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George Washington University Law School

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Sunday, January 26, 2014

What a short notice on arbitration tells us about the Chinese legal system

I recently came across a very short notice from the Supreme People’s Court instructing lower courts how to handle certain arbitration disputes. I think it’s worth writing about because in a few short sentences, it encapsulates a key feature of the Chinese legal system—that is, its essentially bureaucratic nature—that I think make it fundamentally different from systems that are essentially adjudicatory. One can have a view as to whether that difference is a virtue or a vice in general or in particular cases, but it’s not my purpose here to take a stand on that issue; I just want to argue that the system is indeed different.

First, some background. China has rules about the recognition and enforcement of arbitration awards by courts; there are two relevant ones here.

               (1) A valid arbitration agreement must clearly stipulate the forum. This is a general rule of contract law and not unique to China—if we can’t find a meeting of the minds on where to arbitrate, there’s no agreement to enforce—although Chinese courts have tended to be overly demanding about what constitutes “clearly”.

               (2) Domestic arbitration can be carried out only by state-approved arbitration bodies; ad hoc arbitration (i.e., arbitration by persons or institutions not recognized by the state even if agreed upon by the parties) is not recognized by courts.

One of China’s major officially recognized arbitration bodies is the China International Economic and Trade Arbitration Commission (CIETAC). In 2012, when the problem I am about to describe arose, CIETAC had offices (sub-commissions) in Beijing and other Chinese cities, including Shanghai (Shanghai CIETAC) and Shenzhen (South China CIETAC). Thus, if the agreement said, “Arbitration at Shanghai CIETAC” or “Arbitration at CIETAC in Shenzhen”, it would have met the requirements of both of the above rules and been valid; everyone knows which arbitration forum is meant and it’s an officially recognized one.

In 2012, CIETAC issued new arbitration rules that came into effect in May of that year. Shanghai CIETAC and South China CIETAC didn’t like the rules and essentially declared independence. South China CIETAC changed its name to “South China International Economic and Trade Arbitration Commission” or “Shenzhen Court of International Arbitration”, and both the Shenzhen municipal government and the Guangdong provincial government have recognized it as a qualified arbitration organization. In April 2013, Shanghai CIETAC changed its name to Shanghai International Arbitration Center, and I believe has also been officially recognized by the Shanghai government.

In response, CIETAC issued an announcement on Dec. 31, 2012 stating that it was terminating the authorization of Shanghai CIETAC and South China CIETAC to accept and administer arbitration cases and forbidding them to conduct any further arbitration in the name of Shanghai CIETAC and South China CIETAC. CIETAC has also opened a new sub-commission in Shanghai (I’m not sure about Shenzhen) and sent its arbitrators there. In its Dec. 2012 announcement, CIETAC stated that when parties had designated Shanghai CIETAC or South China CIETAC in their arbitration agreements, they should submit their requests for arbitration to CIETAC (in Beijing), which would then take care of it. (For a good backgrounder on the dispute, see this memo from Winston & Strawn.)

Obviously, we have here a recipe for great confusion. Try to apply Rule 1: when an arbitration agreement says, “CIETAC Shanghai,” for example, which arbitration body does it mean? And what about Rule 2: do the new local arbitration bodies count as officially recognized? Who has the authority to recognize them? The Arbitration Law doesn’t say. Until this confusion is cleared up, parties have no way of knowing whether their arbitration agreement will be upheld. Courts in Ningbo and Suzhou refused to uphold arbitration awards of the newly independent Shanghai CIETAC, but were overturned on appeal.

Clearly it’s time for somebody—anybody—to step in and make a definitive ruling on these issues. The Supreme People’s Court is the obvious candidate. In September 2013, it did so. Here’s the full text of a Notice (tongzhi 通知) it issued to lower courts at that time:

Supreme People’s Court Notice on Problems Related to the Correct Adjudication of Cases Involving Judicial Review of Arbitration

To the Higher-Level People’s Court of each province, autonomous region, and separately administered city; the military courts of the People’s Liberation Army; and the Production and Construction Corps branch courts of the Higher-Level People’s Court of the Xinjiang Uighur Autonomous Region:

               Recently, the China International Economic and Trade Arbitration Commission’s (“CIETAC”) May 1, 2012 implementation of its revised rules of arbitration, together with the name changes and implementation of new arbitration rules on the part of the CIETAC Shanghai Subcommission (“Shanghai CIETAC”) and the CIETAC South China Subcommission (“South China CIETAC”), have led to disputes among parties related to issues such as the application of rules of arbitration and the jurisdiction of the above-mentioned arbitration organizations. The people’s courts of all areas have accepted case after case of arbitration review resulting from such disputes. In order to unify the standard for judgments and ensure that people’s courts correctly adjudicate cases, we now notify you as follows regarding relevant issues:

               With respect to cases in which the above-mentioned disputes result in parties applying for a confirmation of the validity of the arbitration agreement, as well as cases in which the above-mentioned disputes result in parties applying for a cancellation or ruling of non-implentation of awards rendered by CIETAC, Shanghai CIETAC, or South China CIETAC, the people’s court must, before making a ruling, submit the matter for discussion by its Adjudication Committee and then report up level by level to the Supreme People’s Court. Only after the Supreme People’s Court has made its reply may the ruling be made.

Supreme People’s Court

Sept. 4, 2013

 There are two things worth noting about this document. First, it was not publicly issued. It’s an internal instruction to courts immediately below it, and they are to pass it on to courts below them. Second, and most importantly, it does not solve the problem. It does not purport to state any rule or even vague principle that courts should use in addressing problematic cases; it does not state how the SPC intends to handle them. Yet the SPC certainly does intend to handle them, and it will produce a result. If the result is the same in cases where the relevant facts are identical, then that’s a rule of law that it would be helpful to let parties know about; if the result is not the same, then apparently there are more relevant facts than we thought.

The key point here is that the SPC is not acting as adjudicator-in-chief in a system that applies laws. It’s acting as decider-in-chief in a system that maximizes administrative discretion to the point where even here, where it would be simple to come up with a rule to resolve any ambiguity, it is unwilling to do so and reserves the right to reach different results in cases that, as far as statutorily relevant facts are concerned, are identical.

 

 

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