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Recent PRC Court Judgment Validated Hybrid Arbitration: CIETAC administers arbitration using UNCITRAL Arbitration Rules

15 September 2014
This article examines a recent judgment by the PRC Courts validating hybrid arbitration whereby CIETAC (ie the China International Economic and Trade Arbitration Commission) administers arbitration using the Arbitration Rules promulgated by UNCITRAL (ie the United Nations Commission on International Trade Law), rather than using CIETAC's own Arbitration Rules.

Despite the decision, parties should nevertheless carefully balance the pros and cons before agreeing on hybrid arbitration.

The Facts

A US technology company ("the Licensor") entered into a technology licensing agreement with a Chinese petroleum company ("the Licensee").  The agreement provided that disputes between the parties shall be resolved by arbitration which "shall take place at CIETAC" using the UNCITRAL Arbitration Rules.

Disputes arose between the parties and in July 2012 the Licensor commenced arbitration proceedings against the Licensee.  Three months later in October 2012 the Licensee challenged the arbitration agreement.  The Licensee argued inter alia that UNCITRAL Arbitration Rules are commonly used for ad hoc arbitration, and given that ad hoc arbitration is invalid under PRC law, the arbitration agreement is invalid.  The Licensee also argued that the wordings "shall take place at CIETAC" should not be interpreted as arbitration administered by CIETAC, because such wordings merely refer to the location where hearings will take place.

The Licensor argued that the parties clearly agreed that the arbitration should be administered by CIETAC, and that under CIETAC Arbitration Rules, parties are allowed to agree on the application of "other arbitration rules" unless such agreement is in conflict with a mandatory provision of the law applicable to the proceedings.  The Licensor submitted that given CIETAC's involvement, the arbitration agreement does not amount to ad hoc arbitration and is thus not in conflict with PRC law.

The Decision

The Zhejiang Province Ningbo City Intermediate People's Court was minded to uphold the challenge and declared the arbitration agreement invalid.  However, under PRC law, in order for a lower court (such as the Courts in Ningbo City) to declare an arbitration agreement invalid, the lower court must report to and seek approval from higher courts ("the Reporting System").

Accordingly, the matter was referred to the Zhejiang Province Higher People's Court.

After examining arguments from both sides, the Zhejiang Higher People's Court required the Ningbo Court to reject the challenge and to uphold the arbitration agreement, thus confirming that given CIETAC's involvement, the arbitration agreement between the parties does not amount to ad hoc arbitration, and that the arbitration agreement is valid under PRC law.

However, the Zhejiang Higher People's Court did not make a wider pronouncement on the validity of administered arbitration taking place in the PRC under UNCITRAL Arbitration Rules.

The decision ended an 18 months stay on the arbitration proceedings.

The Significance

In practice, CIETAC has already administered several arbitrations under UNCITRAL Arbitration Rules.  However, this is the first time the PRC Courts decided on the validity of such hybrid arbitration.

The decision to support hybrid arbitration reflects the support by the PRC Courts to arbitration generally and demonstrates the PRC Courts' judicial attitude to uphold the validity of an arbitration agreement (which attitude accords with international best practice).

The decision also demonstrated that the Reporting System is working well as a check and balance to the arbitration framework in the PRC.

However, given the lack of a wider pronouncement on the validity of hybrid arbitration, parties should carefully balance the pros and cons before agreeing on hybrid arbitration.  For example, the parties should consider whether a set of arbitration rules is suitable for use in administered arbitration in question.  In this connection, the Arbitration Rules published by the ICC (ie the International Chamber of Commerce) expressly stated that only ICC is empowered to administer a dispute under the ICC Arbitration Rules.  Furthermore, the parties should also take into account factors such as the familiarity of an arbitration institution in administering arbitration using arbitration rules other than its own.  Even if hybrid arbitration is ultimately being upheld by the Courts, the delay in the proceedings (18 months in this case) may still be significant.

Terence Wong

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