Arbitration in China Still in Flux – But Improving


June 25, 2013

Arbitration is the favored approach to legal dispute resolution for foreign investors doing business in China. Until recently, the only arbitration tribunal available was CIETAC, the China International Economic and Trade Arbitration Commission. Without much fanfare, CIETAC adopted new rules just over a year ago. While the international legal community didn’t react too much (and they should have) the Shanghai and Shenzhen sub commissions revolted as a consequence and formed new organizations.

This wouldn’t be so revolutionary elsewhere, but in China, an arbitration tribunal must be established under municipal law, registered with the provincial justice bureau and if administering cases related to foreign interests, further established under the China Chamber of International Commerce. Otherwise, local courts don’t have to recognize their awards. And, why go through an arbitration process only to get an award that a court may or may not enforce?

The revolutions happened last August leaving another big question unanswered: how to interpret existing contract clauses that require CIETAC arbitration in one of the wayward cities. But, in the meantime, the new commissions, Shanghai International Economic and Trade Arbitration Commission (SHIAC) and Shenzhen Court of International Arbitration (SCIA) (also called South China International Economic and Trade Arbitration Commission (SCIETAC)) have issued rules, engaged panels of arbitrators and are working their way through the legal approvals. And CIETAC has opened new offices in Shanghai and Shenzhen. One issue is resolved: existing contract clauses using CIETAC in Shanghai and Shenzhen can be enforced. And new tribunals are coming on line.

So which is the best tribunal? All three, CIETAC, SCIA and SCIETAC, have adopted a rule that is good news for foreigners. The parties can now agree to use their own arbitration rules – as long as they are reasonable. Anyone who has experienced a CIETAC arbitration in the past would jump at the opportunity to use another tribunal’s set of rules. SCIA and SCIETAC didn’t like CIETAC’s modernization, so don’t look there.

Remember that a foreign investor is typically only going to choose CIETAC if it has to because it is a WFOE (Wholly Foreign-Owned Chinese Entity) and the other party is also a Chinese company. See my earlier post: Resolving Disputes in China. This new rule gives a foreign investor operating under a WFOE most of the same flexibility regarding arbitration proceedings as if it were a foreign company.

Adopting another tribunal’s rules, say the International Chamber of Commerce (ICC) or the Hong Kong International Arbitration Centre (HKIAC) rules, takes the dispute completely out of the restrictions of CIETAC concerning choice of arbitrators, venue, evidentiary hurdles, etc. Voila! An efficient, modern arbitration proceeding is now possible.

Granted, it may be difficult to convince a Chinese party to go that far. But even under the new CIETAC rules, the parties may agree to a venue outside of China as long as one party is foreign. So far CIETAC has only set up one arbitration center outside of China – in Hong Kong. The irony is rich, except Hong Kong has long been considered a friendlier place for foreigners and it has a well established legal and arbitration community of good reputation. If Hong Kong is agreeable as a venue, perhaps the Chinese company can be persuaded to accept some of the more modern HKIAC rules as well.

While reconsidering your standard arbitration clauses, remember that under Chinese law, an arbitration clause is not enforceable unless it defines the tribunal, rules and venue. That is why the absence of Shanghai and Shenzhen sub commissions of CIETAC was such a problem. CIETAC issued an interim rule stating parties in that situation should use their Beijing office, but a party seeking to avoid arbitration could use the situation to do so.

It remains to be seen how the commissions will interpret the new rules. What is considered reasonable? For example, if the parties can choose their own rules, does that extend to a rule about venue? Will the tribunals still insist the parties use their panels of arbitrators even if they are unfamiliar with other tribunals’ rules? And if a chosen venue or rule is invalidated, is the whole arbitration agreement unenforceable?

Some drafting tips include:

  • When designating an alternative tribunal’s rules, be clear that all the rules, including those on venue, choice of arbitrators and any others of concern apply;
  • State that the parties consider all the alternate rules to be reasonable. The commission has the final word, but it can’t hurt to state that the parties think so.
  • Include a severability clause that requires the arbitrator or commission to reform an unenforceable clause to an enforceable one which most closely reflects the intent of the parties.

Resolving Disputes in China – CIETAC Implodes

November 26, 2012

An annoying side effect of doing business anywhere is having a dispute. At some point, most businesses end up in court, arbitration, mediation and/or protracted settlement negotiations about some matter. One of the considerations about doing business in China, or any country, is whether there are efficient tribunals available to allow your matter to be resolved fairly.

China’s court system has yet to be considered competent and efficient by foreign investors.  By western standards, Chinese judges don’t like to judge. At the end of the day in court, the judge usually tells the parties to go work it out on their own instead of making a decision. And even many Chinese lawyers recognize that the majority of judges outside the more sophisticated large cities can be biased and incompetent.

So, foreign investors take their cue from the locals and try to avoid going to court if at all possible. When negotiations aren’t working, the recommended alternative is arbitration. The New York Convention, signed by 147 countries, allows arbitration awards to be enforced in any court of a participating country.  The theory is that parties can get their dispute resolved by a competent and unbiased arbitrator (or panel of arbitrators), and take it to the appropriate court to be enforced if necessary.

When the goal is to get a competent and unbiased arbitrator, the choice of arbitration tribunal is paramount. In China, the premier arbitration body is CIETAC (China International Economic and Trade Arbitration Commission). Most foreign investors would rather use anything but CIETAC for multiple reasons, including competency issues and anti-foreigner bias, but may get stuck there. If the foreign investor forms a company in China, which is typically required to do business there, and the dispute is with another Chinese company, Chinese law must apply. International and offshore arbitration forums won’t decide a case under Chinese law between two Chinese companies, the same as CIETAC won’t decide a case under New York law between two American companies.(i)

Having to use CIETAC is bad enough, but now CIETAC itself is fracturing. CIETAC is based in Beijing and has sub commissions and branch offices around the country. In August, CIETAC-Shanghai declared its independence from CIETAC-China and CIETAC-China responded by booting both the Shanghai and Shenzhen sub commissions. It would be like the American Arbitration Association decertifying its chapters in New York and San Francisco – with the major exception that we have many other options for arbitration in the US. And what is also discouraging is that Shanghai and Shenzhen revolted because CIETAC-China pushed out rule changes they didn’t like. The new rules provide the tribunal with more flexibility in how it handles cases and brings the rules more in line with international standards.

What does this all mean? If you are unlucky enough to have a dispute about a contract that states your disputes will be resolved by CIETAC-Shanghai or CIETAC-Shenzhen, you’ve chosen now non-existent forums. Instead of preparing your case under pre-agreed rules, your first order of business is to reach agreement with your antagonist about how to resolve your dispute. Will you use CIETAC-Beijing, the new CIETAC Shanghai Commission or new South-China Commission, or will one of you race the other to the People’s Court in your jurisdiction (hmm, wonder which side would consider that?).

Travelling to Beijing may be quite inconvenient for both parties, yet the new Commissions both exist in contravention to PRC law and are completely unknown quantities. Their status as arbitration tribunals might be revoked by the government or they might be reunited with CIETAC-China under new rules at any point in the process. None of these are good choices.

The CIETAC split occurred in early August. It’s now four months later, and nothing has happened except that the new tribunals are working on setting up shop. Will they be allowed to continue? If you were putting together a new deal in Shanghai, what dispute resolution process should you choose? If you choose nothing, you aren’t prohibited from using an arbitration tribunal if you want to, the problem will be getting an agreement to do so with your opponent at the time. What if the new tribunals get a reputation for being more foreigner friendly? Or less competent? Frankly, your choices stink. Your only option is to make your deals work. Guanxi anyone?

[i] For a short time, mainland China said its courts would recognize rulings issued by the Hong Kong International Arbitration Center, but that did not prove true. Hong Kong’s legal system has not been fully integrated with the rest of China.

Cindy Wolf is a Colorado lawyer with more than 25 years experience representing large and small domestic and multinational companies. Her expertise is in corporate law and commercial contracting, with an emphasis on technology licensing and the Internet. She can be reached at

This publication is provided for informational purposes only. It does not constitute legal advice. There is no implicit guarantee that this information is correct, complete, or up to date. This publication is not intended to and does not create an attorney-client relationship between you and the author.