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The Case of XX Paper Mill v. Canada XX Co., Ltd. on Dispute of Equity Joint Venture Contract Jurisdiction: Arbitration; CIETAC 1.Case Brief On X month, X day, XXXX year, the claimant, XX Paper Mill and the respondent Canada XX Co., Ltd. concluded the Basic Contract concerning the Establishment of XXX Paper Mill (hereinafter referred to as "the equity joint venture contract") and the Articles of Association of XXX Paper Mill (hereinafter referred to as "the Articles of Association" to establish XXX Paper Mill (hereinafter referred to as "the Equity Joint Venture Company") enjoying the annual production capacity of 11,000 tons of high-quality offset book paper. The Equity Joint Venture Company was officially established after the examination and approval of the Foreign Economic and Trade Commission of X Province and the registration in the industrial and commercial authority of X province. The Equity Joint Venture Contract prescribes that the amount of the registered capital of the Equity Joint Venture Company shall be $ 1 million, where the claimant shall contribute $ 0.49 million, accounting for 49% and the respondent $ 0.51 million, accounting for 51% and the representative of the respondent shall act as the chairman of the board of directors and the legal representative hereof. After the establishment of the Equity Joint Venture Company, the claimant and the respondent paid off the registered capital hereof in accordance with the relevant provisions. Both parties had disputes over equity joint venture. The claimant deemed that the respondent failed to invest sufficient capital for the operation hereof in accordance with the Equity Joint Venture Contract and the Articles of Association and to convene the conference of the board of directors and took negligent act so that the Joint Venture Company ceased operation, falling under predicament and owed huge debt. Therefore, the claimant submitted the following arbitration requests to CIETAC in accordance with the relevant laws and the Joint Venture Contract: (1) to terminate the Equity Joint Venture Contract and undertake liquidation hereon; (2) to award the respondent to bear all the arbitration fees and attorney fees. The respondent deem that the establishment of the Equity Joint Venture Contract was a swindle contrived by the claimant and the Suburban People's Government of X City(hereinafter referred to as "the Suburban Government) to swindle the investment from the respondent and therefore the Contract should be null and void. Meanwhile, it was the claimant who should be mainly blamed for the predicament hereof. Thereby, the respondent requires the arbitral tribunal to list the Suburban Government as a joint applicant and to overrule all the arbitration requests of the claimant. In accordance with the written statement and evidences submitted by both parties and the facts confirmed in the tribunal session, the major disputes of both parties lie in: (1) The relation between the claimant and the Suburban Government The respondent deems that the subject qualification of one party to the Contract has been superseded by the Suburban Government as of the date of the establishment of the Equity Joint Venture Company and that the Suburban Government is actually the Chinese side hereto, the main reasons is given as follows: (a) The claimant is actually the cloak of the Suburban Government in time of equity joint venture. The claimant was a small district factory, the district government decided to extend the construction of the offset book paper item of the factory which produced 11,000 tons of offset book paper and started the construction of the item in 1992, which was completed funded by bank loan. When the Equity Joint Venture Company was established, all the assets of the claimant (factory house and equipments valued RMB 0.57 million) had been included in the capital contribution of the Suburban Government. The Chinese side the Equity Joint Venture Company was the Suburban Government: the former bank loan of the claimant should be borne by the Suburban Government; the newly-added investment RMB 7 million should be contributed by the Suburban Government, which was the basic reason why the capital inspection report was written to the Suburban Government rather than the claimant. In addition, it was the Suburban Government who negotiated the equity joint venture issues with the respondent and it was expressly written by all the documents of the Suburban Government the involving the Equity Joint Venture Contract that the Suburban Government was the shareholder of the Chinese side and Chinese representatives were major leaders of the Suburban Government, the Suburban Party Committee and the Suburban People's Congress. Furthermore, in order to autograph in the Equity Joint Venture Contract on behalf of the Chinese side, the claimant, i.e. the director of the factory, and the Assistant Suburban Director issued an entrustment otherwise, which manifests that it represents the Suburban Government instead of the claimant. (b) The memorandums signed by the Suburban Government and the respondent on the day of the conclusion of the Equity Joint Venture Contract constitutes an important part of the Equity Joint Venture Contract as well as the basic requisite for the conclusion hereof. The Request for Instruction concerning the Establishment of XXX Equity Joint Venture Co., Ltd. by the Suburban Paper Mill and Canada XXX International Co., Ltd. submitted by the Suburban Government on August 2, 1995 and the official reply of X city manifests that the Equity Joint Venture Company and the Memorandums represents the basic foundation for both interested parties to abide by. (c)The claimant actually possessed the Equity Joint Venture Company after its establishment. All the assets of the claimant, converted to RMB 0.57 million as part of the capital contribution of the Chinese side was totally included in the Equity Joint Venture Company and its precedent bank loan was completed accepted by the Suburban Government as part of its capital contribution. After all the assets had been financed in the Equity Joint Venture Company, it was impossible and unnecessary for the claimant to exist any longer in that the claimant had its subject qualification deprived and had no rights and capability hereof. The Suburban Government is actually the Chinese side hereto and the claimant merely serves as the carrier of rights and obligations in the name of the Suburban Government. The arbitration request submitted by the claimant actually represents the act of the Suburban Government. Therefore, the respondent requires the arbitral tribunal to list the Suburban Government as the joint claimant herein. In response to the aforesaid claims of the respondent, the claimant pointed out its subject of qualification is unquestionable and that it is utterly unjustifiable that the respondent requires listing the Suburban Government as the joint claimant herein. The facts and reasons are given by the claimant as follows: The Equity Joint Venture Company was a scale enterprise established after registration and had more than RMB 30 million prior to its establishment in 1995. In the process of equity joint venture, the claimant invested in factory houses, equipment and cash by the means of credit which totaled RMB 12 million (excluding the surrendered profit RMB 10 million to the Equity Joint Venture Company in accordance with the preferential policy) as well as registered capital. The establishment of the Equity Joint Venture Company should not influence the existence of the claimant as an independent legal person. From 1995 to 1999, the claimant was subject to the annual inspection of enterprise legal person annually in accordance with the relevant law and totally accorded with the important documents of a legal person prescribed in Article 37 of the General Principles of the Civil Law of the People's Republic of China and thereby the Equity Joint Venture Company was established in accordance with the relevant law. In accordance with the relevant laws of the People's Republic of China, the governmental authority shall be forbidden from becoming the shareholder of the equity joint venture enterprise. The property of the enterprise of the claimant, a stated-owned enterprise with independent legal person qualification, should be owned by the nation, which was determined by the nature of Chinese social system. The government as the contributor of the state-owned enterprise was authorized to manage the state-owned asset, which accords with the relevant Chinese laws. In addition, the Suburban Government plays a role of "Governments set up the stage and enterprise put in the show", which has no influence upon the status of the claimant as an independent legal person and cannot supersede the status of the claimant to bear independent civil liability. Furthermore, the arbitration herein was carried out on the basis of the agreement between the claimant and the respondent and it is groundless to list the Suburban Government as the joint claimant in that the Suburban Government has no arbitration agreement with the respondent. (2) About the arbitration request of the claimant The claimant deems that (a) In accordance with the Equity Joint Venture Contract and the Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures, all the parties hereto shall jointly bear the investment risk while sharing the profit of investment and any violation of the principle of equity and mutual-benefit in the contract or the contract appendix shall be null and void. It is wrong that the respondent should share the profit merely by the investment of RMB 10 million and minimum-profit-guarantee in the appendix of the contract goes against the relevant laws and should be null and void. In addition, the respondent cited numerous appendixes of the contract yet to be approved as its evidence, which is inappropriate, in that these appendix has not been examined and approved by the authorities in charge and does not have the important conditions of lawful documents hereof. (b) The completion cession of operation hereof was caused by the negligence of the respondent. Prior to the establishment of the Equity Joint Venture Enterprise, the claimant had a concrete enterprise development program approved by the Planned Economic Commission of X Province in 1993, and the approved contents include the scale, rough calculation of the aggregate amount of investment as well as the environmental protection requirement upon the newly-added items. The technology adopted in the construction of the items accorded with the requirement of the environmental protection policy at that time and was approved by the authorities in charge. After the promulgation of Interim Regulations concerning the Prevention and Control of Water Pollution within the territory of the Huaihe River Valley(the State Council No. 183) in August 1995 ad the revised Law of the People's Republic of China on Prevention and Control of Water Pollution on May 5, 1995, the former technology of the Equity Joint Venture Company did not accord with the new environmental protection requirement, therefore in the trial production of the cooperation items in 1996, the environmental protection items was not passed by the Environmental Protection Bureau of X City and required the update hereof. In accordance with the rough calculation, the reclamation needed adding the investment RMB 15 million. The Equity Joint Venture Company made a special report to the board of directors. Due to the negligence of the chairman of the board of directors entrusted by the respondent, the board of directors did not make the relevant resolution, which is an important reason why this cooperation item has been postponed till now, which is totally different from the statement that "the claimant is responsible for the preparation of the item, so the environmental protection item should be included in the obligation of the claimant as claimed by the respondent. (c ) The accusation of the respondent that the claimant of shifting its liability to the joint venture company, which does not accord with facts and its statement that the Equity Joint Venture Company "is burdened with the interest more than RMB 1 million is groundless. The claimant continued to commit that once that joint venture company has been liquidated in accordance with the relevant law and enters the liquidation procedure, the debt RMB 10.671 million in the name of the Equity Joint Venture Company should be totally assumed by the claimant. To sum up, the claimant deems that the complete cession of operation of the Equity Joint Venture Company was caused by the negligence of the respondent. In accordance with the relevant laws and the relevant clauses in the Equity Joint Venture Contract as well as the status quo of the Equity Joint Venture Company, in order to appropriately and reasonably settle the dispute raising from the cession of operation of both parties for three years, to prevent the increase of loss and to protect the legitimate interest of the claimant, the claimant requires the arbitral tribunal to terminate the Equity Joint Venture Contract, dissolve the Equity Joint Venture Company and to undertake liquidation in accordance with the relevant laws. The respondent argues that the arbitration request of the claimant has no factual and lawful foundation, the reason is given as follows: first, the claimant argues that the respondent should invest the relevant part in that the claimant has invested the tangible assets RMB 4.944 million and current fund RMB 7 million as well as the registered capital to the Equity Joint Venture Company, in fact the claimant has not invested these funds and therefore breaches the Contract. The cash RMB 7 million was invested by the claimant and the Suburban Government in accordance with the agreement between both parties in the period of equity joint venture negotiation. In addition, the tangible investment RMB 4.944 million is invested when the Equity Joint Venture Contract was established rather than by combining the actual production need thereafter. Since the Chinese side did not continue investing, it is unreasonable to require the foreign side to continue investing in accordance with the relevant proportion. Second, it is prescribed in the Memorandums (4) of Basic Contract concerning the Establishment of XX Paper Co., Ltd. that the claimant shall be "responsible for the installment, adjustment of all the equipment of the Equity Joint Venture Company to ensure its formal production on December 1, 1995". The inability of the enterprise to operate because of the unqualified environmental protection items should fall under the scope of the preparatory construction hereof as well as the obligation of the claimant. In addition, in accordance with the Memorandums (3) of Basic Contract concerning the Establishment of XX Paper Co., Ltd., the respondent shall share the profit once it invests RMB 10 million and any other statement that the respondent should continue investing in lacks legal evidence. Third, although the Equity Joint Venture Company has been established, it exists only in name, and the default of the Chinese side resulted in the complete cession of operation hereof and the impossibility for the respondent to execute its right of the chairman of the board of directors. The statement of the claimant that the failure of the respondent to convene the conference of the board of directors leads to the out-of-control of the Equity Joint Venture Company is untenable. The respondent pointed out further that the establishment of the Equity Joint Venture Company was the swindle connived between the claimant and the Suburban Government by means of fraud in order to swindle the investment out of the respondent. In accordance with the confirmation of experts, the amount of investment for the construction of a 11,000 tons offset book paper enterprise from 1995 to 1996 should be more than RMB100 million generally. That the statement in the feasible report provided by the Chinese party that the aggregate amount of investment for the construction of an 11,000 ton paper mill should be RMB 42.94 million is a false one fabricated to swindle the foreign investment. It is confirmed in the evidence hereafter that the Chinese side was clearly aware that it was impossible to construct an 11,000 tons paper of mill in accordance with the original design by using more than RMB 40 million. In addition, the Chinese side tried to attract foreign investment by such acts as the supply of preferential measures in accordance with the government documents， the signature of memorandums with the respondent, and that after the establishment of the Equity Joint Venture Company, the Chinese side required the foreign side to continue its capital contribution by various excuses. Furthermore, the Chinese side transferred the loan debt RMB 10.617 million to the Equity Joint Venture Company so that the Joint Venture Company borne the interest more than 1 million hereof. To sum up, the respondent deems that the claimant and the Suburban Government fooled the respondent into concluding the Equity Joint Venture Company and breached the contract repeatedly in the process of the equity joint venture by means of fraud. Therefore, the respondent deems that in accordance with Chinese law, the Equity Joint Venture Company should be deemed as null and void, and the claimant and the Suburban Government should bear all the liabilities for the invalidation hereof. The facts confirmed by the arbitral tribunal after investigation (1) On the same day of the conclusion of the Equity Joint Venture Contract, the respondent concluded several Memorandums of the Contract with the Suburban Government and agreed further some key points and principles of the establishment of the Equity Joint Venture Company and some agreement were different from the relevant clauses of the Equity Joint Venture Contract. It was agreed in the memorandums that the memorandums shall be supplementary clauses of the contract and have the same lawful effectiveness with the basic contracts. The submitted and examined documents recorded in the Foreign Economic Bureau of X City only included the Equity Joint Venture Contract, the Articles of Association hereof, the Item Suggestion and its approval, the Name Certificate of the Joint Venture Company, the resumes of the staff of the board of directors, the identification card, the capital assessment report of the applicant, the business license of both interested parties, the credibility letter and so on, except the memorandums concluded by both interested parties. (2) The Equity Joint Venture Contract prescribes that prior to the expiration of the equity joint venture period, the Equity Joint Venture Company may be dissolved under any of the following circumstances: (i) the aggregate amount of loss hereof exceeded 200% of the registered capital so that it is difficult to continue its operation;(ii) either party fails to fulfill the obligations in the agreement, the Contract and the Articles of Association so that the Company was in difficult operation; (iii) the Company does not reach its business objective and its future is bleak, the Equity Joint Venture Company may be dissolved. 2.Award (1) to terminate the Equity Joint Venture Contract and liquidate the Equity Joint Venture Company in accordance with the relevant law; (2) to overrule the request of the claimant about the attorney fee; (3) The arbitration fee herein shall be RMB XX, where the claimant shall bear RMB XX and the respondent RMB XX. 3.Comment Legal matters in relation to this case are mainly as follows: (1) About the effectiveness of the Equity Joint Venture Contract and the memorandums The claimant and the respondent concluded the Equity Joint Venture Contract, the Articles of Association and established the Equity Joint Venture Company herein. After the Equity Joint Venture Company and the Articles of Association had been approved by the Foreign Economic and Trade Commission of X Province, the claimant and the respondent applied to the provincial industrial and commercial administrative authority by presenting the approval certificate and officially established the Equity Joint Venture Company. The Equity Joint Venture Contract was agreed by both parties through consultation and approved by the authority in charged in accordance with Chinese laws. The Equity Joint Venture Company has been effectively established and both interested parties shall strictly fulfill their respective obligation in accordance with the Equity Joint Venture Contract. The memorandums concluded by the respondent and the representative of the Suburban Government do not come into effect, in that it violates Article 13 of Detailed Rules on the Implementation of the Law of the People's Republic of China on Sino-foreign Joint Cooperative Ventures, albeit they are the reflection of the intention of both interested parties and where they violates the Equity Joint Venture Contract, the latter shall prevail. In addition, the arbitral tribunal shall not support the statement of the respondent that the Equity Joint Venture Contract should be null and void in that the claimant and the Suburban Government fooled the respondent into concluding the Equity Joint Venture Contract by means of fraud. (2) The legal status of the Suburban Government In accordance with the facts confirmed in the tribunal trial, the Suburban Government and the claimant has close relation with the claimant and plays an important role in the conclusion of the Equity Joint Venture Contract. Thereby, the respondent claims that the claimant is merely the nominal carrier of rights and obligations of the Suburban Government and the cloak hereof in time of the equity joint venture and that the Suburban Government is actually the Chinese side hereof. First, in accordance with the relevant Chinese laws, the equity joint venture enterprise shall be jointly operated by foreign company, enterprise, and other economic organization or individual with the Chinese counterparts and both interested parties hereto shall be equal and the administrative authority shall be forbidden from becoming the shareholder of either party. The claimant is a domestic enterprise with independent legal person qualification and its property shall be owned by the state, which as its manager shall be entitled to manage the state assets. In addition, the Suburban Government is involved in the process of equity joint venture in order to attract foreign investment and to develop the economy and its acts shall be the administrative act and different from that of the claimant with independent legal person qualification in the process of equity joint venture. Even if the Suburban Government has enforced some rights and obligations of the claimant in the process of equity joint venture, the legal consequence upon the equity joint venture enterprise hereof shall, despite of its inappropriateness, only be borne by the claimant, in that the Equity Joint Venture Contract is concluded by the claimant and the respondent, excluding the Suburban Government. Meanwhile, the arbitration request herein is accepted on the basis of the arbitration clauses agreed by the claimant and the respondent herein. The Suburban Government and the respondent have not concluded arbitration agreement, so it lacks legal evidence to list the Suburban Government as the joint claimant. In addition, in accordance with the evidence provided by the claimant, the establishment of the Equity Joint Venture Company shall not influence of the existence of the claimant as an independent legal person. From 1995 to 1999, the claimant undertook annual inspection of legal person and existed lawfully in accordance with the necessary conditions of a legal person prescribed in the General Principles of the Civil Law of the People's Republic of China. Therefore, the statement of the respondent that the claimant does not exist after the establishment of the Equity Joint Venture Company does not accord with the fact. On the basis of the aforesaid evidence, the subjects to the Equity Joint Venture Contract herein shall be the claimant and the respondent and the arbitration herein is drawn on the basis of the Equity Joint Venture Contract. Therefore, the subjects herein shall be the claimant and the respondent and the Suburban Government shall not have the subject qualification to participate in the arbitration herein. (3) About the arbitration request of the claimant The claimant points out that the Equity Joint Venture Company has completely ceased operation and been overburdened with debts so that it is unable to continue its operation any longer. Therefore, the claimant requires the arbitral tribunal to award the termination of the Equity Joint Venture Contract, liquidate the Company and undertake liquidation in accordance with the relevant law. In accordance with the contractual agreement of both parties as well as Article 102 of the Detailed Rules on the Implementation of the Law of the People's Republic of China on Sino-foreign Joint Cooperative Ventures: "the joint venture enterprises may be dissolved under the following circumstances: (i) the expiration of the cooperation period;(ii) the enterprise suffers from serious losses so that it is unable to continue its operation;(iii) the failure of either party to fulfill the obligations in the agreement, the contract and the articles of association so that it is unable to continue its operation;(iv) the enterprise is unable to continue its operation due to such force majeure as natural disaster and war;(v)the enterprise is unable to reach its operation objective and its future is bleak;..." Referring to the inability of the Equity Joint Venture Company to continue its operation, the arbitral tribunal deems that the serious loss and chaotic management hereof make the Company unable and impossible to continue its operation, therefore the Equity Joint Venture Contract shall be terminated and the Equity Joint Venture Company shall be dissolved. Both interested parties shall undertake liquidation hereupon in accordance with the relevant Chinese laws. The claimant shall be mainly responsible for the termination of the Contract and the respondent shall also have its bounden responsibility.
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Awarded by CIETAC on 2006-12-12
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The Case of XX Paper Mill v. Canada XX Co., Ltd. on Dispute of Equity Joint Venture Contract
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