Latham & Watkins International Arbitration Practice Number 1565 July 24, 2013 Chinese Arbitration Award Caught in Arbitration Institute Dispute A Chinese court s refusal to enforce an arbitration award from the CIETAC Shanghai Sub-Commission may affect other disputes. The breakdown in the relationship between the China International Economic and Trade Arbitration Commission (CIETAC) and its former sub-commissions in Shanghai and Shenzhen has attracted considerable attention since 2012. The turf war between the most pre-eminent arbitral commission in Mainland China and two of its established sub-commissions appeared to be resolved in April 2013, when the Shanghai Sub-Commission publicly announced its name change and introduced a set of new arbitration rules and panel of arbitrators. The dust, however, is not yet settled. In May 2013, a court in Suzhou, China refused to enforce an award made by a CIETAC Shanghai Sub- Commission tribunal in December 2012 because the tribunal failed to inform the parties of the change in the Shanghai Sub-Commission s status. The decision, which adds uncertainty to the enforceability of awards rendered in cases administered by the former sub-commissions of CIETAC before their independence, has caused a ripple in arbitration circles both in China and abroad. This Client Alert analyses the grounds on which the Suzhou Court refused to enforce the award and its potential effect on the enforcement future of arbitral awards in China. Background On 7 May 2013, the Intermediate People s Court of Suzhou City, Jiangsu Province of the People s Republic of China (the Suzhou Court), by a Civil Order (2013) Su Zhong Shang Zhong Shen Zi No. 0004 (the Civil Order), decided not to enforce an award rendered in December 2012 in an arbitration administered by the China International Economic and Trade Arbitration Commission (CIETAC) Shanghai Sub-Commission (CIETAC Shanghai), which has now changed its name to the Shanghai International Economic and Trade Arbitration Commission, concurrently known as Shanghai International Arbitration Centre (or SHIAC). The parties to the enforcement proceeding before the Suzhou Court are marquee names in the Chinese and global solar panel market. The applicant, Jiangxi LDK Solar Hi-Tech (LDK Solar), established in 2005 in China, is the world's largest producer of solar wafers and a leading high-purity polysilicon and solar module manufacturer. In June, 2007, LDK Solar was listed on the New York Stock Exchange. Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY 10022-4834, Phone: +1.212.906.1200. Copyright 2013 Latham & Watkins. All Rights Reserved.
The respondent against which the enforcement was sought, Suzhou Artes Sunshine Power Technology (Artes) is a mainland subsidiary of Nasdaq-listed Canadian Solar, one of the world s largest makers of solar panels. In October 2007, LDK Solar and Artes entered into an agreement for the supply of solar wafers under which the parties agreed to refer their disputes to CIETAC (Shanghai Sub-Commission) for arbitration (the 2007 Agreement). In June 2008, the same parties signed two additional supply contracts which were to last for ten years (the 2008 Agreements). The arbitration clauses in the 2008 Agreements are, though similar, slightly different from the 2007 Agreement, which provided for arbitration at CIETAC (with the place of arbitration in Shanghai). Disputes later arose between the parties relating to the entitlement to a RMB 60,000,000 deposit and termination of the 2008 Agreements, which led LDK Solar to file a notice of arbitration before the SHIAC (then known as CIETAC Shanghai) in July 2010. After a two-year proceeding, the SHIAC Tribunal, by an award dated 7 December 2012 ((2012) CIETAC Shanghai No. 452) (the SHIAC Award), found in favor of LDK Solar. Of particular importance in this case is the interplay between the arbitration proceedings before the SHIAC Tribunal and the stalemate between CIETAC and its Sub-Commissions in terms of the time line. By way of illustration, below is a chart setting out these parallel chains of events. Date SHIAC Arbitration Proceeding Breakdown between CIETAC and SHIAC 23 July 2010 LDK Solar commenced arbitration against Artes before the SHIAC (then still known as CIETAC Shanghai). 28 July 2010 CIETAC Shanghai by letter notified the parties of its acceptance of the case. 6 December 2011 CIETAC Shanghai was stated in the Civil Order to have applied for registration with the Municipal Bureau of Justice of Shanghai (Shanghai BOJ). 8 December 2011 CIETAC Shanghai was stated in the Civil Order to have obtained the Certificate of Registration for Arbitral Commission from the Shanghai BOJ. February 2012 Dispute started to brew between CIETAC and its Shanghai and South China Sub-Commissions when CIETAC announced the implementation of new arbitration rules in May 2012. Under the new rules, notices of arbitration (even for arbitration agreements with express reference to CIETAC Shanghai or South China Sub- Commission) are required to be filed with CIETAC (in Beijing). This change of the filing Latham & Watkins Client Alert No. 1565 July 24, 2013 Page 2
procedures gave rise to strong opposition from the Shanghai and South China Sub- Commissions, which eventually led to their independence from CIETAC. 1 August 2012 By a public announcement, CIETAC, with immediate effect, 1. Suspended the Shanghai and South China Sub-Commissions authority to accept and manage cases in which Shanghai or Shenzhen was agreed to be the place for CIETAC arbitrations 2. Requested that parties to the arbitration agreements described above submit their notices of arbitration to CIETAC (in Beijing) 11 October 2012 By a reply to the Council for the Promotion of International Trade, Shanghai, the Shanghai BOJ acknowledged SHIAC s independent authority to accept and administer arbitration cases. In particular, the Shanghai BOJ pointed out that SHIAC s such authority originated from parties agreement, not from CIETAC s authorization. 7 December 2012 The SHIAC Tribunal issued the SHIAC Award. In the SHIAC Award, Jiangxi LDK was awarded with damages of RMB 60,000,000 yuan. 31 December 2012 By a public announcement, CIETAC reinstated the illegality of the declaration of independence of its Shanghai and South China Sub-Commissions, and it 1. Prohibited the two sub-commissions from continuing using the name, brand and logo of CIETAC 2. Terminated their authority to accept and administer arbitration cases 3. Clarified that cases accepted and administered by the CIETAC Shanghai and South China Sub-Commissions before 1 August 2012 may be concluded in accordance with the CIETAC Arbitration Rules and under the uniform leadership of CIETAC in respect of case administration as provided in the rules Latham & Watkins Client Alert No. 1565 July 24, 2013 Page 3
21 January 2013 By a joint announcement of CIETAC Shanghai and Shen Court of International Arbitration (SCIA) (which had then changed its name from CIETAC South China Sub-Commission to SCIA) reinstated the legality of their establishment and authority to perform functions relating to arbitrations. February 2013 LDK Solar applied to the Suzhou Court for enforcement of the SHIAC Award. 16 April 2013 CIETAC Shanghai publicly announced: 7 May 2013 The Suzhou Court issued the Civil Order in which it rejected the enforcement of the SHIAC Award. 1. Its name change to SHIAC 2. Its willingness to accept cases filed in accordance with arbitration agreements which provide for arbitration at CIETAC Shanghai Commission / Branch / Sub- Commission 3. The introduction of new arbitration rules and panel of arbitrators, both to be effective from 1 May 2013. Grounds for Refusing Enforcement In the enforcement proceedings before the Suzhou Court, Artes raised three arguments to resist enforcement: The lack of jurisdiction of SHIAC to hear the dispute Procedural irregularity Errors made by the SHIAC Tribunal in findings of law and the application of law As shown in the Civil Order, the Suzhou Court appears to have only considered the first argument. In deciding whether the SHIAC Tribunal had jurisdiction over the case in question, the Suzhou Court considered three factors as relevant: The parties agreement regarding the arbitral commission The relationship between SHIAC and CIETAC before SHIAC obtained the Certificate of Registration in December 2011 Latham & Watkins Client Alert No. 1565 July 24, 2013 Page 4
The relationship between SHIAC and CIETAC after SHIAC obtained the Certificate of Registration in December 2011 When considering the first factor, the Suzhou Court noted that the disputed matters fell within the jurisdiction of the 2008 Agreements, and therefore, the arbitration clauses in the 2008 Agreements should govern. The parties agreement under the 2008 Agreement, as interpreted by the Suzhou Court, was to select CIETAC as the arbitral commission, with Shanghai as the place of arbitration. In other words, according to the Suzhou Court, the parties did not intend to refer disputes to CIETAC Shanghai for arbitration. As regards the relationship between SHIAC and CIETAC at the material time, the Suzhou Court acknowledged that SHIAC had become an independent arbitral institution as of 8 December 2011 when it was successfully registered with the Shanghai BOJ. Prior to that time, SHIAC was an integral part of the CIETAC. The Suzhou Court found that an arbitral commission s jurisdiction to administer arbitration cases originates from the parties agreement. Thus, the parties choice of CIETAC did not cause any problem before December 2011 when SHIAC was still considered an integral part of CIETAC. However, when SHIAC ceased to be part of CIETAC in December 2011, SHIAC was obligated to explain to the parties the change in the nature of the arbitral arbitration and to offer the parties an opportunity to select a different arbitral institution. By failing to do so, the SHIAC Tribunal acted against the parties true intention, and therefore, the Tribunal no longer had jurisdiction to hear the disputes after December 2011. Enforceability of Awards Made by Former Sub-Commissions of CIETAC The reasoning provided by the Suzhou Court in the Civil Order raises a number of questions. First, the Suzhou Court referred to paragraph 2(2) of Article 237 of the Civil Procedural Law of the PRC as the legislative basis for non-enforcement, but that provision was intended to address the situations when the matters adjudicated by the tribunal are not arbitrable under the Arbitration Law of the PRC (for example, administrative disputes) or when matters fall outside the scope of arbitration agreement. The current case does not appear to fit in either of the categories. Second, a the Suzhou Court drew a line in December 2011 when the SHIAC obtained its registration certificate, and consequently lost its jurisdiction to hear disputes referred to for CIETAC arbitrations. Registration, or the question regarding SHIAC s authority to accept CIETAC cases, however, was not made public until August 2012 when CIETAC announced its suspension of SHIAC s authority in this regard. Before the Civil Order was delivered, few parties were concerned about SHIAC s authority to administer CIETAC cases filed before August 2012. The Suzhou Court s decision in the Civil Order has widened the uncertainty period by casting doubt on the legality of SHIAC s authority to administer CIETAC cases between December 2011 and August 2012. Ironically, the generally accepted principle of party autonomy served as the fundamental basis of the Suzhou Court s decision. The Suzhou Court based its refusal of enforcement on its interpretation of the arbitration clauses in the underlying agreements that the parties intended to select CIETAC (not any other arbitral institution) as the arbitration commission. Whether or not the Suzhou Court would have made the same decision if, for example, the arbitration clause had expressly referred to CIETAC Shanghai as the arbitral commission, remains unclear. Latham & Watkins Client Alert No. 1565 July 24, 2013 Page 5
Conclusion Notwithstanding the above, the effect of the Civil Order should not be over stated. First, only cases accepted or administered by the relevant former sub-commissions in a limited period of time from August 2012 and (probably) May 2013 are potentially in the crosshairs. Further, the decision of the Suzhou Court is not a precedent which must be followed by other courts in China, and the decision should not be treated as a universal view held by the Chinese judiciary regarding the enforceability of awards made by SHIAC and SCIA tribunals. Clearly, at least in Shanghai and Shenzhen where SHIAC and SCIA are based, the courts will uphold their authority to administer CIETAC cases during the transition period, and the courts will likely adopt a more supportive approach when dealing with enforcement applications of awards delivered during such period. In other parts of China, the situation may be less clear, and the enforcement prospect could well depend on various other factors, such as the location of the party against which enforcement is sought (bearing in mind that the respondent in this case is a local Suzhou entity), the assets available for enforcement, the local court s professionalism and familiarity with arbitration practice, among other issues. On a separate note, SHIAC and SCIA have now become independent arbitral commissions, and it will be interesting to see if their awards will be enforceable in jurisdictions outside the PRC, in particular, Hong Kong. The Hong Kong Arbitration Ordinance provides that only awards made by certain recognized arbitral commissions in Mainland China will be enforceable in Hong Kong. To date, neither SHIAC nor SCIA appears to have been gazetted to be qualified as one of such recognized arbitral commissions for enforcement purposes. Hong Kong will need to address the current legislative obstacles to enforcing awards administered by these two arbitral commissions. If you have questions about this Client Alert, please contact one of the authors listed below or the Latham lawyer with whom you normally consult: Yang Ing Loong ( 杨炎龙 ) +852 2912 2790 Ingloong.Yang@lw.com Hong Kong Tina Wang( 王骁 ) +852 2912 2791 tina.wang@lw.com Hong Kong Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the lawyer with whom you normally consult. A complete list of Latham s Client Alerts can be found at www.lw.com. If you wish to update your contact details or customize the information you receive from Latham & Watkins, visit http://events.lw.com/reaction/subscriptionpage.html to subscribe to the firm s global client mailings program. Latham & Watkins Client Alert No. 1565 July 24, 2013 Page 6