China: Jurisdictional Challenge Against Arbitration Agreement Under Chinese Law —— Problems Arising From Contract Modification

Last Updated: 14 December 2017
Article by John Liu and Minli Tang

After contract modification, there are three main scenarios under which jurisdictional challenge against arbitration agreement may be brought by the parties: change of dispute resolution clauses, change of contractual parties, and change of other contract terms. When these modifications occur, does the arbitration agreement under the original contract remain applicable under Chinese law? This article will discuss these issues based on specific cases.

Contract Modification

During contract performance, both contents and parties of contracts may be modified. As to jurisdictional challenge, contract modification can be divided into three main categories:

1. change of dispute resolution clauses

2. change of the parties

3. change of other contract terms

When the above modifications happen, whether the arbitration clause under the original contract remains applicable under Chinese law? There is no universal answer but depends on different situations.

1. Change of Dispute Resolution Clauses

As long as the parties agree with each other, the modification is surely valid and the new dispute resolution mechanism shall apply.

Reported Case: Beijing Tai Si Yi Railway Technology Co., Ltd. v. Beijing Yi Ke Lu Tong Technology Co., Ltd. ([2016] Beijing 01 Min Zhong No. 369)

The claimant filed for a declaratory judgment to affirm that the parties had modified the dispute resolution mechanism from arbitration to court litigation. The court held that the modified dispute resolution clause was valid as it was a consensual agreement made by the parties. Any dispute arose after the contract modification shall be submitted to court litigation.

In this case, the court rendered the judgment in favor of the claimant based on: a. meeting minutes with official seals, which clearly stated that the parties agreed to modify the dispute resolution mechanism from arbitration to litigation; b. the defendant's written reply which confirmed the modification. Based on these evidences, the court found that the parties had agreed to modify the dispute resolution mechanism from arbitration to court litigation.

Practice tips:

Article 16.1 of the Arbitration Law of People's Republic of China (Arbitration Law) states that "[a]n arbitration agreement shall include arbitration clause stipulated in the contract or written agreement of submission to arbitration that is concluded before or after disputes arise". Thus, even though the parties did not have a dispute resolution clause or agreed to court litigation in the original contract, they can still agree to arbitrate later. However, it should be noted that the arbitration agreement shall be concluded in written form. As for the definition of "written agreements", Article 1 of Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of the Arbitration Law of the People's Republic of China (Interpretation of Arbitration Law) stipulates that it shall include agreements which are reached in the forms of contracts, letters or data message (including telegraph, telefax, fax, electronic data interchange and e-mail), etc.

Meanwhile, Article 16.2 further states that an arbitration agreement shall contain the following particulars: "(1) an expression of intention to apply for arbitration; (2) subject matters for arbitration; and (3) a designated arbitration commission."1

Therefore, after the execution of the original contract, if the parties want to modify the dispute resolution clause and use arbitration instead, they shall be very careful about the form and substantive requirements which stipulated in Article 16 of the Arbitration Law and pay attention to keep the relevant written evidences and make sure that the revised dispute resolution clause is in written.

2. Change of the Parties

The fundamental principle is that arbitration shall be based on voluntary agreement between the parties, which requires the parties to voluntarily reach an arbitration agreement before they submit disputes to arbitration. Article 16 of the Arbitration Law explicitly stipulates that the parties shall agree on the subject matters of arbitration and designate an arbitration institution in their arbitration agreement, and if the parties cannot reach an agreement on these issues, the arbitration agreement shall be deemed invalid.

It can be seen that arbitration agreement based on voluntariness is the foundation of arbitration proceedings. Under the circumstance of changed parties, like contract assignment, when the assignee is not the original contractual party and has not expressed its intention under the original arbitration agreement, can the assignee challenge the jurisdiction of the arbitration tribunal?  In this regard, the Supreme People's Court held in the Reply on Validity of the Arbitration Clause under Wuhan Jinlong High-tech Co., Ltd. V97329 Joint Venture Agreement [Law (1998) No. 212] that where the original dispute resolution clause has not been modified and the assignee has not objected the clause upon assignment, it shall be deemed that the new parties agree with the dispute resolution clause under the original contract and the assignee shall be bound by the clause.

The Supreme Court further affirmed this view later in the Interpretation of Arbitration Law — Article 8 stipulates that where a party concerned is merged or divided after it signed an arbitration agreement with another party, the arbitration agreement shall be binding upon the successors to that party, unless the new parties agree otherwise. Article 9 states that where the rights or obligations are entirely or partially assigned, the arbitration agreement under the original contract shall be binding upon the assignee, unless the parties concerned have otherwise agreed, or the assignee explicitly objects to the arbitration agreement upon assignment or does not know there is a separate agreement for arbitration.

Practice tips

During contract assignment, the assignee shall check whether there is an arbitration clause in the original contract and make explicit expression as to whether exclude the arbitration clause from its application or not. If the exclusion is necessary, the assignee shall make it clear to the opponent party upon assignment and make a joint agreement to exclude the application of the arbitration agreement under the original contract.

If there is no arbitration clause under the original contract, it is advisable to ask whether there is a separate arbitration agreement between the original parties and to retain the communication in written forms as evidences in case of any future dispute.

3. Change of Other Contract Terms

According to Article 19.1 of the Arbitration Law, an arbitration agreement shall exist independently. Any amendment, rescission, termination or invalidity of an underlying contract shall not affect the validity of the arbitration agreement in it. This is the severability of arbitration clauses.

Reported case: Beijing Hai Wan Wei Er Electronic Engineering Co., Ltd. v. Shandong Yi Jian Construction Co., Ltd. [(2016) Beijing 01 Zhiyi No. 185]

The dispute relating to a construction project. The original contract price was 2.36 million RMB. During the actual performance of the contract, there were a series of "On-Site Instruction Sheets", signed and confirmed by both parties, which added another 300,000 RMB to the total contract price. Later, due to the overdue payment unpaid by the employer, the dispute arose and the two parties submitted the dispute to the arbitration institution according to the arbitration clause under the original contract. The arbitration institution held that the total price of the contract should be 2.66 million RMB (2.36 million + 300,000). Signing "On-Site Instruction Sheets" is a common practice via which the parties agree upon the price modification and can be deemed as the parties' consensus on modification of the original contract price. However, the employer requested the court to set aside the arbitral awards on the ground that the arbitration tribunal did not have jurisdiction up the increased 300,000 RMB, as it was out of scope of the original arbitration clause.

The court held that the contract price was revised to 2.66 million RMB after the parties signed a series of "On-Site Instruction Sheets". The increased 300,000 RMB shall be deemed as the content of the contract after modification, and the contract agreed that: "During the construction process if there is any modification of construction work due to the change of drawings or employer, the contract price shall be settled by two parties after the completion of the project". Thus, potential modification of the contract price is foreseeable. Meanwhile, the contract also stipulated that the contract price could be revised based on the instructions jointly made by the parties. Thus the "On-Site Instruction Sheets" can be regarded as contract modification re contract price which had already been mentioned and agreed under the original contract.

The dispute resolution clause under the original contract can be applied to all disputes which arise from the performance of the contract, and the increased price agreed by the parties via signing the "On-Site Instruction Sheets" was closely related to the original contract. Therefore, the court held that the revised contract price was foreseeable and within the original contract scope. Thus, the original dispute resolution clause shall still be applicable to the increased amount (300,000 RMB).

Practice tips

Under the circumstances of modified contract terms, there is less controversy regarding the issue of a modified dispute resolution clause. As to the change of other contract terms, one shall pay special attention to the principle of severability of the arbitration agreement (i.e. Article 19 of the Arbitration Law), the applicable scope of the original arbitration clause, and the foreseeability of the modification. To avoid any disputes which may arise between the parties with regards to whether or not the arbitration clause under the original contract is still applicable after the modification, the parties can record these issues in written agreement during or after the modification.

Previously published in Lexology.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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