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Will the Real CIETAC Please Stand Up?

Posted in Legal News

For more than a year, the China International Economic and Trade Arbitration Commission (CIETAC), China’s dominant arbitral institution since its founding in 1956, has been fighting a noisy and public civil war. The resulting chaos shows no signs of ending, and any company considering arbitration in China and any company that has an existing contract with an arbitration clause should take notice.

CIETAC, which is based in Beijing, has four Sub-Commissions within the PRC: Shanghai (known as CIETAC Shanghai), Shenzhen (known as CIETAC South China), Tianjin, and Chongqing. In early 2012, CIETAC issued new arbitration rules which considerably strengthened the power of CIETAC’s Beijing office (CIETAC Beijing). CIETAC Shanghai and CIETAC South China strongly opposed the new rules, and in mid-2012 both Sub-Commissions declared their independence.

A flurry of rhetoric and news releases followed. CIETAC Beijing stated that CIETAC Shanghai and CIETAC South China did not have the authority to declare independence and were no longer authorized to resolve disputes that called for arbitration by CIETAC Shanghai or CIETAC South China. CIETAC Shanghai and CIETAC South China responded by saying they had always been independent, and would continue to resolve disputes that called for arbitration by CIETAC Shanghai and CIETAC South China. These polar opposite positions placed potential litigants in a bind: who is authorized to hear their claims?

The saga continued, with the situation going from bad to worse. On October 22, 2012, CIETAC South China changed its name to the South China International Economic and Trade Arbitration Commission, or SCIETAC, with its own set of arbitration rules that went into effect on December 1, 2012. Realizing that if one new name was good, then two new names must be better, SCIETAC also gave itself a second official name: the Shenzhen Court of International Arbitration (SCIA). Then on April 18, 2013, CIETAC Shanghai changed its name to the Shanghai International Arbitration Center (SHIAC), with its own set of arbitration rules that went into effect on May 1. Naturally they needed a second name as well, and what could be less confusing than the Shanghai International Economic and Trade Arbitration Commission (SIETAC)? Meanwhile, CIETAC Beijing opened up new offices in Shanghai and Shenzhen, using the same arbitration rules that SHIAC and SCIETAC had rejected.

The result is as big a mess as it appears, and should give pause to anyone drafting a contract that contemplates arbitration with CIETAC, SHIAC, or SCIETAC. Would you hire a mechanic whose own car keeps breaking down?

A more immediate problem faces parties with already signed contracts that provide for arbitration in Shanghai administered by “CIETAC Shanghai,” or arbitration in Shenzhen administered by “CIETAC South China.” The parties to that contract now have to consider two troubling questions. First, which arbitral institution is entitled to arbitrate the dispute? Second, would a court enforce an arbitral award?

Consider a contract that provides for arbitration administered by “CIETAC Shanghai.” Both CIETAC Beijing and SHIAC currently claim they are entitled to arbitrate a dispute arising from this contract. If the contract parties can agree on which arbitral body to use, the identity of the “proper” arbitral body is a moot point. But by the time most disputes are referred to arbitration, the parties are not agreeing on much at all. Often, the status quo favors the responding party, and as a result that party will do whatever it can to delay arbitration. In such cases, the responding party will likely argue as follows:

(1)    The selected arbitral institution does not have jurisdiction. For a dispute submitted to SHIAC, the responding party would argue that the parties’ intent was for CIETAC, the institution based in Beijing, to handle the arbitration, with Shanghai being merely the location of the arbitration. For a dispute submitted to CIETAC Beijing, the responding party would argue that the parties’ intent was for the CIETAC Shanghai Sub-Commission — as it existed at the time of contract formation — to handle the arbitration, and SHIAC is the successor to that entity.

(2)    The arbitration clause is fatally vague under Chinese law. Article 18 of the PRC Arbitration Law states that an arbitration agreement shall be null and void  if it “contains no or unclear provisions concerning the matters for arbitration or the arbitration commission.” You don’t need a law degree to make a good argument that a reference to “CIETAC Shanghai” is unclear.

These arguments would not only be made to the arbitral institution to which the dispute was initially submitted, but also to a Chinese court. This exact scenario has already begun playing out and regardless of which side you are on, it is not a good situation. In the above example, it is almost inconceivable that SHIAC would decline arbitration on such jurisdictional grounds, because doing so would call its own legitimacy into question. But a Chinese court would be a different matter, especially a Chinese court outside Shanghai.

A larger problem is that no one knows whether a court would enfororce an award from any of these institutions. The consensus seems to be that it would depend on where the prevailing party seeks to enforce the award. Since the split from CIETAC, the Shenzhen courts have explicitly ratified SCIETAC and the Shanghai courts have explicitly ratified SHIAC, which suggests that awards from SCIETAC would be enforced in a Shenzhen court, and awards from SHIAC would be enforced in a Shanghai court. Left unanswered is whether awards administered by CIETAC Beijing will be enforced in Shanghai or Shenzhen, or whether awards from SCIETAC and SHIAC would be enforced anywhere outside Shenzhen and Shanghai, respectively.

As we have noted a number of times, a there is a lot to be said for having an enforceable contract. If you have an arbitration clause that provides for arbitration at CIETAC Shanghai, or CIETAC South China, talk to the other party now about revising the dispute resolution clause. Do not wait until a dispute looms on the horizon. If you still want to arbitrate in China, you and the other party should mutually decide on an arbitral institution, the governing rules, and a seat of arbitration – all with an eye to enforcement – and then revise the dispute resolution clause to include all of these points. But given the descent into mayhem of the Chinese arbitral institutions, it makes more sense than ever to consider having your disputes resolved by the Chinese courts.

  • Maarten Roos

    Thanks for this timely posting. While I agree that resolving disputes in some courts is not at all bad, this really depends on the court (or the seat of that court) in question. Local protection remains a key challenge in China, that foreign parties must consider when determining dispute resolution clauses.
    The dispute between the CIETAC and SHIAC / SCIETAC does create some unhelpful uncertainty, however looking at the number of disputes that especially the SHIAC continues to deal with, it is inconceivable that the general attitude of courts will be not to recognize and enforce its awards. the SHIAC dealt with over 500 cases in 2012 and the pace has not slackened – making it one of the busiest arbitration tribunals in the world.
    The latest news is that the Supreme People’s Court is looking into the matter, and may come with some kind of solution. Let’s wait and see…

  • Shirley LIU

    All these three institutions won’t deny jurisdiction when the respondent challenge it. The recognition and enforcement of arbitral awards shall go to the intermediate people’s court in the same city as the institution. The Intermediate People’s Court in Shenzhen had few decisions regarding the jurisdiction of the old arbitration clause which name the CIETAC generally as arbitration institution. It explicitly supported the SCIETAC. So at least the recognition of SCIETAC’s awards will have much trouble.

    I agree it is better to amend the arbitration clause and make it clearer. But more optimistically, I view this matter as a great progress made by Chinese arbitration institutions to be more independent, and working more professionally.

  • NDS

    Hello all – any update on this matter? is there a website with recommendedwording for CIETAC arbitration?