Supreme Court issues long-awaited clarification on CIETAC breakaway

By Michelle Tzhori and Vincent Zhang

 On 15 July 2015, the Supreme People’s Court of China issued a long-awaited notice to address the jurisdictional issues arising from the breakaway from CIETAC, China’s largest arbitration institution, by its former two sub-commissions in Shanghai and Shenzhen (the “Notice”). The Notice became effective from 17 July 2015.

CIETAC breakaway in 2012

China International Economic and Trade Arbitration Commission (“CIETAC”) was founded in 1956. It is a non-governmental organization and has been commonly used for arbitration in China for both international and domestic arbitrations. In 2012 CIETAC accepted 1060 international and domestic cases. CIETAC headquarter is in Beijing, with sub-commissions in Shanghai (“Shanghai Sub-commission”) and Shenzhen (“South China Sub-commission”).

In May 2012, the former Shanghai and South China Sub-Commissions announced their independence from CIETAC. This split followed a dispute over the CIETAC’s new arbitration rules adopted in 2012, which permitted the Sub-Commissions to accept and administer arbitrations only upon the authorization from CIETAC headquarters in Beijing. The new arbitration rules provided for a default jurisdiction to CIETAC Beijing of all cases with arbitration clauses that contain no specific nomination of a sub-commission. However, prior to the new arbitration rules, the parties could choose to refer the disputes to CIETAC Beijing or one of its sub-commissions unless a specific sub-commission had been agreed in their agreement. The new arbitration rules were deemed to significantly reduce the number of cases referred to the Sub-Commissions.

After the public announcement of breakaway from CIETAC, the former Shanghai and South China Sub-Commissions changed their names to remove CIETAC’s name and released their own arbitration rules and panels of arbitrators. The former CIETAC Shanghai Sub-commission is now renamed the Shanghai International Arbitration Centre (“SHIAC”, or Shanghai International Economic and Trade Arbitration Commission) and the former CIETAC South China sub-commission is now renamed the Shenzhen Court of International Arbitration (“SCIA”, or South China International Economic and Trade Arbitration Commission).

Following the breakaway, CIETAC announced the cancellation of authorization to the former two Sub-commissions to administer CIETAC cases and its sole jurisdiction over disputes arising from contracts providing for arbitration administered by its former Sub-Commissions. On 31 December 2014, CIETAC announced a re-establishment of its Sub-Commissions in both Shanghai and Shenzhen.

The CIETAC breakaway gave rise to considerable disputes over the validity of arbitration agreements which provides for CIETAC arbitration administrated by the former Sub-commissions, and the enforceability of the arbitral awards issued by the renamed SHIAC or SCIA. For example, in May 2013, the Suzhou Intermediate Court denied the enforcement of an arbitral award rendered by SHIAC, and the ruling was soon ordered by the higher court to be revoked and re-decided.

In response to such dispute the Supreme People’s Court issued a notice on 4 September 2013 to require local courts to consult the Supreme People’s Court level by level to seek internal approval before the final rulings. However, the uncertainty continued to exist and there was no clear guidance as to the validity of arbitration agreements specifying CIETAC Shanghai or Shenzhen arbitration. This uncertainty was removed from July 2015 through the Notice.

The Notice offers guidance on jurisdictional issues

In this Notice, the Supreme People’s Court confirmed that jurisdiction over disputes referred to arbitration administered by the “CIETAC Shanghai Sub-Commission” or the “CIETAC South China Sub-Commission” shall be determined in accordance with the following guidelines:

  1. SHIAC or SCIA shall have jurisdiction over cases where the arbitration agreements were entered into before the renaming of the former Sub-commissions (i.e. 8 April 2013 with regard to SHIAC and 22 October 2012 with regard to SCIA) and which specified “CIETAC Shanghai Sub-commission” or “CIETAC Shenzhen Sub-commission” as the arbitration commission.
  2. For arbitration agreements entered into after the renaming of the former Sub-commissions but before 17 July 2015 (the effective date of this Notice), and which specify “CIETAC Shanghai Sub-commission” or “CIETAC Shenzhen Sub-commission” as the arbitration commission, CIETAC shall have jurisdiction, but in case the dispute in question has already been referred to SHIAC or SCIA, and no objection was raised by the respondent before the arbitral award is issued, SHIAC or SCIA shall have jurisdiction.
  3. For arbitration agreements entered into on or after 17 July 2015 which specify “CIETAC Shanghai Sub-commission” or “CIETAC Shenzhen Sub-commission” as the arbitration commission, CIETAC shall have exclusive jurisdiction.

The Notice has clarified the uncertainties caused by the CIETAC split. The Notice is binding upon courts of all levels so is to ensure consistency on court decisions regarding the CIETAC arbitrations.

Our Comments

Arbitration is a desirable tool in alternative dispute resolution. Though the choice of foreign-seated arbitration may be wise in some cross-border transactions, arbitration in China is more commonly used by onshore foreign-invested enterprises in business transactions with domestic entities and arbitral awards rendered by Chinese arbitration commissions could be more efficiently enforced in China.

Under the Arbitration Law of China, the choice of a specific arbitration commission is a key precondition for the validity of the arbitration agreement (or arbitration clause). Due to this legal requirement, the CIETAC breakaway had resulted in confusion and uncertainty on the validity of the arbitration agreements. This Notice resolved the dispute between CIETAC and its former Sub-commissions, recognized the independent status of SHIAC and SCIA and provided clarity on the jurisdictional issues.

As clarified by this Notice, the arbitration clause must be drafted with caution, and must refer to the correct name of the desired arbitration commission, i.e. CIETAC (China International Economic and Trade Arbitration Commission), SHIAC (Shanghai International Arbitration Center) or SCIA (Shenzhen Court of International Arbitration). Otherwise, the arbitration clause may be deemed invalid.

For existing arbitration agreements, the parties should review and confirm the correct arbitration commission. There is generally no preference to choose CIETAC/SHIAC/SCIA as the competent institution by comparison of its arbitration rules and the costs of arbitration. However, it is worth noting that the Hong Kong Arbitration Ordinance provides that only awards made by certain recognized arbitral commissions in Mainland China will be enforceable in Hong Kong. To date, neither SHIAC nor SCIA appears to have been recognized by the Hong Kong Arbitration Ordinance for enforcement of its arbitral award in Hong Kong. Therefore, an award rendered by SHIAC nor SCIA would encounter difficulties when it is enforced in Hong Kong.