Applying denial of legal personality in arbitration

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The claimant was a world-renowned industrial design software service provider, the first respondent was a domestic new energy vehicle manufacturer, and the second respondent a wholly-owned subsidiary of the first respondent. Amid bright prospects for China’s new energy market, the first respondent intended to design and produce a new-energy vehicle based on a certain technology.

In the second half of 2018, the claimant and first respondent signed a service agreement involved in the case, stipulating that the first respondent would pay for design and development services of core components of the new-energy vehicle provided by the claimant. The first respondent paid the down payment according to the agreement.

In the first half of 2019, the claimant, first respondent and second respondent reached a supplementary agreement stipulating that all rights and obligations of the first respondent under the original agreement would be transferred to the second respondent, with the two respondents jointly and severally liable for all breaches and omissions before signing of the supplementary agreement.

Subsequently, the first respondent stated in public reports that design and development work undertaken under the agreement entered the prototype development stage in late 2019, was completed in early 2021, and would soon be installed.

The claimant therefore believed the first respondent owed its contracted service fees of about RMB45 million (USD6.7 million). Although the first respondent had transferred all its contractual rights and obligations to the second respondent, the claimant argued that the two respondents had indistinguishable legal personalities. Thus, the second respondent should also be jointly and severally liable to the claimant for service fees owed by the first respondent.

The first respondent, meanwhile, believed that after the three parties signed the supplementary agreement, it had already withdrawn from the agreement. Additionally, the first respondent argued there was no confusion of corporate personality between the two respondents, so the first respondent should only be liable for debts before the supplementary agreement was signed.

Finally, the second respondent claimed that payment was only required after the claimant fulfilled its corresponding delivery obligations, and it was here that the payment dispute arose. The claimant had serious delivery delays, along with defects in the quality of the components. Coupled with the outbreak of the pandemic, the project was unable to continue.

ARBITRAL TRIBUNAL’S OPINION

Regarding the question of whether there was a confusion of corporate personality between the two respondents, the claimant submitted expert legal opinion to the tribunal, while the first respondent submitted public information of the industrial and commercial registration and audit report of financial statements and annual transaction details to prove there was no confusion of corporate personality between the two respondents.

The arbitral tribunal held that, in accordance with provisions of Article 20(3) of the Company Law, the claimant claimed the two respondents had a confusion of corporate personality and should be jointly and severally liable. In other words, the basis for the claim of joint and several liability is a provision of the Company Law.

The arbitration clause in the agreement stipulated that: “any dispute arising from this agreement, including … any party may submit the dispute to the Shanghai International Economic and Trade Arbitration Commission.” This arbitration clause was the source of jurisdiction of the arbitral tribunal.

But it was also the boundary of the jurisdiction of the arbitral tribunal, and the claim of confusion of corporate personality exceeded the boundary of “disputes arising from the agreement”. In other words, it was beyond the scope of disputes over which the arbitral tribunal could exercise jurisdiction.

Therefore, the arbitral tribunal finally decided not to make a judgment on whether the two respondents had a confusion of corporate personality. However, the claimant could still seek other remedies in accordance with relevant laws and regulations on the basis of the ruling in this case.

KEY TAKEAWAY

As an emerging industry vigorously advocated and supported by the state, the new-energy vehicle sector gathers all kinds of capital interests. Due to rapid product development and innovation of various technologies involved, the industry is also very prone to civil and commercial disputes related to investment, design, manufacturing, sales and operation.

This was one such case, involving a service contract dispute in new-energy vehicle design and development.

This case, in addition to a traditional dispute over payment terms, also involved the issue of whether the “denial of legal personality” system can be used as basis for claims in commercial arbitration cases – and whether it can be heard and settled by arbitral tribunal.

In this regard, the essence of commercial arbitration is to respect the autonomy of the parties. In particular, the arbitration clause in the agreement clearly stipulated that “disputes arising from the agreement” could be submitted to arbitration.

Therefore, the arbitral tribunal’s jurisdiction was disputes arising from the agreement. But the issue of whether the two respondents had a “confusion of corporate personality” did not belong to “disputes arising from the agreement”, either in terms of time or relevance.

Additionally, there is still no unified understanding of whether the claim of “denial of legal personality” – which is based on provisions of the law – could be arbitrated. Therefore, the tribunal prudently refused to exercise jurisdiction according to the arbitration clause in the agreement, avoiding the risk of improper jurisdiction.

Although the arbitral tribunal did not rule on whether the two respondents had a “confusion of corporate personality” in this case, according to the “additional person to be enforced” system in the civil enforcement law, the rights holder can still decide to add the first respondent in such an enforcement procedure.

Since a revision of the Company Law in 2005, and cancellation of the minimum registered capital system in 2014, and especially amid economic downturn, more and more claims related to “denial of legal personality” can be expected in commercial dispute resolution practice.

But ultimately, attention should be paid to determining the competent authority for adjudicating claims of parties based on “denial of legal personality”.


Li Tingwei is a senior case management secretary of SHIAC