The Shagang Shipping Case

This is a time charter & guarantee dispute between three Chinese Companies that has been resolved in London. In its resolution the matter has reached the English Supreme Court which recent judgment commences in this unusual way:

Allegations that a bribe was paid to procure a contract are by no means unknown in international business disputes heard by the Commercial Court in London. Allegations that evidence was procured by torture are thankfully rare. In this case allegations of both bribery and torture were made.

The parties to the dispute are: Shagang; Grand China; and HNA. They are all companies based in the PRC. Shagang, which is now in liquidation, is based in Hong Kong, as is Grand China (also now in liquidation). HNA is based in Haikou, which is the capital of Hainan province.

A summary from the Surpreme Court judgment shows the following interesting facts:

A time charter concluded on the 6 of August 2008 between the appellant, Shagang Shipping Company Ltd (“Shagang”), as disponent owner and Grand China Shipping Company Ltd (“Grand China”) as charterer. Under the charterparty Grand China agreed to charter from Shagang a capesize bulk carrier, then under construction, for a period of 82 to 86 months to run from when the vessel was delivered in 2010. A few months earlier, Shagang had itself chartered the vessel from head owners, Dong-A Tanker Corporation, on similar terms save for the rate of hire. As Grand China was a new company, its ultimate parent company was the respondent, HNA Group Company Ltd (“HNA”), which guaranteed the performance of Grand China’s obligations under the charterparty. The guarantee, also dated 6 August 2008, is governed by English law and provides that any dispute arising from it is subject to the exclusive jurisdiction of the English courts.

In August 2008 the relevant chartering market was at its height. It was an active market in which owners (including disponent owners like Shagang) held the dominant bargaining position. The rates of hire for the vessel agreed in the charterparty were in line with the market.

The vessel, named “Dong-A Astrea”, was delivered to Grand China in April 2010. By that time market rates were very considerably lower than in August 2008, the financial crisis in the autumn of 2008 having changed things dramatically. From September 2010 onwards, Grand China defaulted in making payments of hire under the charterparty. Shagang commenced arbitration proceedings against Grand China and obtained a series of interim final awards for unpaid hire. Some payments were made by Grand China but it remained in arrears, and on 17 January 2012 Shagang terminated the charterparty on the basis of Grand China’s default in paying hire and consequent repudiatory breach of the charterparty.

The claim for unpaid hire was settled in May 2012 but Shagang pursued its claim in arbitration for damages for the loss caused by Grand China’s repudiatory breach of the charterparty. On 1 November 2012 the arbitral tribunal issued a partial final award for damages in a sum of US$58,375,709. On 8 April 2013 Grand China was wound up in Hong Kong.

In the meantime, on 13 September 2012 Shagang commenced the present action in the Commercial Court against HNA under its guarantee. HNA filed its defence to Shagang’s claim on 4 November 2013, initially without making any allegation of bribery. On 23 June 2014, however, HNA amended its defence to allege that the charterparty had been procured by the payment of bribes by or on behalf of Shagang to senior employees of Grand China. In support of this allegation, HNA relied on confessions made during an investigation undertaken by the Chinese Public Security Bureau (“the PSB”).

The alleged bribery:

At the time when the charterparty was concluded in August 2008, Mr Jia Hongxiang (“Mr Jia H”) was a general manager within HNA and the chief executive officer of Grand China. On 11 November 2013, Mr Jia H was detained by the Haikou PSB on suspicion of embezzlement. On 29 November 2013, Mr Jia H’s son, Mr Jia Tingsheng (“Mr Jia T”), was detained on bribery charges. Mr Jia T was not employed directly by either Grand China or HNA but was employed by an associate company, GCS Development Company.

Mr Jia T knew from college Mr Xu Wenzhong (“Mr Xu”) who in August 2008 had been employed by Shagang. Both men lived in Shanghai. On 22 January 2014, Mr Xu was detained by officers of the Haikou PSB on the charge of bribing a non-public servant. He was flown to Haikou (over a thousand miles away), where he was questioned by PSB officers from the Meilan district branch overnight and during 23 January 2014. According to the PSB’s interrogation record, Mr Xu gave an account of being asked by the general manager of Shagang, Mr Shen Wenfu (“Mr Shen”), to use his relationship with Mr Jia T to cause Mr Jia T’s father, Mr Jia H, to charter the vessel from Shagang as soon as possible. Mr Xu is recorded as saying that Mr Shen gave him RMB 100,000 (equivalent to around US$16,000 at that time) in cash, which Mr Xu delivered to Mr Jia T at Mr Jia T’s home in a single instalment.

The interrogation record states that Mr Xu was willing to confess his crime “for leniency”.

Also on 23 January 2014, Mr Jia T was questioned by the same PSB officers who had interrogated Mr Xu. The only interrogation record disclosed is described as the “4th”. It records Mr Jia T as saying that Mr Xu gave him RMB 150,000 in the hope that Mr Jia T’s father would communicate with HNA to arrange the guarantee as quickly as possible. The money was said to have been handed over by Mr Xu in cash in the cafeteria of a hotel near Mr Jia T’s home. When Mr Jia T told his father about this payment, Mr Jia H said that he could only communicate with HNA according to the company’s normal rules and told Mr Jia T to send the money back. Mr Jia T did not do so and, shortly after the charterparty was concluded, met Mr Xu again at a restaurant near Mr Xu’s house where he received another RMB 150,000. He did not tell his father about this payment. The interrogation record states that Mr Jia T was asked whether his confession had been extorted by “torture or deceit”, to which he replied “no”.

A “confession note” dated 24 January 2014 in Mr Xu’s name gives a similar account to that given in Mr Jia T’s “4th” interrogation record. It describes Mr Xu paying Mr Jia T a sum of RMB 300,000 in two instalments, one before and one after the signing of the charterparty.

Another interrogation record dated 4 March 2014 refers to Mr Xu being asked why he had initially stated that he had bribed Mr Jia T with RMB 100,000, when he was now saying that the amount was RMB 300,000. He answered that in his initial confession he had lied and deliberately given a lower amount because he was trying to escape punishment. However:

“Being educated by the police officers, I realised the mistakes I made. Now, I am willing to truthfully confess, for leniency.”

Mr Xu was also asked why he and Mr Shen would want to bribe HNA if, as he had told the PSB, the pricing of the charterparty was reasonable in any event. Mr Xu is recorded as answering that it would otherwise have been difficult to charter the vessel quickly.

On 17 February 2014, the PSB sent a letter to HNA summarising the confessions made by the individuals accused of bribery. This letter was sent in response to a request made by HNA on 10 February 2014 for information about the criminal investigation to enable HNA to “explain and prove the facts” in the English court proceedings.

Allegations of torture and Mr Xu’s guilty plea

On 1 May 2014 Mr Zhang Jie (“Mr Zhang”), who had by then replaced Mr Shen as the general manager of Shagang, made a formal complaint to the People’s Procuratorate (the entity that has supervisory responsibility for the PSB) of Haikou. The complaint alleged that the confessions of Mr Xu and Mr Shen had been procured by torture and that HNA had wrongly used the PSB to manufacture false charges with a view to interfering in an economic dispute. Mr Zhang requested the Procuratorate urgently to investigate these allegations.

On 23 June 2014, the Procuratorate made a report on the outcome of its investigation into this complaint. The report stated that the Procuratorate had “visited the [PSB], interviewed the concerned suspects, [and] retrieved from the detention centre relevant materials”. It concluded that the allegations made in the complaint were not supported by the facts. (Copies of the complaint and report were not available at the trial and were admitted as new evidence in the Court of Appeal.)

On 23 July 2014 Mr Xu (who in the meantime had been under a form of house arrest at a hotel in Hainan province) was arrested for bribery of a non-public servant and transferred to a detention centre in Haikou. On 21 August 2014 he was visited and interviewed at the detention centre by Mr Guo, a lawyer retained by his wife. Mr Guo’s interview notes record that Mr Xu maintained that he was innocent and gave the following account of his interrogations:

“I was brought to Hainan on 23 January this year [2014], Initially there weren’t any charges. I was taken to the basement of the [PSB]. It was around 11pm and I was definitely there for over 48 hours. I came out on the afternoon of the 26 [January]. The least serious methods used against me were fists and truncheons. I was stripped of my clothes and cold air was blown on me. They covered my mouth with their hands after water was poured into me. I was also burnt with a cigarette butt.

At first I said that there had been no such thing [bribery], but then they tortured me and I couldn’t take it any longer. On the morning of 24 [January], I said I had paid out 100,000 yuan. I made this up. On the afternoon of 24 [January] they tortured me again and poured water into me. I couldn’t bear it any more. They told me it had been 300,000 and it had been paid in two batches – 150,000 each time. In the end, I had no other way out but to say what I was told to say …

I definitely never did it. At that time, the market was dominated by shipowners and we didn’t have to ask any favours of [Grand China]. They had to ask help from us. Their company was a new company and we were an established company.”

Despite what Mr Xu had told Mr Guo in this interview, on 22 August 2014 Mr Guo made an application for bail on behalf of Mr Xu on the basis that Mr Xu had given a true account in his confessions and had repented. Bail was refused.

Confronted with the above facts and much more details that can be read in the judgment, the High Court judge held against HNA. He stated, inter alia, that:

The fact that I cannot rule out torture further reduces the confidence that I can put in the confessions, although it will be apparent from my conclusions on bribery (above) that I already have insufficient confidence in the confessions to allow a finding of bribery. HNA distinguishes the confessions from later admissions (including in bail applications) and pleas of guilty, at which later points torture is not alleged to have been practised. But in the present case the matters are interconnected. Once the confessions had been made, a departure from them, in the form of a denial or a not guilty plea, would likely require reference back to the torture allegations. In the present case, in the circumstances of my conclusion that there was no bribe, it is not necessary to express a definitive conclusion on whether there was torture. I have said that I cannot rule it out; the evidence available does not equip me well to reach a firmer conclusion.

That I should so confine my view at this trial is also in the interests of leaving proper room for investigation in China by the appropriate authorities, to include questioning of the officers who were on duty. I have not set out in this judgment the full extent and nature of the torture alleged to have occurred, but if the allegations were all true it would be hard to imagine a more comprehensive breach of the duties and responsibilities of the officers.”

The matter went to appeal, and the Court of Appeal held that the judge’s reasons were unsustainable:

… The judge did not follow the logical steps necessary to reach a proper evaluation of the admissible evidence. He failed to ask and answer the correct legal question as to what weight should be accorded to the admissions evidence. The judge ought to have said why he was unable to place any reliance on the admissions, if that was his view. The judge also fell into legal error in failing to take all the appropriate matters into account in deciding the crucial bribery issue. As we have also said, the judge failed to exclude irrelevant matters (including his lingering doubt as to whether the admissions were procured by torture) in considering whether the alleged bribe was paid.”

The decision of the Court of Appeal was that the case should be sent back “for reconsideration of the issue of the weight to be attached to the admissions and of the issue of bribery in the light of this judgment, and on the basis that the issue of torture has already been decided”. It directed that these issues be determined by a different Commercial Court judge. However the matter went before the Supreme Court.

The judgment of the Supreme Court allowed the appeal and reinstated the judgment of the High Court. The learned judges of the Supreme Court held that the trial judge approach was legitimate having regard to the way the case was put before him. He did not err in his assessment of the weight of the confession evidence. There were ample grounds to support his conclusion that there was no bribery and that the confession evidence was of little or no weight. The fact that the torture was used to procure the confession was not a fact which Shagang had to prove in order to establish its claim. It was therefore unnecessary for the judge to make any findings as to whether on the balance of probabilities torture had taken place in order to decide the facts in issue in the case. The judge was entitled to rely on his finding that torture could not be ruled out as providing further support to the conclusion he had already reached that no bribe was paid.

It remains to be seen what the outcome to this dispute would have been if the matter was not judged in London.

To read the full judgement, click here.

Arizon Abogados S.L.P
www.arizon.es