Arbitration clauses in China: an already complicated subject becomes even more so

Introduction

A common provision in cross-border M&A and other transactional agreements involving parties based in China is a dispute resolution clause providing that any disagreement which arises among the parties will be submitted to arbitration at the China International Economic and Trade Arbitration Commission (“CIETAC”), which is the best known arbitration body in China. The recent formal splitting of two branches of CIETAC away from the main body, and two conflicting Chinese court decisions on the validity of agreements to submit to arbitration in the two break-away branches, highlight the need to carefully consider which arbitration location is selected. These developments have implications for both existing and new agreements.

Background

There has long been a tendency for overseas parties – whether an acquirer or target – to want any transaction documents involving a Chinese party to be subject to binding arbitration outside of China for the principal reason that offshore arbitration is frequently seen as providing an efficient and level playing field for the parties in comparison to dispute resolution within China. Conversely, parties located in China generally push for dispute resolution in China, often citing the hassle and expense of having to go abroad to participate in a proceeding and an overarching fear of becoming subject to US-style discovery procedures.

These decisions have very real implications, and a number of considerations need to be taken into account including who are the parties involved in the deal, the likelihood of a dispute, the type of disputes that could arise and other factors. While transaction participants often spend considerable time debating these points, Chinese parties usually insist on dispute resolution being conducted within China,¹ in which case CIETAC, as the best known and most established arbitration body in China, becomes an obvious choice of venue.

CIETAC’s headquarters are in Beijing, and it has also operated a number of sub-commissions in cities around China, including Shanghai, Shenzhen, Tianjin and Chongqing. Parties often select one of the regional Sub-Commissions to administer any proceeding which may arise for convenience sake if one or both sides of the transaction are physically located near such Sub-Commission. However, a rupture in the CIETAC organization began in May 2012 when CIETAC Beijing introduced new rules which had the effect of shifting more cases – and therefore more fees -- to Beijing and away from the Sub-Commissions. In response, the CIETAC Shanghai Sub-Commission and CIETAC South China Sub-Commission announced their independence, meaning they would use their own arbitration rules and panel of arbitrators. Those former branches also renamed themselves the Shanghai International Arbitration Centre (“SHIAC”) and Shenzhen Court of International Arbitration (“SCIA”), respectively. CIETAC, SHIAC and SCIA have since been embroiled in a very public battle over, among other things, the legality of the separation and the authority of the break-away branches to accept and hear cases.

Against this messy backdrop, two recent PRC court decisions have contributed to confusion over the enforcement of CIETAC related arbitration clauses. In one case,² the parties in a commercial dispute had previously agreed to submit any disagreement to “CIETAC (place of arbitration: Shanghai, China) to arbitrate the case.” The dispute was submitted to the former Shanghai Sub-Commission of CIETAC before it had declared independence, but the arbitral award was made after the separation. When one party sought to enforce the award in the Intermediate People’s Court of Suzhou in Jiangsu province, the court ruled that although the Shanghai Sub-Commission had jurisdiction over the case when it was initiated, the newly independent SHIAC was not the arbitration body originally selected by the parties. Accordingly, SHIAC had no authority to render an award. This decision directly conflicts with a decision several months earlier by the Intermediate People’s Court of Shenzhen in Guangdong province.³ In that case, the parties had agreed to arbitration at the South China Sub-Commission of CIETAC, and the court determined that although SCIA had declared independence, it had jurisdiction to accept the case and render an award.

Implications for Drafting Arbitration Clauses in Transaction Documents

The dispute between CIETAC, SHIAC and SCIA is still playing itself out, and its full ramifications remain uncertain. Nonetheless, there are a few important contract drafting points to bear in mind:

• Existing Agreements: It is not uncommon for existing agreements to state that any arbitration proceeding shall be administered by CIETAC pursuant to its rules and then name the place of arbitration such as Shanghai or Shenzhen (or other locale where CIETAC has a branch). Prior to the rupture within CIETAC, that type of provision was considered adequate to make clear that the case would be held at the local Sub-Commission per CIETAC rules. Now, however, if the parties in that situation submit a dispute to SHIAC or SCIA in lieu of the former Sub-Commissions or instead submit to CIETAC in Beijing on the theory that the Sub-Commissions no longer exist, then there is a possibility that any arbitral award may be denied recognition because the parties had not selected such venues and therefore they lacked jurisdiction. Thus, while reopening discussions over contract terms may not be appealing for a host of practical reasons, parties should consider proactively clarifying the arbitration provisions, particularly if the contract has a long duration and high risk of disputes arising.
• New Agreements: The CIETAC dispute and the inherent uncertainty it creates should provide parties who would prefer arbitration outside of China, such as the Hong Kong International Arbitration Center or the ICC Court of Arbitration, with additional ammunition in their negotiations going forward. If parties choose instead to keep arbitration within China, then the contractual arbitration clause must be drafted more precisely than had previously been market practice, designating the exact institution, venue and rules that apply.