The Supreme People's Court sets arbitration boundaries

As at September 2014, the position of the Supreme People's Court (SPC) on the interpretation of a pre-split arbitration clause and the enforceability of an arbitration award rendered based on such clause remained unclear, and has long created trouble and inconvenience for disputing parties.

The confusion was recently resolved. On July 15 2015, the SPC issued the Official Reply on Issues for Which Instructions Have Been Requested by the Shanghai Municipal Higher People's Court, etc. on Cases Involving the Judicial Review of Arbitration Awards Rendered by Arbitration Institutions such as the China International Economic and Trade Arbitration Commission and its Former Sub-commissions (Reply) to the Higher People's Courts of Shanghai, Jiangsu and Guangdong Province. It answers questions regarding the judicial review over arbitral awards rendered by the China International Economic and Trade Arbitration Commission (CIETAC) and its former Shanghai and Shenzhen branches (the current Shanghai International Arbitration Center (SHIAC, or the Shanghai International Economic and Trade Arbitration Commission) and the Shenzhen Court of International Arbitration (SCIA, or the South China International Economic and Trade Arbitration Commission)).

The Reply became effective as of July 17 2015 and was issued against the backdrop of over three years' jurisdictional battles between CIETAC and its former Shanghai/Shenzhen branches. In the Reply, the SPC cleared the haze and provided guidelines in adjudicating cases affected by the CIETAC split.

The Chinese arbitration community at large and the foreign parties affected by these jurisdictional battles are relieved to see the SPC finally put its foot down on this issue. Many believe that it will restore confidence in PRC arbitration, reinforce CIETAC's position as the leading arbitration institution in China and put an end to the embarrassing chaos over the last three years.

But, right after the Reply was issued, the Guangdong Department of Justice (Guangdong DOJ) once again mudded the water and put another question mark on whether this war between CIETAC and its former branches will ever come to an end.

A quick recount of the CIETAC split

The jurisdictional battles between CIETAC and its former Shanghai and Shenzhen branches (the current SHIAC and SCIA, respectively) were triggered by the new CIETAC Arbitration Rules (2012), which resulted in the branches losing a considerable amount of caseload and, consequently, financial income.

• On May 1 2012, the former Shanghai branch announced its independence from CIETAC.
• On the same day, CIETAC declared on its website that its Shanghai branch's actions were invalid and unauthorized.
• On August 1 2012, CIETAC further announced the revocation of authorization to the former Shanghai and Shenzhen branches.
• On October 22 2012, the former Shenzhen branch changed its name to SCIA, and began implementing its own arbitration rules soon after.
• On April 8 2013, the former Shanghai branch changed its name to SHIAC and promulgated the SHIAC Arbitration Rules that became effective as of May 1 2013.

Chaos and confusion

The parties and arbitration practitioners were the real victims to these back and forth actions by CIETAC and its former branches. They were uncertain as to which arbitration institution they should file their arbitration requests – it was commonly seen that at this phase, the parties to the same dispute often initiated separate proceedings with different arbitration institutions (some with CIETAC and others with SHIAC/SCIA), and there were over a hundred cases filed with local courts in Beijing, Shanghai and Shenzhen requesting invalidity of affected arbitration agreements or revocation of affected arbitral awards.

The local courts were just as confused, which resulted in very different adjudications. A general rule was that local courts seated in Shanghai and Shenzhen seemed to be more protective of SHIAC/SCIA and therefore more inclined to acknowledge SHIAC/SCIA's legitimacy and independence.

The 2013 Circular

To answer for such needs, the SPC issued the Supreme People's Court, Circular on Issues Relevant to Correctly Trying Cases of Judicial Review of Arbitration (Fa(2013) No.194) (Circular) on September 4 2013, which applied a prior-reporting system to the judicial review of non-enforcement of foreign and/or foreign-related arbitral awards.

The Circular required that any case concerning the judicial review of the validity of arbitration agreements, set-aside or non-enforcement of arbitral awards as affected by the CIETAC split should be reported to, and decided after receiving a reply from, the SPC.

The prior-reporting system is meaningful in terms of guaranteeing that the local courts would render rulings on a shared and common basis, i.e. based on a case-by-case reply from the SPC. However, it obviously lacks clarity and certainty in practice and provides no clear guidelines to lower courts or practitioners, who had to guess the SPC's position on the subject matter at the time based on local rulings.

There are some notable cases adjudicated after the issuance of the Circular, and in these cases, the local courts, via the prior-reporting system, basically applied the same rules as provided in the Reply.

Ni Laibao, Liu Donglian v Soudal Investments (2012)

The first civil ruling issued after the Circular was the one made by the Shanghai No 2 Intermediate People's Court on December 31 2014 (the (2012) Hu Er Zhong Min Ren (Zhong Xie) Zi Di No.5) in Ni Laibao, Liu Donglian v Soudal Investments. The parties entered into an agreement on July 8 2010 (before the name-change of SHIAC) that contained an arbitration clause providing for arbitration with the CIETAC Shanghai Sub-commission. The claimants initiated the arbitration with CIETAC on November 21 2012, after the name-change of SHIAC. The court decided that SHIAC should have jurisdiction, instead of CIETAC.

The ruling further acknowledged the legitimacy and independence of SHIAC by stating that “the CIETAC Shanghai Sub-commission...filed for registration as an arbitration institution with the Shanghai Department of Justice and obtained the PRC Registration Certificate of Arbitration Commission…the current SHIAC, after its name-change, is an arbitration institution lawfully formed”.

SHIAC then published on its website that “the People's Court has rendered a civil ruling that recognized the jurisdiction of our Commission”. SHIAC believed that this civil ruling was made pursuant to a reply from the SPC (via the prior-reporting system), meaning that there was no local protectionism involved and thus should be regarded as the official position.

Shandong Fuyu Blue Stone Tire v Shenzhen Nianfu Business Development (2012)

The parties entered into an agreement on June 12 2012 (before the name-change of SCIA), where the arbitration clause provided for arbitration before the CIETAC South China Sub-commission (i.e. the Shenzhen branch). In mid to late 2013, the claimant Shandong Fuyu Blue Stone Tire applied to the Shenzhen Intermediate People's Court to invalidate the arbitration clause (due to the subsequent name-change of SCIA). On January 6 2015, the same court decided that the dispute should be submitted to SCIA and recognized the legitimacy and independence of SCIA as an arbitration institution.

These two cases were decided after the Circular, and largely reflected the SPC's position at the time. However, precedents have no binding effect under PRC law and the prior-reporting system lacked transparency and certainty. There were also still no clear judicial guidelines for the local courts and practitioners to follow.

The SPC settles the dust

Following the Circular, the SPC issued the Reply in 2015 – a big leap forward in clearing the air.

The Reply provides the lower courts with accessible and clear guidelines regarding jurisdictional issues concerning CIETAC, SHIAC and SCIA. Practitioners and parties also benefit from the greater predictability of the validity of arbitration clauses/awards.

Before promulgating the Reply, the SPC sought several rounds of comments from CIETAC and SHIAC/SCIA in order to present a cautiously crafted and well-balanced solution.

Specifically, by using three points in time (namely, October 22 2012, the date of name-change by SHIAC; April 8 2013, the date of name-change by SCIA; and July 17 2015, the date the Reply entered into effect) as dividing sheds, the Reply dealt with the jurisdictional issues in a fair and reasonable manner.

According to the Reply, the jurisdictions will be decided as follows:

In addition, the Reply further sets forth the following rules:

• The people's courts shall have the final say.

After an arbitration institution has made an affirmative decision of its jurisdiction over a case, if, prior to the first hearing, a party applies to a court to challenge the validity of the concerned arbitration agreement, that court has the authority to render a decision, despite the decision from the institution.

This rule is a departure from the general practice under PRC law where the courts will not accept an application for challenging the validity of an arbitration agreement if an institution already rendered a decision on the same issue.

Note that the application must be made “prior to the first hearing”, meaning the courts will refrain from exercising any judicial power in this field if the arbitration has passed the early stage and entered into a more substantial stage (as symbolized by the conduct of the first hearing).

• The jurisdictions do not apply retroactively to cases already accepted by CIETAC/SHIAC/SCIA.

Prior to the implementation of the Reply, if CIETAC/SHIAC/SCIA had accepted cases that do not fall under their jurisdiction, the parties are prohibited from challenging the affected arbitral awards on grounds of lack of jurisdiction.

It is not clear whether a party can challenge the award if the case endures until after the issuance of the Reply, and if so, whether the challenge must be made prior to the first hearing.

• The jurisdictions may apply retroactively to cases that have been accepted by two arbitration bodies.

Prior to the implementation of the Reply, if a dispute was filed with both CIETAC and SHIAC/SCIA, and the parties applied to a court for review of the validity of the arbitration agreement prior to the first hearing, the court must apply the General Rules to make a decision. If the parties did not make an application, the arbitration institution that accepted the case first will have jurisdiction.

Confirming the status

The SPC has taken a rather cautious attitude in solving the jurisdictional puzzle. It emphasized the leading role and credibility of CIETAC in the Chinese arbitration community while recognizing the legitimacy and independence of SHIAC and SCIA from a legislative standpoint as well.

The SPC also adopted an arbitration-friendly attitude in an attempt to preserve the validity and effectiveness of all affected arbitration agreements.

The Reply further enhances CIETAC's position as the “big brother” of all Chinese arbitration institutions. It also encourages the courts to recognize the legitimacy and independence of SHIAC and SCIA as arbitration institutions lawfully formed in China – a positive message to foreign courts that may be sought for handling recognition and enforcement of arbitral awards rendered by SHIAC/SCIA. And because the SPC has acknowledged the legal status of SHIAC and SCIA, the concern of public policy no longer comes into play.

The Guangdong DOJ causes confusion… again

Just when things were looking up, a letter from the Guangdong DOJ stirred up another round of heated discussions surrounding the current CIETAC branch in Shenzhen.

The story unfolds as follows:

On December 31 2014, CIETAC re-formed (without registration) its South China Sub-commission in Shenzhen, co-existing and competing with SCIA.

On August 3 2015, the Guangdong DOJ issued a letter titled the Notification on Ceasing Illegal Arbitration Activities (Letter) to CIETAC. In the Letter, the Guangdong DOJ requested CIETAC to immediately stop its arbitration activities in Guangdong Province and using the name of CIETAC South China Sub-commission, which was self-formed without registration and violated the PRC Arbitration Law and the PRC Administrative License Law. It also stated that the current CIETAC South China Sub-commission used the name of a previously registered arbitration commission (SCIA registered with the Guangdong DOJ in December 2011 as the “CIETAC South China Sub-commission”).

According to Article 10 of the Arbitration Law, the formation of an arbitration commission must be registered with the relevant judicial administrative department. However, this requirement does not necessarily apply to foreign-related arbitration commissions. Article 66 provides that "Foreign-related arbitration commissions may be organized and established by the China Chamber of International Commerce” and does not specify any registration requirements.

In fact, CIETAC was formed as a foreign-related arbitration commission by the China Chamber of International Commerce in 1954. In 1988, the Chamber decided to establish a CIETAC branch in Shenzhen (the current SCIA), which then conducted arbitration businesses for about 16 years, unregistered, until December 2011.

The key issues are therefore: