ABSTRACT
In supply chain finance where a creditor provides financing in reliance on fabricated accounts receivable (A/Rs), the court, in deciding whether the account debtor on the A/Rs is liable in tort for helping create the appearance of claims, should set a reasonable boundary for the duty of care borne by the debtor, and judiciously establish the causality between the tort and the injury.
FACTS
From February 2015 to June 2019, defendants Guangdong Zhong X Industrial Holdings Co., Ltd. (“GDZX”) and Guangdong Cheng X Holding Group Co., Ltd. (“GDCX”) leveraged the supply chain trade background arising from their procurement transactions with defendant Beijing Jing X Century Trading Co., Ltd. (“JX Trading”) to obtain financing through accounts receivable claims assignment and repurchase arrangements. During this process, GDCX-affiliated companies (“GDCX Affiliates”) fabricated its A/R claims on JX Trading by forging JX Trading’s corporate seals, relevant purchase contracts, and other supporting materials, and entered into financing transactions with plaintiff Shanghai Ge X Asset Management Co., Ltd. (“GX Asset Management”) and its related party.
In particular, starting from 2017, GX Asset Management conducted a series of A/R assignment and repurchase transactions with GDCX Affiliates on behalf of the funds it managed. On January 16, 2018, GX Asset Management signed an Accounts Receivable Assignment and Repurchase Agreement, part of the dispute in this case, with GDCX Affiliates. Under this and the seven subsequent supplements thereto, GX Asset Management paid RMB 3,442.3 million for the relevant A/Rs. Defendant Suzhou Sheng X Marketing Management Co., Ltd. (“Suzhou SX”) provided surety for the resulting debts of GDCX Affiliates.
GX Asset Management verified the authenticity of the A/Rs by, among other means, calling JX Trading’s employees, mailing Accounts Receivable Assignment Confirmation, conducting due diligence at JX Trading, and checking the relevant purchase and sale contracts and value-added tax (VAT) invoices. A detailed account of the process is as follows.
1. In May 2017, GDZX lied to a related party of GX Asset Management, falsely claiming that the A/R payment term between GDZX and JX Trading had been extended from “30+7” days to 180 days, that JX Trading had discontinued its supplier information inquiry system, and that A/Rs would subsequently be confirmed via EMS mail instead of in-person signing as before. An employee of the related party made a conference call to Xu X, JX Trading’s procurement manager, to verify this information, during which Xu made false statement regarding the change to the payment term and the discontinuation of the supplier information system. Earlier in August 2016, Xu also met with another related party of GX Asset Management as part of the latter’s on-site due diligence.
2. All Accounts Receivable Assignment Confirmations from GX Asset Management to JX Trading were intercepted by GDCX Affiliates, who stamped on them the forged corporate seals of JX Trading before mailing them back. While the EMS mails listed Yu X (a JX Trading employee) as the contact person, the provided cellphone number belonged to a GDCX Affiliate employee. Notably, this GDCX Affiliate employee passed off as JX Trading’s staff and intercepted the mails by providing tracking numbers to the courier responsible for JX Trading’s EMS service and directing the courier to deliver the mails to a designated address or mail them from the address of JX Trading. This created false postal records showing that the mails were duly delivered and received and that the receipts for these confirmations were mailed out by JX Trading. The courier said that none of the relevant mails were actually delivered to JX Trading’s mailroom, and some were collected from the basement floor of JX Trading’s building by individuals purporting to be JX Trading employees.
3. Employees of GX Asset Management’s related party conducted on-site due diligence on JX Trading on June 28, 2018, April 3, 2019, and June 17, 2019. In all three visits, GX Asset Management could enter the JX Trading building only with the reservation codes provided by JX Trading to GDCX Affiliates. In every visit, GX Asset Management was actually received in the public reception area by GDCX Affiliate employees posing as JX Trading’s staff.
4. The VAT invoices provided by GDCX Affiliates to GX Asset Management, though authentic, were not actually delivered to JX Trading.
Upon discovering that the A/Rs were fabricated, GX Asset Management filed a civil lawsuit, seeking: (1) performanceof the A/R repurchase obligations by GDZX and GDCX and of the surety obligations by Suzhou SX with respect to its outstanding financing principal of RMB 3,415,405,537.83; and (2) payment of tort damages by JX Trading for failing to exercise the duty of care in employee supervision, mail handling, building access, and tax invoice management, which led it to falsely believe that the A/Rs it purchased were genuine.
HOLDING
On April 30, 2024, the Shanghai Financial Court (“Court”) issued civil judgment (2022) Hu 74 Min Chu No. 3366, which (1) ordered defendants GDZX and GDCX to pay plaintiff GX Asset Management RMB 3,415,405,537.83 within ten days of the effectiveness of the judgment (after deducting any amount already recovered in the criminal case (2023) Hu Xing Zhong No. 8); (2) ordered defendants GDZX and GDCX to pay plaintiff RMB 3,000,000 for attorney’s fees and RMB 617,690.51 for property preservation guarantee fees within ten days of the effectiveness of the judgment; (3) held defendant Suzhou SX liable for compensating plaintiff for any part of the payment obligations under (1) and (2) that is not paid by the defendants, up to the value (as of the actual payment date) of whatever of its 30,800,094 shares in Jiangsu Bo X Investment Holding Co., Ltd. remainingafter meeting its surety obligations under civil judgment (2019) Zhe 01 Min Chu No. 2407; Suzhou SX may then seek recovery from GDZX and GDCX; and (4) denied all other claims of the plaintiff.
Following pronouncement of this judgment, defendant GDZX appealed to the Shanghai High People’s Court on August 27, 2024, which rendered civil judgment (2024) Hu Min Zhong No. 391, affirming the original judgment.
REASONING
The key point of contention in this case was the determination of the tort liability of JX Trading.
The Court reasoned that although GX Asset Management could claim tort damages against JX Trading for its economic losses, whether the claim had merit should be analyzed against the requisite elements of tort liability.
The question of whether JX Trading was liable for the misrepresentation made by its employee should be analyzed in two parts: whether the employee’s conduct constituted an employment-related tort, and whether JX Trading should bear general tort liability due to its inadequate employee supervision.
The answer to the first question is no, for two reasons. (1) The timing, recipient, and content of Xu’s misrepresentation made it far-fetched to conclude that the misrepresentation would mislead GX Asset Management about the authenticity of the A/Rs in question. It merely changed how GX Asset Management would verify the A/Rs, but did not directly cause the injury. GX Asset Management’s losses arose directly from the criminal acts of GDCX Affiliates. There was no evidence showing that Xu, in making the misrepresentation, knew or should have reasonably foreseen that GDCX Affiliate would subsequently commit the crime. In addition, GX Asset Management’s losses were not a foreseeable and typical consequence of such misrepresentation. Because it is difficult to establish this causality between Xu’s misrepresentation and GX Asset Management’s losses incurred by the fraudulent act of GDCX Affiliates, Xu’s conduct did not constitute a tort. (2) Disclosing or confirming the contents of a contract to GDZX’s business partners was not part of Xu’s job, of which GX Asset Management’s related party should have been aware. It is not reasonable to assume that Xu’s misrepresentation about the A/Rs was made as part of Xu’s job responsibilities. There was no evidence showing the misrepresentation was made by Xu for the benefit of JX Trading orhad an inherent connection with his job duties. Therefore, Xu’s conduct did not amount to an employment-related tort.
Second, JX Tradingwasalso not liable for tort for inadequate employee supervision. As Xuwas notauthorized for negotiating or signing contracts with GX Asset Management on behalf of JX Trading, Xu’s misrepresentation, made outside the scope of Xu’s job responsibilities in response to external inquiry, was not causally linked to the injury and thus did not constitute a tort. GX Asset Management’s allegation, that JX Trading was liable in tort for failing to exercise the duty of care in employee supervision, was not sufficiently justified and thus rejected.
Regarding whether JX Trading wasliable forinadequate oversight of its office premises, the Court held that JX Trading did not have the duty of maintaining safety as required by Article 1198 of the Civil Code. Furthermore, the duty of care in relation to preventing hazards can be imposed on an actor only when it is both reasonable and practicable. As the office premises of JX Trading are not a public space, JX Trading had fulfilled its general duty of care by implementinga reservation code system for access, in particular by requiring visitors to make reservations and complete registration once they arrive. Given the size of JX Trading’s office and its crowded reception and business schedules, it was neither realistic nor necessary to require the company to strictly monitor and control all activities of every individual entering its office building.
In the context of this case, no contractual, pre-contractual, or other transactional relationship existed between JX Trading and GX Asset Management. GX Asset Management personnel accessed JX Trading’s office premises using reservation codes provided by GDCX Affiliates.JX Tradingwas unable to foresee or prevent the fraud perpetrated by GDCX Affiliates, because it had no knowledge of either the assignment of the fabricated A/Rs or the purported due diligencevisitsto its office premises.Hence, GX Asset Management’s claim that it was defrauded due to its reliance on JX Trading’s building management was also without merit and thus rejected.
Regarding whether JX Tradingshould bear general tort liability for mail handling and tax invoicemanagement, the Court opined that as a key player in supply chainfinance, JX Trading would perform its duty of care mainly by verifyingthe A/Rs concerned and disclosing truthful information when approached by assignees for verification, rather than by protecting the assignees from fraud through mail handling,tax invoicemanagement, and other internal policies.
In terms of mail handling, JX Trading maintaineda central mailroom for receiving incomingmails. But the confirmation letters sent by GX Asset Management were intercepted before reaching the mailroom due to non-compliant delivery by the courier, a result which was unrelated to JX Trading’s mail handling practices.It was also beyond JX Trading’s control that the courier filled out shipping informationin the EMS system and helped send the mails bearing JX Trading’s printed address.
In terms of tax invoice management, JX Trading was not under any duty of care to use the tax system to prevent fraudulent issuance of VAT invoices by others.
Therefore, JX Trading did not causelosses to GX Asset Managementby breaching its duty of carein its managementpractices, and thus was not liable for tort damages.
SIGNIFICANCE
In supply chain finance, the authenticity of A/Rs underpins effective risk pricing and efficient capital flow. During court hearing, a reasonable assignment of duty of care among the parties to supply chain financing will help prevent the risks posed by false A/Rs.
Since the enactment of the Civil Code, the procedural paths and review standards for an A/R assignee to assert its rights have become relatively clear in cases where the A/R debtor colludes with the creditor to fabricate A/Rs, or where the debtor unilaterally and falsely confirms the authenticity of the A/Rs.
Notwithstanding the foregoing, controversy still exists in practice in situations where the A/R debtor, though not colluding with the creditor or unilaterally making false confirmations, inadvertently creates the appearance of A/R claims because of employee conduct, office management practices, or otherwise. Specifically, there are different opinions on whether the debtor is liable for tort damages to the A/R assignee in the above circumstances.
By examining in turn the employer’s responsibility, its duty of maintaining safety, and the elements of general tort, this judgment made an accurate determination of the tort liability of the A/R debtor, helping clarify the boundaries of duty of care among the parties and contributing to a healthier supply chain finance industry.
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