Shanghai court ruling confirms SHIAC's jurisdiction over arbitrations referred to "CIETAC Shanghai Sub-commission"

On 4 January 2015, only three days after the China International Economic and Trade Arbitration Commission (CIETAC) announced the reorganisation of its Shanghai and South China/Shenzhen sub-commissions (see our post of 31 December 2014), the Shanghai International Arbitration Centre (SHIAC) published on its website the civil ruling in Ni Laibao and Liu Donglian v. Soudal Investment Limited[1] (Civil Ruling), catching the attention of many followers of the turf war between CIETAC and SHIAC.

The Civil Ruling, which was handed down by Shanghai No.2 Intermediate People's Court (Shanghai Court) on 31 December 2014, confirmed that SHIAC, as an arbitration commission duly registered in Shanghai, has jurisdiction over an arbitration where the parties agreed in a 2010 contract to arbitrate before the CIETAC Shanghai sub-commission.

Case summary  

In Ni Laobao and Liu Donglian v. Soudal Investment Limited, the plaintiffs and the defendant entered into an equity purchase agreement (EPA) on 8 July 2010. The arbitration clause in the EPA reads as follows:

"any dispute, litigation [sic] or damage seeking arising from or in connection with this agreement, including the validity, expiration, breach of and termination of this agreement, shall be submitted to China International Economic and Trade Arbitration Commission Shanghai Sub-commission for arbitration. The arbitration shall be conducted in Chinese and English. The arbitral award shall be final and binding upon both parties."

On 21 November 2012, the defendant commenced CIETAC arbitration against the plaintiffs. The defendant submitted the dispute to CIETAC in Beijing, which accepted the case on 26 November 2012. On 5 December 2012, the plaintiffs commenced civil proceedings before the Shanghai Court and requested that the court rule on the validity of the arbitration clause. The plaintiffs' core argument was that the arbitration commission designated by the parties under the EPA is the CIETAC Shanghai sub-commission, which by then had asserted its independence from CIETAC in Beijing and re-named itself SHIAC. As the arbitration before CIETAC in Beijing had already commenced, on 8 January 2013 the Shanghai Court served a written notice to CIETAC in Beijing, ordering that it suspend its arbitration proceedings.

On 31 December 2014, nearly two years after the Shanghai Court suspended the arbitration before CIETAC in Beijing and on the same date as CIETAC announced the reorganization of its Shanghai and Shenzhen sub-commissions, the Shanghai Court handed down the Civil Ruling.

The Shanghai Court held that the CIETAC Shanghai sub-commission was established in 1988 through formal procedures and legitimately registered with the Bureau of Justice of the Shanghai Municipality. It further held that on 17 April 2013, with proper approvals from the Shanghai local authorities, the CIETAC Shanghai sub-commission changed its name to SHIAC (and "Shanghai International Arbitration Centre", adopted concurrently). Despite its change of name, SHIAC continues to accept cases where the parties have agreed to submit disputes to "CIETAC Shanghai sub-commission" for arbitration. 

The Shanghai Court proceeded to assess the validity of the arbitration clause in question. After establishing its jurisdiction to hear the plaintiffs' case and determining that PRC law was the governing law of the arbitration clause, the court stated that the validity of an arbitration clause should be assessed pursuant to Article 16 Section 2 of the PRC Arbitration Law, which requires an agreement to arbitrate, a statement of the matters to be submitted to arbitration, and express designation of the arbitration commission. After satisfying itself that the first two requirements had been met, the court states:

"The arbitration commission designated by said arbitration clause, i.e. 'CIETAC Shanghai Sub-commission' (which has now changed its name to SHIAC), is an arbitration commission duly established by law and is competent to accept cases and make awards according to the parties' arbitration agreement. Therefore, the arbitration clause in this case is a valid arbitration clause. The dispute between the parties in this case shall be administered by SHIAC as expressly agreed in the arbitration clause." 

Impact of the Civil Ruling  

The Civil Ruling breaks the long-standing silence that followed the Supreme People's Court's notice of 4 September 2013 (SPC Notice)[2]. In that notice, the SPC required all lower courts hearing disputes over the competence of CIETAC or its former Shanghai and Shenzhen sub-commissions to refer these cases to the SPC for a final decision. The Civil Ruling is the first reported court decision that touches upon this sensitive legal question. Although the Civil Ruling makes no reference to the SPC Notice, it is reasonable to infer that the SPC has endorsed the Shanghai Court's decision, given the reporting mechanism put in place by the SPC Notice. 

The impact of the Civil Ruling is significant. It reveals the SPC's position that it is SHIAC, instead of CIETAC, that exercises jurisdiction over arbitrations under clauses that designate "CIETAC Shanghai sub-commission", even where the clause was entered into before 2012. Unless the Civil Ruling is later overturned, parties arguing that "CIETAC Shanghai sub-Commission" arbitration clauses should be interpreted as arbitration by SHIAC should have a good case to refer to in their arguments. However, since the Civil Ruling is not binding legal authority in the PRC, disputes over the meaning of "CIETAC Shanghai sub-Commission" may still arise in subsequent cases. 

Consequently, even if the SPC develops a consistent approach to these clauses, parties referring disputes to the "CIETAC Shanghai sub-commission" should still be prepared for challenges and delays in court proceedings if such arbitration clauses are referred to the Chinese courts. 

Conclusions  

Based on the above, it would appear that:

• Arbitration clauses that designate SHIAC and were concluded between 17 April 2013 and 1 January 2015 should be effective in referring disputes to SHIAC;
• Arbitration clauses that designate SHIAC and that are concluded from 1 January 2015 onwards should be effective in referring disputes to SHIAC;
• Existing arbitration clauses (concluded before the CIETAC split in 2012) that refer disputes to "CIETAC Shanghai Sub-commission" are now likely to be interpreted as designating SHIAC. This interpretation, however, is not free from potential challenge. To err on the side of caution, we advise that parties amend such clauses to designate clearly their chosen arbitral commission. 

In light of the Civil Ruling, we recommend that parties consider the following before entering into arbitration clauses: 

• Parties who wish to refer to arbitration before CIETAC in mainland China should still refer disputes to "CIETAC Beijing";
• Parties who have a strong preference to arbitrate in Shanghai should opt for SHIAC for the time being, until the situation is made clearer by further court rulings, or from the operational practice of the newly reorganized CIETAC Shanghai sub-commission. The clause should state SHIAC's full name ("Shanghai International Arbitration Centre") to avoid confusion or uncertainty;
• Parties who wish to arbitrate before CIETAC's Shanghai sub-commission should refer to "CIETAC Shanghai Sub-commission as reorganized by CIETAC as of 31 December 2014", or wording to that effect, to avoid potential disputes. We note, however, that there has been no court ruling on the effect of such a clause and therefor carries with it the risk of an uncertain outcome. 

Latest developments  

On 9 January 2015, the Shenzhen Court of International Arbitration (SCIA, formerly CIETAC's South China sub-commission) posted on its website a decision of the Shenzhen Intermediate Court under the headline "People's Court confirms that 'CIETAC South China sub-commission arbitration' shall be administered by SCIA". Following the logic of the Shanghai Court, this Shenzhen ruling[3], dated 6 January 2015, holds that SCIA is a duly registered arbitration commission and has jurisdiction over a case under an arbitration clause designating "CIETAC South China sub-commission" as the agreed institution.   

On 12 January, SHIAC reported on its website a series of 12 rulings by Shanghai No.2 Intermediate Court on the same issue, handed down on 8 and 9 January 2015. These rulings, according to the report, share a common theme: SHIAC is a duly registered Chinese arbitration commission and has jurisdiction over arbitrations arising from clauses directing the parties' disputes to "CIETAC Shanghai Sub-commission" (see here). 

While the texts of these judgments are not yet available, it is understood that, following its earlier decision on 31 December 2014, the Shanghai No.2 Intermediate Court has now adopted a consistent approach to dispose of a number of pending cases that concern the question of CIETAC / SHIAC jurisdiction.

As these rulings from the Shenzhen and Shanghai courts must have been approved by the SPC in line with the SPC Notice, the SPC's position is now also clear: under clauses designating "CIETAC Shanghai/South China Sub-commission", the competent institution shall be the now independent and renamed SCIA and SHIAC, not the CIETAC Shanghai/South China sub-commissions as reorganized in December 2014. 

One then naturally asks: what about these recently reorganized CIETAC sub-commissions in Shanghai and Shenzhen? Are they entirely ousted in the fight for jurisdiction under CIETAC sub-commission clauses? Will CIETAC make a further announcement in response to the recent court rulings? These questions warrant close observation and further analysis. For the moment, however, we advise avoiding clauses that designate "CIETAC Shanghai sub-commission" or "CIETAC South China Sub-commission" in your contract.

For further information, please contact Justin D’Agostino, Jessica Fei, Brenda Horrigan, May Tai, Simon Chapman or your usual Herbert Smith Freehills contact.

[1] (2012) Hu Er Zhong Min Ren (Zhong Xie) Zi No.5.

[2] Fa [2013] No.194.

[3] (2013) Shen Zhong Fa She Wai Zhong Zi No.133.