On 1 August 2012, China International Economic and Trade Arbitration Commission (“CIETAC”), the well-known arbitration institution in China, suspended the authority of CIETAC Shanghai Sub-Commission (“CIETAC-SH”) and CIETAC South China Sub-Commission (“CIETAC-SZ”) to accept and administer arbitration cases, effective immediately (the “Announcement”). In response, on 4 August 2012 CIETAC-SH and CIETAC-SZ jointly asserted that they will continue to administer arbitration cases at their own discretion. The situation has prompted concerns that the authority of CIETAC-SH and CIETAC-SZ may be challenged in the future when disputes are brought before either body, depriving contracts of the certainty of a particular dispute resolution procedure. This Alert examines those issues and gives the recommendations of our China Practice lawyers.
The dispute arose from the refusal of CIETAC-SH and CIETAC-SZ to apply CIETAC’s new arbitration rules (the “New Rules”), which took effect from 1 May 2012. The New Rules enlarged CIETAC’s jurisdiction and stated that all sub-commissions are branches of CIETAC and must “accept arbitration applications and hear arbitration cases with CIETAC’s authorization”. Previous rules gave the party commencing the claim the right to choose either CIETAC or one of its sub-commissions as the arbitration forum if an institution had not been clearly specified in the arbitration clause. In contrast, the New Rules provide that in the event of any dispute over which body should administer the case, a decision is to be made by CIETAC.
Following the issuance of the New Rules, CIETAC-SH and CIETAC-SZ have generally refused either to apply the New Rules or to remain under the leadership of CIETAC in terms of case administration. CIETAC-SH has gone even further, declaring its own arbitration rules in May 2012 and establishing its own panel of arbitrators. On 1 May 2012, CIETAC declared in response that the establishment of so-called “independent arbitration commissions” and the formulation of arbitration rules by CIETAC-SH were null and void.
Risks and Recommendations
The dispute remains unresolved, presenting uncertainties for the enforceability of awards issued by the two sub-commissions. As a result, parties to a contract that provides for resolution by CIETAC-SH or CIETAC-SZ may expect increased costs, delays and inconvenience as a result of disagreement over the jurisdiction of the arbitral body, as well as the potential risk of conflicting litigation in local courts that would otherwise not have jurisdiction.
Until the dispute among the CIETAC bodies is resolved, we recommend the parties to a China-related contract to consider the following:
- If the parties to a contract that has not yet been executed agree to CIETAC arbitration to resolve disputes, the arbitration clause should specify CIETAC – as opposed to CIETAC-SH or CIETAC-SZ – as the arbitration institution, though the location for the oral hearing could be Shanghai or Shenzhen. The location for the oral hearing is not necessarily the same as the place of arbitration. The place of arbitration determines which local courts associated challenges may be brought before. We recommend that the clause specifies Beijing as the place of arbitration.
- If a previously executed contract specifies CIETAC-SH or CIETAC-SZ for resolution of disputes, the parties may wish to amend the contract to designate CIETAC as the arbitration forum, though Shanghai or Shenzhen may be designated as the location for the oral hearing. Alternatively, in the case of a foreign-related contract where parties have the option to choose offshore arbitration, the parties may wish to designate an offshore arbitration forum such as the Hong Kong International Arbitration Center, Singapore International Arbitration Center, or the International Chamber of Commerce.