China: Jurisdictional Challenge In Original And Supplemental Agreements Under Chinese Law

Last Updated: 3 January 2018
Article by John Liu and Minli Tang

Where the disputing parties choose arbitration as a method of dispute resolution, they shall reach an arbitration agreement in advance. However, although arbitration is subject to the agreement of the disputing parties, the parties may still have jurisdictional challenge over a specific dispute under some special circumstances. While there is various jurisdictional challenge, this article focuses on the jurisdiction disputes that may arise from the original and supplemental agreements, e.g. when the parties have an arbitration clause in the original agreement but there is no such consensus in the supplemental agreement, does the arbitration clause in the original agreement apply to the supplemental agreement? Where the arbitration clause in the original agreement differs from that in the supplemental agreement, which clause shall prevail? This article will discuss these issues based on real cases and further offer practical tips under Chinese law.

The Original Agreement and the Supplemental Agreement

After signing an original agreement, it may be necessary for the same parties to clarify some vagueness in the original agreement or to further agree on additional provisions that are not recorded in the original agreement. Supplemental agreements can be used to modify or clarify issues such as quality, price, and delivery terms in the original agreement, thus are quite commonly used.

In general, there are four typical patterns via which arbitration clauses are signed by the parties in the original agreement and its supplement.

  1. Both agreements have identical arbitration clauses.
  2. The original agreement has an arbitration clause while the supplemental agreement does not.
  3. The original agreement includes an arbitration clause, but the supplemental agreement has a different one (e.g. chooses different arbitration institution, etc.) or chooses court litigation as the dispute resolution method; (or vice versa)
  4. The original agreement includes an arbitration clause and the supplemental agreement does not have an arbitration clause but provides that "any unmentioned matters shall be governed by the original agreement".

(a) Both agreements have identical arbitration clauses

Under this circumstance, the substantive disputes can be solved through arbitration based on the identical arbitral clauses even if the disputes involve issues under both agreements. This pattern is ideal to prevent jurisdictional challenge that may arise under the original agreement and its supplement.

(b) The original agreement has an arbitration clause while the supplemental agreement does not

Under this situation, one should carefully examine the nature of the supplemental agreement:

While the supplemental agreement is only an additional part of the original agreement, the arbitration clause in the original agreement shall still apply. Whereas the supplemental agreement is independent of the original agreement, and the agreed matters in the supplemental agreement are separable from those in the original agreement, the arbitration clause in the original agreement may not necessarily be applied to the supplemental agreement.

Reported case: Hunan Huaxia Construction Co., Ltd. v. Changde School of Arts and Crafts ([2015] zhi shen zi No.33)

In this case, the original agreement concluded by the disputing parties provided that "any disputes arising out of or in connection with the contract shall be submitted to Changde Arbitration Commission". The supplemental agreement did not have any dispute resolution clause. The Supreme People's Court of PRC held that, in this context, it is necessary to examine the contents of the supplemental agreement and whether the supplemental agreement shall apply the arbitration clause under the original agreement is contingent upon peculiar circumstances.

Where the supplemental agreement is independent of and separable from the original agreement

Unless otherwise specified, the dispute resolution mechanism is subject to the specific agreements in the original agreement and supplemental agreement respectively. The arbitration clause in the original agreement shall not apply to the disputes arising from or in connection with the supplemental agreement.

Where the supplemental agreement does not contain an arbitration clause, the arbitration commission chosen by the parties in their original agreement has no jurisdiction over disputes arising from or in connection with the supplemental agreement.

Where the supplemental agreement is independent and separable, it shall be regarded as a new contract. If the supplemental agreement does not contain an arbitration clause, any related disputes shall be filed with the people's court which has the jurisdiction upon the case as provided by Civil Procedural Law of PRC.

Where the supplemental agreement is inseparable from the original agreement

If the supplemental agreement is only an additional part of the original agreement and is dependent on the original agreement, the arbitration clause in the original agreement shall be applied to the supplemental agreement. As to the subject case, the Supreme People's Court held that the provisions of the supplemental agreement in this case are improvements of the original agreement, providing further information on unmentioned matters and new matters which may arise. The supplemental agreement provides that 'This agreement has the same legal effect as the original agreement.' Therefore, the supplemental agreement is inseparable from the original agreement. The disputes under the supplemental agreement shall be submitted to the arbitration commission as per the arbitration clause under the original agreement.

There is no specific test for deciding whether the supplemental agreement is independent or inseparable. Generally, a supplemental agreement provides additional clauses to complete the original agreement, which means it can hardly exist independently. In this reported case, the main provisions of the original agreement are relating to the construction work of a building, without dealing with details of water and electricity work. The supplemental agreement provides detailed provisions regarding water and electricity work. Although the payment of the water and electricity work can be separated from the original agreement, the contents of the supplemental agreement are still sub-sections under the whole construction work of the building. Thus, the Supreme People's Court of PRC holds that the supplemental agreement is dependent on and inseparable from the original agreement, therefore is subject to the same arbitration clause under the original agreement.

(c) The original agreement includes an arbitration clause, but the supplemental agreement has a different one (e.g. chooses different arbitration institution, etc.) or chooses court litigation as the dispute resolution method; (or vice versa)

If the supplemental agreement is inseparable from the original agreement, the arbitration clause in the original agreement shall be applied to the supplemental agreement.

Reported case Zen Qixiu and Xiamen Junhao Real Estate Development Co., Ltd. ([2016] Min 02 Min Zhong Zi No.1303)

In this case, the parties agreed in the original agreement that in case of delay in performance of any party, the other party shall file the case with the people's court which has the jurisdiction upon the dispute. However, the supplemental agreement provides that disputes shall be submitted to Xiamen Arbitration Commission for arbitration. Xiamen Intermediate People's Court ruled that the arbitration clauses of the supplemental agreement should be regarded as modification for the dispute resolution clause in the original agreement. Therefore, the arbitration clause shall apply.

If the supplemental agreement is independent of and separable from the original agreement, one should examine the specific content of the dispute--- whether the dispute arises out of or is in connection with the contents of the original agreement or supplemental agreement, then decide which dispute resolution clause shall apply. Whereas disputes are related to contents of the original and supplemental agreement at the same time, it is still uncertain as for which dispute resolution method shall be adopted.

(d) The original agreement includes an arbitration clause and the supplemental agreement does not has an arbitration clause but provides that "any unmentioned matters shall be governed by the original agreement"

In this situation, the application of dispute resolution mechanism is similar to its application under the situation b as mentioned above. In the reported case mentioned in situation b, the supplemental agreement provided that "the matters that have not been dealt with shall be governed by the original agreement". However, the Supreme People's Court of PRC does not treat this term as the test for deciding the separability of the original agreement and its supplement. Besides, according to article 4 and 16 of Arbitration Law of PRC, an arbitration agreement shall be concluded by the disputing parties voluntarily and be clear and precise. Article 11 of Interpretation of the Supreme People's Court on Certain Issues relating to Application of the Arbitration Law of the People's Republic of China further provides that "in case a contract stipulates that the disputes shall be settled subject to an effective arbitration clause in another agreement or document, the parties shall resort to arbitration in accordance with the said arbitration article when a contractual dispute arise ". However, article 11 emphasized that the parties shall agree to apply the "arbitration clause" of another agreement, therefore, an ambiguous statement of "any unmentioned matters shall be governed by the original agreement" is not enough.

Practical Tips

From the perspective of contract drafting, both the original agreement and its supplement shall have precise and specific provisions regarding dispute resolution. Meanwhile, it is highly recommended that the original agreement and its supplemental agreement incorporate same dispute resolution clause to avoid jurisdictional challenge. If the dispute resolution clause in the original agreement differs from that in the supplemental agreement, jurisdictional challenge can be easily brought by the parties--- especially when the contractual disputes involve contents of both agreements. In practicing, the different results of arbitration and court litigation should also be taken into consideration before choosing the dispute resolution mechanism.

From the perspective of dispute resolution, where there is no clear agreement or even conflict agreement regarding the dispute resolution mechanism in the original agreement and its supplement, it is better to deal with and settle down the jurisdiction issues before formal hearings. Otherwise, the party which subject to the enforcement of the arbitration award may apply to set aside the arbitration award on the ground that the tribunal does not have jurisdiction upon the dispute. 

Originally published by Lexology on 19th October 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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