Dispute Resolution in China 2012: The Disintegration of CIETAC

by Sheppard Mullin Richter & Hampton LLP
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[author: James Zimmerman]
  • CIETAC-Shanghai has declared its independence from CIETAC-China, and claims it's a separate arbitral institution
  • CIETAC-Shanghai refuses to adopt the more flexible 2012 Arbitration Rules that are effective May 1, 2012
  • Significant risks exists for any party to a contract with a CIETAC clause given the potential for costly debates over jurisdiction, and the parties to a contract with a CIETAC clause would be wise to review their contracts and clarify, if necessary, the institution that they prefer to arbitrate their disputes
  • If a clause calls for arbitration before CIETAC-Shanghai, parties to a contract must decide if they desire to arbitrate under an older and less-flexible set of rules
  • For parties in foreign-related contracts that have the option to choose arbitration offshore, they would be wise to select an offshore forum

Business in China needs a predictable and stable dispute resolution environment in order to succeed.

Most experienced China hands instruct their clients to, at all costs, avoid selecting Chinese arbitral institutions such as the China International Economic & Trade Arbitration Commission (CIETAC) or one of the city-level institutions such as the Beijing Arbitration Commission or Shanghai Arbitration Commission for resolving commercial disputes. This recommendation is based upon a number of key systemic problem areas including, but not limited to, unqualified staff and arbitrators, language difficulties, decisions driven by politics or local protectionism, rules that allow the tribunals to ignore the law/facts and to base decisions on equitable grounds or “fairness” (CIETAC arbitrators can act as amiable compositeurs, which is inconsistent with international standards), and lack of effective tools for interim relief.

If the parties must choose a domestic institution, and this is usually the case if both parties are Chinese entities, we recommend that the dispute resolution clause be drafted in a manner to level the playing field as much as possible.

Although CIETAC has made much progress over the years to improve its services and procedural rules, CIETAC-China in Beijing and its regional sub-commissions are fighting a very ugly public battle that throws into question the institution’s ability to survive as a single nation-wide organization, and also its ability to service the needs of the business community.

As background, CIETAC is headquartered in Beijing and maintains sub-commissions in Shenzhen, Shanghai, Tianjin, and Chongqing (www.cietac.org). CIETAC was established in 1954, initially named the Foreign Trade Arbitration Commission (FTAC) and in 1980 renamed as the Foreign Economic Trade Arbitration Commission (FETAC). The initial purpose of FTAC/FETAC was to provide a forum to resolve disputes arising from contractual obligations in foreign trade matters and specifically between foreign and Chinese parties. Since the early 1990s, the caseload of CIETAC has increased from 200 to over 1000 applications annually.

CIETAC-China has been losing control over its sub-commissions for years, and specifically over operational and financial issues. For a review of a litany of complaints that CIETAC-Shanghai has with CIETAC-China, see the Statement of China International Economic & Trade Arbitration Commission Shanghai Commission at www.cietac-sh.org. In addition to management and fiscal issues, CIETAC-Shanghai is objecting to new CIETAC rules of arbitration. Immediately after the rules went into effect on May 1, 2012, CIETAC-Shanghai declared its independence and states that it no longer is a branch of CIETAC-China, and adopted its own rules of arbitration. While CIETAC-Shenzhen and CIETAC-Tianjin have not publicly declared their independence, they have refused to post the 2012 rules in a slight to CIETAC-China.

Several issues have prompted the dispute including that the branches want a greater say in the management of the institution and their key differences with the new rules. The failure to implement a uniform set of rules has potential impact on foreign investors in China.

The sub-commissions object to several revisions in the 2012 rules including an amendment that allows the tribunal to grant interim relief. CIETAC-Shanghai cites the 1995 Arbitration Law that requires that interim relief (i.e., property and evidence preservation) be granted by the people’s court. (Arbitration Law, arts. 28, 46, 68) In a bid to grant the tribunal’s more flexibility, the new CIETAC rule allows for the tribunal to either (1) apply to the court for conservatory measures (CIETAC Rule 21.1), or (2) issue interim relief in the form of a “procedural order or an interlocutory award”. (CIETAC Rule 21.2) This approach by CIETAC-China is more in line with international standards and the day-to-day practices of CIETAC tribunals.

The second issue of concern for CIETAC-Shanghai is that the 2012 rules allow for the consolidation of arbitration claims. Under the new Article 17, the tribunal, at the request of the parties and with their consent, may consolidate cases for efficiency purposes. This rule gives the tribunal more flexibility, and in a manner consistent with international standards. Contrary to CIETAC-Shanghai’s perspective, there is nothing in the Arbitration Law that would prohibit consolidation of cases, and especially if the parties consent.

The third issue of concern for CIETAC-Shanghai concerns the increase in threshold amount for expedited summary proceedings under Rule 54, which went from RMB 500,000 (US$80,000) to RMB 2 million (US$315,000). Under the new rule, the smaller cases will be handled in the expedited manner involving a sole arbitrator and with a time limit of 3 months (although the parties, by agreement, may request a three-party tribunal and extend the time). This is a positive development that can help the parties manage the cost of dispute resolution.

CIETAC-Shanghai’s position on these issue ignores the flexibility that CIETAC-China is attempting to bring to the practice of dispute resolution in China. If CIETAC-Shanghai wants to move in a direction of becoming a world-class institution, as part of a nation-wide organization or independent, it should be encouraging such flexibility.

In response to CIETAC-Shanghai’s declaration of independence and adherence to its own set of rules, CIETAC-China issued a Statement and Open Letter to All Arbitrators providing that the errant sub-commissions will be legally responsible for all consequences for non-compliance with CIETAC’s 2012 Arbitration Rules. (See http://www.cietac.org/index.cms.)

The dispute remains unresolved and casts a pall over the institution’s ability to support the business community, and there is significant risk that a party to any contract with a CIETAC clause may endure the cost and inconvenience of a jurisdictional debate. Until the dispute is resolve, the parties to a contract with a CIETAC clause would be wise to review their contracts and clarify, if necessary, the institution that they prefer to arbitrate their disputes and the rules of arbitration.

For parties in foreign-related contracts that have the option to choose arbitration offshore, they would be wise to select – by way of amendment or in an initial contract – an offshore forum such as the HKIAC, SIAC, or the ICC.

For more information on this matter, contact James Zimmerman at the Beijing office of Sheppard Mullin at 86-10-5706-7500 or jzimmerman@sheppardmullin.com.

 

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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