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Which law governs disputes involving corporations?
Guest post by Dr Sagi Peari, Senior Lecturer/Associate Professor at the University of Western Australia
When it comes to the question of the applicable law that governs disputes involving corporations: one must make a sharp distinction between two principal matters: (1) matters relating to external interactions of corporation (such as disputes between a corporation and other external actors, such as other business entities or individuals); and (2) matters relating to the internal interactions of a corporation (such as disputes within the corporate structure or litigation between a corporation and its directors). A claim of a corporation against another in relation to a breach of contract between the two is an example of a dispute related to external affairs of a corporation. A claim of a corporate shareholder against a director in the firm is an example of a dispute concerning corporate internal affairs.
The division between external and internal affairs of corporation is an important one for the question of applicable law. A review of the case law suggests a strong tendency of the courts to apply the same choice-of-law rules applicable to private individuals. Thus, the general rule of the place of tort applies equally to corporations and private individuals.[1] In similar, the advancing principle of party autonomy[2] does not distinguish between corporations and other litigants on its operational level. The very fact that litigation involves a corporation does not seem prima facie to affect the identity of the applicable law rules.
The situation becomes dramatically different in cases concerning the internal affairs of a corporation. These are the situations involving claims between the corporate actors (i.e. executives, shareholders and directors) and claims between those actors and the corporation itself. Here, different considerations seem to apply. First, internal affairs of corporations tend to be excluded by the various international statutes aiming to harmonise the applicable law rules.[3] Second, there is a clear tendency of the rules to adhere to a single connecting factor (such as the place of incorporation or corporate headquarters with some further constitutional implications[4]) to determine the question of the applicable law. Thirdly, there is a clear tendency of rejecting the party autonomy principle in this sphere according to which corporate actors are not free to determine the applicable law to govern their dispute.[5]
One of the neglected frameworks for addressing the external/internal affairs distinction relates to the classical corporate law theory on the nature of corporations and the relationships within the corporate structure. Thus, the classical vision of corporations perceives a corporation as an artificial entity that places the state at the very centre of the corporate creation, existence and activity.[6] Another, perhaps contradictory vision, challenges the artificial nature of corporation. It views corporation as an independent moral actor what dissects its existence from the originating act of incorporation.[7] Lastly, the third vision of corporation evaluates the corporate existence from the internal point of view by focusing on the bundle/nexus of contracts within the corporate structure.[8]
One could argue that an exercise of tackling the various theories of corporations could provide an invaluable tool for a better understanding of the internal/external division and subsequently shed light on the question of applicable law rules. Thus, for example, the traditional insistence of choice-of-law to equalise between corporations and private individuals seems to correlate with the ‘personality’ vision of corporation. On a related note, the insistence of the choice-of-law doctrine on a single connecting factor that denies party autonomy seems to be at odds with the nexus-contract theory and aligns with the traditional artificial entity theory of the corporation.
From this perspective, placing this question within the conceptual framework of corporate law could enable us to grasp the paradigmatic nature of the division and contemplate on whether the various suggestions for reform in the area of choice-of-law rules applicable to corporations do not just correlate with the underlying concerns and rationales of private international law/conflict of laws, but also those of corporate law.
I have tackled these (and other) matters in my recent article published in the 45 (3) Delaware Journal of Corporate Law 469-530 (2021) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3905751.
[1] See eg Regulation 864/2007, on the Law Applicable to Non-Contractual Obligations (Rome II), 2007 O.J. (L 199) 40 (EC), art 4 (1).
[2] See eg Hague Principles on Choice of Law in International Commercial Contracts, 2015.
[3] See eg Regulation 864/2007, on the Law Applicable to Non-Contractual Obligations (Rome II), 2007 O.J. (L 199) 40 (EC), art 1 (2) (f).
[4] See eg Case C-212/97, Centros Ltd. v. Erhvervs-og Selskabsstyrelsen, 1999 E.C.R. I-1459, 2 C.M.L.R. 551 (1999).
[5] See eg Hague Principles, Commentaries, 1.27-1.29.
[6] See eg Dartmauth College v Woodward 17 U.S. 518, 636 (1819)
[7] See eg Peter A French, ‘Responsibility and the Moral Role of Corporate Entities’, in Business as Humanity (Thomas J Donaldson and RE Freeman eds, 1994) 90.
[8] Of course, the distinction between the above-mentioned three theories is not sharp and variations and overlaps have been suggested over the years in the corporate law literature.
Forum Selection Clauses, Afghanistan, and the United States
One Afghanistan-based company sues another in commercial court in Afghanistan. The plaintiff wins at trial. The Afghanistan Supreme Court reverses. It orders the parties to resolve their dispute in the United States. The plaintiff files suit in the United States. Chaos ensues.
This may sound like an unlikely scenario. It is, however, a concise description of the facts presented in Nawai Wardak Transportation Co. v. RMA Grp. Afghanistan Ltd, No. 350393 (Mich. Ct. App. 2021). This case is noteworthy for a number of reasons. It offers insights into best drafting practices for choice-of-court clauses. It illustrates how U.S. courts decide whether these clauses should be enforced. And it suggests that the Afghanistan Supreme Court takes the principle of party autonomy pretty seriously.
In July 2012, the United States Agency for International Development (“USAID”) contracted with Aircraft Charter Solutions (“ACS”) to perform aircraft flight operations out of Kabul International Airport in Afghanistan. ACS entered into a contract with RMA Afghanistan (“RMA”), an Afghanistan-based company, to supply fuel to locations throughout Afghanistan. RMA, in turn, entered into a contract with Nawai Wardak Transportation Company (“NWTC”), another Afghanistan-based company, to supply fuel in support of the contract between USAID and ACS. The contract between RMA and NWTC contained the following provision:
The parties irrevocably agree that the courts of the United States of America shall have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this Agreement or its subject matter or formation (including non-contractual disputes or claims).
Roughly a year after the RMA-NWTC contract was signed, a dispute arose. NWTC demanded payment. RMA refused. NWTC brought a suit against RMA in commercial court in Afghanistan and won a judgment. The Supreme Court of Afghanistan reversed the judgment of the lower court. It concluded that the case should have been dismissed because the parties had previously agreed in their choice-of-court clause to litigate all disputes in the United States.
Undeterred, NWTC filed suit against RMA in state court in Michigan. RMA immediately moved to dismiss the Michigan lawsuit on the grounds that the state court lacked personal jurisdiction over it. It argued that it had only consented to suit in federal court via the choice-of-court clause. It pointed out that that clause referred to the courts “of” the United States of America. It then argued that this language necessarily excluded state courts because these courts were only “of” the State of Michigan. They were not courts of the United States as a whole.
NWTC responded to this argument by pointing out that the case could not be heard in federal court because those courts lacked subject-matter jurisdiction on the facts presented. If the clause were interpreted the manner suggested by RMA, the plaintiff contended, then the choice-of-court clause would be rendered a nullity because no court in the United States could hear the claim and it would be deprived of a remedy altogether.
The state trial court in Michigan ruled in favor of RMA and dismissed the case. This decision was then appealed to the Court of Appeals of Michigan. That court acknowledged that “the dictionary definition of ‘of’ supports that, while Michigan courts may be in the United States, they are not of the United States.” The court then went on to conclude, however, that dictionary definitions are not conclusive:
We are not constrained to follow dictionary definitions when interpreting a contract, and the effect of interpreting the forum-selection clause to refer exclusively to federal courts is to deprive both parties of a forum in which to resolve their contract disputes. In other words, for either party to have had a legal remedy for the other party’s failure to perform under the subcontract, the parties must have intended “courts of the United States of America” as a geographical designation encompassing both federal and state courts. Any other reading of the forum-selection clause would render it nugatory, which is to be avoided when interpreting contracts.
The court of appeals then considered the defendant’s argument that if the clause was interpreted to refer to any state court in the United States, it would become so “overbroad and so lacking in specificity” that “enforcing it would be unreasonable and unjust.” The court held that this argument had not been fully developed in the proceedings below. Accordingly, it remanded the case for further consideration by the lower court.
This case presents a number of interesting issues relating to choice-of-court clauses. The first has to do with contract drafting. As a matter of best practice, it is better to name a specific U.S. state in which a suit must be brought rather than the United States as a whole. If the clause selects the nation as a whole, however, it is better to select the courts “in” in the United States rather than courts “of” the United States to make clear that the suit may be brought in either state or federal court.
The second issue relates to clause enforcement. U.S. courts routinely decline to give effect to choice-of-court clauses selecting courts that lack subject-matter jurisdiction to hear the dispute. If the chosen forum lacks the power to resolve the case, these courts reason, the parties may sue wherever they want. The Court of Appeals of Michigan recognized this fact and rightly rejected the defendant’s arguments that would have produced a contrary result.
The third issue relates to the need for specificity in identifying the chosen forum. Under ordinary circumstances, a clause selecting the courts of “any” U.S. state would not be enforceable because it does not clearly identify where the suit may proceed. In the unique facts presented in the case described above, however, the lack-of-specificity argument is unlikely to carry the day because, if accepted, it would result in no court being able to hear the dispute.
Finally, it is important to note that the State of Michigan has adopted a statute that clearly spells out when its courts should and should not give effect to choice-of-court clauses. This is unusual. Only three other U.S. states—Nebraska, New Hampshire, and North Dakota—have adopted similar statutes based on the Model Choice of Forum Act. Judges in the remaining U.S. states apply judge-made common law to decide the issue of enforceability. The Michigan approach has a lot of recommend to it because it provides a clear, concise, and unchanging set of factors for the courts to consider when analyzing this issue.
Extraterritorial Application of Chinese Personal Information Protection Law: A Comparative Study with GDPR
Written by Huiying Zhang, PhD Candidate at the Wuhan University Institute of International Law
China enacted the Personal Information Protection Law (PIPL) at the 30th Session of the Standing Committee of the 13th National People’s Congress on August 20, 2021. This is the first comprehensive national law in China concerning personal information protection and regulating the data processing activities of entities and individuals. PIPL, the Cyber Security Law (came into force on June 1, 2017) and Data Security Law (promulgated on September 1, 2021) constitute the three legal pillars of the digital economy era in China.
PIPL includes eight chapters and 74 articles, covering General Provisions, Rules for Processing Personal Information, Rules for Cross-border Provisions of Personal Information, Rights of Individuals in Activities of Processing Personal Information, Obligations of Personal Information Processors, Departments Performing Duties of Personal Information Protection, Legal Liability and Supplementary Provisions. This note focuses on its extraterritorial effect.
1.Territorial Scope
Article 3 of the PIPL provides:
“This Law shall apply to activities conducted by organizations and individuals to control the personal information of natural persons within the territory of the People’s Republic of China.
This Law shall also apply to activities outside territory of the People”s Republic of China to handle the personal information of natural persons within the territory of the People’s Republic of China under any of the following circumstances:
a . personal information handling is to serve the purpose of providing products or services for natural persons within the territory of the People’s Republic of China;
- personal information handling is to serve the purpose of analyzing and evaluating the behaviors of natural persons within the territory of the People’ s Republic of China; or
- having other circumstances as stipulated by laws and administrative regulations.”
According to paragraph 1 of Art 3, PIPL applies to all data processing activities of personal information carried out in China. If foreign businesses processes or handles the personal information within the territory of China, in principle, they shall comply with the PIPL. It indicates that this clause focuses on the activities of processing or handling personal information in the territorial of China, especially the physical link between the data processing or handling activities and Chinese territory.
According to paragraph 2 of Art 3, the PIPL shall be applicable to activities outside the territory of China in processing or handling the personal information within China under some circumstances. As provided in Art 53, “personal information handlers outside the borders of the People’ s Republic of China shall establish a dedicated entity or appoint a representative within the borders of the People’ s Republic of China to be responsible for matters related to the personal information they handle”. Notably, this clause focuses on the physical location of the data processors or handlers rather than their nationality or habitual residence.
PIPL has extraterritorial jurisdiction to data processing or handling activities outside the territorial of China under 3 circumstances as provided in paragraph 2 of Art 3 of the PIPL. This is the embodiment of the effect principle, which derives from the objective territory jurisdiction and emphasizes the influence or effect of the behavior in the domain. If the purpose is to provide products or services to individuals located in China, or to analyze the behaviors of natural person in China, the PIPL shall be applicable. Crucially, the actual “effect” or “influence” of data processing or handling is emphasized here, i.e. when it is necessary to determine what extent or what requirements are met of the damage caused by the above-mentioned data processing or handling activities outside the territorial of China, Chinese courts may reasonably exercise the jurisdiction over the case. Obviously, it reflects the consideration of the element of “brunt of harm”. However, if the “effect” or “influence” is not specifically defined and limited, there will be a lot of problems. It is important to figure out exactly whether data processors or handlers outside the territorial of China are aware of the implications of their actions on natural person within China and whether the “effect” or “influence” of the data-processing behaviors are direct, intentional and predictable.
The PIPL explicitly states its purported extraterritorial jurisdiction for the first time and insists on the specific personal jurisdiction and the effect principle. It is mainly because the PIPL is formulated “in order to protect personal information rights and interests, standardize personal information handling activities, and promote the rational use of personal information”, but in the process of legal protection of personal information of natural person, there are a lot of challenges, such as the contradiction between the application of traditional jurisdiction, the virtual nature of personal information and so on. In this sense, all jurisdiction of the PIPL, whether territorial jurisdiction or personal jurisdiction or effect principle, are all further supplements for the existing personal information protection regime previously provided.
2.PIPL and GDPR: a Comparative Study
The provisions on jurisdiction of GDPR are mainly concentrated in Art 3 and Art 23, 24, 25, 26, 27 of preambular 2. In Art 3, paragraph 1 and 2 identified “establishment principle” and “targeting principle” and paragraph 3 provides “This regulation applies to the processing of personal data by a controller not established in the Union, but in a place where Member State law applies by virtue of public international law”.
A. Establishment Principle
Under paragraph 1 of Art 3, GDPR applies to “the processing of personal data in the context of the activities of an establishment of a controller or a processor in the Union, regardless of whether the processing takes place in the Union or not.” It set the “establishment criterion”, which has the dual characteristics of territorial jurisdiction and extraterritorial jurisdiction.
Compared with establishment criterion in GDPR, the PIPL indicates that personal information handlers outside the territorial of China shall establish a dedicated entity or appoint a representative within China as previously mentioned. It highlights the significance and necessity of establishing an entity when foreign data handlers process the personal information of national persons outside China under circumstance in paragraph 2 of Art3 of PIPL.
B. Targeting Principle
Compared with targeting criterion in GDPR, PIPL has many differences. Paragraph 2 of Art 3 of the GDPR clearly states that for data processors and controllers that do not have an establishment in the EU, GDPR will apply in two circumstances. Firstly, as stated in Art 3 of GDPR, the processing activities relate to “the offering of goods or services, irrespective of whether a payment of the data subject is required, to such data subjects in the Union” (Art 2 GDPR). It seems too abstract to give the definition and processing method of data processor and controller’ s behavior intention. Art 23 of the GDPR provides the clarification that “it should be ascertained whether it is apparent that the controller or processor envisages offering services to data subjects in one or more Member States in the Union.” The key factor to assess whether the processor or controller “targets” the EU is whether the behaviour of the offshore data processors or controllers indicates their apparent intention to provide goods or services to data subjects in the EU. This is an objective subjective test.
In contrast, Art 3 of the PIPL states that the law shall apply when the data processor processes personal information “to serve the purpose of providing products or services for natural persons within the territory of the People’ s Republic of China”. It indicates that the purpose of data processor or controller outside China is to provide a product or service to a domestic natural person in China. The key to the application is not only about whether it has purpose, but also about whether they have processed personal information of a natural person in China.
Secondly, the procession activities are in related to “the monitoring of their behaviour as far as their behaviour takes place within the Union”. It requires both the data subject and the monitored activity be located within the EU. “Monitoring” shall be defined in accordance with Article 24 of the GDPR preamble. This provision does not require the data processors or controllers to have a corresponding subjective intent in the monitoring activity, but the European Data Protection Board ( Hereinafter referred to as EDPB) pointed out that the use of the term “monitoring” implied that the data controllers or processors had a specific purpose, namely to collect and process the data. Similarly, Art 3 of the PIPL also applies to activities outside China dealing with personal information of natural persons within China, if the activities are to analyse and evaluate the acts of natural persons within China. The meaning of “analysis and evaluation” here is very broad and seems to cover “monitoring” activities under the GDPR.
Furthermore, paragraph 3 of Art 3 of the GDPR provides: “This Regulation applies to the processing of personal data by a controller not established in the Union, but in a place where Member State law applies by virtue of public international law.” It suggests that the data processor or controller does not have an establishment in the territory of the EU and there is no circumstances under paragraph 2 of Art 3 of the GDPR. Due to that the international law applies EU member state law in the area where the numerical controller is located, this law shall apply. This condition is primarily aimed at resolving the issue of extraterritorial jurisdiction over data processing or controlling that takes place in EU without an establishment. This condition is similar to Directive 95/46 of the European Parliament and the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data. The similar condition is not included in the PIPL, which instead shall apply to other circumstances “as stipulated by laws and administrative regulations”.
C. Passive personality principle
Under the passive personality principle, a state has prescriptive jurisdiction over anyone anywhere who injures its nationals or residents. As previously mentioned, paragraph 2 of Art 3 of the GDPR states that although the personal data processors or controllers are not established in the EU, EU still applies the laws of member states in accordance with public international law. Art 25 of the preamble of GDPR provides examples of such situations which may include a Member State’s diplomatic mission or consular post.
To some extent, GDPR includes all the personal data processing activities involving natural persons situated in the EU area into its jurisdiction, which is a variation of the passive nationality principle. It is because EU treats the individual data right as a fundamental human right and aims to establish a digital market of the unified level of protection. PIPL adopts the similar practice by adopting the passive nationality principle to protect Chinese citizens and residents.
3.Conclusion
The promulgation of PIPL shows that China recognizes the extraterritorial effect of data protection law. The exploration of legislation not only has the meaning of localization, but also contributes to the formulation of data rules for the international community. It marks an important step towards China’ s long-term goal of balancing the preservation of national sovereignty, the protection of individual rights and the free flow of data across borders.
News
Second Issue of the Journal of Private International Law for 2023
The second issue of the Journal of Private International Law for 2023 has just been published. It contains the following articles:
DJB Svantesson & SC Symeonides, “Cross-border internet defamation conflicts and what to do about them: Two proposals”
Conflicts of laws in cross-border defamation cases are politically and culturally sensitive and their resolution has always been difficult. But the ubiquity of the internet has increased their frequency, complexity, and intensity. Faced with the realities of the online environment—including the virtual disappearance of national borders—several countries have acted unilaterally to preserve their values and protect their interests. Some countries enacted laws favouring consumers or other potential plaintiffs, while other countries took steps to protect potential defendants, including publishers and internet service providers. As a result, these conflicts are now more contentious than ever before. We believe there is a better way—even-handed multilateral action rather than self-serving unilateral action. In this article, we advance two proposals for multilateral action. The first is a set of soft law principles in the form of a resolution adopted by the Institut de Droit International in 2019. The second is a proposed Model Defamation Convention. After presenting and comparing these two instruments, we apply them to two scenarios derived from two leading cases (the first and one of the latest of the internet era) decided by courts of last resort. The first scenario is based on Dow Jones & Company Inc v Gutnick, which was decided by the High Court of Australia in 2002. The second is based on Gtflix Tv v. DR, which was decided by the Court of Justice of the European Union at the end of 2021. We believe that these two instruments would produce more rational solutions to these and other cross-border defamation conflicts. But if we fail to persuade readers on the specifics, we hope to demonstrate that other multilateral solutions are feasible and desirable, and that they are vastly superior to a continuing unilateral “arms race.” In any event, we hope that this article will spur the development of other proposals for multilateral action.
Conference on Digital Justice for Cross-border Cases: University of Alicante, 23 November 2023 (in Spanish)
The Private International Law Department of the University of Alicante is organizing a conference entitled “Digital Justice for Cross-border Cases” (both onsite and online – in Spanish). The event will take place on 23 November 2023 at the Salón de Grados “Rector Ramón Martín Mateo” of the Faculty of Law at the University of Alicante.
Chinese Journal of Transnational Law Special Issue: Call for Papers
CHINESE JOURNAL OF TRANSNATIONAL LAW
Call for Papers
Special Issue: Private International Law and Sustainable Development in Asia
The United Nations Agenda 2030 with its 17 Sustainable Development Goals (SDGs) seems to have a blind spot for the role of private and private international law. That blind spot is beginning to be closed. A collective volume with global outlook published in 2021 addressed “the private side of transforming our world”: each of the 17 SDGs was discussed in one chapter of the book devoted to the specific relevance of private law and private international law. In 2022, the IACL-ASADIP conference in Asunción, Paraguay discussed sustainable private international law with regard to Latin America; the contributions published in 2023 in a special issue of the University of Brasilia Law Journal – Direito.UnB., V.7., N.3 (2023).
In this occasion the focus is on Asia. The Chinese Journal of Transnational Law invites submissions for its Vol. 2 Issue 2, to be published in 2025, engaging critically with the functions, methodologies and techniques of private international law in relation to sustainability from an Asian perspective, as well as in relation to the actual and potential contributions of private international law to the SDGs in Asia. Read more