The U.S. Court of Appeals for the Fifth Circuit affirmed a judge’s dismissal of the People’s Republic of China and a Chinese company, Xiamen, from litigation in the U.S. District Court for the Eastern District of Louisiana. The appeals court agreed with the trial court that the federal judiciary lacked personal jurisdiction and subject matter jurisdiction over the Chinese company and the PRC, respectively. The result was that the district court could not enforce an arbitral award under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention.
The underlying issue is a contract dispute between Covington Marine Corporation and Xiamen Shipbuilding. Pursuant to their contract’s arbitration clause, the dispute went to arbitration under the rules of the London Maritime Arbitration Association. The tribunal found neither side liable, but issued a separate award requiring Covington to pay 40% of the costs and Xiamen 60%. Xiamen then filed a petition in a Chinese court to have the liability award recognized and enforced. Covington did the same with the costs award.
Meanwhile, Covington appealed to the English High Court. The High Court found Xiamen liable, ordered Xiamen to pay 100% of the costs to Covington, and sent back the case to the tribunal for modification of the award. The arbitral tribunal changed their ruling and Covington petitioned the Chinese court to recognize the new awards.
Covington, while waiting for the Chinese court system, petitioned the Eastern District of Louisiana to enforce the order on liability and the costs award against Xiamen and the People’s Republic of China. After several years, the district court finally dismissed Xiamen for a lack of personal jurisdiction and the PRC for a lack of subject matter jurisdiction.
Federal courts are courts of limited jurisdiction. They cannot decide every dispute by every party the world over. In this case, the district court recognized the sovereign immunity afforded the PRC. Sovereign immunity is the privilege invoked by governments protecting them from being hauled into U.S. court. For Xiamen, the court decided that the company did not have sufficient minimum contacts in Louisiana to give the court jurisdiction over Xiamen. A court will judge minimum contacts on the nature and extent of a company’s activities in the forum state.
On appeal to the 5th Circuit, Covington argued that the court did not need to have personal jurisdiction over Xiamen. It argued that the Xiamen Company was really an “alter-ego” of the PRC. If Covington could show that the PRC was really the man behind the curtain at Xiamen, then the PRC could not claim the defense of sovereign immunity. What Covington had in mind was the exception in the Foreign Sovereign Immunities Act. This exception allows plaintiffs to seek confirmation and ultimately enforcement of an arbitral award against a foreign country.
Proving the alter-ego tests is no easy task. Covington had to overcome the presumption that instrumentalities of a foreign state are independent. A court looks at the operations and management of the company, the government’s role in the day-to-day running of the business, and whether the company markets itself as an agent of the government. Finally, a court could disregard an entity’s corporate form to prevent a fraud or injustice.
The district court found, and the 5th Circuit agreed, that Covington did not offer sufficient evidence of PRC’s control of Xiamen. Covington provided these facts: the PRC controlled three of Xiamen’s major shareholders; a Chinese Communist Party representative inspected one of Xiamen’s properties; and one of Xiamen’s professed objectives was “strength[ening] China with shipbuilding”. This was not enough to show an alter-ego relationship existed between Xiamen and the PRC.
Another issue reviewed by the appellate court was the denial of Covington’s request for limited discovery into the relationship between Xiamen and the PRC. Discovery is the means by which parties obtain information and potential evidence from each other. The 5th Circuit applied the abuse of discretion standard to this denial. This is a highly deferential review of the trial court’s action. Covington’s Chinese experts requested that their declarations not be used in litigation against the PRC. The Court found, however, no evidence that the PRC and Xiamen colluded to intimidate Covington’s experts into silence. There was no abuse of the trial court’s discretion to deny Covington discovery into Xiamen’s relationship with the PRC.
Covington also argued that personal jurisdiction was not a defense under the New York Convention. The Fifth Circuit disagreed. As a matter of constitutional due process, foreign entities could assert the personal jurisdiction defense. Thus, the U.S. Court of Appeals for the Fifth Circuit affirmed the decision of the U.S. District Court for the Eastern District of Louisiana in Covington v. Xiamen.
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