Chao Yang and Jingjing Chen of Hui Zhong report on the Supreme Court’s Reply that broke the deadlock on jurisdictional conflicts after the split of CIETAC

In mainland China, arbitration is the preferred means of dispute resolution for cross-border transactions. Over the last few decades, the China International Economic and Trade Arbitration Commission (CIETAC) and its sub-commissions in Shenzhen (south China), Shanghai, Chongqing and Tianjin have resolved thousands of commercial disputes in various industries, earning a reputation for being fair forums and thereby appealing to business people.

However, the unexpected split of CIETAC in 2012 created a great deal of uncertainty with regard to jurisdictional allocation and determination. In August 2012, the former Shanghai and South China (Shenzhen) sub-commissions broke away from CIETAC. These former sub-commissions subsequently changed their names to the Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Centre (SHIAC) on April 8 2013 and the South China International Economic and Trade Arbitration Commission/Shenzhen Court of International Arbitration (SCIA) on October 22 2012. Both SHIAC and SCIA claimed that they were independent from CIETAC, but that they could exercise jurisdiction over disputes arising from arbitration clauses where the parties had agreed to arbitrate before CIETAC and its sub-commissions in Shanghai and Shenzhen. CIETAC fired back and denounced its authorisation to SHIAC and SCIA to administer CIETAC cases.

This split and uncertainty caused serious concerns amongst users of CIETAC arbitration. It adversely affected the contracting parties' predication and assessment on how to select the proper forum of arbitration under the CIETAC regime, and called into question the validity of arbitration agreements referring to the two former sub-commissions as well as the enforceability of the arbitral awards. Even worse, a number of lower courts adopted inconsistent approaches towards these issues, and dozens of conflicting judicial decisions on these issues created further uncertainty and confusion.

For over three years, CIETAC could not reach an amicable settlement with SHIAC and SCIA to offer the outside world a certain, practical and transparent solution package to calm the chaos on jurisdiction issues. The deadlock was eventually broken by the Supreme People's Court (SPC) of the PRC (People's Republic of China) by issuing a binding judicial interpretation.

The SPC Reply

On July 15 2015, the SPC issued the Notice of Reply to Questions raised by the Shanghai Municipal Higher People's Court et al relating to the Judicial Review of Arbitral Awards involving the China International Economic and Trade Arbitration Commission and Its Former Sub-commissions (SPC Reply). The interpretation responded to requests from the Shanghai High People's Court, the Jiangsu High People's Court and the Guangdong High People's Court. The SPC Reply becomes effective on July 17 2015 and all lower people's courts should abide by it in their trial activities. In essence, it has four key points confirming the judicial position that the lower courts must take regarding the validity of arbitration agreements and potential challenges to arbitral awards in setting aside or enforcement proceedings.

The SPC Reply contains rich set of guidelines on how to deal with the after-split issues.

First, the Reply clarifies the principles of jurisdictional allocation among CIETAC, SHIAC and SCIA as follows.

If an arbitration agreement referring to the CIETAC Shanghai Sub-Commission or the South China Sub-Commission was concluded before the former CIETAC sub-commissions renamed themselves as a result of the CIETAC split, then the newly-formed SHIAC or SCIA will have jurisdiction over those disputes. The relevant dates of name change for SHIAC and SCIA are April 8 2013 and October 22 2012 respectively. Accordingly, if a party subsequently applies to court to invalidate the arbitration agreement, set aside the arbitral award or resist the enforcement of the arbitral award on the ground that SHIAC or SCIA has no jurisdiction, such application will not be supported.

If the parties have entered into an arbitration agreement referring to the CIETAC Shanghai Sub-Commission or the South China Sub-Commission on the date of or after the name change, but before July 17 2015, CIETAC will have jurisdiction over any disputes. However, if the claimant submits the disputes to SHIAC or SCIA, and the respondent does not raise any objection, the courts should not support a party's later application to set aside or resist enforcement of an arbitral award on the ground that SCIA or SHIAC had no jurisdiction.

If the parties have entered into an arbitration agreement referring to the CIETAC Shanghai Sub-Commission or the South China Sub-Commission on or after July 17 2015, CIETAC will have jurisdiction over any disputes.

Second, the SPC Reply sets out exceptional rules which deviate from article 13.2 of the SPC Interpretation on Relevant Issues in Application of the PRC Arbitration Law (2006 Interpretation).

Under the 2006 Interpretation, if a party applies to a court to determine the validity of an arbitration agreement or to set aside an arbitral award after an arbitration institution makes a decision on the arbitration agreement, the court should dismiss the application.

Under the SPC Reply, even after CIETAC, SHIAC or SCIA have confirmed the validity of the arbitration agreement and made a decision on jurisdiction in relation to the jurisdiction issue caused by CIETAC's split, a respondent may still apply to the court to determine the validity of the arbitration agreement, provided it does so before the first arbitral hearing. In such cases, the court should accept the respondent's application and make a civil ruling. It seems that this rule is purported to restrain CIETAC, SHIAC and SCIA from showing a bias in their own favour in jurisdictional decision-making.

Third, the SPC Reply shows a firm determination that the previously decided cases should maintain the status quo by stipulating that the people's court should not uphold the application for setting aside or refuse enforcement of an arbitral award on the ground that CIETAC, SHIAC or SCIA should not have taken the case in relation to CIETAC's split. The rational behind this rule is to avoid waste of arbitration and litigation resources merely attributed to the split of CIETAC.

Fourth, the SPC Reply delineates principles where CIETAC, SHIAC and SCIA have accepted the same dispute under the same arbitration agreement before the SPC Reply came into effect. If such a case should occur, any party concerned may apply to the people's court to confirm the validity of the arbitration agreement before the first hearing of the arbitral tribunal. The people's court will hear the case and make a ruling accordingly; otherwise, the arbitration body that first accepted the case will have jurisdiction over the case.

Fifth, the SPC Reply explains that the fundamental aim of the Reply is to take into account the historical relationship between CIETAC and its former sub-commissions, whilst also upholding parties' intentions and promoting China as an arbitration-friendly jurisdiction. The SPC Reply not only ends uncertainty on jurisdiction issues arising from the CIETAC split, but also clearly signals that SHIAC and SCIA are arbitration bodies independent from and equal to CIETAC.

Significance of the SPC Reply

The SPC Reply has provided long-awaited and much needed clarity on issues arising from the split of CIETAC. In one way or another, it provides the business community with a higher degree of certainty, predictability and transparency, compared to the SPC's previous notice on CIETAC's split issue. The SPC Reply aims at resolving problems practically and pragmatically, setting the parties and the relevant arbitration bodies free from troublesome clashes, and it is bound to receive a warm welcome.

The SPC Reply also seeks to preserve the validity of arbitration agreements and enforceability of arbitral awards affected by the split. Arbitration proceedings may already have cost parties significant time and expense, and a re-trial or remission of the cases so affected would be highly undesirable or economically disastrous if the outcome were not different. The SPC Reply also prevents parties from making use of the split of CIETAC to set aside or resist the enforcement of an arbitral award. No doubt the SPC Reply should also be applauded for its efficient orientation.

The SPC Reply gives a final say to jurisdiction disputes among CIETAC, SHIAC and SCIA, with a clear-cut decision on the date of the conclusion of the arbitration agreement. It has duly regarded the parties' autonomy and waiver, but it also emphasises not rescinding arbitral awards that had already been registered before the issuance of the Reply. The confirmation of jurisdiction in many already-concluded cases, along with the binding force of arbitral awards issued over the past three years, will greatly simplify the situation and offer CIETAC, SHIAC and SCIA peace of mind when pursuing their future plans, without being dragged behind by pointless internal quarrels.

However, the SPC Reply cannot deliver answers to all questions. For instance, it does not expressly address the legitimacy of SHIAC and SCIA as independent arbitration institutions (but one may infer from the SPC Reply that SHIAC and SCIA are lawful). The SPC Reply does not specify which arbitration body should be the proper forum if the arbitration clauses designate CIETAC Shanghai Sub-Commission (SHIAC) or CIETAC South China Sub-Commission (SCIA). Since CIETAC re-built its sub-commissions in Shanghai and Shenzhen on December 31 2014 and SHIAC and SCIA are no longer CIETAC's sub-commissions, an expression in the arbitration clause such as the one mentioned above would lead to difficulty in judging the parties' genuine intention of forum selection. Further, it is still uncertain whether the principles of delineating the jurisdiction of CIETAC, SHIAC and SCIA in the SPC Reply will be equally acceptable to judges in other jurisdictions if the relevant arbitral awards are sought for recognition and enforcement outside mainland China.

Recommended arbitration clauses

CIETAC, SHIAC and SCIA have published standard arbitration clauses. To avoid potential disputes over jurisdiction post CIETAC's split, it is wise to include arbitration clauses precisely as recommended by the relevant arbitration bodies.

CIETAC's first model arbitration clause:

Any dispute arising from or in connection with this contract shall be submitted to CIETAC for arbitration which should be conducted in accordance with CIETAC's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties.

CIETAC's second model arbitration clause:

Any dispute arising from or in connection with this contract shall be submitted to CIETAC___________Sub-Commission (arbitration centre) for arbitration which shall be conducted in accordance with CIETAC's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties.

SHIAC model arbitration clause:

Any dispute arising from or in connection with this contract shall be submitted to Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Center for Arbitration.

SHIAC model arbitration clause for Free Trade Zone:

Any dispute arising from or in connection with this contract shall be submitted to Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Center for arbitration. The arbitration shall be held in the China (Shanghai) Pilot Free Trade Zone Court of Arbitration.

Model arbitration clause for aviation arbitration:

Any dispute arising from or in connection with this contract shall be submitted to Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Center for arbitration. The arbitration shall be held in the Shanghai International Aviation Court of Arbitration.

SCIA's first model arbitration clause:

Any dispute arising from or in connection with this contract shall be submitted to South China International Economic and Trade Arbitration Commission (SCIA) for arbitration.

SCIA's second model arbitration clause:

Any dispute arising from or in connection with this contract shall be submitted to Shenzhen Court of International Arbitration (SCIA) for arbitration.

 

  First published by our sister publication IFLR magazine. Take your free trial today.

 

Chao Yang
Hui Zhong Law Firm
Beijing

About the author

Chao Yang is a partner at Beijing Hui Zhong Law Firm, specialising in commercial litigation and arbitration. She has over 10 years' experience in advising both domestic and foreign clients on a variety of legal issues in connection with dispute resolution. She has been involved in international arbitrations before the China International Economic and Trade Arbitration Commission (CIETAC), the Hong Kong International Arbitration Commission (HKIAC), litigations before people's courts in Beijing and other cities in China, and labour arbitration before local Chinese labour arbitration commissions.

Before joining the Junhe Law Offices in 2011, Yang was working with Haiwen & Partners for several years.

 

Jingjing Chen
Hui Zhong Law Firm
Shanghai

About the author

Jingjing Chen is a partner at Beijing Hui Zhong Law Firm, specialising in commercial arbitration and litigation. She has represented both Chinese and foreign clients in over 100 commercial arbitration and litigation cases in foreign investment, construction, international sales of goods and product liability before Chinese and international arbitral tribunals, as well as PRC courts at various levels up to the Supreme People's Court.

Chen also advises clients on their labour disputes. She has represented both Chinese and foreign companies in dozens of labour cases before domestic labour dispute arbitration commissions and PRC courts.

Chen is also a partner at Shanghai Yun Zheng Law Firm. Before joining Junhe Law Offices in 2008, she was working with Haiwen & Partners for several years.