49 Asian Legal Business | December 2024 Commercial Disputes management, or other disputes involving valuation or damage assessment—litigation can be more practical for judges to manage. 3. Coordination in Dispute Resolution Clause for Main and Accessory Contracts In transactions involving main and accessory contracts, there are often inconsistencies in the dispute resolution clauses between the main and subsidiary contracts, leading to disputes over jurisdiction and scope of adjudication. Chinese judicial practice generally follows the following rules when determining jurisdiction in such cases: (1) If the main contract specifies litigation and the accessory contract arbitration, each follows its respective clause. (2) If the main contract specifies arbitration and the accessory contract litigation, each follows its respective clause. (3) If the main contract designates one arbitration institution and the accessory contract another, each follows its own designation. (4) If the main contract designates one court and the accessory contract another, the main contract prevails. (5) In foreign-related cases, Chinese courts have jurisdiction over main or accessory disputes unless exclusive jurisdiction or arbitration clauses specify otherwise. Although disputes under accessory contracts can be independently resolved under scenarios (1) to (3), practical obstacles arise during substantive adjudication. Under Chinese law, if a main contract is invalid, the accessory contract also becomes invalid, making it impossible to determine the validity of the subsidiary contract, which depends on the main contract's validity. This issue exists in international cases where the governing law adheres to the accessory nature of guarantee contracts. Therefore, parties should fully consider the impact on substantive adjudication when deciding on dispute resolution for the main and subsidiary contracts. III. Validity and connection of Dispute Resolution Clauses 1. Agreement on Jurisdiction in Litigation The basic principle of agreement on jurisdiction is that the chosen court should have a real connection with the dispute. Sometimes, parties overlook this, for instance, when a subsidiary uses a contract template from the parent company, specifying the parent company's court—which has no actual connection to the dispute—as the jurisdiction. Parties may also fabricate jurisdictional connections to select a favorable court, which can lead to the jurisdiction agreement being deemed invalid by the court. Examples include specifying a place of signing or performance that does not reflect reality, manufacturing transaction steps to create jurisdictional links. It is also important that agreements on jurisdiction do not violate provisions on exclusive jurisdiction or hierarchical jurisdiction. 2. Arbitration Clauses The applicable law for determining the validity of arbitration clauses is the law of the seat of arbitration. In China, arbitration clauses must clearly designate a single arbitration institution; and both arbitration and litigation cannot be stipulated simultaneously; otherwise, the clause will be deemed unclear and invalid. Although some courts recognize "arbitration first, then litigation" clauses, we do not recommend that parties use such clauses. In complex transactions, inconsistencies between framework and subagreements can result in invalidation by courts. Notably, foreign arbitration institutions may conduct arbitration in China for foreignrelated cases, and the awards can be enforced as domestic awards, but this does not apply to domestic cases. Arbitration clauses that specify arbitration seats in other jurisdictions may have other restrictions, and it is advisable to consult local legal professionals for proper guidance. 3. Mediation and Negotiation Prerequisites Compared to litigation and arbitration, mediation offers greater flexibility, lower costs, and less adversarial proceedings, stipulated as a prerequisite in dispute resolution clauses. In litigation, a mediation prerequisite cannot limit the parties' right to litigate, which is not controversial. However, negotiation prerequisites in arbitration can easily lead to disputes over procedural legality. Thus, some domestic arbitration institutions require parties to provide written confirmation of fulfilling negotiation prerequisites before filing cases. In Chinese judicial practice, failing to fulfill a simple declaratory negotiation prerequisite does not constitute procedural illegality. As for detailed stipulations regarding the initiation conditions, goals, timeframe, and binding nature of negotiation prerequisites, their impact on arbitration should be assessed on a case-by-case basis. From the drafting perspective, complex and detailed negotiation prerequisites may increase options and mitigate the effects of one single and final award system of arbitration, but they may also create procedural complications. Similar clauses may also lead to jurisdiction and admissibility issues in other jurisdictions. If mediation succeeds, the parties may choose one of the following methods to give the mediation result enforceability: (1) apply to the court for judicial confirmation; (2) obtain an arbitral mediation agreement or settlement award from the designated arbitration institution. Notably, the United Nations Convention on International Settlement Agreements Resulting from Mediation grants enforceability to international mediation agreements in several countries. In the future, commercial mediation may gain broad recognition and enforcement abroad, and it is not mutually exclusive with litigation and arbitration. Therefore, it should be considered an important means for parties to resolve disputes. 4. Compulsory Execution Notarization and Litigation/Arbitration Compulsory execution notarization grants enforceability to debt instruments, where a notary office, upon the parties' request and according to the law, notarizes a debt instrument involving payment and grants it enforceable power. If the debtor fails or partially fails to perform, the creditor can apply to the notary office for an enforcement certificate and submit the notarized document along with the enforcement certificate to the court to request enforcement, without needing to undergo substantive adjudication. This process is favored by financial institutions. As a fast way to realize creditor rights, compulsory execution notarization has strict conditions for applicability: the debt
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