing the parties to choose the governing law over property may be problematic.Indeed,this is the reason why even the supporters for the introduction of party autonomy to property do not favor an unlimited choice of law.19
In the author’s opinion,if Chinese legislators do intend to introduce party autonomy into the field of movable property in order to promote predictability and efficiency,they should impose certain limits on party autonomy.First,the parties cannot choose a law that may prejudice the interest of a third party; Second,the chosen law should have substantial relationship to the parties or the property,or there is other reasonable basis for the parties’ choice; Last,the application of party autonomy should not contravene the principle of numerus clausus which is a fundamental principle of property law adopted in most civil law countries,including China.[6]
These limits have been endorsed by some foreign countries which have also introduced party autonomy to movable property.For example,like the Chinese Conflicts Act,the Swiss Code on Private International Law introduces party autonomy to movable property; however,it takes a more restrictive approach which imposes certain limits on the parties’ choice.First,the parties can choose “the law of the State of shipment,or the State of destination or the law applicable to the underlying legal transaction”;20 in other words,the parties cannot choose a law that has no substantial relationship with the property or the underlying legal transaction.Second,Swiss law limits party autonomy to the issues of the acquisition and the loss of real rights in movables which goes on to specify that the extent and the exercise of interests in movable property shall be governed by the lex situs.Last,Swiss law states unambiguously that the choice of law shall not be applied against a third party.21
The Swiss approach,obviously,is preferable,inasmuch as those necessary limits constitute the reasonable basis for the parties’ choice which can prevent party autonomy from being misused.In this light,it is submitted that Article 37 needs amendment and improvement in the future.
It is very interesting to note that the Sanming Intermediate People’s Court of China’s southeastern Province of Fujian rendered a judgment in which it clarified for the first time that “lex situs at the time when the legal fact occurred” in Article 37 of the Conflicts Act in a cultural property repatriation case on December 4,2020.22
Oscar Van Overeem,a Dutch architect,purchased a Buddhist statue for 40,000 Dutch guilders in 1996 from a collector in Amsterdam who had acquired it in Hong Kong.In 2014,Van Overeem loaned the statue to the Drents Museum in Assen for an exhibition,“Mummy World,” which traveled to the Hungarian Natural History Museum in the spring of 2015.Press reporting on the Hungarian exhibition alerted the Chinese villagers.Based on photographs from Hungary and archival materials in China,the Chinese villagers believed the statue was the one that have held the mummy of the village’s patriarch,ZhanggongZushi.The statue was enshrined in the Puzhao Temple,jointly owned by the two villages named “Yunchun” and “Dongpu”,and worshiped by the local residents,for over 1,000 years until it went missing in December 1995.
After an unsuccessful negotiation,the two Chinese village committees sued Van Overeem and demand the statue’s return in a Fujian court and in Amsterdam at the end of 2015.Three years later,the Amsterdam District Court made a decision on December 12,2018,ending one chapter in the legal battle over the statue,but failed to resolve a controversial situation or illuminate the path forward for the parties,as the Dutch court did not decide anything about the ownership of the parties.It simply determined not to hear the case,based on its finding that the two village committees did not have standing to sue in a Dutch court.Against this background,the lawsuit before the Chinese court is more important in terms of legal analysis.
Jurisdiction is the first issue that the Chinese court had to consider when it dealt with the dispute.In the present case,one can hardly believe at the first glance that the Chinese court has the jurisdiction,as the statue is not located in China when the action was filed,nor did the defendants steal it or purchase it in China.(https://www.daowen.com)
However,the Chinese court ruled that its jurisdiction over the case was established pursuant to the prorogated jurisdiction which refers to situations where a party institutes proceedings in a court,and the other party implicitly acquiesces to the jurisdiction of that court by responding to the action and not raising an objection to the jurisdiction.As the Dutch defendants did not raise objection to the jurisdiction of the Chinese court who had responded to the lawsuit by submitting a written statement of defense represented by two Chinese lawyers,to the surprise of many observers,the jurisdiction of the court was eventually established.[7]
As noted above,one of the most widely accepted and significant rules of private international law today is that,in determining property rights,a court applies lex situs.However,the question of application of the lex situs in specific cases remains open out of diverse possible interpretations of the rule.Since Chinese courts have never clarified the meaning of the lex situs,the outcome of the present action was entirely dependent on the interpretation of this rule.
The Chinese plaintiffs commenced the action for recovery of the stolen statue by arguing,among other things,that they are its owners because bona fide acquisition does not apply to stolen cultural property under the Property Law of China.The Dutch defendants took the stand,claiming to have purchased the statue on good title under Dutch Civil Code.Thus,it had to be decided which of the two laws shall govern the ownership of the statue.
The Court,by resorting to the lex situs,held that title was to be determined by Chinese law.Summarizing the conclusion,the judge stressed that the statue is a cultural property of great historic and religious significance,instead of an ordinary property; therefore,when interpreting the lex situs in this case,the object and purpose of international conventions of cultural property should be taken into consideration.The Court went on to highlight two conventions to which China is a contracting party: Convention on the Means of Prohibiting and Preventing the Illicit Import,Export and Transfer of Ownership of Cultural Property and,Convention on Stolen or Illegally Exported Cultural Objects.
As both conventions are devoting to prohibiting the illicit trafficking of cultural property and facilitating the return of cultural property to its origin nations,the Court concluded that the lex situs should be understood as the lex furti,i.e.,law of the location of a cultural property had been stolen,insofar as such interpretation favors the protection of cultural heritage and facilitates the return of cultural property illicitly trafficked,whereas the place of transaction not only favors the laundering of stolen cultural property but also adds considerable uncertainty to the question of title.23
The Court then referred to the Property Law of China under which bona fide acquisition does not apply to stolen cultural property.Consequently,the Court ruled that the Chinese village committees retain the title of the statue and demanded the defendants to return it to plaintiffs.
This is the first time that a Chinese court exercises the jurisdiction over a case to recover a Chinese cultural property stolen and illicitly exported.Therefore,it is a historic judgment,no matter if it will be enforced or not in the future.In addition,the Court clarified for the first time that lex situs should be interpreted to facilitate the return of stolen cultural property,so that the lex furti,i.e.,Chinese law,shall govern the ownership of stolen cultural property overseas.Given the significant number of Chinese cultural property stolen and illicitly exported,it is believed that the impact of the judgment is tremendous.24
5.2.3 Res in Transitu
The transfer of movables while they are in course of transit raises a difficult question of choice of law.The application of the lex situs cannot produce sound results as the actual situs of the res in transitu at any given moment is casual or temporary and not contemplated by or known to either party to the transfer.Hence,it is pedantic to insist that the transfer should comply with the requirements of the lex situs and can only receive such effect as the lex situs ascribes to it.
Chinese scholars have advocated several alternatives to the lex situs,such as,the law of the place of dispatch and the law of the place of ultimate destination.They argue that in international transaction,the law of dispatch is usually favorable to the sellers as they are familiar with it,whereas the other party is left to deal with an alien legal system.For the same reason,they believe that the law of ultimate destination is favorable to the buyers.Based on this presumption,they submit that Chinese conflicts law should stipulate that the law of ultimate destination shall govern the res in transitu in order to benefit Chinese litigants,insomuch as most of the imported goods into China are either expensive high-tech equipment or important mineral resources,while most of exported Chinese goods are cheap products.25
Though the law of ultimate destination is an appropriate choice in many circumstances,the author does not agree with the reasoning of the above argument.First of all,the rigid dichotomy between China’s imported and exported goods is a oversimplified description of China’s foreign trade.As the world’s largest trading country and an emerging power,China imports and exports a great varieties of goods,the simplified classification between China’s importations and exportations like this,apparently,is groundless.Second,even if the above description of China’s foreign trade was true,it cannot follow that the law of ultimate destination would benefit Chinese litigants.Last,but not least,even though the conclusion was true that the law of ultimate destination would benefit Chinese litigants,the author does not favor such a parochial ideology,as it does not conform with the goal of modern conflicts law,i.e.,resolving multistate disputes in a manner that is substantively equitable and fair to the litigants,regardless of their nationalities.
Before the enactment of the Conflicts Act,Chinese law did not provide choice-of-law rules for res in transitu,nor have Chinese courts had to address this issue of which law should be applied in such a case.This is probably because goods in transit are generally represented by a bill of lading or other documentary symbol of ownership which is capable of an independent dealing.However,this legislative vacuum has been filled by the Conflicts Act,as Article 38 prescribes the following:
The parties can choose the law applicable to the transfer of a movable property that is being in transit; where the parties did not make a choice,the applicable law shall be the law of the destination of the concerned property in transit.
Under this article,the law applicable to res in transitu shall be ascertained in the following order of priority: First,when goods in transit are at issue,the parties are entitled to choose the law applicable to the change of real rights.Second,in the absence of parties’ choice,the law of the country of destination shall apply.Again,unlimited party autonomy has been established as the general principle to determine the law applicable to res in transitu,and for the similar reasons as analyzed earlier,it is suggested that certain limits on the parties’ choice should be imposed.
5.2.4 Securities
The Conflicts Act provides conflict rules for securities in Article 39,under which securities shall be governed by the law of the place where the rights are to be exercised or the law which is most closely connected with the securities.26
Under Chinese scholarship,securities are instruments that evidence the holder’s proprietary rights or other rights.In the liberal sense,securities cover title documents or document of claim,which include bills of lading,warehouses receipts,negotiable instruments,share and bond.In the literal sense,securities cover financial instruments,i.e.,equity and bond.Rights over securities includes two distinct categories: (1) the rights to possess and hold securities,i.e.,the rights to the securities as such; (2) the rights represented by securities,i.e.,the holder’s rights evidenced by securities.27 As Article 39 fails to provide any explanation to either the meaning of securities or that of rights over them,the following points,inter alia,are worthy of discussion.
First,from the wording of this article,it is hard to identify whether securities refer to the rights indicated by such securities,or the securities as such in the form of pieces of paper or in digital form.Given that Article 39 is contained in the chapter on rights in rem,it can be inferred that the scope includes but the rights in rem to securities.Hence,it is submitted that Article 39 is devoted to regulating both the rights to the securities as such and those represented by securities if only they are,in nature,rights in rem.
Second,given the diversity of securities,the author believes that Article 39 enjoys flexibility which,meanwhile,suffers from the uncertainty of judicial discretion since there is little legislative guidance regarding the place where the rights are to be exercised or the place with the closest connection.28 In comparison,private international law legislation in many foreign states provide more detailed and concrete choice-of-law rules.For example,English conflicts law follows the lex situs rule for securities and provides a detailed definition of the situs of securities.For bear securities,the situs of securities is the location of the certificates; for registered securities,the situs of securities is the place of incorporation of the issuer or the place of the register for securities transferred by registration.29 Swiss private international law distinguishes title documents from financial asset securities which are subject to different choice-of-law rules.30 U.S.law has more detailed categories: warehouse receipts,negotiable securities,and shares are governed by different conflict-of-law regime respectively.31 Thus,from the perspective of comparative law,Article 39 of the Conflicts Act looks rather simplistic.
Last,Article 39 is intended to apply to securities held directly by investors; therefore,it should not apply in cases where investors hold their securities indirectly through intermediaries and cross-border securities transactions are effected by a mere account transfer.32 However,as one scholar puts it,“over the last half century,there has been a marked change in the way that shares,bonds,and other investment securities are held and transferred”,33 and one of the principal changes is the shift from direct holding system whereby there is a direct relationship between the issuer and holder to indirect holding system in which interests in securities are held through securities accounts maintained for customers by intermediaries,the author,therefore,believes that the lack of choice-of-law rules for securities held with an intermediary is a terrible pity of the Conflicts Act.
5.2.5 Pledges over Rights
It is interesting to note that the Conflicts Act contains a separate choice-of-law rules for pledge over rights.Under Article 40,pledge over rights shall be governed by the law of the place where the pledge was established.In order to understand the accurate meaning of this article,it is necessary to examine pledges over rights under Chinese domestic law.
First of all,it should be mentioned that property rights in Chinese legislation literally refer to rights in rem over tangibles rather than intangibles,as opposed to the common law of property rights,which extend to both tangibles and intangibles.Property rights over intangibles are governed by other statutes alongside with the Property Law of the PRC,for example,the Copyright Act of the PRC and the Trademark Act of the PRC.
Second,pursuant to the Civil Code of China,rights in rem consist of three categories: ownership,usufruct and collateral rights; Collateral rights can be further divided into three subcategories: mortgage,pledge and lien.Mortgage may be established over immovables as well as means of transportation,and pledge over tangible movables as well as rights.To be more specific,pledge can be established on any of the following rights which an obligor or a third party has the right to dispose of: (1) bills of exchange,checks,promissory notes; (2) bonds,deposit receipts; (3) warehouse receipts,bills of lading; (4) transferable fund shares or shares of stocks; (5) the rights to exclusive use of trademarks,the property right among patent rights and copyrights which are transferable according to law; and (6) accounts receivable.34
In this light,it is somewhat confusing that pledges over rights are listed separately alongside immovable,movables and securities.35 Under the current structure of Chapter Five (“rights in rem”) of the Conflicts Act,immovables are subject to Article 36 of the Act,movables in general are subject to Article 37,and securities to Article 39.These three articles are intended to cover all aspects of rights in rem which contain ownership,usufruct and collateral rights (including mortgage and pledge) as well.In contrast,Article 40 is a special rule for pledges over rights only.Hence,a logic conclusion is that mortgages over immovable shall be governed by Article 36 and pledges over movables by Article 37; however,under the principle of lex specialis derogat generali,securities generally shall be governed by Article 39 subject to the exception that pledges over rights represented by securities shall be governed by Article 40.
So far,the rationale behind such an arrangement remains to be unclear.A possible interpretation is the requirement that publicity of pledges over rights be visible to third parties.The concern for protecting third parties leads to the application of the lex situs rule in contrast to the law of the place where the rights are to be exercised or that of the place with the closest connection.
Under the Civil Code of China,a pledge over rights is established by contract in writing plus formalities.A pledge over bills of exchange,checks,promissory notes,bonds,deposit receipts,warehouse receipts and bills of lading is established on the delivery of title certificates,or upon registration with competent authorities in case there is no title certificate; a pledge over transferable fund shares or shares of stocks and rights in intellectual property rights is established upon registration with competent authorities; and a pledge over accounts receivable is established upon registration with the credit reference agency.36
Hence,under Article 40 of the Conflicts Act,pledges over rights incorporated in certificates which are bearer securities shall be governed by the law of the place where the delivery takes place,pledges over rights incorporated in certificates,which are registered securities,shall be governed by the law of the place where the registrar is located; pledges over accounts receivable shall be governed by the law of the place where the credit reference agency is located,and pledges over rights in intellectual property rights shall be governed by the law of the place where the registrar is located.
5.2.6 Concluding Remarks
Thanks to the promulgation of the Conflicts Act,a relative systematic private international law regime of property has been established which contains the choice-of-law rules for immovables,movables,securities,and pledges over rights as well.In this respect,the Conflicts Act is a milestone in Chinese legislation both in the general area of conflicts law and in the more specified area of property conflicts.
In the field of immovables,the Conflict Act follows the universal rule of the lex situs; however,in the field of movables,it has deviated from the universally accepted principle of the lex situs and incorporates unlimited party autonomy.Though China is not the first country to introduce party autonomy to the field of movables,the unlimited party autonomy approach to movables may be problematic,as analyzed above.Thus,the author suggests that the Supreme People’s Court should interpret Article 37 in a limited manner to impose necessary restrictions on party autonomy.
With regard to the choice-of-law rules for securities,the author believes that Article 39 suffers from over-broad categories; moreover,judges are left with too much discretion in deciding which is the place where the rights are to be exercised or that with the closest connection.Therefore,it is my hope that when the Supreme People’s Court issues the judicial interpretation in the future,it could spell out the meaning of the place where the rights to securities to be exercised,and provide a test with concrete standard to determine the place with the closest connection with the securities.Last,but not least,the Conflicts Act fails to provide rules for securities held with an intermediary.Given that the Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary has provided a systematic choice-of-law rules for this type of securities,the author suggests that China should join the Convention in the near future.