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The complexity of commercial disputes often arises from jurisdictional challenges caused by conflicting dispute resolution (DR) clauses in related contracts. This article categorises and briefly outlines the rules and emerging trends in the application of such clauses in domestic and international jurisdictional disputes.

Principal and ancillary contracts

Under PRC laws and prevailing judicial practices, when resolving conflicts between dispute resolution clauses in principal and ancillary contracts, the general principle is to apply the respective litigation or arbitration clauses to each contract, with the extended application of jurisdiction clause from the principal contract to the ancillary contract being an exception. Arbitration clauses generally do not extensively apply under principal or ancillary contracts.

Taking loan contracts (the principal contract) and guarantee contracts (the ancillary contract) as an example, article 21 of the Interpretation of Supreme People¡¯s Court on Application of the Guarantee System under the Civil Code stipulates that, where either the principal or ancillary contract contains an arbitration clause, the litigation and arbitration clause should apply separately; the arbitration clause shall not extend to claims under the ancillary contract.

If neither contract contains an arbitration clause, the creditor may choose to sue the guarantor solely based on the guarantee contract, or the creditor may sue the debtor and guarantor jointly based on the extended jurisdiction clause in the principal contract.

In foreign-related cases, the application of DR clauses is more flexible. According to article 8 of the Minutes of the Second National Conference on Foreign-related Commercial and Maritime Trial Work, in the absence of an arbitration agreement or exclusive jurisdiction clause, if PRC courts have jurisdiction over either the principal or the guarantee contract, they may exercise jurisdiction over the disputes related to both the principal and ancillary contracts.

Article 97 of the Minutes of the National Court Symposium on Foreign-related Commercial and Maritime Trials also stipulates that if the parties to the principal and ancillary contracts are the same and the ancillary contract does not contain a DR clause, the arbitration clause in the principal contract may extensively apply to the ancillary contract.

Also notable is that the revised draft of the Arbitration Law of the People¡¯s Republic of China, currently under review, has removed the provision in the previous consultation draft that allowed for the extension of the arbitration clause from the principal contract to the ancillary contract.

Principal and supplementary contracts

Under prevailing judicial practice, where the DR clauses in a principal contract and a supplementary contract conflict, the first step is to determine whether the two contracts are independent and severable. If they are, each contract¡¯s DR clause applies as agreed.

If the supplementary contract is merely an extension of the principal contract, the DR clause of the principal contract will extensively govern. In practice, the application of DR clauses between principal and supplementary contracts can be more complex, requiring a case-by-case study of factors such as the contractual relationship, date of signing, specific wording, and the contracting parties.

For example, in a share redemption dispute, an investor requested that the target company redeem its shares based on a capital increase contract that included an arbitration clause. After negotiation, the parties signed a supplementary contract that included a litigation clause outlining a capital reduction plan for the company and clarifying that the investor¡¯s exit arrangements be governed by the supplementary contract. When the company failed to reduce capital as promised, the investor terminated the supplementary contract and sought redemption under the capital increase contract.

Although the capital increase contract included an arbitration clause, the supplementary contract, signed later, specified that exit arrangements were governed by its terms. Therefore, the arbitration clause in the capital increase contract is replaced by the litigation clause in the supplementary contract. Even if the supplementary contract is terminated, the redemption claim under the capital increase contract remains subject to litigation.

Multiple related contracts

In international arbitration, the application of DR clauses across multiple related contracts can be challenging. The High Court of Hong Kong¡¯s recent ruling categorises these conflicts into three paradigms:

• Basic paradigm. Where a single contract contains multiple conflicting DR clauses, parties, as rational business persons, are likely to have intended for any disputes arising out of related contracts to be decided by the same tribunal, following the Fiona Trust principle.
• Intermediate paradigm. Where only one of the related contracts contains a DR clause, on its proper construction, this clause may extend to claims made under the related contracts, following the extended Fiona Trust principle.
• Generalised paradigm. Where there are multiple related contracts with conflicting DR clauses, the parties¡¯ true intent and the gravity of the dispute should be considered.

Recently, there has been a significant increase in international arbitration cases involving share redemption disputes in red-chip structures. Investors often file arbitration claims against target companies or founders based on a series of transaction documents, such as the bylaws of such offshore target companies and their shareholder agreements.

As an intermediate paradigm, an issue arises where the redemption clause is stipulated only in the company¡¯s bylaws, without a DR clause, raising the question of whether the arbitration clause in the related shareholder agreement shall be extended to the redemption claim.

In the authors¡¯ view, the investor may invoke the extended Fiona Trust principle to assert a one-stop arbitration solution. However, the true intent of the parties regarding the DR method, the specific wording of the DR and governing law clauses in each related contract, the relationship between the contracts, and incorporation clauses must be thoroughly assessed to arrive at a conclusion.

The above summarises the core principles for applying DR clauses in multiple contracts, based on domestic and international legal frameworks and practices. The authors have highlighted the trade-off between the efficiency of one-stop DR and the respect for party autonomy in practice. To minimise jurisdictional uncertainty, it is recommended that parties to a series of transaction documents strive to unify DR clauses to avoid conflicts.

Zhang Yaxing is a partner at Han Kun Law Offices. He can be contacted by phone at +86 10 8525 4642 and by email at yaxing.zhang@hankunlaw.com
San Bing is a partner at Han Kun Law Offices. She can be contacted by phone at +86 10 8525 4629 and by email at bing.san@hankunlaw.com