China – PRC Court Reaffirms Jurisdiction Under The New York Convention To Recognise And Enforce A Foreign Arbitral Award Against An Offshore Company.

In the recent case of Oriental Prime Shipping Co., Limited -v- Hong Glory International Shipping Company Limited, the Shanghai Higher People’s Court reaffirmed the Shanghai Maritime Court’s decision to recognise and enforce a foreign arbitral award against a Marshall Island company by finding the Marshall Island company was domiciled in Mainland China through having a principal place of business in Shanghai.

Often, claimants may hesitate to take legal action against respondents that are registered as offshore companies with no substantial assets to be enforced. Thus, this decision is an important reminder to parties seeking to enforce arbitral awards in Mainland China, as it reflects the Mainland courts’ willingness to assume jurisdiction over an offshore company by seeking to find its ‘principal place of business’. It also gives stakeholders more confidence in the enforceability of arbitral awards in Mainland China when commencing arbitration and/or after succeeding in their legal battles.

Facts

Applicant: ORIENTAL PRIME SHIPPING CO., LIMITED (東盛航運有限公司)

Respondent: HONG GLORY INTERNATIONAL SHIPPING COMPANY LIMITED (商行榮耀國際航運有限公司, formerly translated as “宏達航運有限公司”)

The applicant alleged that both parties entered into a charterparty, stating that (1) the respondent would charter all of applicant’s vessels for the carriage of goods, and (2) that any disputes between the parties would be resolved by the London Maritime Arbitrators Association (LMAA) through arbitration. A dispute subsequently arose between the parties regarding the execution of the charterparty, and the applicant applied to the LMAA for arbitration in accordance with the clauses of the charterparty. A two-member arbitral tribunal heard the dispute and published the arbitral award, ordering the respondent to pay US$90,790.28 for hiring, £11,400 for arbitration fees, the costs incurred by the applicant for the arbitration as well as the interests on the above costs. As the respondent failed to comply with the arbitral award, the applicant applied to the Shanghai Maritime Court for recognition and enforcement.

The respondent challenged the Shanghai Maritime Court’s jurisdiction in reviewing the matter in its reply to the court, on the basis that it is a company registered in the Marshall Islands which has no principal business office nor assets within Mainland China, thus the applicant had no right to apply for recognition and enforcement of the arbitral award at the Shanghai Maritime Court due to the lack of jurisdiction.

Decision

The LMAA arbitral award is a foreign arbitral award. Under Article 11 of the Special Maritime Procedure Law of the People’s Republic of China (‘Special Maritime Procedure Law’), an applicant can apply to the maritime court of the place where the property against which enforcement is sought or the domicile of the person against whom enforcement is sought is located for recognition and enforcement of the arbitral award.

In finding that the respondent’s principal place of business was Shanghai, the Shanghai Maritime Court considered the following factors:

1. The address of the respondent on the written charter confirmation was stated as Shanghai, China.
2. The arbitral award also stated that the respondent was a company registered in the Marshall Islands and operated in Shanghai, China.
3. According to the correspondences between the parties during the period of the charterparty, the respondent’s signature was a different company named HONG GLORY SHIPPING CO., LIMITED, which had the same business address as that on the written charter confirmation.

Accordingly, the Shanghai Maritime Court ruled that since the respondent had its principal place of business in Shanghai, it was domiciled in Shanghai and hence the Shanghai Maritime Court had jurisdiction over the application.

The respondent subsequently appealed to the Higher People’s Court of Beijing Municipality against the Shanghai Maritime Court’s decision. The Higher People’s Court rejected the appeal and upheld that the original decision.

Comments

Article 283 of the Civil Procedure Law of the People’s Republic of China provides that the Mainland courts should decide whether to recognise and enforce an arbitral award according to the New York Convention, to which China has been a signatory since 1987. The New York Convention itself has no uniform rules regarding the court jurisdiction for the recognition and enforcement of arbitral awards. Rather, according to Article 3 of the New York Convention, each Contracting State shall recognise arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon.

To enforce a foreign arbitral award in Mainland China under the New York Convention, the ‘Notice of the Supreme People’s Court on Implementation of the Convention on the Recognition and Enforcement of Foreign Arbitration Awards Acceded to by China’ (1987) provides that the application must be submitted to the intermediate people’s court, especially when the party subject to enforcement: (1) is a natural  person, in the place where his/her residence is registered or where his/ her domicile is located; (2) is a legal entity, the place where its principal office/ main administrative body is situated or where its enforceable property is located; or (3) has no residence, domicile or principal office in Mainland China but has property within the territory of China, in the place where that property is located.

In practice, it is quite common for Chinese businesses, especially shipping companies, to operate with separate offshore entities. Nonetheless, it is noteworthy that when handling applications for the recognition and enforcement of foreign arbitral awards against offshore companies, the Mainland courts may not decline jurisdiction merely on the basis that the company is incorporated outside Mainland China. The policy reason behind it is to ensure those offshore companies operating their businesses in the Mainland China operate in good faith, and to prevent them from escaping the jurisdiction. The Mainland courts may consider the respondent’s ‘principal place of business’ by assessing whether it has operations or work within Mainland China. The relevant factors of the ‘close connection’ test include:

1. Whether the offshore company is owned or controlled by a Mainland Chinese citizen or company;
2. Whether the affiliate(s) of the offshore company are incorporated in Mainland China;
3. Whether the offshore company has staff or offices operating in Mainland China;
4. official documents from the public authority;
5. tenancy contract, proof and receipts of rental payment, proof and receipts of property utility bills;
6. tax receipts; and
7. address recorded on contracts of business dealings, correspondence name cards of company staff, and company’s external websites, emails and promotions, etc.

Of course, given that Mainland China is a civil law jurisdiction and does not apply the doctrine of judicial precedent (stare decisis), this decision may not necessarily to be followed by the other courts in Mainland China. Each application for the recognition and enforcement of foreign arbitral award against an offshore company remains to be determined on a case-by-case basis. Thus, it is worth observing further whether the test of the ‘principal office of the offshore company’ will be commonly adopted by Mainland courts.

Comparing with Hong Kong’s position

In contrast, despite often being regarded as an ‘arbitration-friendly’ and ‘pro-enforcement’ judiciary, it appears that Mainland China’s approach of ‘enforcing an arbitral award against a non-signatory to the arbitration agreement based on close connection’ has not been accepted in Hong Kong courts. Generally, an arbitral award cannot be enforced against non-parties under Hong Kong law (see IBA Arbitration Committee’s Report). In the context of enforcement of arbitral award, the Hong Kong court will consider the actual named party in the arbitral agreement, and whether the third party/ non-party had been given proper notice of the arbitration proceedings and appointment of arbitrator (see e.g. AB v CD [2021 HKCFI 327). It is therefore also important for a claimant to be careful not to misidentify each counterparty in the arbitration, particularly when it involves a complex corporate structure.