China

Case updates

Zhongshan Fucheng v. Nigeria

Over the past few decades, China has concluded a large number of bilateral and multilateral investment treaties with countries around the world, of which over 120 are in force. These investment treaties provide substantial protection for Chinese investments abroad. Crucially, they allow qualifying Chinese investors, both companies and natural persons, to bring claims against host States before a neutral, independent arbitral tribunal and obtain compensation for wrongful treatment of their investments. The recent victory of Zhongshan Fucheng Industrial Investment Co Ltd (“Zhongshan”) in its USD70 million investment treaty arbitration against the Republic of Nigeria demonstrated how this can be achieved.

In 2010, through its Chinese parent company, Zhuhai Zhongfu Industrial Group Co Ltd (“Zhuhai”), Zhongshan acquired rights to develop a substantial area of land, known as the Ogun Guangdong Free Trade Zone (the “Zone”), in the Ogun State in southwestern Nigeria. Zhongshan entered into a framework agreement with OGFTZ, a subsidiary of the Ogun State of Nigeria. In 2011, Zhongshan set up a local Nigerian entity, Zhongfu International Investment (NIG) FZE (“Zhongfu”) in order to manage the work on the ground in Nigeria. Zhuhai and Zhongfu then carried out a significant amount of work in the Zone, developing infrastructure such as roads, sewerage and power networks, and marketing and letting sites within the Zone.

In 2012, the Ogun State appointed Zhongfu as the interim manager of the Zone. Zhongfu’s appointment was made permanent in a joint venture agreement concluded in September 2013 between Zhongfu and the Ogun State (among others) under which Zhongfu also acquired a majority shareholding in OGFTZ (the “2013 JVA”).

In July 2016, the Ogun State purported to terminate Zhongfu’s appointment (whilst attempting to install a new manager for the Zone with immediate effect) and took a series of actions allegedly aimed at driving Zhongfu out of Nigeria. It was noted in the final award that some individuals working for Zhongfu were harassed by the Nigerian police and faced threats of prosecution and prison sentence. It was further noted in the final award that the Nigerian Immigration Service took away the immigration papers of Zhongfu’s foreign staff so that none of them would be able to work in Nigeria. Furthermore, arrest warrants were issued for two senior managers of OGFTZ, which resulted in one of them, Mr Zhao Wenxiao, “[being] arrested at gunpoint, [...] then deprived initially of food and water, intimidated, physically beaten, and detained for a total of ten days”.

In August 2018, Zhongshan commenced an investment treaty arbitration against Nigeria under the Bilateral Investment Treaty between the People’s Republic of China and Nigeria (the “China-Nigeria BIT”). The tribunal, chaired by Lord Neuberger, the former President of the UK Supreme Court, issued its final award in March 2021 which was published on 27 January 2022, finding Nigeria in breach of its obligations under the China-Nigeria BIT and awarding Zhongshan compensation of around USD70 million.

This decision highlighted the advantage of investment treaty arbitrations in providing recourse for Chinese investors to obtain compensation against host States where international law obligations have been violated. The case is considered to be the first ever investment arbitration win by a Mainland Chinese investor against an African State (if not more widely). Whilst the case may have turned heavily on its own facts, Zhongshan’s success nonetheless underscores why Chinese investors should consider using China’s extensive network of investment treaties in order to safeguard their business and investments abroad.

Oriental Prime Shipping Co., Limited -v- Hong Glory International Shipping Company Limited

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 that the Marshall Island company was domiciled in Mainland China through having a principal place of business in Shanghai.

The Court held that if the principal business office of the offshore company is situated in Mainland China, the Mainland Courts may be empowered to recognise and enforce foreign arbitral awards in accordance with the New York Convention. The relevant test to determine the “principal business office of the offshore company” is whether there is evidence to prove that the respondent has operations or work in that place and has a degree of connection with the Court in Mainland China.

The applicant in this case is the owner of a vessel who alleged that it entered into a charterparty with the charterer/respondent. A dispute subsequently arose between the parties regarding the execution of the charterparty, and the owner applied to the London Maritime Arbitrators Association (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 charterer/ respondent to pay USD90,790.28 plus arbitration fees, costs as well as the interests. As the charterer/ respondent failed to comply with the arbitral award, the owner applied to the Shanghai Maritime Court for recognition and enforcement.

The charterer/respondent challenged the Shanghai Maritime Court’s jurisdiction on the basis that it was a company registered in the Marshall Islands which had no principal business office or assets within Mainland China. Consequently, the owner had no right to apply for recognition and enforcement of the arbitral award at the Shanghai Maritime Court due to the lack of jurisdiction.

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 (the “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 charterer/respondent’s principal business office was in Shanghai, the Shanghai Maritime Court considered the following factors:

• the address of the charterer/respondent on the written charter confirmation was stated as Shanghai, China;
• the arbitral award also stated that the charterer/ respondent was a company registered in the Marshall Islands and operated in Shanghai, China; and
• according to the correspondences between the parties during the period of the charterparty, the charterers/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 charterer/respondent had its principal business office in Shanghai, it was domiciled in Shanghai and hence the Shanghai Maritime Court had jurisdiction over the application.

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

This ruling reminds parties seeking to enforce arbitral decisions in Mainland China that the PRC Courts are willing to establish jurisdiction over an offshore company if it is found that its “principal business office” is in Mainland China. It also offers stakeholders confidence in the enforceability of arbitral awards in Mainland China when starting arbitration or winning legal battles.

According to Article 280 of the PRC Civil Procedure Law, the application for recognition and enforcement of a foreign arbitral award shall be made to the intermediate people’s court where the respondent is located or where its assets are located. Since Mainland China is a civil law jurisdiction and does not apply judicial precedent (stare decisis), this decision may not be followed by other Courts in Mainland China. Each application to recognise and enforce a foreign arbitral award against an offshore company is considered on a case-by-case basis. Thus, it is worth watching whether other Courts in Mainland China will continue applying the same “principal business office of the offshore company” standard going forward.

 

Other key developments

SPC issues new guidance on cross-border commercial & procedural legal issues

December 2021, the Supreme People’s Court of PRC (SPC) issued a Meeting Note of the National Symposium on Foreign-related Commercial and Maritime Trials (全国法院涉外商事海事审判工作座谈会会议纪要) (the “Meeting Note”).

The Meeting Note contains 111 articles and are divided into three sections, namely: (1) foreign-related commercial matters; (2) maritime matters; and (3) judicial supervision of arbitration. Pursuant to Article 111 of the Meeting Note, the Meeting Note applies to cases related to Hong Kong, Macau and Taiwan.

The third section of the Meeting Note covers common issues relating to judicial supervision of arbitration in areas such as the validity of arbitration agreements, setting-aside of or refusal to enforce arbitral awards, and recognition and enforcement of foreign arbitral awards. The key provisions of the Meeting Note, which are important to the arbitration practitioners, are set out below.

• Article 91 provides that if an arbitration institution has accepted an application for confirmation of the validity of an arbitration agreement and has made a decision before the same application is made to a court, the court shall not accept the application. This article makes it clear that PRC Courts only have jurisdiction to rule on the validity of an arbitration agreement if it has not been decided by any arbitration institution.
• Article 94 confirms that the fact that parties have agreed in their arbitration agreement to “arbitrate first and litigate later” does not render the arbitration agreement invalid under Article 7 of the SPC’s Interpretation on the PRC Arbitration Law.
• Under PRC law, ad hoc arbitrations are generally not allowed. In practice, where parties have agreed to apply the UNCITRAL Arbitration Rules in an arbitration administrated by a PRC arbitration institution, it was uncertain if such arbitration would be treated as an ad hoc Article 96 seeks to address this issue and confirms that the UNCITRAL Arbitration Rules may be applied by PRC arbitration institutions if the parties so agree, which will not render the arbitration agreement invalid.
• Further, Article 100 of the Meeting Note clarifies that any arbitral award made by a foreign arbitral institution with the seat in Mainland China, shall be regarded as a foreign-related arbitral award made in Mainland China, recognising the jurisdiction of PRC Courts over such awards.
• Article 107 of the Meeting Note provides that a party’s failure to engage in negotiations before the commencement of an arbitration as agreed in the arbitration agreement shall not be a ground for setting aside the arbitral award pursuant to Article V.1.(d) of the New York Convention. This clarification facilitates enforcement of arbitral awards in China made in a contracting State to the New York Convention.

Although the Meeting Note is not an official judicial interpretation of any legislation, it is crucially important to legal professionals dealing with cross-border commercial issues/disputes involving China.

The first Ad Hoc Arbitration rules in Mainland China and the first appointment made

On 18 March 2022, China Maritime Law Association (CMLA) and China Maritime Arbitration Commission (CMAC) jointly released CMLA Rules for Ad Hoc Arbitration (the “CMLA Ad Hoc Arbitration Rules”) and the CMAC Ad Hoc Arbitration Service Rules (the “CMAC Ad Hoc Arbitration Service Rules”). These were the first institutional rules governing ad hoc arbitrations in Mainland China.

CMAC recently reported that it was appointed as the appointing authority for an ad hoc arbitration under the CMLA Ad Hoc Arbitration Rules for the first time, marking it the first CMAC ad hoc arbitration case. The case involved a dispute arising out of a co-operation agreement between a Hong Kong entity and a Mainland Chinese entity. The dispute resolution clause provided that “all disputes arising out of or in connection with this Agreement shall be subject to the Ad Hoc Arbitration Rules of the China Maritime Law Association...”, “The Hong Kong Arbitration Law shall govern the arbitration agreement...” and “China Maritime Arbitration Commission shall be the appointing authority.” The parties jointly applied to CMAC to appoint a sole arbitrator for the case during the arbitration proceedings.