China’s Anti-Foreign Sanctions Law: A Weapon Against Arbitration or a Bark Without Bite?

In June 2021, China enacted its first Anti-Foreign Sanctions Law (“AFSL”). The AFSL aims to deter foreign parties from implementing or assisting in the implementation of sanctions against Chinese entities. It provides Chinese entities with an avenue of recourse before Chinese courts when their rights are infringed by such sanctions. However, a thorny question arises: with respect to a contract containing an arbitration clause, if a dispute arising therefrom is connected with foreign sanctions, yet a party decides to commence proceedings before a Chinese court on the basis of the AFSL, how should Chinese courts reconcile the potential tension between their jurisdiction and the parties’ consent to arbitration? This article examines this issue in detail.

Latest Development: Enactment of the Implementation Provisions and the First Reported Case Under the AFSL

The AFSL remained dormant since its enactment, as this 16-article law has been widely regarded as primarily declaratory. In March 2025, nearly four years after the AFSL’s promulgation, the State Council of China issued Decree No. 803, promulgating the detailed Provisions on the Implementation of the AFSL (“Implementation Provisions”), thereby establishing the AFSL’s operational mechanism.

Concurrently, the Supreme People’s Court (“SPC”), for the first time, published details of a lawsuit brought by a Chinese party under the AFSL (the “First Case”). According to this case report and an article reportedly authored by Judge Tan Xiaoqing, the dispute arose from a contract for the manufacture of ship component modules between a Chinese manufacturer and its European client, which contained an arbitration clause. The Chinese manufacturer completed the construction of the modules. However, after the Chinese manufacturer was designated on the OFAC Specially Designated Nationals (SDN) List, the European party informed the Chinese manufacturer that it would suspend payment and cease all business dealings pursuant to applicable sanctions regulations. The Chinese manufacturer then filed a lawsuit before the Nanjing Maritime Court pursuant to Article 12 of the AFSL, which stipulates that Chinese citizens are entitled to initiate lawsuits in Chinese courts when their rights are infringed by foreign sanctions. Notably, before commencing the lawsuit, the Chinese manufacturer applied for and successfully obtained from the same court an asset preservation order against the European party’s vessel berthed at a Chinese port. Ultimately, 39 days after commencement of the lawsuit, the parties entered into a settlement agreement, under which the European party fulfilled its payment obligations.

Walking a Tightrope: Statutory Right to Litigate v. Parties’ Autonomy to Arbitrate

The First Case was published in a highly redacted and summarized form on China’s People’s Court Case Database. Notwithstanding the lack of details, the case report indicates that the First Case was the first anti-foreign sanctions tort claim brought by a Chinese party pursuant to Article 12 of the AFSL since the law’s entry into force. Although included in the section of “mediation result” (“调解结果”), it appears evident to the authors that the Nanjing Maritime Court framed the case as a tort action.

The later case-commentary article reportedly authored by Judge Tan, sheds more light on the legal basis for the court’s acceptance of the lawsuit. In the present case, the European party claimed that it would only make payment if the Chinese manufacturer was removed from the SDN List. This refusal prevented the Chinese manufacturer from settling mature engineering payments to subcontractors and repaying bank loans, placing the enterprise under significant operational distress. By facilitating the implementation of foreign sanctions, the aforementioned conduct directly caused substantial financial losses to the Chinese company. Such conduct by the European party therefore satisfies the elements of tort liability under the AFSL, in conjunction with the Chinese Civil Code. In this regard, Judge Tan in his article concluded that the AFSL established a tort-based avenue of relief. In his view, by characterizing the claim as a “tort claim,” the court paved the way for asserting jurisdiction over the sanction-related dispute. Had the claim instead been raised as a breach of contract claim by the claimant, it would have plainly fallen within the scope of the arbitration clause. The Chinese manufacturer would therefore have been precluded from domestic litigation, as contractual disputes fell under the arbitration clause.

Judge Tan’s analysis in his article clarifies the application of Article 12 of the AFSL as a basis for bringing a claim, but leaves unresolved how to mitigate conflicts between tort-based litigation and contract-based arbitration.

The approach typically adopted by Chinese courts is to determine whether there is a concurrence of tort and contractual liabilities. In one SPC ruling, if a tort dispute arises from contractual breach with concurrent liabilities, parties remain bound by the arbitration clause and cannot circumvent it via litigation. Adopting a similar approach, the Shanghai High People’s Court held in another SPC-published case that that the arbitration clause did not bind the parties since the tort claim arose independently of the contractual obligations.

However, in his article, Judge Tan adopted a different stance when dealing with sanction-related tort claims. Rather than examining whether sanction-related tort liability and contractual liability may arise concurrently, he treats the right embodied in Article 12 of the AFSL to seek recourse before Chinese courts as an overriding mandatory rule, thereby granting the Chinese party a statutory right to litigate. If his approach is adopted, Chinese courts may assert exclusive jurisdiction over the sanction-related tort claims. In the authors’ view, the rationale for this approach lies in the pronounced public-law character inherent in sanction-related disputes. The AFSL was enacted with the primary objective of responding to improper foreign sanctions against Chinese entities. If the Chinese court is to prioritize the parties’ autonomy to arbitrate in cases where sanction-related tort liability concurs with contractual liability, Article 12 of the AFSL might be left with little, if any, real operative force.

As the First Case settled, it remains unclear whether Chinese courts would exercise exclusive jurisdiction over the substantive tort claim brought under Article 12 of the AFSL. The judge’s approach proposed in his personal article may be seen as a positive attempt to reconcile the tension between the court’s jurisdiction under the AFSL and the validity of the arbitration clause set out in the contract. Yet it may also give rise to potential conflicts between international arbitration initiated by the non-Chinese party pursuant to the arbitration clause and Chinese courts’ exclusive jurisdiction over the tort claim initiated by the Chinese party under the AFSL.

Should parallel proceedings materialize, whether Chinese courts would issue anti-arbitration injunctions to restrain arbitral proceedings warrants close observation. According to a post reportedly authored by the legal counsel of the claimant in the First Case, one factor influencing the European party’s decision not to initiate arbitration may have been the asset preservation order against it, namely the arrest of its vessel in the Chinese port. It is therefore conceivable that a hypothetical anti-arbitration injunction issued by a Chinese court would carry a tangible deterrent effect on foreign parties with substantial assets in China. Non-compliance with such an injunction might trigger enforcement measures like monetary penalties or asset seizures, posing risks for foreign entities with significant holdings in China.

Conclusion

The First Case conveys a two-fold message. On the one hand, the court would adopt a cautious approach to claims made under Article 12 of the AFSL, accepting them only if they meet the tort requirements under the Chinese Civil Code. By setting such a threshold for commencing litigation, the court seeks to prevent arbitration agreements from being easily circumvented. On the other hand, the court uphold parties’ statutory right to litigate legitimate AFSL tort claims, ensuring the law has teeth. Striking a delicate balance between these two objectives is, however, inherently challenging.

As economic and geopolitical frictions, particularly between China and the United States, continue to intensify, foreign companies engaging in business with Chinese counterparts should be well advised to undertake early contractual planning. This includes negotiating clear terms that address the potential impact of sanctions on payment obligations and dispute resolution mechanisms. Such foresight may help mitigate the risk of being caught in a binary compliance trap between conflicting legal regimes.

The views expressed in the article are the authors’ own and do not represent the views of others.