Case of the Day: S&S Machinery Corp. v. Wuhan Heavy Duty Machine Tool Group

The case of the day is S&S Machinery Corp. v. Wuhan Heavy Duty Machine Tool Group Co. (E.D.N.Y. 2012). S&S was a machine tools merchant in New York. Under a 1999 agreement, it was the exclusive agent in North and South America for Wuhan, one of China’s largest machine tool manufacturers. The agreement gave S&S the right to “select the first machine to be displayed in the next National Machine Tool Show in Chicago.”

In 2000, S&S entered into a contract with Wuhan to purchase a vertical boring mill for about $200,000. The purchase agreement contained an agreement to arbitrate disputes in China under the CIETAC rules. S&S paid a 20% deposit on the mill, as the 1999 agency agreement required, and Wuhan sent the machine in time for the 2000 National Machine Tool Show, with two employees to set it up. But the Wuhan employees were unable to get the machine to work. For four years, S&S tried to get technical assistance from Wuhan, which did not respond. Nor could a third party S&S hired get the machine to work.

S&S sued Wuhan in New York in 2007. While the case was pending, Wuhan commenced a CIETAC arbitration to recover the unpaid balance of the purchase price.

In March 2009, S&S sought entry of Wuhan’s default in the New York case, as Wuhan had failed to answer. The clerk entered the default, as six months had passed since transmission of the documents to the Chinese central authority and no certificate of any kind had been received (a default judgment is permissible in such circumstances under Article 15 of the Convention). Let’s pause for a moment to consider the steps S&S says it took to try to obtain a response from the Chinese authorities, as Article 15 requires. According to a declaration S&S lawyer filed, the lawyer wrote that he hired an experienced process server and “deferred to [his] advice and guidance in assuring that [ellipsis] there are no further steps that can be taken to assure that the Chinese Ministry of Justice did, in fact, effect service upon the defendant.” The process server sent a request for a status update to the Ministry but received no response and did nothing further. It may be that in practice no additional steps would have yielded any better results. But should the plaintiffs have hired a Chinese lawyer to make inquiries or consult about possible alternative courses of action? Should the plaintiffs have made inquiries through the Chinese consulate in New York or the American embassy in Beijing? More pointedly, what value did the process server add in this case? I don’t doubt that in some Hague Convention cases a private process server can be useful. But if all the process server does is to forward the documents to the foreign central authority and then make a pro forma inquiry of the central authority, what is the value to the plaintiff? And should the plaintiff’s lawyer be comfortable simply delegating all service of process issues to the process server?

Wuhan wrote a letter to the New York court (signed only with its corporate name, and not in any case signed by a lawyer) objecting to the court’s exercise of jurisdiction on the grounds that the parties had agreed to arbitration. The judge advised Wuhan to appear in the action and to move to vacate the default, but Wuhan failed to appear. Instead, Wuhan again wrote a letter to the judge objecting to the New York proceedings.

Although S&S asserted the dispute arose under the 1999 agreement rather than the 2000 purchase contract and was therefore not arbitrable, the tribunal ruled otherwise and in December 2009 awarded Wuhan almost $120,000 in damages.

In 2011, S&S moved for entry of default judgment, and the magistrate judge recommended entry of judgment against Wuhan. The magistrate judge rejected S&S’s argument that Wuhan had waived arbitration and award as an affirmative defense by failing to appear, but he reasoned that since the claim in the New York case was for breach of the 1999 agency agreement, and that contract, unlike the purchase agreement, had no arbitration clause, the CIETAC award had no preclusive effect.

Wuhan then sent another letter to the court, signed by Luan Jinqing, but without entering an appearance or identifying Luan’s relationship to the company. It seemed clear that Luan was not admitted to practice in the court and he may not have been a lawyer. The district judge refused to treat this letter as an objection, and instead reviewed the report and recommendation for clear error. Finding none, the judge adopted the report and ordered judgment for S&S.

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