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Analysis of confusion of offshore company in litigation case

Case from Qingdao intermediate people’s court

Basic of case:

The plaintiff, buyer from the United Arab Emirates, filed a lawsuit with the Qingdao intermediate people’s court, saying that the defendant, Qingdao company, failed to fulfill its delivery obligations and should return the advance payment. The defendant, Qingdao company, argued that it was not the same company as the English name k-reliance Co., Ltd. listed in the contract involved. K-reliance Co., Ltd. was a company registered abroad, and the plaintiff chose the wrong subject of action.

Judgment of court:

After hearing, the Qingdao intermediate people’s court held that the domicile of defendant is in Qingdao, so Qingdao intermediate people’s court has jurisdiction over the case. All parties unanimously choose to apply Chinese law, so Chinese law is the applicable law to solve the dispute in this case.

On the question of whether Qingdao company is a qualified defendant in this case, judging from the facts found out in the two stages of conclusion and performance of sales contracts involved in this case. First of all, the seller’s business address, telephone number, email address and website recorded in the sales contract are consistent with the contents recorded in the business card of the manager of the Qingdao company. The place of business, telephone number, quantity and specifications of goods recorded in the sales contract between Qingdao company and the factory are consistent with those in the sales contract involved in this case. Secondly, the manager of Qingdao company, also admitted that he was the actual controller, and the business involved was by his operation. Qingdao company negotiated the business involved with a company in the United Arab Emirates, and signed a contract with buyer in the United Arab Emirates in the name of k-reliance Co., Ltd. The buyer in the United Arab Emirates paid 20% of the advance payment, and Qingdao company purchased the goods involved, a company in Shanghai was entrusted to handle the export declaration procedures of the goods involved. Qingdao company and k-reliance Co., Ltd. were confused in terms of personnel, finance and place of business. Thirdly, the court also found that the collection account designated by the seller in the three goods sales contracts involved in the case was an offshore account opened in a bank in China in the name of k-reliance Co., Ltd. the contact address of the company shown in the bank account opening data was the same as that of Qingdao company. Based on the above facts, it can be determined that Qingdao company is a qualified defendant in this case. If Qingdao company fails to deliver the goods as agreed, it shall return the plaintiff’s advance payment. Therefore, the judgment: Qingdao company compensated the plaintiff.

Typical significance:

Properly resolve the problem of domestic enterprises using offshore companies to evade legal liability, equally protect the legitimate rights and interests of Chinese and foreign parties, and help the development of open economy. Because offshore companies are registered in the offshore jurisdiction and operate outside the place of registration, they have convenient capital operation, high confidentiality and tax incentives. Registering offshore companies has gradually become a shortcut for domestic enterprises to carry out international business. However, in international trade, domestic enterprises often use offshore companies with similar names and mixed personnel and business places to evade their obligations under the sales contract.

In this case, the domestic enterprise signs a sales contract with a foreign enterprise in the name of an offshore company by registering an offshore company with a similar name abroad, and uses the offshore company with a similar name and mixed personnel with a domestic enterprise to violate the principle of good faith and evade the debts under the sales contract. From the perspective of trial practice, this case focuses on the relevance between the obligations performed by the seller during the conclusion and performance of the sales contract and domestic enterprises, combined with the statement of the actual controller of domestic enterprises on the confusion between offshore companies and domestic enterprises, and takes the principle of good faith as the main line, so as to accurately identify domestic enterprises that deliberately confuse themselves with offshore companies with similar names, the legitimate rights and interests of the parties in the UAE have been safeguarded according to law, and the fair, competitive and free market order has been optimized.

Lawyer opinion:

How to avoid commercial risk with offshore companies?

1. Conduct background checks on offshore companies

Before signing an international trade contract, conduct a detailed and comprehensive investigation on the offshore company, especially pay attention to its background information, business status, previous performance ability and business reputation, so as to ensure that it can perform its obligations in accordance with the contract; In addition, the offshore company can be required to provide effective materials issued by its registered agent or the offshore government to prove the legitimacy of the company, such as the registration certificate issued by the registered agent and the certificate of good reputation issued by the offshore government, and these certificates usually disclose the information of the directors and shareholders of the company.

These documents can only prove that the offshore company still exists and pays the annual inspection and maintenance fees to the government on time. As for the current integrity, capital and solvency of the company, it can not obtain effective guarantee from these supporting materials.

2. Require the actual controller or related party of the offshore company to provide effective guarantee.

In order to effectively prevent foreign trade practitioners from using offshore companies to evade legal liability, the opposite party of the transaction can require the actual controller of the offshore company in China to provide legal and effective property guarantee; Or require the domestic affiliates of the offshore company to bear joint and several guarantee liabilities for the performance of the agreement. In case of the above-mentioned risks, the opposite party may require the actual controller or affiliated company of the offshore company to bear the contract debts or liabilities on behalf of it. After all, compared with the time-consuming and labor-consuming foreign-related litigation, the litigation procedure of suing domestic individuals or companies is relatively simpler and more effective, which is also conducive to taking enforcement and other coercive measures to effectively protect the rights and interests of the opposite party of the contract.




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