Lawsuits of subrogation and arbitration agreements in China

Article 73 of the Contract Law and articles 11 and 14 of the Interpretation of the Supreme People’s Court on the Application of the Contract Law I stipulate the circumstances and conditions under which the obligee may initiate a lawsuit of subrogation. Article 18 of interpretation I stipulates that the secondary obligor has the right to protest. However, in practice, there are still debates on whether the secondary obligor may protest against the subrogation right of the obligee in the lawsuit on the ground of the arbitration agreement entered into by the secondary obligor and the obligator.

The Civil Trial Chamber II of the Supreme People’s Court set out in its Guidance to the Commercial Trial (4th edition, 2013) that “the exercise of the subrogation right must be by the way of litigation and under the jurisdiction of the court of the defendant’s domicile. The agreement on arbitration between the obligator and the secondary obligator is the dispute resolution determined by the negations of both parties, which has the effect of exclusion of the court jurisdiction.

“However, the obligee is not a party to the agreement on arbitration, and therefore must not be subject to that arbitral jurisdiction, and the secondary obligator may not raise, on the ground of arbitral jurisdiction, an objection to the jurisdiction of the suit of subrogation initiated by the obligee.”

Meanwhile, Shanghai High People’s Court upheld, in a civil ruling over a related case on 20 March 2017, the objection to court jurisdiction by the secondary obligator on the ground of arbitration agreement between the secondary obligator and the primary obligator, and rejected the suit brought by the obligee.