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China Law Insight

Dispute Resolution

Retrial Ruling of the Supreme People’s Court Settles the Disputes on the Jurisdiction over Joint Tort Cases: Litigation or Arbitration

Posted in Dispute Resolution

By Harry Liu and Qiu yue  King and Wood Mallesons’ Dispute Resolution Group  Shanghai Office

As an alternative dispute resolution mechanism, arbitration has been increasingly widely chosen as the dispute resolution method by parties to the commercial contracts. A signatory to the arbitration clause may bring litigation jointly against the other party to the arbitration clause and non-signatories to such arbitration clause. It remains uncertain in judicial practice whether courts have jurisdiction over such joint tort disputes despite of the arbitration clause. The Supreme People’s Court’s view towards the issue also has shifted back and forth. The retrial ruling lately handed down by the Supreme People’s Court after confirmed by its judicial committee gave a clearer answer to the question, which will definitely have a demonstration effect on the judicial practice in the future.

I. Overview of the Previous Cases

During performance of the contract, a party’s deceit or other breach of the contract may also amount to tort. In such cases, the other party would rather initiate a tort claim in court than resort to arbitration pursuant to the arbitration clause in the contract, while the breaching party tends to insist on arbitration. Can the breaching party compel arbitration against the non-breaching party? The Supreme People’s Court has given confirmative answer in the Summary of the Second National Working Conference on Foreign-related Commercial and Maritime Trials. It is emphasized by the Supreme People’s Court that in case there is an effective arbitration agreement between the parties to a foreign-related commercial contract providing that all disputes arising out of or in connection with the contract are to be settled through arbitration, the people’s court shall not exercise jurisdiction over the lawsuit brought by the plaintiff disregarding the fact that the cause of action was tort.

However, the abovementioned Summary did not specifically address the issue whether the people’s court has jurisdiction over the cases brought jointly against a party to the contract and a non-contractual party for a tort arising out of the conclusion and performance of the contracts. Since it is not uncommon that contract claim and tort claim duplicate, there has been considerable number of cases in which objection to the jurisdiction of courts was raised. The people’s courts tend to hold two opposite positions when dealing with such disputes over jurisdiction. One side holds the view that courts have no jurisdiction over the disputes between the signatories to the arbitration clause, but can exercise jurisdiction over the disputes between the plaintiff and non-signatory defendant. The opposing side contends that arbitration cannot solve the disputes completely and appropriately given that arbitration agreement won’t be able to bind non-signatories to the arbitration agreement, i.e., the joint tortfeasors. No consensus has been reached in judicial practice with respect to this issue. Published cases have shown inconsistent opinions by the Supreme People’s Court on such issue.

In the appeal case of Light Industry and Textiles Company of Jiangsu Material Group (“Textiles Company”) against (Hong Kong) Top Capital Holding Ltd. (“Top Capital Company”) and (Canada) Prince Development Ltd. (“Prince Company”) for relief in tort, the Supreme People’s Court adopted the first position as mentioned above. In specific, even if the case involves a non-signatory to the arbitration agreement, the parties’ legitimate interests and rights can still be protected because the plaintiff can bring an independent legal action against the non-signatory in court when the arbitral tribunal has no jurisdiction over the third party. In this case, Textiles Company signed on the sales contracts of used generators respectively with Top Capital Company and Prince Company, both contracts have an arbitration clause. Textiles Company lodged a lawsuit against Top Capital Company and Prince Company to seek relief for tort of deceit under the disguise of contracts. The Supreme People’s Court held that given the fact that the parties expressly agreed in the contracts to submit their disputes to arbitration, such agreements shall be binding on the parties unless confirmed to be void by relevant authorities. All the parties in this case shall be bound by the arbitration clauses set forth in the contracts. The disputes arising from the contracts shall be submitted for arbitration, while courts have no jurisdiction over such disputes.

In the appeal case of WP International Development Company (“WP Company”) v. Songmei Acetic Acid Co., Ltd. (“Songmei Company”) and Jilin Chemical Co., Ltd. (“Jihua Company”) on the disputes over the jurisdiction of tort liability actions decided on May 10th, 2005 (“WP Company Case”), the Supreme People’s Court took the second stance stated above and rejected the Jihua Company’s jurisdiction objection on the basis that the arbitration clause cannot govern the indispensable joint tort disputes between the signatory and non-signatory parties. In this case, WP Company signed a Joint Venture Contract with Jihua Company and agreed to establish a joint venture named Songmei. WP Company alleged that Songmei Company colluded with Jihua Company during production process and took measures such as increasing prices of the resources, absorbing unreasonable costs for other companies, faking losses etc. to deceive WP Company. Therefore, WP Company sued Jihua Company and Songmei Company jointly as defendants, requesting the two companies to bear shared liability for compensation. The Supreme People’s Court held that the lawsuit of WP Company against Jihua Company and Songmei Company is an indispensable joint tort action, and concluded that the court has jurisdiction over the case because the arbitration clause between WP Company and Jihua Company cannot govern the indispensable joint-tort action among the three parties in this case.

II. Retrial Ruling of the Supreme People’s Court

(i) Background of the Case

In the present case, a Chinese ship building company (“Ship Yard”) signed a Ship Building Contract with a foreign shipping company (“Ship Owner”), in which Ship Yard undertook to build ships for the Ship Owner. The parties agreed in the Ship Building Contract that any disputes arising out of or in connection with the contract shall be submitted for arbitration in England and the arbitration will take place in London. The Ship Yard signed the Supply Contract with a foreign ship equipment supply company (“Equipment Company”) in which the Equipment Company is obligated to provide ship equipments to the Ship Yard. The Supply Contract provides that any disputes arising out of or in connection with the Supply Contract shall be submitted for arbitration in Paris. After the Ship Yard installed the equipment, one of the Equipment Company’s affiliated companies in China (“Service Company”) provided commissioning service to the Ship Yard at the direction of the Equipment Company.

Subsequently, the Ship Yard sought relief jointly against the Ship Owner, the Equipment Company and the Service Company in court with the cause of action of commercial deceit. The Ship Yard, the Equipment Company and the Service Company raised objection to the jurisdiction of the court of first trial, arguing that the court has no jurisdiction over any disputes arising out of or in connection with the Ship Building Contract and the Supply Contract, including tort disputes, because there exist valid arbitration clauses both between the Ship Owner and the Ship Yard and between the Equipment Company and the Ship Yard.

(ii) The Rulings of the Court of First Instance and the Court of Second Instance

The court of first instance held that the arbitration clause between the Ship Owner and the Ship Yard and the arbitration clause between the Equipment Company and the Ship Yard are not binding because the clauses cannot cover all the disputes of the case. The current case is a tort dispute. Given that the place where the tort occurred falls under the territorial jurisdiction of the court of first instance, therefore, the court of first instance has jurisdiction over the case.

The court of second instance held that the court of first instance has jurisdiction over the case because it is the court of the place where the tortious actions occurred. The claim of the appellants that the disputes shall be submitted for arbitration in compliance with the arbitration agreements was denied, as the court maintained that the arbitration agreements have no binding effects on the tort disputes among all the parties.

(iii) The Reasoning and Decision of the Supreme People’s Court

The Ship Owner, the Equipment Company and the Service Company disagreed with the ruling of court of the second instance and applied for retrial with the Supreme People’s Court. Recently, the Supreme People’s Court has delivered the retrial ruling and upheld the decision of the court of second instance.

The Supreme People’s Court concluded that the Ship Yard provided prima facie evidence to allege that the Ship Owner and the Equipment Company maliciously conspired to supply used equipments and the Service Company installed the equipments with the knowledge of the defects, and that the three defendants’ wrongful actions amounted to a joint tort as they infringed the legitimate interests of the Ship Yard by taking advantage of the contracts. Based on the above claims and requests, it is held that the tort action jointly against the Ship Owner, the Equipment Company and the Service Company shall be construed as indispensable joint action. Due to the fact that the Supply Contract between the Equipment Company and the Ship Yard is not binding on the Ship Owner, whereas the Ship Building Contract between the Ship Owner and the Ship Yard does not bind the Equipment Company, and that both the arbitration agreements have no binding effect on one of the joint defendants, the Service Company, which is not a party to either of the contracts. In this regard, the arbitration agreements cannot bind all the parties involved in the joint tort disputes in this case. Based on the discussion and decision of the judicial committee of the Supreme People’s Court, it is decided that the original court has jurisdiction over the case.

III. Influence of the Retrial Ruling

The ruling of the Supreme People’s Court reemphasized its stance in the case of WP Company, i.e, the arbitration agreement between the parties has no binding effect on the joint-tort disputes between a signatory and a non-signatory to the arbitration agreement and the court can exercise its jurisdiction over such tort cases. The stance the Supreme People’s Court took in the retrial showed its tendency to protect the interests of the infringed parties, and has a significant value as a reference for similar jurisdiction objections. The decision being made after discussions and decision of the judicial committee further proves that Supreme People’s Court intends to emphasize the jurisdiction of courts over such cases. On the other hand, the retrial ruling would probably be utilized by the party seeking to avoid arbitration. The party can circumvent the arbitration clauses by means of bringing tort claims, as the court will not examine the legality, genuineness and relevance of the evidence when deciding whether to accept the lawsuit or not. In order to make up the reason for court to exercise jurisdiction, the party seeking to avoid arbitration only needs to provide prima facie evidence to prove the existence of a joint tort. As long as such evidence is submitted, the court will be able to exercise jurisdiction over the disputes in tort between the plaintiffs and all the defendants regardless whether there is a valid arbitration clause between the parties.