In a diesel engine accident onboard a vessel, the key question was: who should bear responsibility for the incident? Should Company B, as the manufacturer, be held fully liable? Should Company C, as the shipbuilder and seller, be accountable for the quality defects?

Basic Facts

On April 18, 2019, while dredging operations were underway off the coast of Qinzhou Port, the vessel LIANG LONG suffered a sudden mechanical failure accompanied by a loud explosion. Cylinders No. 15 and 16 of the deck pump diesel engine burst simultaneously, resulting in serious damage to the engine.

Following the accident, operations were immediately halted. Engineers disassembled the damaged engine and transported it to a repair facility for inspection. The costs for repair, disassembly, and replacement parts placed a heavy financial burden on the shipowner.

Fortunately, prior to the incident, Company D—the owner of the LIANG LONG—had taken out an ocean-going vessel all-risks insurance policy from Company A. After the accident, Company A engaged Company E to conduct a damage survey and loss assessment. Based on its investigation findings, Company E concluded that the root cause of the accident was a latent defect in the nozzle of the fuel injector assembly of the diesel engine. The property loss resulting from the incident was assessed at RMB 1,455,428.76. In accordance with the insurance policy, Company A paid Company D RMB 1,277,990.05 in compensation and thereby obtained the right of subrogation. Company A also bore the cost of the appraisal, amounting to RMB 33,564.32.

Subsequently, Company A filed a lawsuit with the Guangzhou Maritime Court (GZMC), demanding that Company B and Company C be held jointly and severally liable for payment of the insurance compensation (RMB 1,277,990.05) and corresponding interest, as well as for reimbursement of the appraisal fee (RMB 33,564.32) and corresponding interest.

The incident was attributed to a latent defect in the fuel injector nozzle of the marine diesel engine. Pursuant to Article 26 of the Interpretation of the Supreme People's Court on the Application of the Criminal Procedure Law of the People's Republic of China, Company D had purchased the engine from Company C, whose domicile was in Guangzhou. Hence, GZMC had jurisdiction over the case as the court in the place of product sale. In accordance with Article 41 of the Product Quality Law, Company B, as the manufacturer, was found liable for full compensation, since the incident was attributed to a latent defect in the fuel injector nozzle of the marine diesel engine. Company B (China), responsible for the import and distribution of Company B's products in China, knew or ought to have known that the engine posed unreasonable risks to persons or property and failed to take necessary measures. As such, under Article 8 of the Tort Liability Law, Company B (China) was deemed a joint tortfeasor and held jointly liable. Company C, as the builder of the LIANG LONG and seller of the engine, was also held jointly liable under Article 43 of the Product Quality Law. Since Company A had paid Company D the amount of RMB 1,277,990.05 in compensation, it was entitled under the first paragraph of Article 252 of the Maritime Code to exercise the subrogated right of claim against the defendants. The appraisal fee of RMB 33,564.32 was considered a reasonable expense incurred in assessing the loss and pursuing the claim, and thus the defendants were jointly liable for its reimbursement.

Case Outcomes

 Upon review, GZMC held jurisdiction over two related maritime commercial cases between Company A and the defendants. On May 9, 2022, the court mailed legal instruments, including a notice of response, to Company B's address in China via Company B (China). These documents were confirmed delivered on May 12, 2022. It was further found that Company B (China)'s business scope included: providing consulting services to its parent company; supporting affiliates with market and investment policy information; undertaking outsourced services for its parent and affiliates; providing after-sales services for products manufactured by the parent company; engaging in retail (subject to further approval in case of opening shops) and wholesale of the parent company's and its affiliates' products (excluding specific restricted goods); and acting as a commission agent (excluding auction services). Company B (China) is a wholly owned subsidiary of Company B (Hong Kong), in which Company B holds a 99.99% stake. Accordingly, Company B (China) was deemed an agent of Company B in China.

With service of process duly completed, and under the court's mediation efforts, Company B, through its legal counsel, reached a settlement agreement with Company A. The court issued a mediation document stipulating that within 60 days of delivery, Company B would pay Company A a settlement sum of RMB 550,000. The case was thereby satisfactorily resolved.

Key Significance

The successful resolution of this case addressed a long-standing judicial challenge: effective service of process on multinational corporations via their Chinese subsidiaries. The case bears dual significance. First, it offers a substantive reference for counteracting the doctrine of "long-arm jurisdiction." In judicial practice, as long as the plaintiff's asserted rights are sufficiently connected to the defendant, Chinese courts may exercise personal jurisdiction over foreign entities in accordance with domestic law. Second, Company B, a globally renowned multinational manufacturer of heavy machinery, accepted the principle of mediation promoted by China. This ultimately led to the peaceful resolution of the dispute.