Uncertainties with jurisdiction agreements

By Craig Zhou, Martin Hu & Partners
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Pursuant to article 4 of the Civil Procedure Law (CPL), “All those who are engaged in civil actions within the territory of the People’s Republic of China must abide by this Law.” Additionally, the law applicable to a foreign-related civil or commercial contract refers to the substantive law of the relevant country or region, without consideration of its conflict of laws or laws of procedure. Taking into consideration common international practice, the first thing that we need to clarify is that the laws of China govern procedural issues such as jurisdiction, etc., in civil (including foreign-related civil) disputes within the territory of China.

周富胜 CRAIG ZHOU 胡光律师事务所律师 Associate Martin Hu & Partners
周富胜
CRAIG ZHOU
胡光律师事务所律师
Associate
Martin Hu & Partners

The CPL, implemented from 1 January 2013, deletes the provisions on agreement on jurisdiction of domestic and foreign courts in foreign-related civil disputes, instead providing in article 34 that parties to a contract or other property interest dispute may agree to the jurisdiction of a domestic court. The interpretations of the Supreme People’s Court (SPC) on the application of the CPL, implemented on 4 February 2015, further specify that parties to a foreign-related contract or other property interest dispute may agree in writing that a foreign court “in a place with an actual connection with the dispute” has jurisdiction.

EXCLUSIVE JURISDICTION

Based on the principle of the autonomy of will in contracts, the provisions agreed upon by the parties prevail in respect of contract jurisdiction (except in cases of exclusive jurisdiction), with the statutorily provided circumstance applying only where jurisdiction has not been provided for. However, the existence of the provision on special territorial jurisdiction over foreign-related civil dispute cases in the CPL can still expose parties to a foreign-related contract that have agreed upon jurisdiction of a foreign court to the risk of parallel proceedings in separate countries.

In the Chinachem Financial Services Limited v Century Venture Holdings Limited (CVHL) and Beijing Dishi Law Firm general engagement contract dispute jurisdiction opposition case, the SPC clarified the trial logic in an opposition to the jurisdiction of a Chinese court in a foreign-related civil contract dispute: (1) whether the Chinese court has jurisdiction; (2) if the Chinese court has jurisdiction, whether it has the option not to exercise jurisdiction.

In the Chinachem Case, Chinachem and CVHL specified in their agreement that a Hong Kong court would have non-exclusive jurisdiction over any disputes. On this basis, the SPC held that this could be construed as the parties expressly providing for non-exclusive jurisdiction, that it did not have the effect of excluding other competent courts from exercising jurisdiction, that Chinachem’s grounds for claiming exclusion of the jurisdiction of mainland courts based on the agreement’s jurisdiction clause were not tenable and, while also taking into consideration such factors as the major performance place of the agreement, etc., that the relevant mainland court had jurisdiction in the case.

The basis on which the SPC rendered its ruling in the Chinachem Case is the “non-exclusive jurisdiction provision” expressly specified by the parties. In legal practice, the exclusiveness of contract terms has to be expressly provided for. If parties fail to expressly provide for such exclusiveness, the relevant provisions will normally be found to not have the effect of exclusiveness. Accordingly, if parties to a foreign-related contract only agree on jurisdiction of a foreign court, without expressly excluding exercise of jurisdiction by other competent courts, then, when a dispute case satisfies the conditions for special territorial jurisdiction in foreign-related civil procedures specified in the CPL, Chinese courts will have jurisdiction in the case, giving rise to parallel proceedings in separate countries.

Accordingly, the author would recommend that, when negotiating jurisdiction over a foreign-related contract, if the parties reach a consensus confirming that in the event of a dispute jurisdiction by Chinese courts is excluded, they should expressly provide for exclusive foreign court jurisdiction in writing, thereby reducing the unnecessary risk of parallel proceedings arising due to uncertainty over competent courts.

EXERCISE OF JURISDICTION

If parties to a foreign-related contract fail to provide for exclusive jurisdiction by a foreign court and, pursuant to the provision on special territorial jurisdiction, a Chinese court secures jurisdiction over a foreign-related contract dispute, will the Chinese court refuse to exercise such jurisdiction? In the author’s experience, once a Chinese court finds that a Chinese court can exercise jurisdiction over a foreign-related contract dispute, very few Chinese courts will not exercise such jurisdiction.

First, the precondition for a Chinese court not to exercise jurisdiction in such a case is satisfaction of all of the six circumstances under which the taking of jurisdiction is inconvenient as specified in article 532 of the interpretations. However, under normal circumstances, it is rare for a case to satisfy all six circumstances. Second, from existing precedents it can be seen that once a Chinese court has secured jurisdiction in such a case, it is usually willing to try the case in accordance with the principle of parallel proceedings in separate countries. For example, in the Chinachem Case, with respect to the issue of whether a Chinese people’s court may opt not to exercise jurisdiction, the SPC held that:

CVHL and Chinachem instituted a legal action in respect of the dispute in a mainland court and a Hong Kong court respectively, giving rise to a situation where opposing proceedings were conducted in parallel in two places over the same dispute. Whether the mainland court accepted the case should be determined based on the specific circumstances, i.e. whether elements that would make jurisdiction in the case inconvenient existed. In the case, both the place where the contract was performed and the place where the facts of the case occurred were located on the mainland, and the property of Chinachem available for seizure was also located on the mainland.

Accordingly, exercise of jurisdiction by the mainland court was more conducive to achieving the civil procedure objectives of timely trial of a case and protection of the lawful rights and interests of the parties. Furthermore, the agreement’s providing for the application of Hong Kong law, the language of certain documents being English, certain witnesses potentially being located in Hong Kong, etc., were insufficient to constitute material and clear elements that made jurisdiction by the mainland court inconvenient. Accordingly, the relevant mainland court should have jurisdiction over the case.

Craig Zhou is an associate with Martin Hu & Partners

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