Chinese Judicial Practice On The Validity Of "Either Arbitration Or Litigation" Clauses

The validity of an arbitration agreement directly determines whether arbitral proceedings can be commenced and whether an arbitral award can be recognized and enforced. Under Chinese law, an arbitration agreement that provides for "either arbitration or litigation" is invalid. In practice, however, whether a particular clause actually constitutes an "either arbitration or litigation" arrangement is often disputed. In making that determination, Chinese courts do not apply the statutory language mechanically. Instead, they conduct a holistic assessment in light of the transactional background, the specific contractual context, and the parties' true intentions. By systematically reviewing representative judicial decisions from recent years, this article analyzes the rules applied in Chinese judicial practice when determining the validity of "either arbitration or litigation" clauses, and on that basis summarizes the key points companies should bear in mind when drafting arbitration agreements.

I.Arbitration Agreements Providing for "Either Arbitration or Litigation" Are Invalid

Party autonomy is the cornerstone of arbitration. The core value of an arbitration agreement lies in the parties' clear agreement to exclude the jurisdiction of the courts and, as between arbitration and litigation, to choose arbitration as the means of dispute resolution. If a clause simultaneously gives the parties parallel options to choose between arbitration and litigation, the allocation of jurisdiction becomes uncertain. This may not only undermine the finality of arbitration, but also encourage abusive forum shopping for either courts or arbitral institutions, thereby impairing the efficiency and fairness of dispute resolution.

Accordingly, Chinese law expressly denies the validity of "either arbitration or litigation" clauses. Article 7 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Arbitration Law of the People's Republic of China (2008 Revision) (the "Judicial Interpretation") provides: "Where the parties agree that a dispute may be submitted either to an arbitral institution for arbitration or to a people's court for litigation, the arbitration agreement shall be invalid, except where one party applies for arbitration and the other party fails to raise an objection within the period prescribed in Article 20, paragraph 2 of the Arbitration Law."

A large number of judicial decisions show that Chinese courts have consistently adhered to this position in adjudicatory practice and have denied the validity of arbitration agreements that provide for "either arbitration or litigation."

For example, in a case heard by the Wuhan Intermediate People's Court¹，the arbitration applicant had purchased construction accident insurance and additional coverage from the respondent. Clause 5.4 of the insurance policy provided: "The dispute resolution method under this contract shall be selected by the parties from one of the following two methods: 1. Any dispute arising from the performance of this contract shall be resolved by consultation between the parties; if consultation

fails, the dispute shall be submitted to an arbitral commission jointly selected by both parties for arbitration; 2. Any dispute arising from the performance of this contract shall be resolved by consultation between the parties; if consultation fails, the dispute shall be brought before the people's court in accordance with law." The Wuhan Intermediate People's Court held that "this clause is a typical 'either arbitration or litigation' clause, and the parties did not reach any further agreement regarding the arbitration clause. Under Article 7 of the Judicial Interpretation, where the parties agree that a dispute may be submitted either to an arbitral institution for arbitration or to a people's court for litigation, the arbitration agreement is invalid." The court therefore held that the arbitration agreement contained in the insurance clause at issue was invalid.

Similarly, in its reply to an inquiry submitted by the Beijing Higher People's Court²，the Supreme People's Court considered a prospectus for a short-term financing bond issued by the issuer. Article 2(1), Chapter 11, "Liability for Breach," provided: "If the issuer fails to repay the principal and interest of the current short-term financing bond when due, investors may initiate legal proceedings in accordance with law." Article 7, Chapter 11, "Remedies and Waiver Mechanism," provided: "If the issuer breaches the foregoing provisions, investors shall have the right to submit the dispute to the China International Economic and Trade Arbitration Commission for arbitration in Beijing in accordance with the arbitration rules in effect at the time of the application." The bondholders argued that the word "litigation" in Article 2(1) did not specify before what body proceedings should be brought, and that "litigation" could be interpreted to include arbitration. The issuer opposed that interpretation. The Supreme People's Court construed "litigation" as court litigation, and further held that the scope of "the foregoing provisions" referred to in Article 7 was itself unclear and insufficiently specific. It therefore ruled that the arbitration agreement under the prospectus was invalid for violating Article 7 of the Judicial Interpretation.

That said, in judicial practice, not every dispute resolution clause is obviously an "either arbitration or litigation" clause. Many clauses are ambiguous, and not every arbitration agreement that contains both the words "arbitration" and "litigation" will necessarily be deemed invalid on that basis. Courts examine such clauses from multiple perspectives, including the logic of the wording, the parties' true intentions, and the transactional background. Their primary focus is whether the parties clearly agreed to exclude judicial jurisdiction and whether the two dispute resolution methods were arranged as parallel alternatives, so as to avoid unjust outcomes caused by a mechanical application of the law.

The discussion below reviews a number of cases to illustrate the rules and judicial reasoning Chinese courts use in determining whether an arbitration agreement constitutes an "either arbitration or litigation" clause.

II.Arbitration Agreements That Ostensibly Provide for Both but Do Not Substantively Constitute "Either Arbitration or Litigation" Are Valid

1.Dispute Resolution Clauses in Different Contracts or Involving Different Parties Do Not Constitute "Either Arbitration or Litigation"

In complex commercial transactions, especially those involving long-term cooperation or project performance, parties often execute a series of contracts that are sequentially related or linked as principal and ancillary agreements in terms of content and performance. Where these related contracts provide for different dispute resolution methods, such as arbitration in one and litigation in another, difficult questions arise as to the validity of the relevant clauses. In judicial practice, the core legal principle Chinese courts apply in addressing this issue is the "privity of contract". Under that principle, each contract is an independent legal relationship, and its clauses generally bind only the parties that entered into that contract. Accordingly, review of a dispute resolution clause must return to the specific contract in which it appears and determine the validity of the arbitration agreement based on the true intentions of that contract's signatories and the legal relationship established by that contract. Courts should not mechanically merge different contracts into a single "either arbitration or litigation" arrangement merely because they contain different dispute resolution mechanisms on their face, and then deny the validity of the arbitration agreement on that basis.

For example, in a case included in the Supreme People's Court's 2024 Annual Report on Judicial Review of Commercial Arbitration³，Shandong Zhuo Co. and Weifang Bei Co. entered into a Lease Agreement in 2015, which provided: "For matters not covered herein, the parties shall resolve them through friendly consultation. If consultation fails, litigation may be initiated, and the court at the plaintiff's domicile shall have jurisdiction." In 2017, Shandong Zhuo Co., Weifang Bei Co., and Rui Co. entered into an Agreement on the Transfer of Contractual Rights and Obligations, which provided: "Any dispute arising in the performance of this agreement shall be resolved through consultation among the three parties. If consultation fails, any party may apply to the Yantai Arbitration Commission for arbitration." In 2024, Weifang Bei Co. applied to the people's court for a declaration that the arbitration clause was invalid, arguing that the two agreements were in substance part of the same lease relationship and that the dispute resolution clauses conflicted by providing for "either arbitration or litigation." The court held that the Lease Agreement and the Agreement on the Transfer of Contractual Rights and Obligations had different contracting parties and did not belong to the same contractual relationship. In the later tripartite agreement, the three parties had expressly agreed to an arbitration clause, manifested an intention to arbitrate, and designated a specific arbitral institution. The clause should therefore be recognized as valid, and the applicant's claim that the arbitration agreement was invalid could not stand.

The core logic reflected in this case is that, as part of a contract, an arbitration agreement binds only the parties who signed that agreement. Dispute resolution arrangements arising out of different legal relationships should be assessed independently. The fact that an earlier contract provides for litigation while a later contract provides for arbitration does not in itself create an "either arbitration or litigation" problem; rather, it reflects a new expression of intent by the parties in light of a changed legal relationship, and that expression of party autonomy should be respected.

2.Distinguishing Between Authorizing Dispute Resolution Clauses and Basic Dispute Resolution Clauses

Contracts often contain clauses authorizing third parties to exercise rights. In practice, such clauses commonly appear in arrangements involving multiple interested parties or successive transactions, such as beneficiaries under insurance contracts, end users in supply-chain contracts, and subcontractors in construction contracts. If such a clause further authorizes the third party to choose litigation or arbitration in the event of a dispute, courts may analyze it separately from the contract's basic dispute resolution clause. Because the third party is not itself a party to the underlying contractual relationship, the nature of such an "either arbitration or litigation" clause is that of an authorizing dispute resolution clause, which cannot bind the two contracting parties themselves.

For example, in a case heard by the Guangzhou Intermediate People's Court⁴, the debtor and a certain branch of Bank of China entered into a Fixed Asset Loan Contract (the principal contract at issue), which contained an arbitration agreement. Article 17 of the Pledge Contract entered into by the guarantor, Feng Co., and the bank branch provided that "the same dispute resolution method as agreed in the principal contract shall apply." However, Article 19 further provided that "if, due to business needs, the bank branch entrusts another Bank of China institution to perform the rights and obligations under this contract, Feng Co. acknowledges and accepts the same. Such authorized Bank of China institution shall have the right to exercise all rights under this contract and shall have the right to bring litigation before a court or submit the dispute to an arbitral institution for adjudication with respect to disputes under this contract." After the bank branch initiated arbitration, Feng Co. requested the court to confirm that the Pledge Contract did not contain a valid arbitration clause. The court adopted a three-step analysis. First, the Pledge Contract had already provided that the same dispute resolution method as in the principal contract would apply, and the principal contract had clearly chosen arbitration before the Shenzhen Court of International Arbitration; subsequent supplemental agreements did not make any new arrangement regarding dispute resolution. Accordingly, the Pledge Contract satisfied the requirements for an arbitration agreement under the Arbitration Law of the People's Republic of China (the "Arbitration Law"). Second, Article 19 of the Pledge Contract was, in substance, a provision authorizing other Bank of China institutions to exercise contractual rights and to enjoy the corresponding right to bring suit or request arbitration. It addressed the legal basis on which such institutions could exercise contractual rights, rather than the dispute resolution method governing disputes under the contract. As between the contracting parties, disputes under the contract remained governed by Article 17 of the Pledge Contract. Third, even if Article 19 were viewed as involving a dispute resolution method, it would apply only where an authorized third-party institution asserts rights against Feng Co.; in the present case, however, the bank branch itself was asserting rights directly, so Article 19 was inapplicable. The court ultimately dismissed Feng Co.'s application.

This case drew a clear line between authorizing dispute resolution clauses and basic dispute resolution clauses. It made clear that the function of an authorizing clause is to address who may exercise contractual rights, not to alter the parties' previously agreed dispute resolution mechanism. The focus of judicial review therefore remains whether the specific parties to the dispute have agreed to an "either arbitration or litigation" arrangement.

3."Arbitration First, Litigation Later" Clauses Do Not Constitute "Either Arbitration or Litigation"

In practice, some contracts provide for "arbitration first, litigation later." The key distinction between such clauses and "either arbitration or litigation" clauses is that the former establishes a sequential, rather than parallel, arrangement between the two dispute resolution methods. In such circumstances, courts may adopt a severability approach, holding the arbitration portion valid while treating the litigation portion as invalid for violating the principle of finality in arbitration. The invalidity of the litigation portion does not affect the validity of the arbitration portion.

For example, in a case heard by the Shenzhen Intermediate People's Court of Guangdong Province⁵,

a company entered into a Loan Contract with Liu Co. and Hong. Article 5 of the contract provided: "If any dispute arises under this contract, the parties shall resolve it through consultation. If consultation fails, the dispute shall be submitted to the Shenzhen Arbitration Commission, at the place where the contract was signed, for arbitration, with the final determination to be made by the Shenzhen courts." After the company applied for arbitration under this clause, Liu Co. and Hong applied to have the arbitration agreement declared invalid on the ground that the clause constituted "either arbitration or litigation." The court held that the clause contained a clear intention to arbitrate, identified the matters to be arbitrated, and designated a specific arbitral institution, thereby satisfying the requirements of the Arbitration Law and thus being valid. The phrase "with the final determination to be made by the Shenzhen courts" was not an "either arbitration or litigation" arrangement, but rather reflected the parties' intention to provide for "arbitration first, litigation later." Accordingly, Liu Co. and Hong lacked a legal basis for claiming that the arbitration agreement was invalid.

This case treated the validity of an "arbitration first, litigation later" clause on a severed basis, thereby both respecting the parties' prior choice of arbitration and preserving the core institutional value of arbitration finality.

4.Unilateral Option Arbitration Clauses Do Not Constitute "Either Arbitration or Litigation"

A unilateral option arbitration clause, also known as an asymmetric arbitration clause, is a clause that grants one party to the contract, typically the creditor, pledgee, or another rights holder, the unilateral right to choose either litigation or arbitration. Because of their flexibility, such clauses have become common in international financing transactions in recent years. The key distinction between such clauses and "either arbitration or litigation" clauses lies in the exclusivity and certainty of the choice. Once the rights holder exercises its option, the dispute resolution method becomes fixed.

In a case heard by the Beijing Financial Court⁶, the parties entered into a Pledge Agreement. Article 23.1 provided that all disputes arising out of the agreement should be submitted to the certain arbitral commission in Beijing for arbitration, and that the arbitration would be final. Article 23.2 further provided that, notwithstanding Article 23.1, if the pledgee (a certain bank) so elected, the parties would submit to the non-exclusive jurisdiction of the courts of Country J. After the bank applied to the arbitral commission for arbitration in relation to a dispute over the performance of the agreement, the certain Telecom Co. applied to the court to declare the arbitration clause invalid, arguing that the clause gave the bank the unilateral option to choose arbitration or litigation and therefore constituted an "either arbitration or litigation" arrangement. The court held that the standard for identifying an "either arbitration or litigation" agreement under Article 7 of the Judicial Interpretation is whether arbitration and litigation are provided as parallel or alternative methods such that a jurisdictional conflict arises. In this case, however, the clause at issue was a unilateral option dispute resolution clause, the nature of which depended on the bank's choice. The clause resulted from mutual agreement between the parties, there was no legal prohibition against such an arrangement, and it was not sufficient to render the parties' rights and obligations manifestly unfair. The parties' autonomy should therefore be respected. Since the bank had already applied for arbitration and had expressly waived its right to bring suit in court, the dispute resolution clause had crystallized into a definite and exclusive agreement to arbitrate. It did not constitute an "either arbitration or litigation" clause and should be held lawful and valid.

This case, following the earlier decision of the Shanghai First Intermediate People's Court in Xiamen C&D Chemical Co., Ltd. v. Switzerland Albert Trading Co., Ltd.⁷, marked another clear affirmation by Chinese courts of the validity of unilateral option arbitration clauses. Because it also involved a Belt and Road project, it is of particular significance. The case clearly delineates the boundary between unilateral option arbitration clauses and "either arbitration or litigation" clauses, and recognizes the legality and validity of such clauses in commercial transactions. This approach both respects party autonomy and responds to the practical needs of complex commercial arrangements.

III.Conclusion and Implications

The representative cases discussed above show that, in determining the validity of "either arbitration or litigation" clauses, Chinese courts favor a substantive review approach designed to avoid a mechanical application of the law. Their core judicial reasoning may be summarized as follows: First, they focus on examining the true intent of the parties, making a comprehensive determination of whether a clear arbitration agreement exists by considering factors such as the wording of the clauses, the sequence of agreements between the parties, and the context of the transaction. Second, they distinguish between different contracts and different clauses within the same contract, so as to accurately identify the dispute resolution clause that is genuinely applicable to the opposing parties with rights and obligations. Third, they respect the independence of the arbitral proceeding and do their utmost to uphold the validity of the arbitration agreement.

To minimize the risk of an arbitration agreement being invalidated during judicial review and to enhance predictability in dispute resolution, parties should focus on at least two key points. First, the chosen method of dispute resolution should be stated as clearly as possible, with careful drafting to avoid presenting arbitration and litigation as parallel options in the same clause. Second, the arbitral institution should be explicitly designated and the scope of arbitrable matters clearly defined, so as to fully satisfy the essential validity requirements of an arbitration agreement in China. Looking ahead, as commercial transaction structures continue to diversify and new forms of arbitration agreements continue to emerge, Chinese courts' rules for identifying "either arbitration or litigation" clauses are likely to become more nuanced and more fully developed in practice. Whatever new forms such clauses may take, party autonomy will remain the central criterion for determining the validity of an arbitration agreement. This judicial tendency provides parties with a relatively stable expectations, while also offering necessary support for the continued development of arbitration.

Footnotes

1 Application by a Hubei-based Construction Labor Service Company to Confirm the Validity of an Arbitration Agreement, Case No. (2025) E 01 Min Te No. 61, Wuhan Intermediate People's Court, Hubei Province

2 Reply in the Matter of Beijing Huaye Capital Holdings Co., Ltd.'s Application for Confirmation of Validity of Arbitration Agreement, Case No. (2019) Zui Gao Fa Min Ta No. 221, Supreme People's Court

3 Regarding the case between Weifang Bei Co., (applicant) and Rui Co. and Shandong Zhuo Co. (respondents) requested confirmation of the validity of the arbitration agreement, reproduced on page 12 of the Supreme People's Court's 2024 Annual Report on Judicial Review of Commercial Arbitration

4 Guangzhou Feng Co. v. Bank of China Certain Branch, Application for Confirmation of Validity of Arbitration Agreement, Case No. (2023) Yue 01 Min Te No. 865, Guangzhou Intermediate People's Court, Guangdong Province

5 The Fourth of Ten Typical Cases of Judicial Review of Arbitration in 2024 Released by the Shenzhen Intermediate People's Court of Guangdong Province: Liu Co. and Hong, Application for Confirmation of Validity of Arbitration Agreement—accurately identification of "either arbitration or litigation" clauses to recognize the validity of an arbitration agreement

6 The Fifth of Ten Typical Cases of Judicial Review of Financial Arbitration: Certain Foreign Telecom Co. (Applicant) and Certain Bank (Respondent), Application for Confirmation of Validity of Arbitration Agreement—a unilateral option arbitration clause is not necessarily "either arbitration or litigation"

7 Xiamen C&D Chemical Co., Ltd. v. Switzerland Albert Trading Co., Ltd., Case No. (2016) Hu 01 Min Zhong 3337, Shanghai First Intermediate People's Court

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