Singapore Goldenland Investment (Group) Co. Ltd. v. Huludao Logistics Co. Ltd.

Cite as: Singapore Goldenland Investment (Group) Co. Ltd. v. Huludao Logistics Co. Ltd., The Supreme People’s Court (25 October 2012), in Fan Yang, Foreign-related Arbitration in China: Commentary and Cases, Part IV

Case identification

Date of Decision: 25 October 2012
Court:

The Supreme People’s Court
The Higher People's Court of Beijing

Arbitral Tribunal:

Case number / Docket number:

No. 47 of the Fourth Civil Tribunal of the Supreme People’s Court [2012]
No. 251 of the Higher People’s Court of Beijing [2012]

Classification of issues present

Application of the New York Convention: No
Key PRC law provision(s) at issue: Article 70 of the <PRC Arbitration Law> and Paragraph 1(3), Article 258 of the <Civil Procedure Law of the People’s Republic of China>.
CIETAC Rules (2005) Article 25; equivalent Article 29 of the CIETAC Rules (2012)

Descriptors: Arbitral procedures; Impartiality or independence of arbitrator; Disclosure; Facts or circumstances likely to give rise to justifiable doubts as to the impartiality or independence of the arbitrator; Annulment/Setting-aside of arbitral awards; Pending court proceedings affected the dispute in arbitration; Impossible to enforce the award; Public interest

Singapore Goldenland Investment (Group) Co. Ltd. v. Huludao Logistics Co. Ltd.

An application to set aside a CIETAC Beijing foreign-related arbitral award was denied. In its Report to the Supreme People’s Court, the Higher People's Court of Beijing was of the view that the arbitral award should be set aside on the ground that “the composition of the arbitration tribunal or the procedure for arbitration was not in conformity with the rules of arbitration” in that Yang Song, the arbitrator failed to disclose his close personal relationship with the counsel of Huludao. In its Reply, the Supreme People’s Court disagreed and found that the evidence was insufficient to establish that a close personal relationship existed between the arbitrator Yang Song and counsel of Huludao and that the facts or circumstances were not such as to give rise to justifiable doubts as to the impartiality or independence of the arbitrator.

Case text (English translation)

(25 October 2012 No. 47 of the Fourth Civil Tribunal of the Supreme People’s Court [2012])

The Higher People’s Court of Beijing:

Your court’s <Request on instructions on Singapore The applicant Investment (Group) Co. Ltd.’s application to set aside an Arbitral Award by the China International Economic and Trade Arbitration Commission> No. 251 of the Higher People’s Court of Beijing [2012] submission has been received. Upon deliberation, our reply is as follows:

This is an application to set aside a foreign-related arbitral award. Review shall be made pursuant to the relevant provisions in Article 70 of the <Arbitration Law of the People’s Republic of China> and Article 258 of the <Civil Procedure Law of the People’s Republic of China>.

The applicant, Singapore Goldenland Investment (Group) Co. Ltd.’s application to set aside the Arbitral Award was based on the argument that the composition of the arbitral tribunal in question was not in conformity with the arbitration rules. It submitted that a close personal relationship existed between the arbitrator Yang Song and Xu Shuangquan, the attorney representing the respondent, Huludao Logistics Co. Ltd. in the arbitration and the arbitrator failed to disclose the relationship, violating Article 25 of the <China International Economic and Trade Arbitration Commission Arbitration Rules (2005)>.

Pursuant to the Request on Instructions, Xu Shuangquan, the head of Yingke Law Firm (Shengyang), was a graduate from the Liaoning University. The arbitrator Yang Song was the dean of the Law School of the Liaoning University, and he had made a speech in the opening ceremony of the Yingke Law Firm (Shengyang) as a guest. Considering the circumstances, Xu Shuangquan and Yang Song merely possess same educational background and experience in participating in certain ceremonies together, but they were not involved in any direct mentor-student relationship or other relevant interests, which were insufficient to affect the independence and fairness of the arbitration. Therefore, the abovementioned facts and circumstances are not sufficient to establish a close personal relationship existed between the arbitrator Yang Song and Xu Shuangquan, which affected the impartiality or independence of the arbitrator. Therefore, the applicant’s application to set aside the Arbitral Award relying on the grounds that the composition of the arbitral tribunal in question was not in conformity with the Arbitration Rules was not in conformity with Paragraph 1(3), Article 258 of the <Civil Procedure Law of the People’s Republic of China>. Our court does not agree with your court’s opinion supporting the setting aside the Arbitral Award in question.

It is so replied.

Enclosed:

Request on instructions on Singapore Goldenland Investment (Group) Co. Ltd.’s application to set aside an Arbitral Award by the China International Economic and Trade Arbitration Commission

(8 August 2012 No. 251 of the Higher People’s Court of Beijing [2012])

The Supreme People’s Court:

Regarding the applicant’s application to set aside Arbitral Award No. 0654 by the China International Economic and Trade Arbitration Commission accepted by the Higher People’s Court of Beijing, the court decided to set aside the Arbitral Award and made a request to our court for instructions pursuant to the relevant regulations. Upon deliberation, our court hereby reports the relevant circumstances and makes a request for your court’s further instructions:

I. The Parties

Applicant (Arbitration Respondent): Singapore Goldenland Investment (Group) Co. Ltd. Domicile: 32/F, UOB Plaza 1, 80 Raffles Place, Singapore.

Legal Representative: Li Longjing, Director of the company.

Authorized Attorney: Zhao Yinwei, Attorney, Liaoning Siyang Law Firm.

Authorized Attorney: Sun Changjiang, Attorney, Liaoning Siyang Law Firm.

Respondent: (Arbitration Applicant): Huludao Logistics Co. Ltd. Domicile: Building No. 41,

Jinhu Lu, Longgang, Huludao, Liaoning, the People’s Republic of China

Legal Representative: Deng Shengan, General Manager of the company.

Authorized Attorney: Xu Shuangquan, Attorney, Yingke Law Firm (Shengyang).

II. Grounds supporting the application to set aside the arbitral award and defences

The applicant submitted an application to set aside the first, second and fourth ruling of the Arbitral Award by the China International Economic and Trade Arbitration Commission. The facts and reasoning are as follows:

Firstly, the China International Economic and Trade Arbitration Commission failed to make a reply to the applicant’s application to suspend the arbitration, violating the Arbitration Rules. During the arbitration procedure, Liaoning Bohai Sea Shipbuilding Heavy Industry Ship Making & Repairing Co. Ltd (Liao Ship) had initiated a litigation claim in the Intermediate People’s Court of Shenyang (Shenyang Intermediate Court) against the applicant, the respondent and Huludao New Century Port Industrial Park Co. Ltd. (New Century) requesting an order that the applicant and the respondent shall obviate the impediments and to guarantee Liao Ship’s exercise of its shareholder’s pre-emptive rights. Concerning this matter, the applicant submitted an application to the China International Economic and Trade Arbitration Commission for termination of the arbitration. The China International Economic and Trade Arbitration Commission confirmed receipt on 17 August 2010. Due to Liao Ship’s addition of litigation requests demanding setting aside of the Share Transfer Contract and Share Custody Agreement between the applicant and the respondent during the litigation proceedings, the applicant submitted another application to the China International Economic and Trade Arbitration Commission for termination of the arbitration, which was received by the Commission on 25 August 2010. Liao Ship also submitted an application to the China International Economic and Trade Arbitration Commission for termination of the arbitration, which was received by the Commission on 31 August 2010. The China International Economic and Trade Arbitration Commission sent the applicant’s second application to suspend the arbitration to the respondent only after the rendering of the Arbitral Award. The respondent was unable to submit its defence regarding the second application to suspend the arbitration. Hence, the China International Economic and Trade Arbitration Commission intentionally omitted the application to suspend the arbitration, which would significantly influence the result of this case. Although the explanatory notes of the Secretariat of the China International Economic and Trade Arbitration Commission sent to the applicant expressed that upon deliberation, the arbitral tribunal decided to dismiss the applicant’s application to suspend the arbitration, the opinions of the members of the arbitral tribunal were not attached. The notes cannot confirm whether the members of the arbitral tribunal had investigated into the applicant’s two applications to suspend the arbitration and whether the China International Economic and Trade Arbitration Commission had sent the two applications to suspend the arbitration to the members of the arbitral tribunal. Article 136 of the <Civil Procedure Law> stipulates that “legal Proceedings shall be suspended in any of the following circumstances: … (5) The adjudication of the case pending is dependent on the results of the trial of another case that has not yet been concluded…” Considering that The applicant’s second application to suspend the arbitration due to Liao Ship’s addition of litigation requests would significantly influence the outcome of this case, the China International Economic and Trade Arbitration Commission’s intentional omission and failure to reply violated the relevant legal procedures.

Secondly, the Arbitral Award violated public interest and shall be set aside. New Century is a Sino-foreign joint-venture enterprise, approval from the relevant authorities is required for share transfers. In addition, the share transfer arrangements would be null and void if consent of the other parties of the joint-venture is not obtained. Here, the Share Custody Agreement between the applicant and the respondent, was a de facto share transfer agreement, in attempt to evade the mandatory reviewing requirements in share transfers stipulated in law, damaging the national interests. Therefore, the Arbitral Award violated public interest. Further, it is impossible to perform the Arbitral Award. The arbitral tribunal ruled that the applicant and the respondent shall continue to perform the Share Custody Agreement, yet Liao Ship demanded setting aside the Agreement and exercise its pre-emptive rights. Additionally, a Share Transfer Contract had been concluded between the applicant and Liao Ship, and therefore it is impossible to perform the Arbitral Award.

Thirdly, since members of the arbitral tribunal had material interests with the respondent, the composition of the arbitral tribunal violated the relevant procedures. During the arbitration proceedings, the respondent appointed Yang Song, the dean of the Law School of the Liaoning University as an arbitrator, while the attorney representing the respondent, Xu Shuangquan was among the pioneer batch of graduates from the master of laws of the Law School of the Liaoning University, and therefore the two were teacher and student. During the arbitration proceedings, Xu Shuangquan joined Yingke Law Firm (Shengyang) and become an executive director of the Firm. Yang Song was invited as a guest of the opening ceremony of the Law Firm on 3 July 2010, In view of the facts, no disclosure had been made by the arbitrator to the China International Economic and Trade Arbitration Commission, affecting the fairness of the arbitration.

During the trial proceedings in the First Intermediate People’s Court of Beijing (First Intermediate Court), The applicant submitted the following supplementary opinions, firstly the factual grounds supporting The respondent’s arbitration requests no longer exist. Secondly, pursuant to the judgment of the Shenyang Intermediate Court, the formalities for changes in share equity had been completed between the applicant and Liao Ship, a third party. The applicant was no longer a shareholder of New Century. It would be impracticable to enforce the matters concerning share custody in the Arbitral Award. The respondent’s demand to continue performance of the share custody agreement lacked factual and legal support.

The respondent submitted in defence that:

Firstly, concerning the issue of the arbitration procedure, the arbitral tribunal was entitled to conduct independent review and make a ruling on the application to suspend the arbitration submitted by the applicant. The applicant’s submission that the China International Economic and Trade Arbitration Commission’s failure to make a reply as to its application to suspend the arbitration proceedings was in violation of the procedures stipulated in law lacked factual and legal support. The hearings of arbitral tribunals and the formation of the tribunal are flexible. Conclusions that the arbitral tribunal’s arbitration procedures violated the law shall not be made merely on the grounds that Secretariat of the China International Economic and Trade Arbitration Commission’s failure to attach the collegial opinions of the arbitral tribunal in its notice sent.

Secondly, concerning the issue of public interest, no clear definitions as to the meaning of public interests can be found under the current law. The applicant’s submission that the outcome of this arbitration violated public interests was a mere speculation. The arbitral tribunal’s legal determination regarding the parties’ conducts under the ambits stipulated by the law was consistent with the law of the People’s Republic of China. Regarding the enforcement of the Arbitral Award, the issue was not under the court’s jurisdiction for procedures determining setting aside of arbitral awards.

Thirdly, concerning the issue of whether members of the arbitral tribunal had material interests with the respondent, the hearing for the arbitration in question was held on 10 May 2010, while Xu Shuangquan joined Yingke Law Firm (Shengyang) in July 2010. Yang Song was the dean of the Law School before Xu Shuangquan’s graduation. He was not a mentor of Xu Shuangquan and had not taught Xu Shuangquan directly. In the opening ceremony of Yingke Law Firm (Shengyang), Yang Song merely attended the ceremony as a guest. Therefore, these matters did not affect the fairness of the arbitration hearings. Apart from that, the attorney of the applicant, Sun Changjiang was also a graduate from the Law School of Liaoning University. Yang Song and Sun were both members of the Law Society of the Liaoning province, having personal relationships. Also, concerning the issue whether an explanation as to the parties’ application for an interested arbitrator’s withdrawal had been made by the arbitral tribunal, no objections had been made by the parties. Therefore the applicant’s submission of this issue after the issuance of the Arbitral Award should be rejected.

In response to the supplementary opinions submitted by the applicant, the respondent submitted the following defence, firstly, the Arbitral Award was effective before the judgment of the Shenyang Intermediate Court came into force. The Arbitral Award and the judgment of the Shenyang Intermediate Court referred to different matters and were not in contradiction of each other. Secondly, the shares in question were registered under the name of Golderland. Thirdly, the argument that it may be impracticable for the performance of the Custody Agreement in question is not a valid ground for setting aside the award. The effectiveness of the Arbitral Award shall not be negated by relying on the aforementioned grounds. Considering that several other issues, including the lawyers’ fees and the arbitration fee were involved in the Arbitral Award, Logistic Co. may resort to other relief pursuant to the said Arbitral Award.

III. The arbitration

Due to disputes arising from the performance of the Share Custody Agreement between the applicant and the respondent, the respondent made an arbitration application on 25 December 2009 pursuant to the arbitration clauses contained in two Agreements, requesting that, the applicant shall continue to perform the Share Custody Agreement and shall be responsible for the lawyers’ fees, traveling expenses, arbitration fees and preservation fees incurred during arbitration proceedings.

During the arbitration proceedings, the applicant submitted that the Share Transfer Contract had not been submitted for approval and shall be null and void. Since the effectiveness of the Share Custody Agreement depended on the Share Transfer Contract, the agreement was a de facto share transfer agreement which shall be null and void.

The majority of the arbitral tribunal held that, firstly, the scope for the determination of the dispute is only limited to the Share Custody Agreement. Secondly, the Share Custody Agreement reflected the true intention of the parties and did not violate relevant mandatory provisions in law. The Agreement is valid and effective, save for the provisions as to the share transfer. In view of the two Contracts, the Share Custody Agreement was concluded before the Share Transfer Contract and so its effectiveness did not depend on the contract. The existence of the agreement on share transfer would not render the share custody agreement ineffective. The parties shall continue to perform the matters for share custody as agreed in the agreement. The applicant failed to exercise due care while signing the agreement. It was dishonest when performing the agreement. After changing its legal representative, the company relied on various grounds attempting to revoke the Custody Agreement in violation of the principle of good faith, and so the arbitral tribunal shall not accept its submissions. Accordingly, the Arbitration Commission made the following Award on 5 November 2011: (1) The parties shall continue to perform the matters concerning share custody provided in the Share Custody Agreement signed between the respondent and the applicant on 8 October 2007. (2) The applicant shall be responsible for the respondent’s attorney fees incurred amounting to RMB¥ 100,000.00. (3) The respondent’s other arbitration requests shall be dismissed. (4) The applicant shall be responsible for 90% of the arbitration fees, and the respondent shall be responsible for the remaining 10%. (5) Actual costs incurred from traveling to Beijing by Yang Song, the arbitrator appointed by the respondent shall be borne by the applicant.

The award was rendered on 5 November 2010.

IV. The award in question and relevant circumstances

During the arbitral tribunal’s hearing of the arbitration case between the applicant and the respondent, Liao Ship initiated a litigation application in the Shenyang Intermediate Court against the applicant, with the respondent and New Century being third parties, requesting: (1) Setting aside the Share Custody Agreement and the Share Transfer Agreement concluded between the applicant and the respondent; (2) Obviating the impediments and obstacles, and guaranteeing Liao Ship’s pre-emptive rights; (3) The applicant and New Century shall complete the formalities for the change in name of shareholders.

The main holdings of the Shenyang Intermediate Court are as follows, Liao Ship is entitled to set aside the Share Transfer Contract. The Share Custody Agreement shall not be classified as a share transfer contract as it did not contain substantive contents regarding share transfer. Liao Ship was not entitled to set aside the agreement. Yet according to the privy of contract, the respondent was not entitled to make direct demands requiring New Century or other shareholders to exercise profit distribution or other shareholders’ rights pursuant to the share custody agreement. It may only exercise its rights against the applicant. Based on this interpretation, the court made a conclusion that the Share Custody Agreement was not a de facto share transfer agreement. Accordingly, the Shenyang Intermediate Court made the following rulings on 9 August 2011: (1) Setting aside the Share Custody Agreement between The applicant and The respondent; (2) New Century shall complete the formalities on changes in share equity for Liao Ship, upon its discharge of reporting obligations owed to the foreign-funded enterprise examination and approval organ in 2 months upon the judgment coming into force; and (3) Dismissing Liao Ship’s other litigation requests.

The judgment dated 9 August 2011 had been effective. On 23 December 2011, the Huludao Foreign Trade and Economic Cooperation Bureau issued <Reply concerning share transfer arrangements for Huludao New Century Port Industrial Park Co. Ltd.>. The reply approved the applicant, the original shareholder of New Century’s transfer of its shareholding in New Century (Constituting 49% of New Century’s registered capital) to Huludao Bohai Sea Shipbuilding Steel Structure Co. Ltd. Subsequent to the change in share equity, New Century was no longer foreign-owned. The original foreign joint-venture had been converted into a Chinese-funded enterprise. On 26 March 2012, the relevant changes had been approved and registered by the administrative department for industry and commerce.

V. Proposed rulings

The First Intermediate Court proposes that:

(1) Regarding the issue concerning the Applicable Law

Considering that the applicant is a foreign enterprise and that the foreign-related Arbitral Award in question is rendered by the China International Economic and Trade Arbitration Commission pursuant to its foreign-related Arbitral Rules, this case shall be determined in accordance with Article 70 of the <Arbitration Law> and Article 258 of the <Civil Procedure Law>.

(2) Regarding the issue concerning whether the applicant‘s grounds supporting its application to set aside the Arbitral Award are justified

1. Regarding the applicant‘s submission that the arbitration procedure was not in conformity with the Arbitration Rules. Pursuant to the Arbitration Rules, the arbitral tribunal retains the right to make an order as it sees fit regarding parties’ application to suspend the arbitration. Here, the China International Economic and Trade Arbitration Commission had made a reply titled “Regarding Disputes Arising from the Share Entrustment Agreement No. VT 20100006”, that “the arbitral tribunal had decided to refuse the respondent’s application to suspend the arbitration. The arbitration proceedings for this case shall proceed.” Despite The applicant’s submission that the arbitral tribunal’s reasoning was not attached by the China International Economic and Trade Arbitration Commission in the letters, the Arbitration Rules contain no stipulations requiring the arbitral tribunal to disclose matters as to the tribunal’s deliberation to the parties; Despite The applicant submitted that no defence had been made by the respondent in the second application to suspend the arbitration, the applicant’s interests would not be affected regardless of the respondent’s submission of defence. The grounds submitted by the applicant shall therefore not be established.

2. Regarding the applicant’s submission that the composition of the arbitral tribunal was inconsistent with the Arbitration Rules. Pursuant to Article 25 of <China International Economic and Trade Arbitration Commission Arbitration Rules (2005)>, “(1) An arbitrator appointed by the parties or by the Chairman of the CIETAC shall sign a Declaration and disclose to the CIETAC in writing any facts or circumstances likely to give rise to justifiable doubts as to his/her impartiality or independence. (2) If circumstances that need to be disclosed arise during the arbitral proceedings, the arbitrator shall promptly disclose such circumstances in writing to the CIETAC. (3) The CIETAC shall communicate the Declaration and/or the disclosure of the arbitrator to the parties”. Upon investigation, the arbitrator Yang Song was the dean of the Law School of the Liaoning University, while Xu Shuangquan, the attorney representing the respondent for the arbitration graduated from Liaoning University and obtained a master in laws. Despite no direct teacher-student relationship existed between Xu Shuangquan and Yang Song, Xu Shuangquan was the person in charge for the preparatory group of Yingke Law Firm (Shengyang). Xu became the head of the Law Firm upon the Firm’s commencement of business. Yang Song, the arbitrator attended the opening ceremony of the Law Firm as a guest and made a speech. According to the facts, the applicant may have reasonable doubts concerning whether a relatively close relationship existed between the arbitrator Yang Song and Xu Shuangquan, the attorney representing the respondent for the arbitration. Since the arbitrator failed to disclose these matters, the situation supporting setting aside as stipulated in Paragraph 1(3), Article 258 of the <Civil Procedure Law> that “the procedure for arbitration was not in conformity with the rules of arbitration” had been satisfied. The applicant’s grounds supporting setting aside shall be supported.

3. Regarding the applicant’s submission that the Arbitral Award was in violation of public interests. In general, in terms of juridical supervision regarding arbitral awards, violation of public interests refer to the interests of the public at large, involving fundamental social interests including law and morality. It shall be expressed as a violation of the basic system and standards of the Chinese Law, fundamental values of economic and social lives or the fundamental moral standards of China. Here, the Share Custody Agreement between the applicant and the respondent was not a share transfer contract. The arbitral tribunal’s ruling that the Share Custody Agreement is valid and effective, save for the provisions as to the share transfer was not in violation of the mandatory provisions in the Law of People’s Republic of China. Therefore, the grounds for setting aside the award by the applicant shall not be accepted.

Apart from that, for Liao Ship (the Chinese shareholder of New Century)’s application to the Shenyang Intermediate Court demanding exercise of its shareholder’s pre-emptive rights during the arbitration proceedings, if the Shenyang Intermediate Court ruled in favour of Liao Ship’s litigation requests, the subject matter under custody stipulated in the Share Custody Agreement would be owned by Liao Ship, making the performance of the Share Custody Agreement between the applicant and the respondent no longer practicable. Therefore, the result of the court judgment would significantly affect the Arbitral Award as the outcome of the arbitration depended on the outcome of the court judgment. Therefore, considering in view of case management, the arbitral tribunal shall suspend the arbitration proceedings upon knowledge of the litigation initiated in the Shenyang Intermediate Court, pending the relevant judgment from the court. However, the arbitral tribunal failed to suspend the arbitration proceedings and made an award ruling that the applicant shall continue to perform the Share Custody Agreement. Currently, pursuant to the judgment of the Shenyang Intermediate Court, the applicant shall complete the formalities on changes in share equity for Liao Ship, upon discharging the reporting obligations owed to the foreign-funded enterprise examination and approval organs, making it impracticable for the performance of the said Arbitral Award.

Summarizing the above, the Arbitral Award shall be set aside.

The proposed opinion of our court:

Upon review and deliberation, our court agrees with the First Intermediate Court’s opinion supporting setting aside the Arbitral Award in question. The reasons are as follows: Pursuant to the relevant provisions in the <China International Economic and Trade Arbitration Commission Arbitration Rules (2005)> and considering that Yang Song, the arbitrator of this case failed to disclose relevant matters during the arbitration procedure, the circumstances supporting setting aside of awards provided in Paragraph 1(3), Article 258 of the Chinese <Civil Procedure Law> that “the composition of the arbitration tribunal or the procedure for arbitration was not in conformity with the rules of arbitration” had been met. Therefore, the applicant’s grounds for setting aside shall be supported.

Please reply whether the above opinions are correct.