Introduction

The rules governing arbitration and jurisdiction in China can be confusing to foreigners because of the distinctive nature of the regulations and court system. This article provides some guidance on the rules governing arbitration and jurisdiction in relation to contractual disputes that occur in China. The opinions contained herein are based on case which might be regarded as typical. As arbitration is generally preferred by foreigners to resolve disputes that occur in China, this article focuses on the rules governing arbitration.

Arbitration Agreement

According to the Arbitration Law of the People's Republic of China as revised in 2009 (herein referred to as the “Arbitration Law”): parties adopting arbitration for dispute settlement shall reach an arbitration agreement on a mutually voluntary basis. An arbitration centre shall not accept an application for arbitration submitted by one of the parties in the absence of an arbitration agreement.[1] Furthermore, “a court shall not accept an action initiated by one of the parties if the parties have concluded an arbitration agreement, unless the arbitration agreement is invalid.” [2] Therefore, in order to ensure that an application for arbitration is upheld, it is critical to ensure that the arbitration agreement concluded between the parties is valid.

In many circumstances, however, the arbitration agreement may be deemed to be invalid. In general, “if the arbitration matters or the arbitration centre is not agreed upon by the parties in the arbitration agreement, or if the relevant provisions are not clear, the parties may supplement the agreement. If the parties fail to agree upon the supplementary agreement, the arbitration agreement shall be invalid.” [3]

Specifically, “an arbitration agreement is invalid if it does not specify an arbitration institution unless both parties can reach a supplemental agreement.” [4] Furthermore, according to the Interpretation of the Supreme Court concerning Some Issues on Application of the Arbitration Law of the People's Republic of China as revised in 2006:where an agreement for arbitration stipulates that the disputes shall be arbitrated by the arbitration institution at a certain locality and there is only one arbitration institution in this locality, the arbitration institution shall be deemed as the stipulated arbitration institution. If there are two or more arbitration institutions, the parties concerned may choose one arbitration institution for arbitration upon agreement; if the parties concerned fail to agree upon the choice of the arbitration institution, the agreement for arbitration shall be ineffective.”[5]

In a case published by the Shanghai court,[6] a contract concluded by two parties provided that “any controversy, dispute or claim whatsoever arising out of or in connection with [the] contract or the breach thereof shall be referred to arbitration in Beijing.” [7] The issue here was that there are two arbitration centres in Beijing, known as the Beijing Arbitration Commission and the China International Economic and Trade Arbitration Commission respectively. The aforementioned arbitration clause, despite being agreed by both parties, was therefore deemed to be invalid according to Chinese Arbitration Law as the parties had not specified an arbitration centre. With no supplementary agreement reached by the parties concerning the selection of a specific arbitration centre, the court ruled that the arbitration clause was invalid and that the court had jurisdiction over the case.

Jurisdiction of Chinese Courts

When considering the jurisdiction of the Chinese courts, it is important to first clarify the relationship between the arbitration regime and the court system in China. The two regimes are separate as stipulated in the Arbitration Law. According to the Arbitration Law, “a court shall not accept an action initiated by one of the parties if the parties have concluded an arbitration agreement, unless the arbitration agreement is invalid.[8] In addition, the Arbitration Law stipulates that “an arbitration centre shall not accept any application for arbitration, nor shall a court accept any action submitted by the party in respect of the same dispute after an arbitration award has already been given in relation to that matter.”[9]

Even in the absence of an arbitration agreement, the jurisdiction of the Chinese courts to hear contractual disputes can be confusing. According to the Civil Procedure Law of the People's Republic of China (2012 Amendment, herein referred to as the “Civil Procedure Law”), there are four types of court jurisdiction in China: hierarchical jurisdiction, territorial jurisdiction, exclusive jurisdiction and specified jurisdiction.

Generally speaking, hierarchical jurisdiction is based on the amount being claimed; the larger the value of the claim, the higher the level of the court that has jurisdiction over the case. Specified jurisdiction concerns three specific types of dispute: those concerning immovable property, harbour operations and inheritance. Exclusive jurisdiction is rarely relevant. The provisions concerning hierarchical jurisdiction, exclusive jurisdiction and specified jurisdiction can be easily found in the Civil Procedure Law and in Notices promulgated by the Supreme Court. Different provinces may have different criteria promulgated by the Provincial High Court according to their economic and regional status. Territorial jurisdiction is the only type of jurisdiction that allows parties, in certain specified circumstances, to select the court in which they want the dispute to be heard. Territorial jurisdiction is discussed in more detail below.

As stated in the Civil Procedure Law: parties to a dispute over a contract or any other right or interest in property may, by a written agreement, choose the court at the place of domicile of the defendant, at the place where the contract is performed or signed, at the place of domicile of the plaintiff, at the place where the subject matter is located or at any other place actually connected to the dispute to have jurisdiction over the dispute, but the provisions of hierarchical jurisdiction and exclusive jurisdiction shall not be violated. [10] A “written agreement” means “the negotiated jurisdiction clause in the contract or the agreement on selection of jurisdiction reached before litigation”. [11]

In the absence of a written agreement between the parties concerning the selection of territorial jurisdiction, the legal rules of territorial jurisdiction for contractual disputes will apply as set out below.

According to the Civil Procedure Law: “an action instituted for a contractual dispute shall be under the jurisdiction of the court at the place of domicile of the defendant or at the place where the contract is performed.” [12] This means that, in a contractual dispute, if the place of domicile of the defendant and the place where the contract is performed are inconsistent, two Chinese courts may concurrently have jurisdiction over the same dispute. Pursuant to the Civil Procedure Law: “when two or more courts have jurisdiction over an action, the plaintiff may institute an action in one of such courts; and if the plaintiff institutes actions in two or more courts that have jurisdiction, the court which dockets the case first shall have jurisdiction over the action.”[13] Generally speaking, where more than one Chinese court has jurisdiction, the plaintiff has the right to choose a court from among all the competent courts. The plaintiff may take a number of factors into consideration when choosing a court, such as his/her own convenience, the attitude of the judges, the status of the court and the value of the claim.

It is also important to clarify how the “place where the contract is performed” is defined under Chinese law. The Opinions of the Supreme Court on Some Issues Concerning the Application of the Civil Procedure Law of the People's Republic of China (herein referred to as the “Opinions”) provides that: “if both parties to a purchase-and-sale contract have stipulated the place of delivery in the contract, the place of delivery as stipulated in the contract shall be the place where the contract is performed.”[14] The Opinions also contains provisions which clearly define the “place where the contract is performed” for different categories of contracts such as contracts on processing work, property leasing or financial leasing contracts, compensation trade contracts, insurance contracts and railway transport contracts.

Conclusion

In practice, parties to a contract usually prefer to incorporate an arbitration clause into the contract in the event that any disputes arise out of the contract. Considering the Chinese arbitrational regulations, parties should be aware of the importance of specifying the details of the arbitration and choosing a specific arbitration centre in order to prevent the arbitration clause or agreement being declared invalid.

When considering the jurisdiction of Chinese courts, parties should be aware that the rules of exclusive jurisdiction take priority. These are relevant to disputes concerning immovable property, harbour operations and inheritance. All other contractual disputes follow a separate process to determine the court(s) that have jurisdiction to hear the claim. The place of domicile of the defendant or the place where the contract is performed will determine the region(s) in which the claim may be heard. The level of court that is competent to hear the claim will depend on the value of the claim; opinions issued by the Provincial High Court should be used to determine the correct level. Once this is known, the plaintiff can choose from among a number of competent courts, and may base his/her decision on a number of factors such as convenience, attitude of the judges and the status of the courts in different regions.

In addition, parties to a contract may enter into a written agreement regarding territorial jurisdiction. This may take the form of a jurisdiction clause in the contract or a separate agreement entered into prior to commencing litigation. Such clauses/agreements allow the parties to bring the claim in a court situated in any of the following places: the place of domicile of the defendant, the place where the contract was performed or signed, the place of domicile of the plaintiff, the place where the subject matter of the contract is located or any other place actually connected to the dispute. One thing to bear in mind when concluding such agreements is that the provisions of hierarchical jurisdiction and exclusive jurisdiction cannot be violated.