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Second Group of Model Cases Involving Building of the “Belt and Road” Case No. 4-6

Case No. 4

Honoring the Obligation of Award Enforcement under the New York Convention

Creating a Premium Environment of Rule of Law

——Siemens International Trade (Shanghai) Co., Ltd. v. Shanghai Golden Landmark Co., Ltd. (Case concerning application for recognition and enforcement of a foreign arbitral award)

 

[Basic Facts]

On September 23, 2005, Shanghai Golden Landmark Co., Ltd. (“Golden Landmark”) and Siemens International Trading (Shanghai) Co., Ltd. (“Siemens”) entered into a contract for goods supply by means of bidding, in which it was agreed that Siemens should deliver the equipment to the construction site prior to February 15, 2006, and if any dispute arose, it shall be submitted to Singapore International Arbitration Centre (“SIAC”) for settlement by arbitration. Disputes arose between the parties during the performance of the contract. Golden Landmark referred it to SIAC for arbitration and asked to rescind the contract and stop paying for the goods. Siemens counterclaimed in the arbitration procedure by asking for the full payment of the goods price and interests as well as the compensation for other losses. In November 2011, the SIAC dismissed the petition of Golden Landmark and supported the counterclaim of Siemens. Golden Landmark made partial payment and owed outstanding payment and interests under the award totaling CNY 5,133,872.3. Pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitration Award, i.e. the New York Convention, Siemens submitted a petition to No. 1 Intermediate People’s Court of Shanghai asking for the recognition and enforcement of the award made by SIAC. In its defense, Golden Landmark believed that such award should not be recognized or enforced because both parties to the case were Chinese legal persons and the place of contract performance was China as well. Thus, the civil relationship involved in the case had no foreign-related factors and the agreement between both parties on referring the dispute to a foreign arbitration body was invalid. Recognizing and enforcing the award of the case involved would be against the public policies of China.

 

[Judgment]

After reporting level by level to the Supreme People’s Court and receiving the reply, No. 1 Intermediate People’s Court of Shanghai ruled to recognize and enforce the arbitration award of the case pursuant to the provisions of the New York Convention. As to whether the arbitration clause in accordance to which the dispute of the case should be submitted to foreign arbitration was valid or not, the key issue  whether the contractual relationship at issue has foreign-related factor. If it does, the arbitration clause is valid; otherwise, it is invalid. Having given a full review of the actual situations as the subjects, performance attributes, etc. involved in the contract under the case, and pursuant to Paragraph 5, Article 1 of the Interpretation (I) of the Supreme People’s Court on Issues concerning the Application of the Law of the People’s Republic of China on Application of Laws to Foreign-Related Civil Relations, it can be determined that the contractual relationship at issue is a foreign-related civil legal relationship. This is because first, despite both being Chinese legal persons, the place of registration of both Siemens and Golden Landmark were in China (Shanghai) Pilot Free Trade Zone, their  were both wholly foreign-owned enterprises, and both of them were closely related to foreign investors. Second, the attributes of contract performance in this case involved foreign-related factors. The equipment involved was firstly delivered from a foreign country to the pilot free trade zone for bonded supervision, and then, as needed for contract performance, the formalities for customs clearance and tax payment were handled at appropriate time to enable the equipment involved to be moved from the pilot free trade zone to the outside. Up to this point, the formalities for import of the goods had been completed. Therefore, the circulation of the subject matter of the contract had some characteristics of international sale of goods. The arbitration clause involved was therefore valid. In addition, there was no conflict between the content of the arbitral award involved and the public policies of China. For this reason, it is not violating the public policies of China to recognize and enforce such arbitral award. In the meantime, the ruling also specified that Golden Landmark Company actually participated in the entire arbitration procedure, claimed that the arbitration clause was valid and partially performed obligations as determined in the arbitral award after the issuance of such arbitral award. Under such circumstance, the petition of Golden Landmark Company for refusing the recognition and enforcement of the arbitral award on the ground that the arbitration clause was invalid violated the generally accepted legal principles of estoppel, good faith, justice and reasonableness. Therefore, the claim of Golden Landmark Company should not be supported.

 

[Significance]

Pilot free trade zones (PFTZs) play as the fundamental platform, important link and strategic support for China to promote the “Belt and Road” building. It is helpful in boosting the international credibility and the influence of China’s rule of law to keep abreast of the internationally universal practice, to support the development of pilot free trade zones and complete the mechanism for settling the international arbitration and other non-litigation disputes. The case ruled that, against the reform background of promoting investment and trade facilitation in the PFTZ, it is important to recognize the foreign-related factors in any contractual dispute among wholly foreign-owned enterprises inside the PFTZ. The case also confirmed the arbitration provision to bevalid, made clear the principle of “estoppel” , and applied the “pro-enforcement bias” concept provided in New York Convention, which showed China’s fundamental stance of honoring the obligation under international treaties. Meanwhile, this case pushed ahead the breakthrough reform from point to surface for enterprises inside the PFTZ choosing offshore arbitration, making itself a successful example of replicable and promotional judicial experience in the PFTZ. In January 2017, the Supreme People’s Court issued the Opinions on Providing Judicial Guarantee for Building Free Trade Zones in which it stipulates that where the wholly foreign-owned investment enterprises registered in the PFTZ mutually agree to submit the commercial dispute to foreign arbitration, the relevant arbitration agreement shall not be treated as invalid on the ground that there is no foreign factor involved in such dispute; it also stipulates that where one of both parties to a dispute is a foreign investment enterprise registered in the PFTZ and agrees to submit any commercial dispute to foreign arbitration or if either party submits the dispute to foreign arbitration but claims that the arbitration agreement is invalid after an award is made, or if the other party raises no objection to the force of arbitration agreement in the arbitration procedure, but claims that the arbitration agreement is invalid after an award being given on the ground that no foreign-related factor is involved, that will not be supported by the People’s Court. This is beneficial to building a more stable and certain legal business environment for the “Belt and Road”.

 

Case No. 5

Recognizing the Reciprocal Relationship between Singapore and China

Recognizing and Enforcing the Commercial Judgment Made by Singapore Court for the First Time

——Case Concerning Application by Kolmar Group AG for Recognizing and Enforcing the Civil Judgment Delivered by the Singapore High Court

 

[Basic Facts]

Kolmar Group AG (hereinafter referred to as “Kolmar Group”) is a corporation incorporated in Switzerland. In its application submitted to Nanjing Intermediate People’s Court of Jiangsu Province in June 2016, it claimed that it had disputes with Jiangsu Textile Industry (Group) Import & Export Co., Ltd. (abbreviated as Sutex Group) arising from a sales contract and both Parties reached a settlement agreement. Since Sutex Group failed to perform the settlement agreement, Kolmar Group filed a lawsuit with Singapore High Court in accordance with the jurisdiction clause agreed in the settlement agreement. The Court made an effective judgment. Since Sutex Group and its properties were within the territory of China, it requested Nanjing Intermediate People’s Court of Jiangsu Province to recognize and enforce such Singapore judgment. Sutex Group claimed in its statement that there were no provisions on the mutual recognition, enforcement of judgments and awards in the Treaty on Civil and Commercial Judicial Assistance concluded by and between China and Singapore. Pursuant to Article 282 of the Civil Procedure Law of the People’s Republic of China, the application of Kolmar Group should be dismissed.

Nanjing Intermediate People’s Court of Jiangsu Province found out through investigation that Sutex Group was present at the court despite being summoned by Singapore High Court. Furthermore, Singapore High Court made a default judgment on October 22, 2015 that Sutex Group should repay USD 350,000, the interest and expenses to Kolmar Group. Sutex Group also received such judgment. In January 2014, Singapore High Court recognized and enforced the civil judgment made by Suzhou Intermediate People’s Court of Jiangsu Province.

 

[Judgment]

Nanjing Intermediate People’s Court of Jiangsu Province held that the civil judgment involved was delivered by Singapore High Court. China and Singapore did not conclude or jointly participate in any international treaty on mutual recognition and enforcement of effective civil and commercial judgments. However, since Singapore High Court once enforced a civil judgment delivered by a Chinese court, according to the principle of reciprocity, the Chinese court may recognize and enforce qualified civil judgments delivered by the Singaporean court. After review, the judgment involved did not violate the basic principles of Chinese laws or the state sovereignty, security and public interest. Therefore, on December 9, 2016, in accordance with the provisions of Article 282 of the Civil Procedure Law of the People’s Republic of China, Nanjing Intermediate People’s Court of Jiangsu Province delivered a ruling to recognize and enforce the civil judgment No. O13 delivered by Singapore High Court on October 22, 2015.

 

[Significance]

In this case, the Chinese court recognized and enforced the commercial judgment as delivered by the Singaporean court for the first time. Article 282 of the Civil Procedure Law of the People’s Republic of China stipulated that the basis for recognizing and enforcing a judgment delivered by a foreign court was an international treaty or the principle of reciprocity. At present, China has concluded treaties on judicial assistance in mutual recognition and enforcement of civil and commercial judgments with less than 1/3 of the countries along the “Belt and Road”. Therefore, the determination of whether there is a relationship of reciprocity between both countries is crucial to whether the commercial judgments as delivered by the courts of countries along the “Belt and Road” can be recognized and enforced by the Chinese court. According to the precedent where the Singaporean court recognized and enforced the judgment delivered by the Chinese court, the judgment of this case determined that there was a relationship of reciprocity between China and Singapore for the first time and according to the principle of reciprocity, the Chinese court further recognized and enforced the commercial judgment delivered by the Singaporean court. This decision is of landmark significance in the mutual recognition and enforcement of commercial judgments delivered by the Chinese and Singaporean courts which will greatly promote the practice of judicial cooperation among countries along the “Belt and Road” in recognition and enforcement of foreign judgments.

 

Case No. 6

Applying the ICC’s Uniform Rules for Demand Guarantees as Agreed

Ensuring the Trading Order of Independent Guarantees

——Hyundai Motor Group Co., Ltd. v. Zhejiang Branch of Industrial and Commercial Bank of China (Case concerning dispute over an independent guarantee compensation)

 

[Basic Facts]

Hyundai Motor Group Co., Ltd. (hereinafter referred to as “Hyundai”) is a company registered and incorporated in South Korea. It concluded a Contract on the Supply of Diesel Generating Set with Zhejiang Zhonggao Power Technology Co., Ltd. (hereinafter referred to as “ZGPT”) , in which the parties agreed that ZGPT should apply to the Zhejiang Branch of Industrial and Commercial Bank of China (hereinafter referred to as Zhejiang Branch) for issuing an irrevocable demand guarantee, namely, an independent guarantee, as the payment method for underlying transactions. It was stated in the independent guarantee issued by Zhejiang Branch to Hyundai that in the claim for compensation, Hyundai should submit the “duplicate of the order clean ocean bill of lading specifying the informant of freight payable at destination notify as the applicant”. Afterwards, ZGPT failed to make payment on schedule. Hyundai made a claim for compensation to Zhejiang Branch and submitted the duplicate of a straight bill of lading, but its claim was rejected. Hyundai filed a lawsuit with the Intermediate People’s Court of Hangzhou City, Zhejiang Province and requested Zhejiang Branch to reimburse USD 6,648,010 under the independent guarantee and the overdue fine. Zhejiang Branch contended that the claim for compensation made by Hyundai according to the independent guarantee was an invalid claim. Zhejiang Branch has issued a telegraph text on refusal of payment according to the stipulations, specified three noncompliance points, and requested the Intermediate People’s Court of Hangzhou City to dismiss Hyundai’s claims.

 

[Judgment]

After the trial of first instance, the Intermediate People’s Court of Hangzhou City, Zhejiang Province held that it was stipulated in the guarantee involved that the Uniform Rules for Demand Guarantees (ICC Publication No. 758) was applicable and this stipulation was valid. In accordance with the provisions of the Rules, under the circumstance where the terms and conditions of a guarantee were specific and clear, the guarantor only needed to consider whether the receipts were superficially consistent with the terms and conditions of the guarantee whereas the performance of the underlying contract was not a relevant factor to be taken into consideration in the examination of receipts. Since there were several noncompliance points between the receipts involved and the terms of the guarantee, the repeated refusals of payment by Zhejiang Branch conformed to the regulations and were valid. Therefore, the Intermediate People’s Court of Hangzhou City delivered a judgment to dismiss Hyundai’s claims. Hyundai refused to accept the judgment of first instance and appealed.

In the trial of second instance, the High Court of Zhejiang Province held that an independent guarantee was a contract with legally binding effect between the issuing bank and the beneficiary. Once the beneficiary accepted the terms of the guarantee or made a claim for compensation to the issuing bank in accordance with the terms of the guarantee, it showed that the beneficiary voluntarily accepted all terms of the guarantee and was bounded by such terms of the guarantee. The guarantee issued by Zhejiang Branch clearly stated the requirements for receipts. When accepting the guarantee, the beneficiary Hyundai raised no objection. In its claim for compensation, it should provide all receipts consistent with the terms and conditions of the guarantee. In accordance with the provisions of Article 2 of the Uniform Rules for Demand Guarantees (ICC Publication No. 758), the standard for examination of receipts as stated in the independent guarantee, the issuer should apply the doctrines of format compliance and strict compliance. The duplicate of the straight bill of lading submitted by Hyundai was significantly different from the duplicate of the order bill of lading as requested by the guarantee involved in the case. There is a difference between the two duplicates in terms of international trade and maritime transport. Zhejiang Branch refused the payment on the ground of noncompliance points, which conformed to the stipulations of the guarantee. Hyundai alleged that the receipts it submitted were not different from those as requested by the guarantee based on the performance of the underlying contract, which violated the principle of receipt transactions and the doctrine of format compliance in an independent guarantee. Therefore, the High People’s Court of Zhejiang Province delivered a judgment to dismiss the appeal and affirmed the original judgment.

 

[Significance]

An independent guarantee has important functions to serve as trading guarantee, credit confirmation and to provide financing support. It has become a common financial guarantee instrument that is indispensable for the outgoing Chinese enterprises and in the building of the “Belt and Road”. The People’s Court fully respects and applies the international trading rules agreed upon by the parties in hearing an independent guarantee claim, which is crucial to accurately defining the rights and obligations of the parties and ensuring the trading order of independent guarantees. The independent guarantee involved in this case specified that the ICC’s Uniform Rules for Demand Guarantee should be applicable. The courts of first instance and second instance adjusted the relationship of rights and interests of the parties in accordance with the Rules, applied the doctrines of strict compliance and format compliance, examined whether the receipts strictly complied with the terms and conditions of the guarantee based on the receipts themselves and determined the existence of noncompliance, which has shown the capability of the Chinese court in accurately applying international rules. The judgment of this case specified that a conclusion on format compliance may not be reached on the basis of performance of the underlying contract, which has reflected the full respect of the principle of receipt transactions of independent guarantees and the principle of independence, equally protecting the lawful rights and interests of Chinese and foreign parties, and effectively ensured the trading order of independent guarantees. This case also reflects the importance of the Chinese banking industry in learning and applying international financial transaction rules to protect its own rights and interests and effectively guard against financial risks.

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