Dispute Resolution Clause is Easy to be Ignored

A Nanjing company and a Harbin company entered into a sales contract, in which the dispute resolution clause was stipulated as “any disputes arising from this contract shall be settled by the Arbitration Institution of Jiangsu Province”. Later then, the Harbin company failed to pay on time, the Nanjing company applied for arbitration to the Nanjing Arbitration Institution, but it was informed that the agreement on the dispute resolution was invalid. Finally, the Nanjing company had to bring a lawsuit against the Harbin company to the court in which the Harbin company was located.

Such cases are not rare. Many companies, especially those salespeople, would take the dispute resolution clause as a trivial matter, because the delivery period, price, payment terms are the key matters. However, where there is a dispute, once the dispute resolution clause is unfavorable to the company, then it may cost more time and money. Therefore, it is very important to set a valid and reasonable dispute resolution clause .
In practice, the common problems related to the dispute resolution clause include:

1.Both parties have agreed to resolve a dispute by arbitration, but they failed to stipulate the correct name of the arbitration institution. According to the “Arbitration Law”, if the name of the arbitration institution is not correct, then such article is invalid. The case hereinabove is a typical one.

2.Both parties have agreed to solve a dispute by choosing litigation or arbitration. For example, a contract stipulates, …… when the negotiation fails, either party may apply for arbitration or file a lawsuit. Because the laws have clearly stipulate that a party could only choose 1 dispute resolution method, otherwise the arbitration clause is invalid.

3.There are conflicts among several relevant contracts on the dispute resolution clauses. For those long-term batch sales contracts or complex construction contracts, both parties might sign several contracts or supplementary agreements. If there is any conflicts among the disputes resolution clauses, and both parties failed to agree on the article which should prevail, then both parties might be beset by the dispute resolution clauses.

4.Both parties have agreed on the jurisdiction of 2 courts. According to Article 24 of the “Opinions on Several Issues Concerning the Application of the Civil Procedure Law of the People’s Republic of China”, if the agreement on the selection of jurisdiction by both parties is ambiguous or there are two or more competent courts according to Article 25 of the “Civil Procedure Law”, the clause shall be invalid. Therefore, although both parties could make an agreement on the selection of jurisdiction, the final court agreed by both parties shall be unique. For example, “If Party A breaches the contract, Party B can choose the jurisdiction of the court in which Party B or the project is located. If Party B breaches the contract, Party A may choose the jurisdiction of the court in which Party A or the project is located.” Such an agreement was found to be invalid due to ambiguity (see the Supreme People’s Court [2014] Min Ti No. 231 Civil Ruling). It is worth mentioning that the “Supreme People’s Court’s reply to the contractual disputes between the two parties in the contract can be filed with the local people’s court to determine how to determine the jurisdiction,” points out that if both parties agree to file the lawsuit to its local court, then such agreement could be deemed as both parties have agreed to file the lawsuit to the court in which the plaintiff is located.

Companies shall be aware of the importance of the dispute resolution clause, and try to avoid the above problems, in addition, companies could also strive to design a favorable clause if it is possible. If you want to choose arbitration, it is recommended to find a higher level arbitration institution, which might be more professional and fair. Personally speaking, for those cases related to the new developed industries or fields, and some IP cases, it would be better to choose litigation, because the cost is relevant lower, the courts are relevant more professional, and both parties would have a second chance, such as the second instance and the retrial. If you are dominant during the negotiation, then it would be better to agree that the litigation shall be heard in the court in which you are located. Such clause would save HR, cost, and the counter party might have less motivation to bring a lawsuit against you. If both parties are evenly matched during the negotiation, then you shall analyze the complexity of each party’s obligations, the difficulties in judging the default, and the possibility of being sued, based on this analysis, then you can make a relevant favorable decision.