China Arbitration: An End To Uncertainty

As we reported in earlier posts, international arbitration in China entered a period of uncertainty in 2012. See Will The Real CIETAC Arbitration Please Stand Up. many years, the 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 at the Shanghai CIETAC subcommision, 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 the CIETAC Shanghai-subcommission should be referred to Beijing CIETAC for resolution.

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

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 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 as though I have had the last laugh.

What are your thoughts?

The post China Arbitration: An End To Uncertainty appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.