The China International Economic and Trade Arbitration Commission ("CIETAC") is one of the world's major arbitration forums, handling both domestic disputes and matters involving foreign parties. In fulfilling construction contracts, it is common for unforeseen circumstances to arise, giving occasion for disputes. In such situations, it is common practice for those involved to utilise arbitration over litigation due to the highly technical and complex nature of the issues involved, usually requiring some form of expert knowledge.
In order to help the dispute resolution process, CIETAC issued the "Construction Dispute Review Rules (Trial)" (the "Rules") in January of 2010 effective as of 1 May 2010. The Rules set out guidelines for a new system of dispute resolution when dealing with construction contracts.
The New System
The Dispute Review Board
Under the Rules, parties in dispute over construction contract fulfilment are given the option of referring the dispute to a Dispute Review Board ("DRB") for resolution. When referring a dispute to the DRB, the parties may enter into an agreement detailing the function, jurisdiction and compensation of the DRB. In the absence of such an agreement, the Rules will apply.
There are two types of DRB: a standing DRB may be established at the time of the contract or within a time period agreed by the parties; or, an ad hoc DRB may be formed specifically to deal with a given dispute. The DRB shall be composed of three members unless the parties agree that the DRB will comprise only one member. While CIETAC maintains a list of recommended experts, the parties are free to appoint members not included on this list to the DRB.
Where the DRB is composed of only one member, the parties will appoint the member jointly, failing which the sole DRB member will be appointed by the Secretary-General of the CIETAC. For three-member DRBs, each party elects one member, and the two nominees then jointly select a third member, who shall be the chairman of the DRB. DRB members are expected to have significant experience and expertise in the construction industry as well as experience with contract management.
Rights and Procedures
In the course of resolving a dispute, the DRB can organise review proceedings and any other measures it deems appropriate to evaluate the dispute. The jurisdiction of the DRB includes deciding its jurisdiction in relation to the dispute and the scope of review; deciding the procedural arrangement; calling of meetings, site visits and hearings; questioning the parties, their representatives and witnesses; deciding to conduct an appraisal and appointing an expert for opinion on specific or legal issues.
Within 84 days of commencing the review proceedings, the DRB will provide the relevant parties with its decision supported by its reasoning. In three-member DRBs, if a member has a dissenting opinion, he shall submit his opinion on the matter. However, this dissenting opinion does not form part of the decision.
Decision of the DRB
Once a decision is made, either party is allowed to submit a written objection to the decision with reasons within 14 days of issuance. If no objection is lodged within 14 days, the decision is binding on both parties. If there is an objection, the decision of the review committee is no longer binding. However, if the issue is taken to court or to arbitration, the opinion of the DRB can be admitted as evidence. All of the above is subject to modification through contractual agreement by both parties.
The new system promoted by the Rules is an attempt to deal with niche problems that may arise in the course of fulfilling a construction contract. An important advantage conferred by the system is the shortened timeframe for decisions (as compared to CIETAC arbitration, which can take considerably longer), which makes the system very appealing for settling disputes of a small scale or minor nature. Those in common law jurisdictions will not be comfortable with the idea of opinions of the DRB being admissible in subsequent proceedings though this can be contracted out of.
However, the right of objection, which nullifies any binding nature of the decisions of the DRB, limits the effectiveness of the new system. In cases where either party stands to suffer significant financial distress, objections are likely to be raised as a matter of course. That said, from the perspective of the Rules, there needs to be some finality and hence such a provision.
In principle, the Rules will help ease the friction which arises between parties during the currency of a construction contract, but significant matters involving substantial financial gains or losses are likely to remain the domain of CIETAC.
The Rules were first published in Chinese on CIETAC's website (http://cn.cietac.org/Accreditation/index.asp). Recently, the English version has become available at http://www.cietac.org/index.cms under the section entitled "Rules".
For inquiries related to this Legal Update, please contact:
Geoffrey Chan (firstname.lastname@example.org)
Tom Fu (email@example.com)