In November 2024, in the first successful private cause of action under the Anti-Foreign Sanctions Law (AFSL), a Chinese court adjudicated a civil claim by a Chinese company against its overseas customer for failure to pay after the former was added to the U.S. Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) List. Additionally, in March 2025, China issued the Regulations on Implementation of the Anti-Foreign Sanctions Law of the People’s Republic of China (“Regulations”). The Regulations enhance the enforceability of the AFSL by clarifying the roles of different PRC agencies in implementing the AFSL, expanding the toolkit of sanctions countermeasures, and establishing mechanisms for sanctions relief.
Case Background
- In 2023, a Chinese marine engineering company (“Plaintiff”) contracted with a foreign equipment supplier (“Defendant”) to manufacture equipment for the Defendant’s vessel.
- On June 12, 2024, OFAC designated the Plaintiff on the SDN List, along with over 300 others. OFAC alleged that the Plaintiff violated U.S. sanctions targeting Russia under Executive Order 14071 by providing U.S.-related IT and design services to Russia’s military-industrial base personnel.
- In June 2024, the Defendant refused to pay an outstanding installment payment in the amount of approximately RMB 83,900,000 (around USD 11.86 million) for work performed in China, to the Plaintiff after the latter was designated by OFAC.
- In September 2024, the Nanjing Maritime Court (“Court”) granted a preliminary injunction sought by the Plaintiff to freeze the Defendant’s vessel in China pending the outstanding payment.
- In October 2024, the Plaintiff filed the case under Article 12 of the AFSL. The Court agreed to hear (受理) the lawsuit.
- The Court explained to the Defendant the legal consequences of assisting in the foreign unilateral sanctions under the AFSL, and both parties petitioned to seek resolution through Court mediation.
- In the interim, the Defendant successfully obtained a special license from OFAC to pay the Court (rather than the OFAC-designated Plaintiff) a counter-guarantee pending resolution of the Court mediation.[1]
- On November 19, 2024, the Court issued a civil mediation agreement,[2] which included:
- Payment by the Defendant to the Court of RMB 99,743,000 (approximately USD 13.8 million) as a counter-guarantee to lift the asset freeze on the Defendant’s vessel. The Plaintiff received its outstanding installment payment from Court, paid out of the Defendant’s counter-guarantee; and
- An agreement between both parties that the Court has jurisdiction over any dispute that may arise after the civil mediation agreement, and that PRC law governs.
Takeaways
1. The Court Exercised Jurisdiction Notwithstanding an Existing Arbitration Clause.
Despite an existing arbitration clause, the Court agreed to hear the Plaintiff’s case,[3] brought under Article 12 of the AFSL. The Court also determined that it has jurisdiction, on a preliminary basis, without specifying its exact authority. After the Court explained to the Defendant the potential legal consequences under the AFSL arising from compliance with unilateral foreign sanctions, the Defendant willingly relinquished the arbitration clause and subjected itself to the Court’s jurisdiction. Therefore, the case did not litigate, on the merits, whether Article 12 of the AFSL prevails over an existing arbitration clause.
Still, this case demonstrates that Article 12 of the AFSL recognizes private causes of action for Chinese persons when their foreign counterparts refuse to perform contractual obligations based on unilateral foreign sanctions. The Supreme People’s Court of China later included this case in the People’s Court Casebooks as a persuasive authority for nationwide courts.[4] In its March 8, 2025 annual work report to the National People’s Congress, the Supreme People’s Court again highlighted this case as the first civil action where a Chinese court “hear[d] a case pursuant to the AFSL and mediated a settlement.”[5] These actions signal that China’s highest court has likely adopted the position that the AFSL provided Chinese courts with the jurisdiction to hear foreign sanctions-related cases notwithstanding arbitration clauses in commercial agreements.
2. The Recent Implementation Regulations Take AFSL Enforcement a Step Further.
The Regulations reemphasize that Chinese citizens and organizations have the right to sue counterparties in Chinese courts that comply with “discriminatory restrictive measures” imposed by foreign governments. See Article 18 of the Regulations. While neither the AFSL nor the Regulations define “discriminatory restrictive measures,” unilateral sanctions and export controls by foreign governments targeting Chinese entities and persons fall squarely within this definition.
Furthermore, drafted in broad terms, the Regulations also provide countermeasures against foreign organizations or individuals that endanger China’s sovereignty, security, or development interests by facilitating or implementing foreign litigation proceedings. See Article 19 of the Regulations. The Regulations extend the scope of foreign actions beyond unilateral sanctions and export controls that could trigger countermeasures, such as denials of entry, seizures of property, and prohibitions of business transactions, from Chinese authorities.
As the strategic use of sanctions and export controls by various governments continue to proliferate, businesses operating in the United States, China, and other countries increasingly find themselves in their crosshairs. Companies are advised to proactively identify business activities and business partners with higher exposure to sanctions and export control risks and develop contingencies that balance these competing laws from different jurisdictions.
[1] There is no publicly available information as to how and when the OFAC license was successfully obtained.
[2] The civil mediation agreement in this case is not publicly available.
[3] In general, Chinese courts would not agree to hear a case when the parties have reached an arbitration agreement. See Article 5 of the PRC Arbitration law, which provides that if the parties have reached an arbitration agreement and one party files a case in the people’s court, the people’s court shall not accept the case filing, unless the arbitration agreement is void. However, here, the Court first determined that it would hear the case, and the Defendant later did not object to the Court’s jurisdiction within the statutory defense period (法定答辩期间).
[4] The People’s Court Casebooks are recorded in a case resource database established by the PRC Supreme People’s Court to “prevent different judgments for similar cases.” The Casebooks source cases from courts on all levels nationwide and conduct layers of reviews to select cases to ensure quality. Chinese courts on all levels are required to refer to similar cases included in the People’s Court Casebooks when adjudicating cases.
[5] See Work Report of the Supreme People's Court.
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