A Chinese court’s refusal to enforce an arbitration award from the CIETAC Shanghai Sub-Commission may affect other disputes.

The breakdown in the relationship between the China International Economic and Trade Arbitration Commission (CIETAC) and its former sub-commissions in Shanghai and Shenzhen has attracted considerable attention since 2012. The turf war between the most pre-eminent arbitral commission in Mainland China and two of its established sub-commissions appeared to be resolved in April 2013, when the Shanghai Sub-Commission publicly announced its name change and introduced a set of new arbitration rules and panel of arbitrators. The dust, however, is not yet settled.

In May 2013, a court in Suzhou, China refused to enforce an award made by a CIETAC Shanghai Sub-Commission tribunal in December 2012 because the tribunal failed to inform the parties of the change in the Shanghai Sub-Commission’s status. The decision, which adds uncertainty to the enforceability of awards rendered in cases administered by the former sub-commissions of CIETAC before their independence, has caused a ripple in arbitration circles both in China and abroad.

This Client Alert analyses the grounds on which the Suzhou Court refused to enforce the award and its potential effect on the enforcement future of arbitral awards in China.

Background

On 7 May 2013, the Intermediate People’s Court of Suzhou City, Jiangsu Province of the People’s Republic of China (the Suzhou Court), by a Civil Order (2013) Su Zhong Shang Zhong Shen Zi No. 0004 (the Civil Order), decided not to enforce an award rendered in December 2012 in an arbitration administered by the China International Economic and Trade Arbitration Commission (CIETAC) Shanghai Sub-Commission (CIETAC Shanghai), which has now changed its name to the Shanghai International Economic and Trade Arbitration Commission, concurrently known as Shanghai International Arbitration Centre (or SHIAC).

The parties to the enforcement proceeding before the Suzhou Court are marquee names in the Chinese and global solar panel market.

The applicant, Jiangxi LDK Solar Hi-Tech (LDK Solar), established in 2005 in China, is the world's largest producer of solar wafers and a leading high-purity polysilicon and solar module manufacturer. In June, 2007, LDK Solar was listed on the New York Stock Exchange.

The respondent against which the enforcement was sought, Suzhou Artes Sunshine Power Technology (Artes) is a mainland subsidiary of Nasdaq-listed Canadian Solar, one of the world’s largest makers of solar panels.

In October 2007, LDK Solar and Artes entered into an agreement for the supply of solar wafers under which the parties agreed to refer their disputes to CIETAC (Shanghai Sub-Commission) for arbitration (the 2007 Agreement). In June 2008, the same parties signed two additional supply contracts which were to last for ten years (the 2008 Agreements). The arbitration clauses in the 2008 Agreements are, though similar, slightly different from the 2007 Agreement, which provided for arbitration at CIETAC (with the place of arbitration in Shanghai).

Disputes later arose between the parties relating to the entitlement to a RMB 60,000,000 deposit and termination of the 2008 Agreements, which led LDK Solar to file a notice of arbitration before the SHIAC (then known as CIETAC Shanghai) in July 2010. After a two-year proceeding, the SHIAC Tribunal, by an award dated 7 December 2012 ((2012) CIETAC Shanghai No. 452) (the SHIAC Award), found in favor of LDK Solar.

Of particular importance in this case is the interplay between the arbitration proceedings before the SHIAC Tribunal and the stalemate between CIETAC and its Sub-Commissions in terms of the time line. By way of illustration, below is a chart setting out these parallel chains of events.

Click here to view table.

Grounds for Refusing Enforcement

In the enforcement proceedings before the Suzhou Court, Artes raised three arguments to resist enforcement:

  • The lack of jurisdiction of SHIAC to hear the dispute
  • Procedural irregularity
  • Errors made by the SHIAC Tribunal in findings of law and the application of law

As shown in the Civil Order, the Suzhou Court appears to have only considered the first argument. In deciding whether the SHIAC Tribunal had jurisdiction over the case in question, the Suzhou Court considered three factors as relevant:

  • The parties’ agreement regarding the arbitral commission
  • The relationship between SHIAC and CIETAC before SHIAC obtained the Certificate of Registration in December 2011
  • The relationship between SHIAC and CIETAC after SHIAC obtained the Certificate of Registration in December 2011

When considering the first factor, the Suzhou Court noted that the disputed matters fell within the jurisdiction of the 2008 Agreements, and therefore, the arbitration clauses in the 2008 Agreements should govern. The parties’ agreement under the 2008 Agreement, as interpreted by the Suzhou Court, was to select CIETAC as the arbitral commission, with Shanghai as the place of arbitration. In other words, according to the Suzhou Court, the parties did not intend to refer disputes to CIETAC Shanghai for arbitration.

As regards the relationship between SHIAC and CIETAC at the material time, the Suzhou Court acknowledged that SHIAC had become an independent arbitral institution as of 8 December 2011 when it was successfully registered with the Shanghai BOJ. Prior to that time, SHIAC was an integral part of the CIETAC.

The Suzhou Court found that an arbitral commission’s jurisdiction to administer arbitration cases originates from the parties’ agreement. Thus, the parties’ choice of CIETAC did not cause any problem before December 2011 when SHIAC was still considered an integral part of CIETAC. However, when SHIAC ceased to be part of CIETAC in December 2011, SHIAC was obligated to explain to the parties the change in the nature of the arbitral arbitration and to offer the parties an opportunity to select a different arbitral institution. By failing to do so, the SHIAC Tribunal acted against the parties’ true intention, and therefore, the Tribunal no longer had jurisdiction to hear the disputes after December 2011.

Enforceability of Awards Made by Former Sub-Commissions of CIETAC

The reasoning provided by the Suzhou Court in the Civil Order raises a number of questions.

First, the Suzhou Court referred to paragraph 2(2) of Article 237 of the Civil Procedural Law of the PRC as the legislative basis for non-enforcement, but that provision was intended to address the situations when the matters adjudicated by the tribunal are not arbitrable under the Arbitration Law of the PRC (for example, administrative disputes) or when matters fall outside the scope of arbitration agreement. The current case does not appear to fit in either of the categories.

Second, a the Suzhou Court drew a line in December 2011 when the SHIAC obtained its registration certificate, and consequently lost its jurisdiction to hear disputes referred to for CIETAC arbitrations. Registration, or the question regarding SHIAC’s authority to accept CIETAC cases, however, was not made public until August 2012 when CIETAC announced its suspension of SHIAC’s authority in this regard. Before the Civil Order was delivered, few parties were concerned about SHIAC’s authority to administer CIETAC cases filed before August 2012. The Suzhou Court’s decision in the Civil Order has widened the uncertainty period by casting doubt on the legality of SHIAC’s authority to administer CIETAC cases between December 2011 and August 2012.

Ironically, the generally accepted principle of party autonomy served as the fundamental basis of the Suzhou Court’s decision. The Suzhou Court based its refusal of enforcement on its interpretation of the arbitration clauses in the underlying agreements that the parties intended to select CIETAC (not any other arbitral institution) as the arbitration commission. Whether or not the Suzhou Court would have made the same decision if, for example, the arbitration clause had expressly referred to CIETAC Shanghai as the arbitral commission, remains unclear.

Conclusion

Notwithstanding the above, the effect of the Civil Order should not be over stated.

First, only cases accepted or administered by the relevant former sub-commissions in a limited period of time from August 2012 and (probably) May 2013 are potentially in the crosshairs.

Further, the decision of the Suzhou Court is not a precedent which must be followed by other courts in China, and the decision should not be treated as a universal view held by the Chinese judiciary regarding the enforceability of awards made by SHIAC and SCIA tribunals.

Clearly, at least in Shanghai and Shenzhen where SHIAC and SCIA are based, the courts will uphold their authority to administer CIETAC cases during the transition period, and the courts will likely adopt a more supportive approach when dealing with enforcement applications of awards delivered during such period.

In other parts of China, the situation may be less clear, and the enforcement prospect could well depend on various other factors, such as the location of the party against which enforcement is sought (bearing in mind that the respondent in this case is a local Suzhou entity), the assets available for enforcement, the local court’s professionalism and familiarity with arbitration practice, among other issues.

On a separate note, SHIAC and SCIA have now become independent arbitral commissions, and it will be interesting to see if their awards will be enforceable in jurisdictions outside the PRC, in particular, Hong Kong. The Hong Kong Arbitration Ordinance provides that only awards made by certain recognized arbitral commissions in Mainland China will be enforceable in Hong Kong. To date, neither SHIAC nor SCIA appears to have been gazetted to be qualified as one of such recognized arbitral commissions for enforcement purposes. Hong Kong will need to address the current legislative obstacles to enforcing awards administered by these two arbitral commissions.