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In China, according to article 7 of the Interpretation of the Supreme People¡¯s Court on Several Issues Concerning the Application of the Arbitration Law of the People¡¯s Republic of China, clauses on either arbitration or litigation are generally deemed invalid. This article discusses the topic of asymmetric arbitration agreements through the perspective of a judge in the Hong Kong High Court case of G v P (2023) regarding the validity of such clauses.

Case study

The arbitration applicant, G, is a licensed lender in Hong Kong. On 8 September 2022, debtor P borrowed money from G and signed a loan contract, agreeing to apply Hong Kong law and submit disputes to the non-exclusive jurisdiction of Hong Kong courts. Both parties subsequently signed a supplementary agreement, stipulating that disputes could be resolved through arbitration or court litigation, and that the supplementary agreement would prevail in case of any inconsistency with the loan contract.

Debtor P argued that the dispute resolution clause was not a valid arbitration agreement because there was no element of compulsion for the parties to arbitrate. P cited the precedent in Tommy CP Sze & Co v Li & Fung (Trading) (2023), where the judge opined that if a dispute resolution clause allows for both arbitration and litigation, it is not a true arbitration agreement. A true arbitration agreement must compel parties to submit disputes to arbitration.

The Hong Kong High Court judge disagreed with the debtor¡¯s view, stating that the issue was about interpreting the contract clause to determine the parties¡¯ intent at the time of contracting.

If the dispute resolution clause grants the choice of litigation solely to the lender and not the borrower, then once the lender opts for arbitration and initiates it, the arbitration agreement exists and is valid, and the borrower must comply.

In this case, the judge found that the contract in question granted such a choice to the lender, rather than the borrower. Since the lender opted for arbitration, the judge concluded that there was a valid arbitration agreement between the parties, and the arbitration tribunal had jurisdiction over the case.

Validity determination

When interpreting the validity of asymmetric arbitration agreements, the court considers whether there are factors affecting the contract¡¯s validity (such as meeting the requirements for contract formation); factors rendering the contract wholly or partially invalid; or factors preventing court assistance in enforcement (such as the contracting party lacking capacity and violations of public policy).

The fairness of the contract clause to the parties is not a reason for invalidity, as international practice generally recognises freedom of contract. As long as both parties have fully negotiated, the contract content can favour one party over the other. In the absence of invalidity or unenforceability factors, the court respects party autonomy and deems the clause valid.

Judicial practice

Internationally, the recognition and confirmation of the validity of asymmetric arbitration agreements or asymmetric jurisdiction clauses has long been established. In recent years, China¡¯s judicial attitude has shifted to align with international practices.

For instance, the Minutes of the National Court Symposium on Foreign-Related Commercial and Maritime Trials explicitly recognises the validity of asymmetric jurisdiction agreements. Additionally, the Beijing Financial Court¡¯s civil ruling of Cambodia Fiber Optic Communication Network Co v China Development Bank (2022) showcases China¡¯s judicial stance on asymmetric arbitration agreements.

The case details are as follows: The China Development Bank (lender/mortgagee) and Cambodia Fiber Optic Communication Network (borrower/mortgagor) agreed in their contract that the China Development Bank could submit disputes to either the China International Economic and Trade Arbitration Commission or Cambodian courts.

The borrower argued that this agreement did not constitute a valid arbitration agreement and applied to the court to invalidate the clause based on article 7 of the judicial interpretation of the Arbitration Law and apparent unfairness.

The Beijing financial court disagreed with the borrower, reasoning that the dispute arbitration clause was a unilateral choice of dispute resolution resulting from mutual agreement. Chinese law does not prohibit such clauses, and the agreement does not constitute apparent unfairness in the parties¡¯ rights and obligations.

The court respected party autonomy, recognising the clause as valid. Since the China Development Bank had applied for arbitration and waived court litigation, the dispute resolution clause formed a definite, exclusive arbitration agreement, not falling under the invalid ¡°either arbitration or litigation¡± clauses as per the judicial interpretation of the Arbitration Law.

Implications

As long as an asymmetric arbitration agreement responds to the commercial needs of the parties, is fully negotiated and clear, and reflects true intent, the court should respect the parties¡¯ agreement rather than intervene or deny its validity, even if the rights are unequal.

Given that the validity of asymmetric arbitration agreements is a matter of contract interpretation, and different regions and countries have varying views, it is advisable to consider and design the arbitration seat, enforcement location and applicable law when drafting such clauses.

Zhong Zhifen is a partner at ETR Law Firm