When entering into an agreement with a Chinese company, a strong arbitration clause is essential. Part of constructing the arbitration clause, will be deciding on a place of arbitration. The place of arbitration is the location at which both parties agree to hold the arbitration proceeding, and generally is not required to be in a city the Arbitration Association is located. For example, if China International Economic and Trade Arbitration Commission (“CIETAC”) is agreed by both parties as the arbitration association, according to its rules, the place of arbitration could be any place agreed by both parties, and is not limited to those cities in which CIETAC has established an office (Beijing, Tianjin, Shanghai, Chongqing, or Hong Kong). This means the arbitration may be agreed to be held in New York, London, Paris, or Timbuktu, as long as the parties agree.
While it may appear to be more convenient for a USA or Europe based company, there are some major consequences for choosing a location outside of China to serve as the place of arbitration.
Firstly, the procedural matters of the arbitration will be governed by the applicable Arbitration Law for that jurisdiction in addition to CIETAC’s arbitral rules. If there is a conflict between CIETAC’s rules and the local Arbitration Law, the Law will prevail. Foreign parties may prefer this as they are more familiar with procedural law in their home jurisdiction. By the same token, Chinese parties would in general prefer Chinese Arbitration Law apply as to procedural issues.
Though CIETAC is a Chinese Arbitration Commission, an arbitral award issued by CIETAC in connection with an arbitration proceeding which took place outside of the PRC, would be treated as a foreign arbitration award in the eye of the Chinese judicial system. This means the award could not be enforced in Chinese courts directly, but would have to utilize the enforcement mechanisms provided for under the New York Arbitration Convention of 1958. This is true even if PRC domestic law is agreed by the parties to govern the substantive issues of the arbitration.
The place of arbitration also determines the competent court will have jurisdiction to review and revoke any arbitration award. If a place outside of mainland China is chosen, Chinese courts will be unable to perform an independent review of the award.
In China, stating a place of arbitration is not required for an Arbitration Agreement to become valid. However, doing so as part of the initial agreement eliminates a potential point of disagreement in any future dispute. Attention should also be paid to additional costs, which may arise when setting arbitration in a city in which the arbitration commission does not have an office. There may be costs associated with finding an approved arbitrator in the chosen city, or in connection with transportation costs for an arbitrator from the commission. Additionally, there will likely be costs in connection with securing a neutral facility in which the arbitration proceed will take place.
We generally recommend to our clients to name a place of arbitration in Beijing, or in Shanghai. Arbitration commissions and arbitrators in these cities are typically very professional and quite used to handing arbitrations involving a foreign party.