New judicial trends in objections to jurisdiction

By Li Chen and Wang Qiao, Dentons
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The issue of jurisdiction has always been of great significance in dispute resolution, however, in the past it was generally believed that an objection to jurisdiction was only subject to a pro forma review, and was a handling procedure issue, not a matter of substance.

李晨, Li Chen, Senior partner, Dentons
Li Chen
Senior partner
Dentons

This idea has become obsolete. As the contradictions between parties to legal actions have intensified, the intense conflicts have gradually spilled over from the realm of substance into the realm of procedure, which has inevitably led to multiple connections between procedure and substance, with a far-reaching impact on whether cases are won or lost.

The author calls its manifestation in the field of objections to jurisdiction the “substantiation” of the jurisdiction objection procedure. The following cases reveal the new judicial trends in objections to jurisdiction, in tort disputes and contractual disputes.

Equity transfer dispute

Case briefing: Party A sold equity to party B under an equity transfer contract, where disputes were to be resolved by arbitration in Hong Kong. Subsequently, party B instructed party A to deliver the equity to company A, but the parties had yet to carry out delivery of the equity when the dispute arose.

Company A then instituted a legal action in a Shanghai court on the grounds that party A transferred the equity to a third party without authorisation. The case involves competing contractual and tort claim bases. As the substantive trial has yet to start, the plaintiff has not yet finalised its claim bases, and it can be seen that it has left itself some room for maneuver from the fact that the cause of action is an equity transfer dispute (a third type of dispute that is neither contractual nor tort). In the legal action, party A raised an objection to jurisdiction on the grounds that the contract provides an arbitration clause.

Opinion of the courts: The court dismissed party A’s objection to jurisdiction on the grounds that the substance of the case was not a dispute over a breach of contract, but a tort dispute, and there was no need to determine jurisdiction in accordance with the contract.

王峭, Wang Qiao, Wang Qiao, Associate, Dentons
Wang Qiao
Associate
Dentons

Insight: As similar transaction structures are rare in China, extra-territorial arbitration is easy to understand and support, and for this reason the defendant proposed arbitration in Hong Kong. Although the court ultimately did not uphold the objection to jurisdiction, it laid the foundation for the defendant’s victory in substance.

When the claims were in competition, the plaintiff’s choice of whether to go with breach of contract or tort determined the direction of the entire case, and the court also found the case to be a tort dispute. As the entire case subsequently proceeded along the tort track, the defendant consistently insisted that the tort should be based and predicated on the enjoyment of rights, and the equity in question had not yet been delivered, so company A had not obtained it. Accordingly, there was no issue of tort.

Company A consistently found itself in an awkward passive position, on the one hand, genuinely impossible to substantiate the basis of its rights, and on the other hand, impossible to make breach of contract as its claim basis, as it would face the embarrassing consequence of having its suit dismissed.

Guarantee contract dispute

Case briefing: Company A instituted a legal action against company B, demanding that the latter bear guarantee liability under the guarantee contract, and the court that accepted the case was the court of the place where company A is located as specified in the contract. Company B raised an objection to jurisdiction on the grounds that the official contract seal was fraudulent, and additionally provided an expert witness opinion. It argued that the legal consequence was that the guarantee contract and the jurisdiction clause were not formed, so the court should be determined based on statutory jurisdiction.

Opinions of the courts: At the time of publication of this article, the objection to jurisdiction had yet to be determined. The Supreme People’s Court (SPC), however, has handled a similar case. In Gazette Case (2015) Min Er Zhong Zi No. 428, the SPC held that, as the official seal was fraudulent, “there was a material flaw in terms of the key conditions for the formation of the jurisdiction clause, [and] it was not possible to render a finding that a valid jurisdiction clause existed”.

Insight: This case has one distinctive feature – the formation, or not, of the guarantee contract not only determines substantively whether company B is liable for bearing the guarantee liability, but also whether the court o vf the place where company A is located, as specified in the contract, has jurisdiction. It is foreseeable that a sharp conflict revolving around whether the contract was formed will unfold. The ultimate finding of the court will not only spell the final word on the jurisdiction procedure, but will also have a key effect on the substantive trial of subsequent cases.

Re-assessing the significance of objections to jurisdiction

The above-mentioned cases show that the jurisdictional objection procedure has gradually been given a whole new meaning. First, it can lay the foundation for a substantive victory. In the course of a court’s handling of an opposition to jurisdiction, it is inevitable that an examination of the substantive claims of the parties will be involved, which will produce a free evaluation of the evidence supporting the parties’ viewpoints, and may produce a discourse, or even a preliminary finding, on the substantive issues.

Furthermore, it can reduce a controversy to nothing. The factual and legal basis on which a substantial number of plaintiffs institute legal actions are not very solid. If the defendant succeeds in having the case moved to a court or arbitration institution unfamiliar to the plaintiff, or even a foreign dispute resolution institution, the plaintiff’s expectation of victory will drop, compelling it to reconsider whether it wishes to continue waging an uphill battle on an unfamiliar battlefield.

An enterprise facing a dispute should keep firmly in mind the great significance of the jurisdictional objection procedure, and make good use of it in service of the entire legal action.

Li Chen is a senior partner and Wang Qiao is an associate at Dentons

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