United States: CIETAC Has Suspended Its Authorization To Shanghai And Shenzhen Sub-Commissions For Administering

On August 1, 2012, the China International Economic and Trade Arbitration Commission

("CIETAC") headquartered in Beijing, the leading arbitration institution in China, posted an announcement on its website ("Announcement"), declaring that CIETAC's authorization to two of its branches, i.e., the CIETAC Shanghai Sub-Commission and the CIETAC South China Sub-Commission (located in Shenzhen), for accepting and administering arbitration cases has been suspended since the same date.

Background of the Announcement

This Announcement came as a result of the recent rift between CIETAC headquarters and its branches in Shanghai and Shenzhen surrounding CIETAC's new arbitration rules which took effect in May 2012 ("CIETAC's New Rules"). Companies which have selected the CIETAC Shanghai Sub-Commission or the CIETAC South China Sub-Commission as the dispute resolution forum, will have to consider the risk and uncertainty brought about by the Announcement and will need to take appropriate action accordingly.

The rift within CIETAC appeared to originate from the changes brought about by CIETAC's New Rules, particularly the change in the jurisdiction of the CIETAC Shanghai Sub- Commission and the CIETAC South China Sub-Commission over cases. CIETAC's old arbitration rules described CIETAC's sub-commissions as an integral part of CIETAC, with the secretariats of the sub-commissions having the power to administer cases. Under the old rules, the parties to a dispute had the right to decide which body will administer the case, CIETAC or one of its sub-commissions. In contrast, according to CIETAC's New Rules, the sub-commissions are branches of CIETAC, which "accept arbitration applications and administer arbitration cases with CIETAC's authorization" and the case should be administered by the Secretariat of CIETAC unless the parties have clearly agreed to the administration by a sub-commission. In the event of any dispute over which body should administer, a decision would be made by CIETAC. These changes meant that an arbitration clause simply providing for "CIETAC arbitration" would result in an arbitration administered by CIETAC's headquarter in Beijing.

According to the Announcement, the CIETAC Shanghai Sub-Commission and the CIETAC South China Sub-Commission refused to apply CIETAC's New Rules, and refused to remain under the leadership of CIETAC in respect of case administration. Hence, CIETAC declared in the Announcement that from August 1, 2012, where parties have agreed to arbitrate their disputes by the CIETAC Shanghai Sub Commission or the CIETAC South China Sub- Commission, the parties must submit their applications for arbitration to CIETAC headquarters and the CIETAC Secretariat shall accept such arbitration applications and administer such cases.

As a matter of fact, the CIETAC Shanghai Sub-Commission went further than what was stated in the Announcement – it has declared itself an independent arbitration institution, promulgated its own arbitration rules and set up its own panel of arbitrators. In response, CIETAC has declared that CIETAC Shanghai Sub-Commission's above conduct is null and void.

Potential Risks and Recommendations

The controversy between CIETAC and its sub-commissions has caused confusion and disorder in the arbitration community. Although the Announcement has not put an end to the controversy, it has clearly shown CIETAC's position and provided instructions to companies selecting arbitration administered by the CIETAC Shanghai Sub-Commission and the CIETAC South China Sub-Commission.

Companies who have agreed to arbitration administered by the CIETAC Shanghai Sub-Commission and the CIETAC South China Sub-Commission should be aware of the risk that the awards issued by the sub-commissions after the issuance of the Announcement may be challenged and potentially denied recognition and enforcement on the ground that the sub-commissions have no jurisdiction over the cases. To eliminate the risk, it may be advisable to submit disputes to CIETAC as instructed by the Announcement.

However, it is not completely risk-free to have agreed to arbitration administered by CIETAC's sub-commission but submit the disputes to CIETAC headquarters. The losing party may later argue before a court that CIETAC has no jurisdiction or that the award issued by CIETAC is invalid because the agreement between the parties provided for arbitration by CIETAC's sub-commission, not CIETAC. To avoid this, it is worthwhile to make efforts to change any existing arbitration clauses to provide for arbitration by CIETAC before any actual dispute arises.

Since there is no dispute over CIETAC Beijing's own jurisdiction to administer cases, and while the controversy between CIETAC and its sub-commissions continues, for any new contract, it is best to provide for arbitration by CIETAC, rather than by one of its sub-commissions. However, we also recommend that arbitration outside of mainland China be selected when it is permitted under PRC law.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.