China Arbitration: An End to Uncertainty

Clarity Comes to CIETAC at Last

As we reported in earlier posts, international arbitration in China entered a period of uncertainty in 2012. See Will The Real CIETAC Please Stand Up. For many years, Beijing based CIETAC controlled international arbitration in China. To expand its scope, Beijing CIETAC established sub-commissions in both Shanghai and Shenzhen.

Tiring of the oppression of their Beijing masters, the Shanghai and Shenzhen Sub-Commissions of CIETAC in 2012 broke away from control by Beijing CIETAC. Then to cement their new-found independence, each sub-commission adopted a new name. The Shanghai sub-commission changed its name to the Shanghai International Arbitration Center (SHIAC). This newly named arbitration center adopted new rules and engaged a new panel of arbitrators. However, the formal legal entity was never changed.

The question then immediately arose: For a contract that specified arbitration before Shanghai CIETAC, did the newly renamed SHIAC have jurisdiction or not? Beijing struck the first blow by issuing a notice on August 1, 2012 stating that the former sub-commissions had no jurisdiction and that all contracts referring to CIETAC-Shanghai should be referred to Beijing CIETAC for resolution.

The situation was made even more unclear by CIETAC’s December 31, 2014 notice announcing it had formed new sub-commissions in both Shanghai and Shenzhen. Under this notice, all contracts referring to CIETAC-Shanghai should be heard before the newly formed Beijing CIETAC. As a result of this decision, Shanghai now has two competing international arbitration centers: the SHIAC and Beijing CIETAC-Shanghai-subcommission.

A recent set of decisions by the Shanghai Number 2 Intermediate Court have finally brought some semblance of order to this situation. In a decision announced on December 31, 2014, the court concluded that if a contract provides for arbitration before the CIETAC Shanghai-subcommission, SHIAC has exclusive jurisdiction in the matter and Beijing CIETAC has no jurisdiction. That is, the court held that the August, 2102 notice from Beijing CIETAC has no legal force and must be ignored. In a series of 12 decisions issued on January 8-9, 2015, the same court reached the same conclusion. This matter is thus settled for Shanghai.

The basis for the Shanghai Intermediate Court’s decision is very simple. The Court determined that the CIETAC Shanghai subcommission was formed in 1988. On April 17, 2013, that legal entity changed its name to Shanghai International Arbitration Center (SHIAC). Other than the change of name, the entity made no other change in its legal status. For this reason, an arbitration clause that refers to the CIETAC Shanghai subcommission is in fact referring to SHIAC. That is, at least during the period up to December 31, 2014, CIETAC Shanghai subcommission and SHIAC refer to exactly the same entity. SHIAC therefore has exclusive jurisdiction for arbitration where this designation has been used.

Though Chinese court decisions have no precedential value the logic of this series of Shanghai Court decisions is so powerful that our China lawyers are viewing this matter as having been settled. For the future though, care in drafting an arbitration clause in your China contract is required. There are now two competing international arbitration commissions operating in Shanghai: SHIAC and the CIETAC Shanghai subcommission. For newly formed contracts, you should take care to designate the exact arbitration entity that you wish to use. Like good lawyers everywhere, Chinese lawyers are masters at delay. It is therefore essential that your China contract be absolutely clear on threshold decisions like dispute resolution, governing language and governing law. For more on how to choose these, check out China Contracts That Work and Three Rules for China Contracts.

Above all else though, foreign parties should carefully consider whether it even makes sense for them to use arbitration in China at all. In our experience, CIETAC arbitrators are excellent and the decisions are well crafted. See China CIETAC Arbitration: Different But Fair. However, arbitration is usually slow and expensive and arbitration panels are limited in their power to coerce through attachment of assets, fines and injunctive relief. This recent period of arbitration uncertainty and chaos should cause all of us to think carefully on this issue. Which method is truly better: litigation in a Chinese court, international arbitration in China or arbitration in a neutral foreign country? Over the years I have been criticized (mostly by lawyers not based in China and not fluent in Chinese) for preferring litigation in China. But after this mess, I feel like I just had the last laugh.

What are your thoughts?

3 responses to “China Arbitration: An End to Uncertainty”

  1. The decision by the Shanghai Intermediate Court has been approved by the Supreme People’s Court per a September, 2013 notice of the Supreme People’s Court, which requires cases of this sort to be submitted to it. Also, the Shenzhen Intermediate Court issued a similar judgment regarding an old CIETAC/South China clause. If you review the arbitrator list for the Shenzhen International Court of Arbitration and the Shanghai International Arbitration Center you will see many of the same outstanding arbitrators are on both the CIETAC list and the Shanghai and Shenzhen lists, including many foreign/HK arbitrators. Peter Corne, for example, is on the Shanghai list, and I myself (along with many others) am on the Shenzhen list.

  2. My thoughts on the matter, having lived in China for ten years, are that arbitration is a blind alley. If your situation really comes to an impasse, quickly employ the most influential, powerful law firm you can in the place where your conflict is actually located. Money talks, big time, here in China. And most disputes involve locations outside of the three big cities, Beijing, Shanghai, and Shenzhen. Many times international businesses are dumbfounded to discover, that the company they believed to be in Shanghai, for example, is actually located in a suburb of Shanghai, in a totally different jurisdiction.

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