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Wrongful arrest in China: how relevant is the outcome of the substantive claims?

News / / Wrongful arrest in China: how relevant is the outcome of the substantive claims?

Zhoushan Ship Agency & Forwarding Co. Ltd v. Dalian Fenghai Ocean Fishery Co. Ltd (Sheng Fu) [2018] Zui Gao Fa Min Shen No. 6289

A key feature in arresting ships in Mainland China is that the arresting party must provide counter security for any potential liability that it may incur if the arrest is found to be wrongful. Whilst wrongful arrest of a ship provides a legal cause of action for a claim for damages, the test for wrongful arrest has not been entirely clear. Among the few previously reported cases (and Mainland China does not adopt a precedent-based judicial system), there has been a divergence of views on whether or not the result of the substantive claims would be a decisive factor (in the sense that the arrest would be considered wrongful if the arresting party/claimant ultimately lost its case in the substantive proceedings).

In October 2019, the PRC Supreme People’s Court (the highest court in Mainland China) dealt with this issue in the Sheng Fu judgment and made clear that whilst the outcome of the substantive claim may be one relevant factor, the Court must have regard to all the relevant circumstances before deciding whether an arrest is wrongful.

The background facts

The underlying disputes between the parties arose from a contract of carriage by sea (“the Substantive Claim”). In order to secure the Substantive Claim, Dalian Fenghai Ocean Fishery Co. Ltd. (“Dalian Co.”), applied successfully to the local maritime Court to arrest the Vessel owned by Zhoushan Ship Agency & Forwarding Co. Ltd (the “Owner”). The Vessel was subsequently sold by judicial sale.

At trial, where the merits of the Substantive Claim were considered, the Owner raised a time bar defence.  On appeal from the lower Court, the Liaoning Provincial High People’s Court held that although the Owner would have been liable for the Substantive Claim on the merits, the claims were time-barred.

The Owner sought damages from Dalian Co. for wrongful preservation (i.e. the arrest and the subsequent court sale) (“the Wrongful Arrest Claim”), and the matter was subsequently appealed to Liaoning Provincial High People’s Court. The Wrongful Arrest Claim was rejected by both the first instance and appeal courts. The Owner applied to the PRC Supreme People’s Court for review, on the following grounds:

  1. the lower courts had mistakenly confined the test for wrongful arrest to “gross negligence” or “wilful misconduct” only; “negligence” should also be a relevant factor. Further, given that Dalian Co. commenced the Substantive Claim after the lapse of the statutory time limit, and that it chose to continue with the arrest and the judicial sale applications after the Owner raised the time bar defence, there was in any event gross negligence and/or wilful misconduct on their part;
  2. the counter security provided by Dalian Co. at the time of their application for arrest and judicial sale was a third party guarantee. It transpired that the two ships owned by the guarantor were subject to mortgages. Further, its business licence was annulled by the authorities in 2008. Therefore, the Owner contended that Dalian Co. had provided insufficient counter security in the form of a third party guarantee that was inadequate to meet its liability;
  3. the test for wrongful arrest should depend on the outcome of the Substantive Claim, which had been rejected by the lower courts in this case on the basis that the statutory time limit had lapsed. The courts should not overlook the wrongfulness of Dalian Co.’s applications for ship arrest and judicial sale because this would violate the doctrine and spirit of statutory time limits.

The PRC Supreme Court decision

The Supreme Court noted that there were no express statutory provisions on how to adjudicate on issues of wrongful preservation or arrest. However, since the cause of action for wrongful arrest is a claim in tort, the courts should apply general principles applicable to tort claims.  Specifically, the following four elements must be proven in order to establish a claim in tort (where the burden of proof is on the claimant, in this case the Owner):

  1. fault on the part of the wrongdoer;
  2. the wrongdoing act(s);
  3. that the claimant suffered loss/damage; and
  4. that there is a causal link between the act(s) of the wrongdoer and the loss/damage suffered by the claimant.

The Court held that the Wrongful Arrest Claim had not been made out. In summary, it found as follows:

  1. Time bar issues are often not straightforward. The issue as to whether the Substantive Claim was time-barred in this case had been considered by two lower courts. Furthermore, even experienced judges may have differing views. It would impose an overly onerous duty of care on an arresting party if the law required it to know the outcome of a particular legal issue before the underlying claims were fully tried by the courts. An arresting party often does not know (and indeed is not in a position to know) the outcome of the substantive claims at the time when the arrest application is made.
  2. If the outcome of the underlying/substantive claims alone is relied on by the courts as the test for establishing a wrongful arrest claim, it would impose an excessive duty of care on a party applying for property preservation, and would create further obstacles for parties trying to protect their legal rights in this way.
  3. Dalian Co. applied for the property preservation order on the basis that it alleged that the Owner was liable for the Substantive Claim, and the lower courts (putting the time bar issue aside) had agreed with this. Therefore, Dalian Co.’s case had a valid evidential and legal basis and Dalian Co. had reasonably satisfied its duty of care when it applied for ship arrest/judicial sale even though the Substantive Claim eventually failed on the time bar point.

Comment

This decision is significant for the PRC Supreme Court’s useful clarification of and guidance on the test for wrongful arrest claims under PRC law. It confirms that the outcome of the underlying claim should not be the only (decisive) factor that the Court should take into account; the courts will look at all the relevant circumstances, in particular whether the essential elements for a claim in tort are present, to determine whether a wrongful arrest claim can be established.

As the volume of trade and the frequency of ships calling at Chinese ports have grown over the years, Mainland China has become an increasingly important jurisdiction for ship arrests despite the counter security requirement. This judgment is, therefore, likely to be welcomed by parties considering the arrest of ships in Mainland China.

Shirley Li

Shirley Li Partner

Samuel Ding

Samuel Ding Senior Associate

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