Legal update on dispute resolution in China

CIETAC announces suspension of Shanghai and Shenzhen Sub-Commissions

1. Background

The China International Economic and Trade Arbitration Commission ("CIETAC") was founded in 1956 in Beijing as the first arbitration institution in the People’s Republic of China. CIETAC has its headquarters in Beijing and sub-commissions in various cities such as Shanghai and Shenzhen. The majority of the arbitration disputes in 2011 were submitted to the Shanghai and Shenzhen Sub-Commissions.

With effect from 1 May 2012, CIETAC issued amended arbitration rules ("Rules 2012"). The release of the Rules 2012 resulted in a dispute between CIETAC in Beijing and its Shanghai and Shenzhen Sub-Commissions. The Rules 2012 require that all cases submitted to CIETAC should be administered in Beijing unless the parties have expressly submitted them to a sub-commission in the arbitration agreement. This requirement differs from the previous practice, where, for example, the Shanghai Sub-Commission would administer a dispute if an arbitration clause refers to CIETAC and states that the hearing should take place in Shanghai. The Rules 2012, however, provides that such an arbitration clause would require the case to be administered by CIETAC in Beijing with the hearing to be held in Shanghai. The Shanghai Sub-Commission would not be involved in such case.

As a result of the release of the Rules 2012 the Shanghai and Shenzhen Sub-Commissions have been objecting to the Rules 2012 with the consequence that CIETAC in Beijing released an announcement on 1 August 2012 ("Announcement"). According to the Announcement, the Shanghai and Shenzhen Sub-Commissions refused to apply the Rules 2012 and refused to remain under the leadership of CIETAC with regard to the case administration. Therefore, CIETAC has suspended the authorization of the Shanghai and Shenzhen Sub-Commissions to administer any CIETAC cases. The parties must submit their applications for arbitration to CIETAC in Beijing and the CIETAC Secretariat shall accept such applications and administer the cases.

2. Impact on investors in China

The dispute between CIETAC in Beijing and the Shanghai and Shenzhen Sub-Commissions has caused confusion. There are uncertainties for the parties to an arbitration agreement with CIETAC as the arbitration institution:

Parties who have agreed to arbitration administered by the Shanghai or Shenzhen Sub-Commission should bear in mind the risk that the arbitration award issued by such Sub-Commission may be challenged and denied recognition and enforcement based on the ground that the Sub-Commission has no jurisdiction over the cases as of the Announcement of CIETAC in Beijing.

On the other hand there is also the risk to submit a dispute to CIETAC in Beijing despite the agreement that the case should be administered by the Shanghai or Shenzhen Sub-Commission. The losing party may challenge the award in court claiming that CIETAC in Beijing has no jurisdiction or that the award is invalid because the parties agreed on arbitration by a Sub-Commission and not CIETAC in Beijing.

It is not clear yet when and how the dispute between CIETAC in Beijing and its Sub-Commissions will be resolved. However, it is most likely that the higher courts will be engaged in making the ultimate decision. Until the uncertainties are eventually resolved, we recommend as follows:

• Parties negotiating arbitration clauses and wishing cases to be administered by CIETAC shall expressly state CIETAC Beijing as the administration institution. Parties can still choose Shanghai or Shenzhen as the seat of arbitration for the hearings.
• Parties with existing arbitration clauses specifically stating that the Shanghai or Shenzhen Sub-Commission shall administer any dispute may re-negotiate and agree for cases to be administered by CIETAC Beijing with hearings to be held in Shanghai or Shenzhen.
• Parties with arbitration clauses stipulating the case administration by the Shanghai or Shenzhen Sub-Commission cannot alter the arbitration agreement or parties with pending cases at the Shanghai or Shenzhen Sub-Commission should consult litigation specialists before commencing or continuing arbitration proceedings.

Contact Person

Raymond Kok, Mag. rer. publ., Attorney at Law (Germany) / Partner
Pyn-An Sun, LL.M. (LSE), Attorney at Law (Germany)