19 June, 2013
On May 7, 2013, the Intermediate People’s Court of Suzhou in Jiangsu province (hereinafter the “Suzhou Intermediate Court”) made a ruling of non-enforcement of the arbitral award (The Intermediate People’s Court of Suzhou, Jiangsu made the “Civil Order” Suzhongshangzhongshenzi No. 0004 (2013) on May 7, 2013 (hereinafter the “Civil Order”) rendered by the Shanghai Sub-Commission of China International Economic and Trade Arbitration Commission (announcing its separation from the China International Economic and Trade Arbitration Commission (hereinafter the “CIETAC”) in 2011 and establishing itself as an independent arbitration institution named hereinafter the “SHIAC”). Prior to the Suzhou Intermediate Court’s ruling, the Intermediate People’s Court of Shenzhen in Guangdong province (hereinafter the “Shenzhen Court”) made a ruling on November 20 2012 with regard to the dispute over the jurisdiction of South China Sub-Commission of CIETAC (announcing its separation from CIETAC in 2011 as well and establishing itself as an independent arbitration institution named hereinafter the “SCIA”), confirming the validity of the parties’ arbitration agreement submitting disputes to SCIA and recognizing SCIA’s jurisdiction over the case.
The fact that local Chinese courts have made opposite rulings on the same issue after the independence of the former branches from CIETAC raises the issue of uncertainty of arbitration jurisdiction and the validity of relevant arbitration clauses. In particular, one issue is whether the SHIAC or SCIA still has jurisdiction after their separation from CIETAC over the cases where the parties have agreed on the CIETAC Sub-Commissions’ jurisdiction before their announcements of separation. In practice, there are more and more cases where the parties apply to local court for cancellation or non-enforcement of an arbitral award on the basis of the afore-mentioned reasons. Therefore, it is worthwhile to further analyze and research this issue so that the parties can take necessary and timely measures to control risk and prevent a crisis before it emerges.
In the case decided by the Suzhou Intermediate Court (The Applicant of the case: Suzhou Canadian Solar Inc. (hereinafter referred to “Suzhou CSI”), the Respondent of the case: LDK Solar Co., Ltd (hereinafter referred to “LDK Solar”), Suzhou CSI and LDK Solar signed the contract of supplying polycrystalline silicon chips in 2008, in which they “agreed to submit the case to CIETAC (place of arbitration: Shanghai, China) to arbitrate the case under the then-valid arbitration rules of that arbitration commission at the time of case filing.” In July 2010, the former Shanghai Sub-Commission of CIETAC (i.e. the SHIAC after the independence) accepted the filing of the contractual dispute between the two parties according to CIETAC’s 2005 Arbitration Rules, and made the award of CIETAC Huzi No.452 (2012) (hereinafter the “SHIAC Award”) on December 7, 2012. Meanwhile, the SHIAC announced its separation from CIETAC in April 2011, acquired the Registration Certificate of Arbitration Commission from the Shanghai Justice Bureau in December 2011, and published its Arbitration Rules and Panel of Arbitrators. Since Suzhou CSI refused to enforce the SHIAC Award, LDK Solar applied to the Suzhou Intermediate Court for compulsory enforcement of the SHIAC Award in February 2013. Suzhou CSI then made the defense of SHIAC’s lack of arbitration jurisdiction against Suzhou CSI’s application for compulsory enforcement.
In the Civil Order, the Suzhou Intermediate Court held that “an arbitration institution’s jurisdiction stems from the consensus of the parties.” In the present case, CIETAC as selected by the two parties as the arbitration institution to solve their disputes. SHIAC was an integral part of CIETAC before it announced its separation from CIETAC and thus had the jurisdiction over the case. However, SHIAC registered as an independent arbitration institution at the end of 2011, and was no longer a part of CIETAC. Thus SHIAC is not the arbitration institution originally chosen by the two parties any more, and has no power to carry out its jurisdiction over the case after its separation from CIETAC unless the parties confirmed to choose SHIAC to solve their disputes. The Suzhou Intermediate Court held that SHIAC has contravened the true will of the parties by failing to explain to the parties about the circumstance of its change of registration as an independent arbitration institution and to inform the parties of their right to confirm or re-select an arbitration institution. Therefore the Suzhou Intermediate Court ruled that SHIAC had no right to continue to hear and render an award over this case after its separation from CIETAC, and the application for compulsory enforcement of the SHIAC Award was thus rejected.
In this case, the Suzhou Intermediate Court did not comment or judge the dispute over the validity of SHIAC and SCIA’s separation from CIETAC. However, it recognized the principle of party autonomy as the basis for the validity of the arbitration agreement. Although we cannot completely rule out the suspicion of local protectionism in the decision of non-enforcement of SHIAC Award by the local court, the Suzhou Intermediate Court’s confirmation that “an arbitration institution’s jurisdiction stems from the consensus of the parties” hits the mark of the modern concept of arbitration and conforms to the basic principles of arbitration. The principle of party authority is the cornerstone of modern arbitration, and every and all issues in arbitration may be decided by the consensus of the parties, including selecting the method of dispute resolution (arbitration or litigation), the type of arbitration (institutional arbitration or ad hoc arbitration), the arbitration institution, the arbitration rules, the arbitration language, the place of arbitration, the appointment of arbitrators, the governing law etc. One of the critical reasons explaining why arbitration is widely used internationally and domestically is that the true, willing and free choices of the parties are fully respected in arbitration. At the time when the SHIAC accepted this case, the SHIAC was still a part of CIETAC and thus had the power to accept this arbitration case. However, during the arbitration proceeding, SHIAC announced its independence and separation from CIETAC. As a result, on the one hand, the parties are entitled to be informed of this change of the arbitration institution and to be offered chances to confirm or re-select its arbitration institution; and on the other hand, SHIAC is obliged to inform the parties of this change in a timely manner and inquire the parties whether they want to choose SHIAC for arbitration. Otherwise, it is in violation of the principle of party autonomy for SHIAC to continue to hear and render an award on this case without the parties’ confirmation. Therefore, the Suzhou Intermediate Court justified itself by ruling that SHIAC had no power to continue to hear the case and render an award.
However, before Suzhou Intermediate Court rendered the Civil Order, the Shenzhen Court, on November 20 2012, made a conflicting decision on a similar arbitration clause providing for SCIA (i.e. the former South China Sub-Commission of CIETAC). The Shenzhen Court held that SCIA is an independent arbitration institution, and pursuant to the arbitration agreement between the parties in 2006 submitting the dispute to the former South China Sub-Commission of CIETAC, SCIA has the power to accept the arbitration case and to render an award after its independence in September 2012. The Shenzhen Court held that SCIA had jurisdiction over the case.
The Suzhou Intermediate Court and the Shenzhen Court made two contrary decisions on the same type of arbitration clause and under the same circumstance of case filing, which will inevitably cause uncertainty to the validity and the enforcement of this type of arbitration clause. The published announcements by the local government and local offices of justice administration and other authorities in Shanghai and Shenzhen indicated that the local courts support that SHIAC and SCIA, as independent arbitration institutions, have jurisdiction over the arbitration cases submitted by the parties to Shanghai Sub-Commission and South China Sub-Commission of CIETAC before their separation from CIETAC. However, the courts in the provinces other than Shanghai or Guangdong may have different opinions and attitudes towards these types of cases and the jurisdiction issue of SHIAC and SCIA after their announcement of independence. As a result, it is likely that the courts in other provinces may render civil orders different from those of the courts in Shanghai and Shenzhen. Pursuant to the relevant provisions of the judicial interpretations, the intermediate people’s courts located in the province of the domicile of the party against whom the enforcement of an arbitral is sought or in the province where the assets against which the enforcement is sought, have jurisdiction over the cases where the parties apply for the enforcement of an arbitral award (ee Article 29, the Interpretation of the Supreme People's Court on Some Issues concerning the Application of the Arbitration Law of the People's Republic of China). If the domicile of the party against whom the enforcement is sought or the assets against which the enforcement is sought are located in the provinces other than Shanghai or Guangdong, it is still likely that the court in these provinces may make the same ruling as that of the Suzhou Intermediate Court, holding that the SHIAC or SCIA has no jurisdiction over these types of arbitration cases and rejecting the enforcement of the arbitral award thereon by the reasons of local protectionism or the defects in the arbitration procedure etc.
Based on the aforesaid analysis, we suggest that the parties take various measures to control the risk with regard to different types of the contract, the arbitration clauses and the nature of disputes so that the jurisdiction dispute between CIETAC and its separated branches will not negatively affect the settlement of parties’ dispute and the enforcement of arbitral award. Our specificrecommendations are as follows:
New Arbitration Agreement:
On the one hand, SHIAC and SCIA have announced their separation from CIETAC, published Arbitration Rules and Panel of Arbitrators of their own. On the other hand, CIETAC has made announcements on several occasions withdrawing its authorization to SHIAC and SCIA to arbitrate and has re-established its Shanghai Sub-Commission and South China Sub-Commission respectively in Shanghai and Shenzhen. As a result, there are currently two arbitration institutions in Shanghai both named CIETAC Shanghai Sub-Commission, and the same situation in Shenzhen, i.e. there are two arbitration institutions in Shenzhen with the name of CIETAC South China Sub-Commission (Although SHIAC has changed its name into “Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Center” and CIETAC Shanghai has become its former name, SHIAC emphasizes that it will continue to accept the arbitration cases where the parties agreed to submit to CIETAC Shanghai; Similarly, although SCIA has changed its name into “South-China International Economic and Trade Arbitration Commission/Shenzhen Court of International Arbitration” and CIETAC South-China has become its former name, SHIAC maintains that it will continue to accept the arbitration cases where the parties agreed to submit to CIETAC South-China or CIETAC Shenzhen as well). Under this circumstance, if the parties continue to use the wording of CIETAC Shanghai Sub-Commission or CIETAC South China Sub-Commission in their arbitration clauses, it will result in confusion and uncertainty in the acceptance of case filing and in the future enforcement of arbitral awards, adding further risks of setting-aside or non-enforcement of the arbitral awards, similar with the Civil Order made by the Suzhou Intermediate Court.
Therefore, as to new contracts, for the purpose to avoid risks caused by the factors of uncertainty, we recommend as follows:
- Avoid using the wording of “CIETAC Sub-Commission” in drafting the arbitration clause, such as “submit to CIETAC Shanghai Sub-Commission for arbitration” or “submit to CIETAC South China Sub-Commission for arbitration” lest emerge the aforesaid confusion and risk;
- Where the parties are willing to submit to CIETAC for arbitration, then clearly specify to submit to CIETAC Beijing headquarters for arbitration. Where the parties wish to submit to the independent SHIAC or SCIA for arbitration, the new organization’s name used after the independence should be specified in the arbitration agreement in order to distinguish it from CIETAC and CIETAC Sub-Commissions.
- Consider choosing other arbitration institutions, such as Hong Kong International Arbitration Center, ICC Court of Arbitration, American Arbitration Association or Australian Centre for International Commercial Arbitration for arbitration, on the basis of the circumstances of the specific case and of the negotiation between the parties.
Where an Existing Arbitration Agreement Specifies CIETAC or one of its Sub-Commissions
There are two scenarios under this circumstance: (a) the arbitration agreements providing for arbitration at CIETAC Beijing Headquarters, CIETAC Tianjin Sub-Commission or CIETAC Southwest/Chongqing Sub-Commission; (b) the arbitration agreements providing for arbitration at CIETAC Shanghai Sub-Commission or CIETAC South China Sub-Commission, or arbitration at CIETAC Shanghai or CIETAC Shenzhen.
The arbitration agreement under the first scenario will not create disputes and can continue to be used, because there is no jurisdiction dispute or independence issue among CIETAC Beijing Headquarters, CIETAC Tianjin Sub-Commission or CIETAC Southwest/Chongqing Sub-Commission. Thus, there is no need for the parties to worry about the negative effect caused by jurisdiction fight.
Under the second scenario, where the arbitration agreement provides that the disputes should be referred to CIETAC ShanghaiSub-Commission or CIETAC South China Sub-Commission for arbitration, our recommendations are as follows:
- Modify and clarify the relevant arbitration clause as soon as possible before the actual dispute occurs. Do not delay the modification of the arbitration agreement when the dispute occurs, because usually it is impossible for the parties to reach any agreement once there is dispute, not mention the modification of the arbitration agreement;
- Certain items need to be clarified in modifying the arbitration agreement: (a) arbitration institution: clearly specify CIETAC Beijing Headquarters or other arbitration institutions or SHIAC or SCIA for arbitration; (b) arbitration procedure: apply CIETAC’s 2012 Rules or CIETAC’s 2005 Rules or the Arbitration Rules of other arbitration institutions or the Arbitration Rules established by SHIAC or SCIA; and (c) Panel of Arbitrators: adopt CIETAC’s Panel of Arbitrators or the Panel of Arbitrators of other arbitration institutions or the Panel of SHIAC or SCIA.
The Situation where Dispute Already Occurred
This refers to the circumstance where the parties agreed to submit their dispute to CIETAC Shanghai Sub-Commission or CIETAC South China Sub-Commission in their arbitration agreement, and the dispute already occurred. We discuss the two different scenarios under this circumstance:
The first scenario is that, the arbitration clause provides for arbitration at CIETAC Shanghai Sub-Commission or CIETAC South China Sub-Commission and the dispute already occurred, and the parties have already submitted to the SHIAC or SCIA for arbitration and the case is under substantive proceeding. Under this scenario, the parties should clearly raise this issue during the arbitration procedure and should not act in an ambiguous or undecided manner. If the Claimant is willing to continue the procedure at SHIAC or SCIA, it should confirm SHIAC or SCIA as the arbitration institution in writing and invite the Respondent to confirm in writing as well. Generally speaking, since the case is already in substantive stage, the Respondent usually would not challenge the jurisdiction of the arbitral tribunal or the arbitration institution at this stage and the case generally could move on. Furthermore, according to the Civil Order made by Suzhou Intermediate Court, we can foresee that SHIAC and SCIA will invite the parties to confirm in writing that they are aware of and agree on SHIAC or SCIA’s jurisdiction upon the acceptance of the case or during the arbitration proceedings, in case the non-enforcement issue occurs again in the future due to the same reason.
However, if the Claimant chooses to submit to CIETAC for arbitration instead of continuing arbitration at SHIAC or SCIA, the Claimant may apply to withdraw its request for arbitration, and then re-file the case with CIETAC’s newly established Shanghai Sub-Commission or Shenzhen/South China Sub-Commission. If the respondent disagrees, it would not obstruct the Claimant to withdraw the case. However where the Respondent has already filed a counterclaim, upon Respondent’s confirmation of SHIAC or SCIA’s jurisdiction over the counterclaim, the case will continue to be heard by SHIAC or SCIA. However, under this circumstance, since Claimant and Respondent have chosen different arbitration institutions, i.e. Claimant wants to go for CIETAC arbitration while Respondent prefers to continue arbitration at SHIAC or SCIA, it is inevitable that the two sides will have to fight for jurisdiction, and
the case will not go into substantive hearing due to the other party’s challenge of jurisdiction until the competent court, upon the parties’ application, makes decision on the jurisdiction issue.
The other scenario is that the arbitration clause provides for arbitration at CIETAC Shanghai Sub-Commission or CIETAC South China Sub-Commission and the dispute already occurred, but the two parties have submitted to neither CIETAC nor SHIAC or SCIA for arbitration and the parties cannot reach agreement on the arbitration institution. This is a dilemma, because whichever arbitration institution the Claimant files for arbitration, the other party may challenge it. Under the present circumstances, it is possible that both SHIAC/SCIA and the newly established CIETAC Shanghai Sub-Commission or CIETAC South China/Shenzhen Sub-Commission may accept the case on the prima facie basis. However, it is very likely that the parties will have to face the challenge of arbitration jurisdiction by the other party right after the acceptance of the case, which may be a process where the parties have to spend a long time and lots of effort in the fight over arbitration jurisdiction.
At present, the Chinese Supreme People’s Court, has not made any final and definite decision upon the jurisdiction of CIETAC former branches and the issue of independence of the arbitration institutions. Thus, the parties may have to encounter risks no matter to which arbitration institution the party has referred their dispute. Therefore it is strongly recommended that the parties seek professional advice from lawyers and manage to solve the jurisdiction problem through careful analyzing all aspects of the dispute on a case-by-case basis, including bringing the jurisdiction dispute to the competent court and then submitting the case to the arbitration institution with jurisdiction as decided by the court in its civil ruling.
For further information, please contact:
Kang Yi, Partner, Jun He
Wan Xing, Jun He
Zhu Xianwu, Jun He