Issues Concerning the Validity of Dispute Resolution Clauses for Foreign Businessmen Conducting Business in China should Pay Attention to

The network service providers often require users to confirm some contract terms online when providing services. Does the Chinese court recognize the legal validity of such online signed contract terms once these contracts are disputed? What is the attitude of the Chinese courts especially regarding the legal validity of such dispute resolution clauses determining the application of foreign laws and foreign dispute resolution agencies?

A case that a prominent internet company in USA and its European affiliate represented by Beijing Wis & Weals Law Firm against a Chinese company in the internet advertisements contract dispute concerning clicks fraud reflects the complexity and high risk of the above issues. Based on this typical case, we discuss not only the relationship between the applicable law and the agreed dispute jurisdiction, but also the validity of the dispute resolution clause in the standard contract.

I. Viewing the governing law and dispute jurisdiction agreed upon in foreign-related contracts and their mutual influence from the perspective of proper law

1. Foreign-related contracts may contain stipulations on governing law and dispute jurisdiction

Article 145 of the General Principles of Civil Law of the People's Republic of China stipulates that "The parties to a foreign-related contract may choose the law applicable to the resolution of contract disputes, except as otherwise stipulated by law."

Article 242 of the Civil Procedure Law of the People's Republic of China and Article 126 of the Contract Law of the People's Republic of China stipulate that: "The parties to a dispute over a foreign-related contract or over foreign-related property rights and interests may, through written agreement, choose the court of the place which has practical connections with the dispute to exercise jurisdiction. If a people's court of the People's Republic of China is chosen to exercise jurisdiction, the provisions of this Law on jurisdiction by forum level and on exclusive jurisdiction shall not be violated."

Article 271 of the Civil Procedure Law of the People's Republic of China stipulates that: "In case of a dispute arising from the foreign-related economic, trade, transport or maritime activities, if the parties have had an arbitration terms in the contract concerned or have subsequently reached a written arbitration agreement stipulating the submission of the dispute for arbitration to an arbitral institution in the People's Republic of China handling cases involving foreign interests, or to any other arbitral institution, they may not bring an action in a people's court." 

Therefore, in accordance with Chinese laws, the parties to a foreign-related contract may agree on which country's law may be applied to interpret the contract and resolve disputes, as well as on the courts and arbitral institution governing the disputes. As far the typical case is concerned, the different versions of the online contract signed by and between users and service provider stipulate the governing law and dispute jurisdiction, which conform to the provisions of Chinese laws.

2. Uniformity of governing law and dispute jurisdiction under foreign-related contracts

Foreign-related contracts may stipulate both the court of jurisdiction and the governing law, but attention should be given to the corresponding relationship between them. We should not stipulate that disputes should be governed by the law of the United States, while at the same time submit to the jurisdiction of Chinese courts. If it is agreed that disputes shall be resolved by an arbitral institution, the choice of governing law shall not take into account the registered place of the arbitral institution.

As far as the typical case is concerned, the evidence presented by the plaintiff shows that among the online contracts signed between users and the service provider, the 2005, 2006 and 2007 versions clearly stipulated the application of the law of California and also successively and explicitly stipulated that dispute resolution shall be under the jurisdiction of the Court of San Clara, California, USA and the International Center for Dispute Resolution of the American Arbitration Association (AAA). The 2008 version stipulated that the governing law is the Chinese law, and the dispute resolution agency is Beijing Branch of China International Economic and Trade Arbitration Commission (CIETAC). Meanwhile, the actual controllers of the disputed accounts have explicitly accepted these different versions of online contracts.

The 2005 version of the online contract chose the law of California, USA as the governing law, and the Court of Santa Clara, California, USA as the court of jurisdiction, which reflects the consistency of the court of jurisdiction with the governing law. The other three online versions stipulated that the dispute resolution agency shall be an arbitral institution, and the governing law shall be the American law and the Chinese law respectively, which conforms to the provisions of the Chinese law.

In the light of the uniformity of the governing law and the court of jurisdiction, the three versions of the disputed foreign-related contracts which stipulated the application of the law of California, USA, were unlikely to choose Chinese courts as the courts of jurisdiction. Although the 2008 version stipulated the application of the Chinese law, the arbitration terms precluded the exercise of jurisdiction. Therefore, in no case should the Chinese courts be identified or construed as the courts of jurisdiction over dispute resolution explicitly agreed upon by the two parties.

II.  Viewing the validity of dispute resolution terms in standard contracts from the perspective of the Chinese law

Because of the characteristics of Internet service (for the unspecified public, and mostly online), the terms of the typical case, like many other Internet services, also adopts online service as its main form of service by signing online contracts with users. According to the technical measures of the contract for user account management, users must accept the corresponding terms to enjoy the service, or else, they cannot proceed with the service process. Due to the repeatability of the transaction content and to the simplicity, promptness and efficiency pursued by both parties, it is decided that the terms in the case should be standard terms.

Article 39 of the Contract Law stipulates that: "Where a contract is concluded by way of standard terms, the party supplying the standard terms shall abide by the principle of fairness in prescribing the rights and obligations of the parties and shall, in a reasonable manner, call the other party's attention to the provision(s) whereby such party's liability is excluded or limited, and shall explain such provision(s) upon request by the other party."

As for the typical case, the plaintiff argued in the cross-examination that even if there were online advertising plan terms in the four (4) versions, they were unfair contract terms unilaterally formulated and imposed on users by Google Inc., which obviously violated the principle of equality and voluntariness of the contractual parties under the Contract Law.

In fact, the courts of first and second instances evaded the validity of the terms, but used exclusion method to point out that the plaintiff's so-called location of computer terminal (i.e. where the plaintiff is located) had no inevitable connection with the place where the contract was performed, and the court of first instance had no jurisdiction over the case, thus deciding to reject the lawsuit filed by the plaintiff.

In accordance with Article 12 of the Contract Law of the People's Republic of China, the terms of a contract generally include eight items, including the methods of dispute resolution, which have a great impact on the substantive rights and obligations of the contractual parties. As for these important terms, when an online contract stipulates the methods of dispute resolution in the form of standard terms, it is advisable to anyhow remind users to sign contracts in a prudent manner so that they can fulfill their reasonable duty of care, and standard terms such as the dispute resolution terms can be lawful and valid and conform to the provisions of the Chinese law in form, so as to avoid unnecessary misunderstanding among users.