Examine Contracts for Chinese Anti-Foreign Sanctions Law Liability, Lawyer Says

The Chinese law, passed in June of 2021, gives the government broad discretion to penalize companies for obeying U.S. and other countries' restrictions against China (see 2107080057). Although it generally has been good practice to include a laundry list of laws in a contract to make sure all parties are compliant, companies may need to rethink the practice because the anti-foreign sanctions law could result in penalties or private lawsuits to recoup profits Chinese lose from compliance with certain foreign regulations, Chuck said.

Chuck said he has seen joint venture agreements include a clause about complying with various federal acquisition regulations, which may run afoul of the Chinese law. "There may be other ways to still have all that, but you want to really look at your existing and prospective agreements for anti-foreign sanctions law liability and triggers, particularly for dealing with a large Chinese company," Chuck said.

Chuck also said companies need to be careful when communicating with Chinese companies, because negotiations or business communications can be "deemed as admissions" under the anti-foreign sanctions law, Chuck said. "We have to be very careful when we advise our clients," even at the highest levels and early stages of business negotiation, Chuck said.

Some lawyers have advised companies to avoid asking Chinese suppliers if they are in compliance with the Uyghur Forced Labor Prevention Act, which may also violate China's anti-foreign sanctions law (see 2305230058).

"It would be easy for a U.S. company to trip up on these laws if they're not paying attention to the laws and understanding as best they can," Michael Atkinson, a partner at Crowell & Moring, said on the webinar. China has enacted a series of similar laws over the past few years in retaliation for foreign sanctions laws and trade and investment restrictions. Understanding what the law requires and "being able to demonstrate that the company organization took reasonable steps to comply with Chinese laws as best as they understood them" can help avoid a situation such as having an employee detained in China, he said.

"It's one thing if you were aware of the law, took reasonable steps and you got caught up in some ambiguous definition, but it's another thing to entirely miss the law," Atkinson said. "That's not a position any U.S. or global company wants to be in."