Civil Ruling of Shanghai Second Intermediate People’s Court

(2014) Huerzhongminren(waizhong)zi No.l, 20 July 2015

Claimant: Fukui Bank Co., Ltd. Legal Representative: Ito Zhong Sho. 

Attorney: Yu Yongzhong, Shanghai Dabang Law Firm.

Respondent: Shanghai Yekao Spectacles Co., Ltd.

Legal representative: Fu Yong Bang Nan.

Application for recognition and enforcement of foreign arbitral award in the case Claimant, Fukui Bank Co.，Ltd. (“Fukui Bank”)，and Respondent, Shanghai Yekao Spectacles Co.，Ltd. (“Yekao Spectacles”)，was accepted by the Court on September 10, 2014. The court constituted a panel for trial The trial has been ended.

Claimant Fukui Bank said that, Yekao Spectacles is a foreign-invested company which Nojiri Optical Industrial Co., Ltd. (Japan) established in China. At the request of Yekao Spectacles, Fukui Bank offered a credit guarantee to an outsider，the Bank of Tokyo-Mitsubishi (China) Co., Ltd. Shanghai Branch, for a RMB 17 million short-term loan to Yekao Spectacles. Fukui Bank also established a standby letter of credit.

Later, Yekao Spectacles failed to repay the loan as scheduled, Fukui Bank, as a guarantor, repaid the loan of $2,5013471.46, which equivalent to RMB 17 million on behalf of Yekao Spectacles on March 30, 2009. Accordingly, Fukui Bank got the recourse right to Yekao Spectacles.

On April 7, 2009, Fukui Bank and Yekao Spectacles entered into an “Agreement” that Yekao Spectacles is liable to repay Fukui Bank RMB 17 million，which is $2,501,471,46, and also a 6% annual rate of interest since March 30, 2009 until the repayment date March 30, 2010. According to the PRC law, Yekao Spectacles registered the foreign debt. On March 15, 2010, due to Yekao Spectacles failed to repay the debt, the two parties signed an “Agreement on the extension of the repayment of the debt”，agreeing to extend the payment date to March 30, 2011.，2011. On May 31，2010, the two parties signed “Maximum Mortgage Agreement” agreeing that Yekao Spectacles set a maximum mortgage on its land use right and house ownership to ensure the performance of the above debt payment obligation.

In March 2012, due to its inability to pay the employees “wages, Yekao Spectacles’s land and factories was sealed off by the Jiading District Peopled Court. Fukxii Bank applied for distribution on the ground of mortgage. Later, the court escrowed the money.

On March 28, 2014, based on an arbitration agreement with Yekao Spectacles, Fukui Bank commenced an arbitration in Japan Commercial Arbitration Association, requesting for the repayment of debt. On June 9, 2014, the Japan Commercial Arbitration Association rendered the arbitral award that Yekao Spectacles shall pay the principal amount of $2,501,471.46, the interest of $37,938.98, and the 14% annual rate overdue interest of the sum of principal and interest up to $2,539,410.44, since March 31, 2012 until the date of payment. Also, Yekao Spectacles shall bear the arbitration fees. Later, the Japan Commercial Arbitration Association rendered an additional award that Yekao Spectacles shall pay the legal fees to Fukui Bank, which is 2,209,704 yen.

After the above-mentioned awards were rendered, Yekao Spectacles still failed to perform its payment obligation. The claimant Fukui Bank applied for recognition and enforcement of the above arbitral awards pursuant to Supreme People's Court Implementing the Participation of China in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards “Circular”，the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”)， and the China Civil Procedure Law of the PRC. In support of its claim, the claimant Fukui Bank submitted the following evidence:

Notarized arbitral awards and translation, proving Japan Commercial Arbitration Association Tokyo tribunal No. 14-03 rendered the above arbitral award on June 9, 2014 and the additional award on June 19，2014. 2) The “agreement” and the “supplementary agreement”，proving the existence of guarantee legal relationship between Fukui Bank and Yekao Spectacles. The arbitral awards were made pursuant to the legal relationship. 3) The maximum mortgage agreement and real estate registration certificate, proving that because of Yekao Spectacles’s inability to pay the debt, the two parties agreed to set a mortgage guarantee on the house ownership of Yekao Spectacles, and registered. 4) The external guarantee registration and the foreign debt registration, proving that because Yekao Spectacles’s debt is foreign debt, it had been registered on the dispute amount and the repayment date according to the PRC law. 5) The notification of implementation, proving that the Jiading District People’s Court has escrowed the payment amount including principal, interests and the delay interests, and informed Fukui Bank to confirm the above claims through litigation or arbitration. 6) The translation of Japanese lawyer Shan Gen Ji Hong’s legal opinion and the Japan “Arbitration Act’’，proving that according to the Japanese Arbitration Act, the arbitration agreement of this case is valid，and the arbitration procedures were in accordance with the currently effective “Commercial Arbitration Rules” of Japan Commercial Arbitration Association. The arbitral award is the final award. 7) Two notarized certificates of Japan Commercial Arbitration Association and translation, proving the service of “notice of arbitration’’，arbitral award and additional award to Yekao Spectacles.

The Respondent Yekao Spectacles said in its reply submitted to the court that: Yekao Spectacles confirms the authenticity of the “agreement” in this case and has a debt of $2,501,471.46 as principal and its interests. Because Yekao Spectacles has stopped operating, and its assets have been seized. There is no money to repay Fukui Bank, the interest payment also ceased after March 2012. In the arbitration proceedings, Fukunaga Kunio, the legal representative of Yekao Spectacles signed the arbitration documents sent by the arbitration body in Japan, submitted a reply saying “recognize the facts described in the application for arbitration and has no dispute about the claim”, and participated in the arbitration hearing through telephone conference on May 19, 2014. After the arbitration hearing ended，Fukunaga Kunio signed the arbitral award on June 11, 2014 and the additional award on June 25, 2014. Yekao Spectacles has no objection to the awards, and it will not apply for annulment of the awards in Japan. In summary, the Respondent Yekao Spectacles recognizes the arbitral awards, and agree to perform the debt to Fukui Bank.

Examined after trial: On April 7, 2009, Fukui Bank and Yekao Spectacles signed an “Agreement” agreeing that, considering the two loan contracts between Yekao Spectacles and Mitsubishi Bank on September 19, 2008 and December 18, 2008, Mitsubishi Bank has issued the loan of RMB million and RMB 1L4 million, which in total RMB 17 million. As a guarantee to Yekao Spectacles, Fukui Bank issued a standby letter of credit to Mitsubishi Bank. Later, since Yekao Spectacles failed to repay the loan and interests before the time limit in the loan contract, Mitsubishi Bank sent the request for performance of the standby letter of credit at the total amount of $2,501,471.46, to Fukui Bank on March 30, 2009. According to the request, Fukui Bank paid the amount to Mitsubishi Bank’s designated account on March 30, 2009. Mitsubishi Bank went through the approval procedures for the PRC foreign exchange administration department. Fukui Bank got the recourse right to Yekao Spectacles due to the payment performance of standby letter of credit. Thus，in the case of confirmation of above facts, Fukui Bank and Yekao Spectacles reached the following agreement: Both sides confirm that Yekao Spectacles is obliged to repay the standby letter of credit money in US dollars to Fukui Bank, and a 6% annual rate of interests since March 30, 2009 till the payment day. The payment date of standby letter of credit money is one year from March 30, 2009. Yekao Spectacles shall pay for it in full before the expiry of the period. Interests shall be paid in three days every three months since March 30, 2009. Yekao Spectacles bears the cost of foreign debt registration procedure to PRC foreign exchange administration department. In addition, both side agreed that, Fukui Bank as the mortgagee, Yekao Spectacles set a mortgage on the land use right according to the “Shanghai state-owned land use right transfer contract”【沪嘉房地（2008)出让合同第 35 号】，and the properties located in the Jiading Distract. In respect of the mortgage right, the two sides will sigh another contract. Moreover, Article 10 of the Agreement “applicable law and dispute resolution” said that “the signature, interpretation and performance of this agreement shall all apply the PRC law. Any disputes arising from or related to this agreement shall be settled through friendly negotiation between both parties. If negotiation fails, the dispute shall be settled by arbitration in Japan Commercial Arbitration Association located in Tokyo, in accordance with its arbitration rules. Arbitration is final and binding to both parties.” Both parties stamped and signed by legal representatives at the end of the contract.

On March 15, 2010, Fukui Bank and Yekao Spectacles signed the “Agreement on the extension of the repayment period of the debt” Yekao Spectacles confirmed its obligation to repay Fukui Bank $2,501,471.46 and the interests since March 30, 2009 at the annual rate of 6%. They agreed to extend the performance date of the principal for one year since March 30, 2010, and the interests shall be paid in three days every three months since March 30, 2010. In addition, both sides agreed that, Fukui Bank as the mortgagee, Yekao Spectacles set a maximum mortgage on the No. XXX building located in Jiading District, Shanghai. The two parties signed another contract for the maximum mortgage. What’s more, the “applicable law and dispute resolution” clause in this agreement is consistent with the April 7, 2009 “agreement”. Both parties stamped and signed by legal representatives at the end of this agreement.

On May 31, 2010, Fukui Bank and Yekao Spectacles signed the ''maximum mortgage agreement”，agreeing: To guarantee the debt, Yekao Spectacles agrees to set a maximum mortgage of $4,000,000 on the 1-5 buildings located in Behebei Road, Jiading District, Shanghai and the use right of state-owned construction land, for Fukui Bank as the first option. Both sides recognize the value of the subject matter of the mortgage is $6,383,883, and the mortgage period is from June 1, 2010 to May 31, 2030. The mortgage agreement also stipulated the subject matter of the mortgage insurance, registration and other matters. The “dispute resolution” clause is consistent with the April 7, 2009 “agreement”. Both parties stamped and signed by legal representatives at the end of this contract. On June 15 2010, the two parties made a notarization at the Shanghai Dongfang Notary Office.

On March 23, 2011, again, Fukui Bank and Yekao Spectacles sign an “Agreement on the extension of repayment period of the debt” In addition to extend the principal payment date to March 30, 2012, paying interest in three days every three month since March 30, 2011，and the confirmation of the validity of the “maximum mortgage”， other contents including the “dispute resolution” are all consistent with the March 15, 2010 “Agreement on the extension of repayment period of debt”. Both parties stamped and signed by legal representatives at the end of this contract.

In terms of the above debt to Fukui Bank, Yekao Spectacles made a registration on the change of performance date to the PRC foreign exchange administration department on Aril 22, 2009. As to the “maximum mortgage” guarantee, the SAFE (State Administration of Foreign Exchange) issued the “external guarantee registration certificate”（总外保字第23213 号）on July 19, 2010.

On January 13, 2014, the Shanghai Jiading District Peopled Court issued notification of implementation (2012)嘉执字第1403 号 , informing Fukui Bank，the mortgagee of Yekao Spectacles, that the distribution of Yekao Spectacles' properties is still lack of legal basis. The court escrowed the money and Fukui Bank should seek confirmation of its claims against Yekao Spectacles through litigation or arbitration.

On March 28, 2014, Fukui Bank commenced an arbitration against Yekao Spectacles in Japan Commercial Arbitration Association according to the arbitration agreement in the parties’ contracts, claiming: 1) Yekao Spectacles shall pay Fukui Bank the principal of $2,501,471.46, the interests of$37,938.98 and the overdue interests of total amount $2,539,410.44 at the annual rate of 14% since March 31, 2012 until the pay-off date; 2) The administrative fee，arbitrator’s fee and other arbitration fees shall be paid by Yekao Spectacles.

After the acceptance, Japan Commercial Arbitration Association sent the notice of arbitration and other arbitration documents to Fukunaga Kunio, the legal representative of Yekao Spectacles. Fukunaga Kunio signed those documents on April 17, 2014. The two parties selected San Shan Yu Shan as the sole arbitrator. On May 1, 2014, Yekao Spectacles submitted a reply to the tribunal saying that: “no defense to the facts in the application of arbitration (March 28, 2014).” On June 9, 2014, the Tokyo No. 14-3 tribunal of the Japan Commercial Arbitration Association rendered the following arbitral award: 1) Yekao Spectacles shall pay Fukui Bank the principal of $2,501,471.46, the interest of$37,938.98 and the overdue interests of total amount $2,539,410.44 at the annual rate of 14% since March 31, 2012 until the pay-off date. 2) Yekao Spectacles shall pay Fukui Bank administrative fee 1，884,545 yen，arbitrator’s rewards 513,200 yen and the arbitrator’s fee 2,720 yen, which is in total 2,400,465 yen.

On June 19, 2014, at the request of Fukui Bank, the arbitral tribunal rendered an additional award that: Yekao Spectacles shall pay Fukui Bank additional arbitrator’s rewards 40,000 yen, legal costs 2,169,704 yen, which is in total 2,209,704 yen. After the above-mentioned awards were rendered, Japan Commercial Arbitration sent the awards to Yekao Spectacles. Fukunaga Kunio signed the arbitral award on June 11, 2014 and the additional award on June 25, 2014.

Also, Shan Gen Ji Hong, lawyer from TMI Law Firm in Japan, says in his legal opinion that:

According to article 13 of Japan Arbitration Act (2004), arbitration agreement between parties to settle civil disputes (except divorce and termination of adoptive relationship) is valid and the arbitration agreement shall be in writing. Therefore, the arbitration clause in this case meets the essential requirements for validity. According to article 26 of Japan Arbitration Act, parties are free to agree on the arbitration procedures and rules of the tribunal. In this case, the parties have agreed to apply the “Commercial Arbitration Rules” of Japan Commercial Arbitration Association. According to the rules, all the arbitration procedures including the service of application for arbitration, the reply of the Respondent, the hearing of the tribunal, the rendering and service of arbitral award and the additional award met the rules. According to Article 44 of the Japan Arbitration Act, parties may apply to set aside the arbitral award which constitutes one of the statutory grounds within 3 months after receiving the arbitral award. In this case, it has been more than 3 months since Yekao Spectacles received the arbitral award. Yekao Spectacles has lost the right to apply for annulment. The arbitral award is final and binding.

We find that: Both China and Japan are contracting countries of the New York Convention. According to China’ s commercial reservation, the dispute shall arise from commercial legal relations. The dispute in this case meets the requirements, so we should review this case in accordance with Article V of the New York Convention.

According to Article V(l) of the New York Convention, recognition and enforcement may be refused, at the request of the party against whom it is invoked, and proofs of listed grounds. In this case, the Respondent Yekao Spectacles had no objection to the validity of arbitration agreement, the arbitration procedures and the arbitral award, nor made any defense tinder Article V(l) of the New York Convention. Yekao Spectacles confirmed there are no grounds of Article V(l) of the New York Convention to be triggered, thus we confirmed this. 

According to Article V(2) of the New York Convention, recognition and enforcement may also be refused if the subject matter of the dispute is not capable of settlement by arbitration under the PRC law, or the recognition or enforcement of the award would be contrary to the public policy of China. In this case, the dispute arose from a guarantee contract between the debtor and its creditor，which is arbitrable according to the Arbitration Law of the PRC. The parties could settle this dispute by arbitration. The recognition or the enforcement of the arbitral awards would not be contrary to the public policy of China. Therefore, there are no grounds of article V(2) to be triggered in this case.

In summary, after a comprehensive review of all the evidence and the statements by the parties, there are no grounds for refusing to recognition and enforcement of the arbitral awards in this case. Accordingly, pursuant to Article V of the New York Convention and Article 283 of the Civil Procedure Law of the PRC, the court rules as follows: 

We recognize and enforce the Tokyo No. 14-03 arbitral award on June 9, 2014 and the Tokyo No. 14-03 additional award on June 19 made by the Japan Commercial Arbitration Association. The court costs of this case of RMB 400 shall be paid by the Respondent Shanghai Yekao Spectacles Co.，Ltd.

Presiding Judge: Jiang Nan

Judge: Li Wei

Assistant Judge: He Yun

July 20, 2015

Court Clerk: Ma Yingyi

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*The original text is Chinese and has been translated into English for reference only. If there is any inconsistency or ambiguity between the Chinese version and the English version, the Chinese version shall prevail.