China: Jurisdictional Challenge Against Arbitration Agreement Under Chinese Law (III) 覧 Problems Arising From Principal And Accessory Contracts

Last Updated: 21 December 2017
Article by John Liu and Minli Tang

Compared to other commercial dispute resolution mechanisms (e.g. litigation and mediation), arbitration has a lot of advantages, such as the award is final and binding, the procedure and the hearing are confidential, the award is much easier to be recognized and enforced abroad, etc. However, in practice, quite a lot arbitration awards are held by local courts as non-enforceable due to lack of jurisdiction of the arbitral tribunal. Therefore, in order to minimize the possibility of such jurisdictional challenge, parties who refer their disputes to arbitration shall pay attention to the wording and the applicable scope of the arbitration agreement. In some complex transactions, the foregoing question does not only relate to the drafting of a specific arbitration clause under a contract, it requires consistency among a series of contracts.

I. Jurisdictional Challenge Against Arbitration Agreement under Principal Contract and Accessory Contract

A principal contract stands on its own, is self-contained, and not subordinate to any other agreements. An Accessory contract is executed mainly for carrying out an existing principal contract--- to assure the performance of the principal contract.

Security agreements are the most common types of accessory contracts. For instance, guarantee contracts, mortgage contracts and pledge contracts under the Security Law of the PRC are dependent on the relevant principal contracts, such as loan agreements, purchase and sales contracts, transportation contracts, contractor contracts, etc.

As per Article 129 of Interpretations of the Supreme People's Court on Several Issues Concerning the Application of the Security Law of the People's Republic of China (the "Interpretations"), "If a court action is brought up based on the dispute under the principal contract and the relevant guarantee contract, jurisdiction of the court shall be determined according to the principal contract". However, the aforementioned provision only clarifies the jurisdiction issues in litigation, leaving unclear about the jurisdiction issues for arbitration agreement in principal contracts and accessory contracts under the current Chinese law.

Generally speaking, there are four scenarios for the drafting of arbitration clauses under a principal contract and its accessory contract/s (assuming the parties are the same):

a) The principal contract and the accessory contract provide for the same arbitration clause.

b) The principal contract incorporates arbitration clause but the accessory contract does not.

c) The principal contract has an arbitration clause but the accessory contract stipulates a different arbitration clause (e.g. different arbitration institution) or agrees to submit the dispute to the court.

d) The principal contract provides for an arbitration clause while the accessory contract does not but indicates that "any unmentioned matters shall be governed by the principal contract".

A. The principal contract and the accessory contract provide for the same arbitration clause

Under this scenario, since the arbitration clauses under the principal contract and the accessory contract are the same, the possibility for jurisdictional challenge is low (assuming that the arbitration clause itself is good enough) because of the consistency between the two contracts.

B. The principal contract incorporates arbitration clause but the accessory contract does not

Under this scenario, the dispute resolution mechanism for the accessory contract is not subject to that in the principal contract.

No. 4 Civil Court of the Supreme People's Court states in the Supreme People's Court's Reply to the Question Regarding Chengdu Youbang Stationary Co., Ltd. and Wang Guojian's application to revoke the arbitration award ([(2011) Shen Arbitration No. 601]) made by Shenzhen Arbitration Commission [(2013) Min Si Ta Zi No. 9] that "there is no arbitration clause in the related guarantee contract and the tribunal's opinion that 'since there is an arbitration clause in the principal contract, the guarantee contract, as an accessory contract, shall be subject to the arbitration clause in the principal contract' does not have legitimate ground. The tribunal has rendered its award on the guarantee contract which does not have an arbitration clause, and the applicant's submission for partially setting aside the award which against him as the guarantor shall be supported."1

The Supreme People's Court has repeatedly reaffirmed the above judicial opinion in its subsequent adjudication in other cases.

C. The principal contract has an arbitration clause but the accessory contract stipulates a different arbitration clause (e.g. different arbitration institution) or agrees to submit the dispute to the court

According to the aforementioned reply of [(2013) Min Si Ta Zi No. 9], dispute resolution mechanism for accessory contracts is not subject to the dispute resolution clause in principal contracts. Therefore, if an accessory contract clearly provides for a different arbitration clause (e.g. different arbitration institution) or court litigation, any dispute arising from the accessory contract shall be subject to the dispute resolution clause under that contract.

Therefore, to avoid unnecessary chore arising from jurisdictional challenge during arbitration proceedings, the parties shall specifically pay attention to the consistency of the dispute resolution clauses when they are drafting a series of principal contract and the related accessory contract/s.

D. The principal contract provides for an arbitration clause while the accessory contract does not but indicates that "any unmentioned matters shall be governed by the principal contract"

Article 11 of the Interpretation of the Supreme People's Court on Certain Issues relating to Application of the Arbitration Law of the People's Republic of China ("Interpretation on Arbitration Law") stipulates that "Where the contract provides that a valid arbitration clause of another contract or document shall apply in the dispute resolution of the first-mentioned contract, the parties shall apply for arbitration pursuant to the subject arbitration clause in the event of a relevant dispute". This provision emphasizes that the contractual language shall be clear enough to specify that the "dispute resolution" of the first-mentioned contract is subject to arbitration clauses in another contract--- not simply mention that "any unmentioned matters shall be governed by the principal contract".

In an appeal case, Guangzhou Yu Pin Xuan Trade Co., Ltd. vs. De Sheng Rice Co., Ltd. [(2010) Yue Gao Fa Li Min Zhong Zi No. 232], the appellant and appellee signed a sales contract (the "first contract") and the first contract had an arbitration clause. Later on, the appellant and appellee signed the second and third sales contracts ("second and third contracts") where they agreed that all the other clauses shall be the same with the first contract. The High People's Court of Guangdong Province ("the High Court of Guangdong") confirmed that the arbitration clause in the first contract is valid. Then the High Court of Guangdong referred to article 19 of the Arbitration Law of the PRC and Article 11 of the Interpretation on Arbitration Law and concluded that an arbitration agreement must be specifically and explicitly based upon mutual agreement between the two parties. It further concluded that although the second and third contracts provided that all the other clauses shall be the same with the first contract, they did not explicitly refer to the arbitration clause in the first contract as the dispute resolution clause therein. Therefore, the arbitration clause under the first contract shall not be deemed to be incorporated into the second and third contracts. 2

Although the above case is not about disputes regarding jurisdictional challenge against principal contracts and accessory contracts, the analysis of High Court of Guangdong can also be treated as a reference when deciding disputes regarding application of arbitration clauses in principal and accessory contracts. Meanwhile, the above judgment is compliant with the specific provision under Article 11 of Interpretation on Arbitration Law. However, in practice, some courts still support a broader application of article 11 and rule that agreements like "any unmentioned matters shall be governed by the principal contract" are enough to confirm the application of arbitration clause in the principal contract to its accessory contract/s.

In Wang Chaomin vs. Anhui Fuyang Ankang Property Development Co., Ltd. [(2014) Fu Min Yi Zhong Zi No. 00740], the Intermediate Court of Fuyang, Anhui Province ("Intermediate Court of Fuyang") confirmed the broader application of Article 11. In this case, the appellant Wang Chaomin signed a Project Construction Contractor Contract ("PCC Contract") with Fuyang No. 8 Construction Co., Ltd. ("No. 8 Construction Co."). Article 8.9 of the PCC Contract stated that "the performance of this contract shall refer to the General Contract". The General Contract meant the Construction Contract between No. 8 Construction Co. and Anhui Fuyang Ankang Property Development Co., Ltd. Article 37.1 of the General Contract explicitly stipulated that disputes arising from the contract shall be submitted to arbitration in Fuyang Arbitration Commission. The court of first instance ruled that "disputes between Wang Chaomin and No. 8 Construction Co., shall be submitted to Fuyang Arbitration Commission" based on Article 11 of Interpretation on Arbitration Law and dismiss the court claim brought up by Wang Chaomin. The judgment was upheld by the Intermediate Court of Fuyang.

In practice, it is quite common that accessory contracts state that any unmentioned matters shall be governed by the principal contract, especially in the situation where one principal contract has several guarantee contracts. Under these situations, while the self-contained principal contract is more comprehensive to have a dispute resolution clause, the guarantee contracts simply provide for supplementary terms such as "scope of guarantee"," method of guarantee", "terms of guarantee" and simply stipulate a general reference to the principal contract. Since there is no uniformed interpretation of "any unmentioned matters shall be governed by the principal contract", in order to avoid dispute, it is suggested to further clarify in the accessory contracts (e.g. the guarantee contracts) that "the dispute resolution clause in the principal contract shall apply to any dispute arising from or in connection with the accessory contracts".

II. Practical Tips

As stated above, if parties plan to use arbitration as the dispute resolution mechanism under a contract, to avoid extra costs and trouble arising from jurisdictional challenge, it is always more sensible to include an express arbitration clause in the contract. When it comes to principal and accessory contracts, since some issues may have a connection both with the principal contract and the related accessory contract/s, it is highly recommended that all the dispute resolution clauses shall be consistent among each other.

Originally published in Lexology December 18 2017.

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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