Arbitration in China Still in Flux – But Improving

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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.
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