what we think

Opting for arbitration when negotiating contractual dispute resolution clauses is increasingly common for Chinese and foreign business partners. Although many foreign companies prefer reputable international arbitration centers such as Sweden and Singapore, more often than not, a Chinese partner will only agree to arbitration in China due to the high costs and unfamiliarity with international arbitration. When it comes to sheer caseload, the China International Economic and Trade Arbitration Commission (CIETAC) may well be the biggest arbitration tribunal in the world. In 2011 alone, the CIETAC accepted a total of 1,435 new arbitration cases, 470 of which were foreign-related. Earlier this year, the CIETAC announced a revision of the former Arbitration Rules from 2005, which ultimately entered into effect on 1 May 2012. Amending several old articles while adding three new provisions to the Arbitration Rules that now consist of 74 articles, the revision is not a drastic redesign but rather a refinement in line with international best practices. The changes are generally considered a welcome step to internationalize Chinese arbitration and diminish several uncertainties.

Overview of Key Amendments

Interim Measures

One of the more controversial new additions concerns interim rules. According to a new provision, the tribunal is entitled to order any interim measure and the provision of appropriate security to back it up. It is unclear how the CIETAC defines “interim measure”, and even more so how it intends to exercise this new feature, as the PRC Civil Procedure Law only allows courts to order interim measures.

And so it is still uncertain if orders of CIETAC arbitrational tribunals will be enforced by courts. So far, Chinese courts are only entitled to order interim measures of assets conservation (e.g. freezing bank accounts) in arbitration proceedings upon application of one of the concerned parties, albeit a future amendment of the Civil Procedure Law may bring changes that harmonize with the new Arbitration Rules.

Internationalization

The new rules allow for broader flexibility in shaping arbitration procedure. For example, under the old rules the parties were required to specify the desired language for arbitration in the arbitration clause. Where parties failed to do so, the arbitration language was Chinese by default, oftentimes leaving uninformed foreign companies that failed to prepare accordingly with no choice but to accept Chinese, thus making the arbitration procedure somewhat less convenient and transparent for them.

Under the new rules, however, the appropriate language may be determined by the CIETAC according to the individual circumstances. This amendment can be seen as an answer to the high percentage of foreign-related arbitrations that roughly accounted for one-third of all arbitrations in 2011. Despite its size and caseload, the CIETAC does not have the reputation of a truly international arbitration tribunal. Instead it is so far perceived a domestic Chinese institution. Foreign companies that prefer an international tribunal may decide for arbitration abroad, although this literally rules out the possibility of freezing assets in China. Under the new rules, the CIETAC is empowered to  nominate a suitable seat in China or abroad at its discretion if the parties have not agreed on a seat of arbitration. However, under Chinese law, arbitration abroad is restricted to foreign-related contracts. Wholly foreign-owned enterprises that are incorporated in mainland China are considered domestic entities, as are Chinese-foreign joint ventures – in other words, international arbitration awards for these entities can only be enforced in China if the other party is not a Chinese legal entity.

Consolidation

Under the new rules, consolidation of two or more arbitrations into a single arbitration is possible upon request of a related party or where CIETAC believes it is reasonable, provided that the other involved parties do not disagree. Consolidation may facilitate cases where the same parties are involved and the claims are made under the same arbitration agreement. Furthermore, the new rules provide for suspension of the arbitration where necessary.

Appointment of Arbitrators

Where one party was in default regarding the appointment of the arbitrator, the previous rules provided the arbitrator be appointed by the CIETAC. The new rules equal international best practice: In case of a delay, the CIETAC is now entitled to appoint the whole tribunal, and thus ensuring equality in the proceeding. When appointing the arbitrators, the nationality of the parties should be taken into account. Nevertheless, the presiding arbitrator can still be of the same nationality as the parties, thus leaving the problem of bias unsolved.

Irritation over Shanghai CIETAC's Solo Attempts

In the aftermath of the announcement of the new arbitration rules, some confusion has been caused by the declaration of the Shanghai CIETAC tribunal that it would ignore the amendments and instead establish its own arbitration rules as well as an own panel of arbitrators. It is believed that this action is a reaction to amendments made in Article 2 of the rules, which now automatically give the CIETAC in Beijing authority over arbitration cases where the parties failed to clearly nominate a specific arbitration tribunal. In the new rules, the sub-commissions of the CIETAC in Beijing are no longer described as integral parts with the power to administer cases under their own directive, but rather branches that accept cases under authorization of Beijing.

While this shift from individual sovereignty towards centralization in Beijing is intended to prevent parties from simultaneous “forum shopping” with multiple CIETAC branches and the delays caused with it, the Shanghai CIETAC is most likely concerned about its independence and future role in arbitration cases.

The CIETAC in Beijing published an open statement on its own website, declaring the steps taken by the Shanghai subcommission null and void, and explicitly stressed that the sub-commission is not authorized to establish its own rules.

Conclusion

The next months will bring clarity on the matter of how the new rules will be employed by CIETAC. Some of the changes may not be applicable until legal amendments have followed, for example the ordering of interim measures by an arbitration tribunal. But overall, all parties are expected to benefit from an improved organization and international best practice.