An internal feud between rival parts of China's main arbitration body has seen its Shanghai and Shenzhen branches suspended, leaving question marks for investors such as private equity funds over the validity of existing documents and contracts supporting their investments.
The China International Economic and Trade Arbitration Commission (CIETAC), the country's most commonly used arbitration body for foreign investors and companies, announced the suspensions in a notice posted on its web site on Aug. 1.
CIETAC said the branch offices were suspended because they refused to comply with new rules that it introduced in April, and to remain under its leadership for case administration. Parties who previously agreed to have disputes resolved by Shanghai and Shenzhen should now submit applications for resolution to the central CIETAC body.
Going to CIETAC Beijing will likely lead to court cases since existing documents stipulate the Shanghai and Shenzhen branches as arbitrators. But the negative publicity that court cases can attract means private equity funds in China will be less likely to pursue claims in the event of any dispute.
Lawyers say the funds now face a choice between having to change the contracts behind their investments or getting drawn into highly public court battles.
"If CIETAC Shanghai in effect doesn't exist anymore, because CIETAC has thrown it out, you may end up in the courts when you thought you had a binding agreement to arbitration by CIETAC Shanghai," said Marcia Ellis, a partner at law firm Ropes & Gray LLP. "That means funds are less likely to bring any kind of claim."
CHANGE OF RULES
CIETAC Beijing issued new rules in April to align itself more closely with other arbitration centres such as London and Hong Kong. Among the rules, it stipulated that all arbitrations had to be administered by the central Beijing commission unless contracts explicitly stated an alternative venue.
CIETAC in Shenzhen and Shanghai refused to adopt the new rules and declared their independence. Shanghai and Shenzhen are commercial hubs, and their arbitration offices generate significant revenue.
The Shanghai branch office has gone one step further and published its own set of rules.
That has led to Shanghai and Shenzhen being suspended, according to CIETAC.
"This leaves a lot of uncertainty for companies and entities who have arbitration clauses that make reference to Shanghai," said Ashley Howlett, a litigation partner for Jones Day in Beijing.
The public dispute between the CIETAC branches means the Shanghai and Shenzhen commissions have effectively shot itself in the foot.
"I think the likelihood is that legal advisers will encourage their clients while this uncertainty continues to select alternative commissions to CIETAC, certainly so far as Shanghai and Shenzhen are concerned," said Jim James a partner at Norton Rose law firm in Hong Kong.
This article is copyrighted by Reuters
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