Arbitration Awards Made by the Shanghai and Shenzhen Subcommissions May Not Be Enforceable

by Perkins Coie
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On August 1, 2012, the China International Economic and Trade Arbitration Commission ("CIETAC") issued an announcement suspending its Shanghai and Shenzhen subcommissions. Subsequently, the Shanghai and Shenzhen subcommissions jointly declared their independence of CIETAC and further stated that the CIETAC announcement did not bind them. This situation represents an escalation of a dispute between CIETAC and its Shanghai and Shenzhen subcommissions that began earlier this year. As a result, arbitration awards made by the Shanghai and Shenzhen subcommissions after August 1, 2012, and potentially earlier, may not be enforceable.

Background

CIETAC is a private association providing arbitration services mainly to companies engaged in cross-border business. It is the most commonly used arbitration commission in China. CIETAC was originally founded in 1956 with its headquarters in Beijing and later set up four subcommissions in Shenzhen (established in 1989), Shanghai (established in 1990), Tianjin (established in 2008) and Chongqing (established in 2009). CIETAC accepts foreign-related and international arbitration cases as well as purely domestic cases. CIETAC is gradually developing into one of the major arbitration commissions in the world. Based on CIETAC’s statistics, it (and its subcommissions) accepted 1,435 cases in 2011, 741 of which were filed in the Shanghai and Shenzhen subcommissions. (The Shenzhen subcommission is also known as CIETAC South China Commission.)

Foreign parties typically prefer to resolve disputes before CIETAC rather than before a Chinese court because CIETAC rulings may be of a higher quality and because disputes can be heard in English. Further, CIETAC procedures are typically faster and potentially have less risk of corruption and local favoritism. In addition, CIETAC rulings are more likely to be enforceable in other countries since China is a country member of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been adopted by 146 countries of the United Nations.  

Overview of Dispute

This dispute originates from the release of the CIETAC Arbitration Rules (2012) (“New Rules”) published by CIETAC on April 24, 2012. The New Rules became effective as of May 1, 2012. The Shanghai and Shenzhen subcommissions objected to the New Rules mainly because the New Rules, compared with the CIETAC Arbitration Rules (2005) (“Old Rules”), make significant changes to the status and jurisdiction of the Shanghai and Shenzhen subcommissions as well as to their right to issue arbitration awards in their own names.

The impetus for the New Rules is presumably because CIETAC has been losing control over its subcommissions, and therefore the associated revenue, and wishes to regain control of same.

Firstly, the New Rules expressly stipulate that a subcommission is a branch of CIETAC that accepts arbitration applications and handles arbitration cases with CIETAC’s authorization. However, the Old Rules defined a subcommission as a component of CIETAC without referencing CIETAC’s explicit control of the subcommissions.

Secondly, according to the New Rules, parties may agree to submit their disputes to CIETAC or a subcommission of CIETAC for arbitration. Where the subcommission agreed upon by the parties does not exist, or where the agreement is ambiguous, the secretariat of CIETAC in Beijing shall accept the arbitration application and handle the case. In the event of any dispute over where to hold arbitration, a decision shall be made by CIETAC.

This means all cases submitted to CIETAC should be handled by the headquarters unless the parties to a contract have expressly agreed to submit a dispute to a subcommission in their arbitration agreement. This is a departure from past practice. If an arbitration agreement simply refers to CIETAC and states that the hearing should be held in Shanghai, past practice allowed the Shanghai subcommission to handle the case. However, the New Rules now hold such a clause as “ambiguous” and require such a case to be handled by CIETAC with the hearing held in Shanghai, thus excluding the Shanghai subcommission and causing the Shanghai subcommission to lose revenue as a result.

Thirdly, the New Rules require all arbitration awards made by CIETAC and its subcommissions to be affixed with CIETAC’s seal, which substantially changes the past practice of affixing a subcommission’s own seal to its arbitration award. The subcommissions consequently lose the right to issue arbitration awards in their own names.

In response to the New Rules, on April 30, 2012, the Shanghai subcommission announced that it was an independent arbitration body and would follow its own Arbitration Rules with its own panel of arbitrators, effective May 1, 2012.

On May 1, 2012, CIETAC issued a Statement and Open Letter to all arbitrators denying the alleged independence of the Shanghai subcommission, declared the Arbitration Rules made by the Shanghai subcommission as void and ordered that the Shanghai subcommission would be liable for all consequences for its noncompliance with the New Rules.

On May 2, 2012, the Shanghai subcommission made a statement reiterating its independence of CIETAC and challenging the legality of the New Rules.

Further, on June 16, 2012, the Shenzhen Court of International Arbitration (“SCIA”) was established. SCIA shares offices, staffs and arbitrators with the Shenzhen subcommission. Subsequently, on June 17, SCIA published a notification that it would not apply the New Rules, and SCIA would make its own Arbitration Rules and assemble its own panel of arbitrators, in effect declaring independence from CIETAC.

On August 1, 2012, CIETAC released an announcement suspending authorization of the Shanghai and Shenzhen subcommissions and stated that “as from 1 August 2012, where parties have agreed to arbitrate their disputes by the CIETAC Shanghai Commission or the CIETAC South China Commission (the CIETAC Shenzhen Commission), the parties shall submit their applications for arbitration to CIETAC and the CIETAC Secretariat shall accept such arbitration applications and handle such cases. Without CIETAC’s authorization, no institutions shall have the right to accept and handle the aforementioned arbitration cases.”

In response, on August 4, 2012, the Shanghai and Shenzhen subcommissions jointly declared that CIETAC’s announcement had no binding effect on them. Parties could continue to apply for arbitration with the Shanghai and Shenzhen subcommissions according to their arbitration agreements.

So far, it seems the situation is at an impasse. None of the three parties has filed a lawsuit in a Chinese court for this dispute. The Chinese governmental authorities have remained silent on the situation.

Risks and Suggestions

Parties to a contract who have agreed to an arbitration clause before the Shanghai or Shenzhen subcommissions should be aware of the risk that arbitration awards issued by these subcommissions after August 1, 2012, and possibly after May 1, 2012, may be denied recognition and enforcement by Chinese courts due to the subcommissions’ potential lack of authorization.

Parties to an existing contract should modify any arbitration clause to select CIETAC. Foreign parties may also want to consider selecting a foreign arbitration commission instead of CIETAC. Similarly, new contracts with such arbitration clauses under negotiation should be revised accordingly. For disputes currently undergoing arbitration in the Shanghai or Shenzhen subcommissions, parties may wish to suspend them or transfer them to CIETAC until the situation is clarified.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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