Grabbing Disappearing Funds

Pre-Award Writs of Attachment in Foreign Jurisdictions Pending CIETAC (China International Economic and Trade Arbitration Commission) Arbitrations

Our firm has undertaken representation over the past six (6) months on behalf of a Taiwanese company that regularly does business here in California. Client entered into a substantial contract for the export of agricultural goods from the U.S. (specifically, from Long Beach, California) to China. The agricultural products were to be delivered from Long Beach to Qindao and Tianjin. Interestingly enough, the American company was a California company and subsidiary of a larger Chinese conglomerate based out of Shenzhen.

The basic allegations in the case are that the quality of the agricultural products to be delivered at the ports in Qindao and Tianjin were to be of a certain quality evidenced by analysis reports conducted by a third party independent testing laboratory in New York. This condition was a stipulation agreed upon by contract and said reports were to be submitted to a bank here in the California as a condition of payment of funds pursuant to contractual terms and a sight letter of credit.

Once the goods arrived in Tianjin and Qingdao ports from Long Beach, our client discovered that the goods were not of sufficient quality as was spelled out in the contract and letter of credit. Through thorough investigation and discovery, the client’s allegations are that the U.S. based subsidiary of the Chinese company altered and/or defrauded our client by changing key number values in the agricultural testing results published by the independent testing laboratory.

In terms of dispute resolution, the contract between parties provided for any and all disputes between parties to be adjudicated through arbitration before CIETAC (China International Economic and Trade Arbitration Commission) in Shanghai. Such an arbitration, however, may take one (1) to (2) years to resolve. Given the fact that our client completely lacks trust in the U.S. based subsidiary of the Chinese conglomerate in terms of the potential dispersal or disappearance of the corporate assets of the subsidiary over that period of time — what is the client to do in a foreign jurisdiction when there is a binding CIETAC arbitration clause for all disputes to be decided by private arbitration in China when the assets to satisfy any future arbitration award may disappear in the home jurisdiction of a non-Chinese company before the award is obtained? Even if an award is eventually obtained through CIETAC arbitration, if there are no assets against which that award can be enforced in the company’s home jurisdiction due to dissipation and dispersion of assets, the arbitration award is rendered worthless.

In such cases, an Irvine, CA international lawyer in the foreign jurisdiction must file a Pre-Arbitration Award Writ of Attachment working closely in conjunction with the client’s Chinese legal counsel. The aim of such an action is to take emergency measures to prevent the company from dispersing and dissipating assets pending adjudication of the dispute at CIETAC.

Pre-arbitral or pre-judgment attachment is a temporary statutory remedy, which allows a commercial creditor to move for a judicial lien on a debtor’s property before final adjudication. Under the statute, an attachment may only issue if there’s a readily ascertainable claim for more than $500 under a commercial contract, which is either unsecured or secured by personal property. See, Code of Civ. Proc. §483.010; see also, e.g., Bank of Am. v. Stonehaven Manor, LLC, 186 Cal.App.4th 719, 723 (2010); see also, Goldstein v. Barak Construction, 164 Cal.App.4th 845, 852 (2008). Procedurally, before a writ of attachment may be issued, a complaint must be filed. See Code of Civ. Proc. §484.010 (“[u]pon the filing of the complaint or at any time thereafter, the plaintiff may apply pursuant to this article for a right to attach order and a writ of attachment by filing an application for the order and writ with the court in which the action is brought”).

The moving party has the burden of proving (1) that “[t]he claim upon which the attachment is based is one upon which an attachment may be issued,” (2) the probable validity of such a claim, (3) the purpose is not vexatious, and (4) “the amount to be secured by attachment is greater than zero.” Code of Civ. Proc. §484.090(a); see also Goldstein, 164 Cal.App.4th at 852. Even if the contract calls for arbitration, a party may still apply for attachment as long as they can demonstrate that the arbitration award might be rendered ineffective without such temporary relief. Code of Civ. Proc. §1281.8(b).

In China National Metal Products Import/Export Co v. Apex Digital, 155 F.Supp.2d 1174 (C.D. CA 2001), the parties to the contract acknowledged that they were bound by the China International Economic and Trade Arbitration Commission (hereinafter “CIETAC”), adherence to which had been agreed upon in the contract. However, the plaintiff filed a suit in federal district court for breach of contract. In the decision of the district court judge, the district court explained that the plaintiff’s reason for filing suit was solely to seek the ancillary issuance of a writ of attachment. Id. at 1177. This, itself, the district court found unobjectionable, concluding specifically that the International Convention on the Recognition and Enforcement of Foreign Arbitral Awards did not supplant its own subject-matter jurisdiction to issue ancillary orders, such as a request for issuance of a writ of attachment. Id. at 1180. However, the Court decided to, nonetheless, dismiss the suit because it was persuaded by the defendant that a CIETAC provision, namely Article 23, already allowed for provisional relief that effectively supplanted its own authority to issue such pre-arbitral relief. Id. at 1182. In other words, the district court in China National, supra, left the parties to their respective benefits of the bargain. As noted by the district court judge in China National, supra, Article 23 of CIETAC, as incorporated by reference into the commercial contract, had read as follows at the time:

When a party applies for property preservative measures, the Arbitration Commission shall submit the party’s application to the people’s court for a ruling in the place where the domicile of the party against whom the property preservative measures are sought is located or in the place where the property of the said party is located. Id. at 1181 (emphasis added).

However, subsequently, Article 23 of CIETAC was amended as follows by significantly narrowing the scope of its reach:

Where a party applies for conservatory measures pursuant to the laws of the People’s Republic of China, CIETAC shall forward the party’s application to the competent court designated by that party in accordance with the law. Article 23 of CIETAC (Attachment 1) (emphasis added).

Thus, whereas the earlier version by its very terms applied generally to whenever a party sought provisional pre-arbitral relief (and specifically directed the party seeking such relief to the “people’s court),” the present wording only provides guidance where such relief is sought within the “laws of the People’s Republic of China”[.] By its very terms, the new language does not supplant the authority of another tribunal from issuing such provisional relief if subject-matter jurisdiction can properly be maintained in such tribunal. Therefore, given the material change in language under Article 23 of CIETAC, Plaintiff submits that China National, supra, does not operate to bar it from seeking a pre-arbitral issuance of attachment under Code of Civ. Proc. §483.010, pending arbitration.

Therefore, clients that are contractually bound to a CIETAC arbitration through the provisions in an agreement with a Chinese business (or foreign subsidiary of a Chinese business) that has a majority of their assets here in an extraterritorial jurisdiction, a knowledgeable international law firm should be engaged to take preventative measures to protect the client from asset dispersal and dissipation pending CIETAC arbitration.

Otherwise, the company later seeking enforcement of an eventual CIETAC arbitration award may find that their award is worthless as all company assets have gone up in smoke pending their private arbitration litigation in China rendering the arbitration award worthless for enforcement purposes.

Thanks to our friend and blog author, David Dodge of Dodge Zhong Partners, for his insigth into pre-award Writs of Attachment in foreign jurisdictions pending CIETAC arbitration.