Ecom USA. Inc. v. Liuzhou Overseas Chinese Chemical Fiber & Textile Co., Ltd

Ecom USA. Inc. v. Liuzhou Overseas Chinese Chemical Fiber & Textile Co., Ltd

Cite as: Ecom USA. Inc. v. Liuzhou Overseas Chinese Chemical Fiber & Textile Co.,Ltd, The Supreme People’s Court (6 February 2013), in Fan Yang, Foreign-related Arbitration in China: Commentary and Cases, Part IV

Case identification

Date of Decision: 6 February 2013
Court:

The Supreme People’s Court
The Higher People's Court of Guangxi Zhuang Autonomous Region

Arbitral Institution/Tribunal:

Case number / Docket number:

No. 3 of the Fourth Civil Tribunal of the Supreme People’s Court [2013]
No. 19 of the Higher People’s Court of Guangxi Zhuang Autonomous Region [2012]

Classification of issues present

Application of the New York Convention: No
Key PRC law provision(s) at issue: Article 258 paragraph 1. (3) of <The Civil Procedure Law of the People’s Republic of China>; Article 20 of <The SPC’s Interpretation of Several Issues Concerning the Application of “The Arbitration Law of the People’s Republic of China”>; Articles 36 (3) and 37(3) of <CIETAC Arbitration Rules> (2005) .

Descriptors: Non-enforcement of foreign-related arbitral awards; Re-arbitration; Evidence had not been cross-examined in the arbitration; Arbitration was not conducted in accordance with the arbitration rules; Non-compliance may affect the appropriate disposal of the dispute; Non-compliance affected the outcome of the proceedings to justify a refusal to enforcement; Notice of amendment of arbitration claims; Arbitral tribunal’s power to decide on the admission and weight of evidence; Costs of arbitration; Damages; Price of the goods; Market price; Lawyer’s fees in arbitration

Ecom USA. Inc. v. Liuzhou Overseas Chinese Chemical Fiber & Textile Co., Ltd

A CIETAC (Beijing) foreign-related arbitral award was enforced. In its Report to the Supreme People’s Court, the Higher People's Court of Guangxi Zhuang Autonomous Region formed two different views. The first view was to order re-arbitration so that the arbitral tribunal could have an opportunity to correct any defect due to non-compliance with the arbitration rules in the arbitral proceedings. The second view was to enforce the arbitral award because applying article 20 of the SPC Interpretation of the PRC Arbitration Law (2006), the non-compliance with the arbitration rules did not affect the fair and appropriate disposal of the dispute in the arbitration. In its Reply, the Supreme People’s Court agreed with the second view and found that the problems concerning evidence as descripted in the Report did not constitute non-compliance with the arbitration rules that would justify non-enforcement of the award.

Case text (English translation)

(6 February 2013 No. 3 of the Fourth Civil Tribunal of the Supreme People’s Court [2013])

The Higher People’s Court of Guangxi Zhuang Autonomous Region:

Your court’s Request for Instructions on Ecom USA. Inc.’s Application for the Enforcement of a Foreign-related ArbitralAward ([2012] No. 19 of the Higher People’s Court of Guangxi Zhuang Autonomous Region) submission has been received. Upon deliberation, our reply is as follows:

Despite the arbitral tribunal’s quotation for the price of the goods in question had not been cross-examined by the parties, the said quotation was well-known, and the damages awarded under the arbitral award was far lower than the amount claimed. The arbitral award did not exceed the scope of the [applicant’s] arbitration request. When determining the amount of attorney fees awarded, the arbitral tribunal did not accept the applicant’s evidence submitted after the period of providing evidence. In addition, issues concerning evidence are not equivalent to issues concerning the arbitration procedure. Therefore, the issue related to the evidence contained in the Request does not constitute a situation where the arbitration procedure is not in conformity with the arbitration rules. In the absence of other situations constituting non-enforcement, Arbitral Award No. 0161 of the China International Economic and Trade Arbitration Commission (2007) shall be enforced. [Our court] concurs with your court’s opinion.

It is so replied.

Enclosed:

Request for Instructions on Ecom USA Inc.’s Application for the Enforcement of a Foreign-related Arbitral Award

(20 July 2012 No. 19 of the Higher People’s Court of Guangxi Zhuang Autonomous Region [2012])

The Supreme People’s Court:

Regarding the dispute over a contract of sale between Ecom USA Inc. (hereafter “Ecom”) and Liuzhou Overseas Chinese Chemical Fiber Textile Limited Company (hereafter “Liuzhou Textile”), the China International Economic and Trade Arbitration Commission (“CIETAC”) rendered Arbitral Award No. 161 (2007) on 13 April 2007, which had come into force. Since the respondent, Liuzhou Textile, did not perform the said award, the enforcement applicant, Ecom, filed an application to the Intermediate People’s Court of Liuzhou (hereafter the “Liuzhou Intermediate Court”) to enforce the said award on 28 December 2007. The respondent, Liuzhou Textile, submitted defences for non-enforcement. Upon formation of a collegiate panel and adjudication, it is in the Liuzhou Intermediate Court’s opinion that the said award shall not be enforced. [The court] reported its opinion for our court’s consideration pursuant to article 2 of the Circular of the Supreme People's Court on the Relevant Issues Regarding the Handling of Foreign-related Arbitration and Arbitration of a Foreign Country by the People's Court (No. 18 of the Supreme People’s Court [1995]). After accepting the case, our court formed a collegiate panel to deliberate the case. The adjudication of the case has now been completed. [Our court] hereby reports [the case] for your court’s consideration.

I. The parties

Enforcement Applicant: Ecom USA Inc. Domicile: 3141 Hood Street, Second Floor, Texas 75219, USA.

Respondent: Liuzhou Overseas Chinese Chemical Fiber Textile Limited Company. Domicile: 3 Shengli Lu, Liuzhou, Guangxi.

Legal representative: Pan Chao, Chairman.

II. The contents of the Arbitral Award

The arbitral tribunal unanimously made the following rulings: (1) The respondent shall compensate the applicant’s losses arising from its breach of contract amounting to USD$177,470.30; (2) The respondent shall compensate the applicant attorney’s fees amounting to USD$10,000.00; (3) The applicant’s other arbitration requests shall be dismissed; (5) The arbitration costs totaling USD$ 21,290.00, where 80 per cent of the costs (USD$17,032.00) shall be borne by the respondent and 20 per cent of the costs (USD$4,258.00) shall be borne by the applicant. Subsequent to the set-off of the abovementioned sum with the applicant’s payment in advance, the respondent shall compensate the applicant USD$17,032.00, representing the applicant’s arbitration costs paid in advance. The respondent shall settle the abovementioned payments to the applicant within thirty days from the date of rendering of this award. This award shall be final and effective from the date of issue. [Note: Ruling (4) was misprinted in the Arbitral award as “Ruling (5).”]

III. Defences submitted by the respondent

The respondent Liuzhou Textile submitted the following defences for non-enforcement:

(i) Regarding the issue on the delivery of legal documents

Upon accepting the case, the arbitration commission sent Liuzhou Textile the arbitration application and relevant evidence submitted by Ecom, without the notice on the filing of the arbitration case. [Also, the arbitration commission] did not notify Liuzhou Textile any particulars regarding the submission of its defences, appointment of arbitrators and the submission of counterclaims. Regardless of the captioned party and its contents, the Arbitration Notification No.002729 of the CIETAC (2006) sent to Liuzhou Textile specifically referred to Ecom.

(ii) Regarding the issue on the modifications of arbitration requests

Subsequent to the first hearing by the arbitral tribunal dated 15 November 2006, Ecom modified its arbitration requests by submitting a Supplementary Explanations on Arbitration Application No.G20060096 on 1 February 2007. On the same day, the arbitral tribunal sent Liuzhou Textile Letter No.001326, attached the Supplementary Explanations on Arbitration Application No.G20060096 and relevant evidence. The contents of Letter No.001326 were in connection with Supplementary Explanations on Arbitration Application No.G20060096. Until the second hearing on 16 March 2007, the arbitral tribunal did not notify Liuzhou Textile of its decision whether Ecom’s modifications of its arbitration requests were accepted and did not notify Liuzhou Textile to submit its defences. Besides, the time period [between 1 February 2007 and] the second hearing was less than 45 days.

(iii) Regarding the issue on the price of the goods

Ecom failed to submit relevant evidence to support its claim on losses incurred from the difference in price. The arbitral tribunal collected “Relevant Quotes from Foreign Cotton Merchants in the Main Ports of China as at March 2005” on its own, and confirmed the price for the calculation of losses arising from differences in price based on the said quotes. Before rendering the award, the arbitral tribunal did not make a disclosure to Liuzhou Textile as to the source, contents, form, quality of the raw cotton, the foreign cotton merchants involved and the conditions of the price related to the evidence collected on its own. Moreover, no opportunities were given for Liuzhou Textile to cross-examine the evidence and to submit its own opinions. Thus, the legality of the said award had been completely lost.

(iv) Regarding the issue on the attorney fees

Ecom submitted the receipts of its attorney fees paid after the period for submission of evidence stipulated by the arbitral tribunal. In Letter No.001326 of the CIETAC (2007), although the arbitral tribunal expressly stipulated that it would not accept the abovementioned evidence, it had granted Ecom attorney fees amounting to USD$10,000.00 in violation of the arbitration rules.

IV. The opinions of the Liuzhou Intermediate Court on the four issues in dispute

(i) Regarding the issue on the delivery of legal documents

The China International Economic and Trade Arbitration Commission had submitted Details of Domestic Express Mail Service and receipts from its queries to prove that the commission had sent the Arbitration Notification, Arbitration Rules, List of Arbitrators, and the Arbitration Application submitted by Ecom and its annexures by Letter No.002730 of the CIETAC (2006) [to Liuzhou Textile] by mail on 3 April 2006. On 4 April 2006, the said materials were properly delivered to Liuzhou Textile. Liuzhou Textile’s submission that it had not received the said Arbitration Notification cannot be established.

(ii) Regarding the issue on the modifications of arbitration requests

The arbitral tribunal’s Letter No.001326 of the CIETAC (2007) to Liuzhou Textile indicating its acceptance of Ecom’s Supplementary Explanations on Arbitration Application No.G20060096 should be considered a clerical error. However, since [the Letter] caused modifications on the substantive contents [of Ecom’s arbitration requests], such errors were not acceptable. It can be determined that Liuzhou Textile did not receive the arbitral tribunal’s notification regarding Ecom’s modifications on its arbitration requests. Even so, the arbitral tribunal declared its acceptance of Ecom’s changes on its arbitration requests during the second hearing on 16 March 2007. [The tribunal] made a Confirmation on Relevant Procedures Regarding Case No.G20060096 to arrange matters related to the arbitration procedures. In particular, Guo FengWu, the attorney of Liuzhou Textile, had signed and confirmed the contents regarding matters on Ecom’s changes in its arbitration requests and the notification that Liuzhou Textile shall submit its defences, evidence and counterclaims regarding Ecom’s latest arbitration requests before 27 March 2007. According to this, it can be determined that Liuzhou Textile’s argument that it was unable to fully exercise its right to submit its defence against Ecom’s latest arbitration requests was not established.

(iii) Regarding the issue on the price of the goods

Whether the civil rights of a party had been infringed upon, the type of damage and the extent of damage fall under the matters to be proved in the case. The determination of the abovementioned matters is indispensable and is equally important to the fairness of the outcome of the award. The arbitral tribunal may exercise its discretion not to accept the price submitted by the parties and refer to the “Relevant Quotes from Foreign Cotton Merchants in the Main Ports of China as at March 2005” to determine the reasonable amount of compensation. However, the so-called “Relevant Quotes from Foreign Cotton Merchants in the Main Ports of China as at March 2005” were merely industry information known by the arbitrators without a specific form. Specific matters such as the cotton merchants involved and the ports where the quotes were determined shall be made known to the parties before the rendering of the award, so as to enable the parties to submit defences. Liuzhou Textile’s submission that the arbitral tribunal had applied evidence not cross-examined was established.

(iv) Regarding the issue on the attorney fees

Although the arbitral tribunal retains the inherent power to rule that the losing party shall compensate the winning party reasonable costs incurred in handling the case, this must be based on the assumption that the winning party had already incurred expenses in handling its case. In other words, the costs paid by the winning party for the preparation of the case should be considered a matter to the proved. If a party merely proves that its rights had been infringed upon but fails to prove the extent of the damage, it would be impossible for it to succeed in its claim. Here, Ecom merely proved that it had appointed attorneys in the arbitration, but it did not prove the amount paid, and so it failed to discharge its burden of proof. Since the arbitral tribunal expressly indicated its decision not to accept Ecom’s late submission of receipts of attorney fees paid, it shall not consider the said receipts, as if it had not seen the abovementioned evidence. Under the circumstance that the arbitral tribunal had no knowledge of Ecom’s actual payment regarding the attorney fees, it would be impossible for the [arbitral tribunal] to determine a reasonable amount for Liuzhou Textile’s compensation of Ecom’s attorney’s fees incurred. With this assumption, the arbitral tribunal’s ruling that Liuzhou Textile shall compensate Ecom attorney’s fees amounting to USD$10,000.00 was an indirect adoption of Ecom’s evidence that was submitted late. Therefore, Liuzhou Textile’s argument that the arbitral tribunal adopted evidence which it expressly declared that it would not accept is established.

Summarizing the above, it is in Liuzhou Intermediate Court’s opinion that the arbitral tribunal’s failure to provide evidence collected on its own for the parties’ cross-examination and its indirect adoption of evidence that was submitted late, which the arbitral tribunal expressly declared that it would not accept, constitute a violation of article 36(3) and article 37(3) of the arbitration rules, causing procedural improprieties in the arbitral award. Therefore, [the court] shall rule that [the said award] shall not be enforced.

V. The opinions of our court

It is in our court’s opinion that since the applicant, Ecom, is a company from the USA, which involved foreign-related elements, Arbitral Award No. 0161 of the China International Economic and Trade Arbitration Commission (2007) should be considered a foreign-related arbitral award.

Upon review, the first opinion agreed with Liuzhou Intermediate Court’s opinions on the four issues in dispute, but it is inappropriate to rule for the non-enforcement of the said arbitral award. The arbitral tribunal’s determination on the price of the goods in question and the attorney’s fees constituted the situation provided in paragraph 1(3), article 258 of the Civil Procedure Law of the People’s Republic of China that “The procedure for arbitration was not in conformity with the rules of arbitration.” Apart from that, the arbitral tribunal ruled that the loss from difference in price for 195-ton Pima cotton shall be calculated at USD$0.295 / pound (amended contract price at USD$1.275 / pound – price at the Chinese port at USD$0.98 / pound), while in its arbitration request, Ecom claimed USD$0.265 / pound (original contract price at USD$1.355 / pound – actual sale price at USD$1.09 / pound), causing the outcome of the award on losses from Pima cotton to exceed the scope of Ecom’s request. It would be difficult to determine whether the abovementioned violations of the arbitration rules should be regarded as relatively serious or [they] lead to unfair outcomes. If [the court] rules that the arbitral award shall be enforced, Liuzhou Textile would consider that the people’s court’s rulings were based on subjective speculations. Considering the actual circumstance, it is not appropriate to make a decision regarding enforcement or non-enforcement of this case. Instead, the arbitral tribunal should be given an opportunity to ratify its mistakes. This can also reduce the burden on the parties. Therefore, the adjudication of this case shall be suspended, and notifications shall be made to the arbitral tribunal for re-arbitration within a specified period. If the arbitral tribunal re-arbitrates the case within a specified period, [the court] shall terminate the adjudication proceedings; If the arbitral tribunal refuses to re-arbitrate or fails to re-arbitrate within the specified period, the adjudication proceedings for this case shall resume. The court shall make an order of non-enforcement of the arbitral award in question based on the original facts of the case.

The second opinion advocated affirming the Liuzhou Intermediate Court’s opinion regarding issues (i) and (ii), but not issues (iii) and (iv). The said arbitral award shall be enforced. Reasoning: Although the arbitral tribunal’s determination on the price of the goods in question and the attorney’s fees give rise to the situation provided in paragraph 1(3), article 258 of the Civil Procedure Law of the People’s Republic of China that “The procedure for arbitration was not in conformity with the rules of arbitration,” according to article 20 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of the “Arbitration Law of the People's Republic of China,” “The term ‘violation of legal procedures’ as prescribed in Article 58 of the Arbitration Law shall refer to violation of the arbitration procedures prescribed in the Arbitration Law or a circumstance under which the arbitration rules chosen by the parties concerned might affect the correct award for the case.” Applying [the abovementioned provision] to this case, the arbitration commission adopted a well-known port price of the goods based on its non-approval of the price submitted by the parties. Considering the procedure, it seems that the tribunal did not provide an opportunity for the parties to cross-examine the quotes, yet the arbitration commission had explained that the quotes were not adopted as evidence, but they should be regarded as generally known facts. Therefore, it is controversial whether these facts require cross-examination. Even given [the tribunal’s] failure to provide the parties an opportunity to cross-examine the quotes in violation of the arbitration rules, considering the difference in price submitted by the applicant (its losses) and summarizing the decrease in price reflected in the respondent’s letters submitted, it can be seen that the difference in price (and losses) determined by the arbitral tribunal was a careful decision based on appropriate restrictions. Although objectively, the arbitral award’s determination on the loss arising from the 195-ton Pima cotton slightly exceeded the scope of Ecom’s request, the overall ruling regarding losses arising from differences in price based on the calculation of 500-ton CA cotton, 500-ton SJV cotton and 195-ton Pima cotton did not exceed the scope of Ecom’s arbitration request. The attorney’s fees had been actually incurred. In addition, the applicant had supporting evidence including the contract and the invoices. [The applicant] had only submitted the evidence after the period for submission of evidence [had lapsed]. Therefore, the arbitration institution did not accept the said evidence but to exercise its discretion to order the respondent to compensate [the applicant] for USD$10,000.00. This sum was far lower than the applicant’s claim based on the contract and the invoices, and did not exceed the standard for lawyers’ charges in Beijing. Therefore, this determination was legitimate and reasonable, which took into account the objective facts of this case.

Our court tends to agree with the first opinion.

Please reply whether the above opinions are correct.