The breakaway from CIETAC, the China International Economic and Trade Arbitration Commission, by two of its sub-commissions in Shenzhen and Shanghai has consequences for many companies whose commercial contracts provide for CIETAC arbitration. Our Q&A explains the impact of the split and lays out the steps that companies can take to mitigate the resulting risks.
Who should read this Q&A?
Parties whose commercial contracts contain dispute resolution clauses specifying CIETAC arbitration administrated by CIETAC’s “Shanghai sub-commission” or “South China/Shenzhen sub-commission.
What is CIETAC’s current position?
The former CIETAC sub-commissions in Shenzhen and Shanghai have broken away from CIETAC Beijing. In addition to breaking away from the parent CIETAC body, the two sub commissions have changed their names to remove any CIETAC identification and issued their own arbitral rules and panels of arbitrators.
The former CIETAC Shanghai sub-commission is now named the Shanghai International Arbitration Centre (SHIAC) or Shanghai International Economic and Trade Arbitration Commission (SIETAC). The former CIETAC Shenzhen/South China sub-commission is now named the Shenzhen Court of International Arbitration (SCIA) or South China International Economic and Trade Arbitration Commission. We understand these commissions have also successfully registered their new status with the local authorities.
CIETAC’s Secretariat (CIETAC Beijing) has disputed the legitimacy of the two sub-commissions’ actions and has re-established its own sub-commissions in Shenzhen and Shanghai.
What are the risks and what can be done to mitigate them?
Following CIETAC’s split, arbitration under such clauses is now a less certain and predictable process, with greater scope for opposing parties to delay (and perhaps derail) the arbitration proceedings by bringing challenges in the Chinese courts.
Companies with affected CIETAC arbitration clauses may decide to enter into a supplemental agreement modifying their arbitration clause to provide for a clearer and more certain process (see Qs 7 and 8). If drafted correctly, the arbitration procedure could closely follow that originally agreed by the parties.
Will requests for arbitration be accepted?
Although they no longer operate under the CIETAC brand, both sub-commissions have previously indicated that they will still accept and administer arbitrations referred to CIETAC’s “Shanghai sub-commission” or “Shenzhen/South China subcommission”. In a joint announcement on August 4, 2012, the former sub-commissions pledged to “continue to accept and manage arbitration cases as agreed upon by the parties”.
By contrast, CIETAC Beijing argues that the sub-commissions have no legitimacy to accept and administer CIETAC arbitrations in those cities and advises such cases be submitted instead to CIETAC Beijing. On December 31, 2012, CIETAC Beijing declared that its former sub-commissions in Shanghai and Shenzhen
were no longer authorized to accept and administer CIETAC cases. The same announcement stated that references to the former Shanghai/Shenzhen sub-commissions shall be submitted to CIETAC Beijing and “[w]ithout CIETAC’s authorization, no institutions shall have the right to accept or administer [such] arbitration cases”.
What might be the grounds for a challenge?
Parties can choose to submit their request for arbitration to either CIETAC Beijing or the relevant former sub-commission. Unfortunately, whichever institution is chosen, the decision will in any case invite a challenge. On the one hand, a submission to (for example) the former CIETAC Shanghai sub-commission could be challenged on the basis that the institution is “not authorized” by CIETAC Beijing. But if a request is made to CIETAC Beijing, a challenge could be brought on the basis that this choice does not reflect the agreement of the parties which envisaged arbitration by the Shanghai-based entity.
How would a challenge affect arbitration proceedings?
A “jurisdictional” challenge may be made at an early stage in proceedings on the basis that the chosen institution does not have standing to administer proceedings. A challenge could also be made before the People’s Courts after an award is issued by the arbitration tribunal.
There is little guidance available now on how a particular court may treat such a challenge. The Supreme People’s Court is preparing to issue an opinion on the enforcement of arbitral awards in light of the CIETAC split. In the absence of such an opinion, at least two recent court judgments have reached conflicting results, including the refusal by the Intermediate People’s Court of Suzhou to enforce an award rendered by the former Shanghai sub-commission; and the rejection by the Intermediate People’s Court of Shenzhen of a jurisdictional challenge in relation to arbitration proceedings commenced at the former Shenzhen sub-commission.
There is always a risk that any such challenge might be upheld by the court. Regardless of the outcome, any such proceedings will give rise to additional delay and costs.
How can parties mitigate their risk by amending their arbitration clauses?
Companies with CIETAC Shenzhen or CIETAC Shanghai arbitration clauses could enter into a supplemental agreement, modifying their arbitration clause. While the parties could agree to conduct hearings in any city of their choice (including Shanghai or Shenzen), they should specify that the administering institution be CIETAC in Beijing. Doing so would have little impact on the arbitration procedure but would remove the scope for challenge on the grounds above.
What wording might be expected in a modified clause?
Below is an example of a modified arbitration clause:
If a party refers a dispute, controversy or claim to arbitration then such dispute, controversy or claim shall be submitted to the China International Economic and Trade Arbitration Commission (CIETAC) for arbitration, which shall be conducted in accordance with CIETAC’s arbitration rules in effect at the time of applying for arbitration. The arbitral award shall be final and binding upon the parties.
The arbitration shall be seated in Beijing and administered by the CIETAC Beijing Secretariat. However, this is without prejudice to the discretion of the parties to agree for any oral hearings to take place in any other place [and the parties agree that any such hearing will take place in Shenzhen/Shanghai].
This clause is not intended to be a full arbitration clause and appropriate consideration should be given to the detailed provisions of any arbitration agreement for a given set of circumstances.
Might it be appropriate to retain a CIETAC Shanghai/Shenzhen arbitration clause in some circumstances?
Some parties may consider leaving their arbitration clauses unchanged if, for example, their counterparty’s assets are entirely or substantially located within the jurisdiction of the Shanghai or Shenzhen courts. Given local judicial support for the former CIETAC sub-commissions, a party may therefore judge it unlikely that any challenge to jurisdiction or enforcement would succeed.
We would advise against this approach. We have no knowledge to date of an arbitral award rendered by CIETAC Beijing being set aside by the courts in Shanghai and Shenzhen on account of CIETAC’s split. By contrast, an award rendered by one of the former sub-commissions may still invite a challenge, along with the associated cost and delay implications (even if that challenge is ultimately unsuccessful).
Are there any alternatives to CIETAC?
Yes. The Beijing Arbitration Commission (BAC) and Shanghai Arbitration Commission (SAC) have emerged as serious domestic competitors to CIETAC and neither is affected by the current conflict. If the parties are unable to agree to arbitration seated outside of the PRC, they may therefore consider one of these institutions.