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The Case of xx Company, Guangzhou V. xx Company, Haikou and xx Company, Hong Kong on Dispute over Cooperative Operation of xx Imported Car Maintaining Company, Haikou
Jurisdiction: Arbitration; CIETAC Shenzhen
1.Case Brief
On August 3, 1993, the first respondent Company A in Haikou(Party A), the second respondent Company B in Hong Kong (Party B) and the claimant Company C in Guangzhou (Party C) concluded the Chinese-foreign cooperative operation contract (hereinafter referred to as the cooperative contract) with main contents as follows:
(1) The three parties agreed to jointly invest to establish a cooperative company in Haikou, Hainan, named as Haikou X Imported Car Maintaining Company (hereinafter referred to as the cooperative company), primarily engaged in car maintaining as well as car accessories wholesale and retail, concurrently in passenger transportation and freightage, engineering design, engineering decoration as well as hardware and household appliances, etc. (see Articles 1, 2 and7).
(2) The total investment was RMB 3, 000, 000; registered capital was RMB 3, 000, 000, and the cooperation term was 5 years. (See Article 8)
(3) Conditions for cooperation: Party A shall invest a piece of field with 3,000 sq. meters (including old workshop 650 sq. meters) once for all. In addition, Party A shall provide the cooperative company with vacant ground of 500 sq. meters connecting to production field for parking. Only the use right of the invested ground and workshop other than the property right thereof was provided, and they shall be returned to Party A when the cooperative company terminates or winds up its operation. Party B and Party C shall be in charge of the daily operation of the cooperative company, while Party A shall obtain a certain sum of operating profits from Party B and Party C and should not participate in the daily operation directly and bear no loss thereof. Party B shall contribute HK$ 1, 500, 000 in cash for purchasing and introducing overseas advanced technologies, and shall cooperate with Party C to operate the cooperative company and bear operation risk. Party C shall invest RMB 1, 500, 000 in cash for purchasing part of equipments as well as current capital. Party C shall cooperate with Party B to take charge of the daily operation of the cooperative company and bear operation risks (see Article 9).
(4) The registered capital shall be paid by each party according to their contribution proportion in installments. Thereinto, Party A shall present the certifications of the invested field and workshop when the registration was handled, and should hand over them to the cooperative company for use, while Party B and Party C should prepay Party A RMB 100, 000 as deposit of the invested field and workshop when the contract was concluded. Within half a year as of the conclusion of the contract, Party B and Party C should invest in the registered capital 3, 000, 000 in total(see Article 9).
(5) In spite of profits or losses of the cooperative company, Party B and Party C shall pay Party A profits, namely, RMB 600, 000 for the first year and increased annually at the rate of 20% from the second year; the profits shall be paid quarterly. If the cooperative company still profits after paying Party A the aforesaid profits, Party B and Party C shall distribute the remaining profits on the base of 50-50; if the cooperative company has losses or suffers risks, Party B and Party C should bear 50% respectively(see Article 37).
(6) In case any party failed to invest in time and with full amount as stipulated in the cooperative contract, the observant was entitled to terminate the contract as stipulated therein and require the breaching party compensate, in addition to enforcing the penalty clause of the contract (Article 51)
(7) If performance of the contract or its annexes were unavailable or incomplete by virtue of any party's defect, the faulty party should bear liabilities for breaching contract; if due to the defects of each party, the liabilities should be born by each liable party respectively (Article 52).
(8) Any dispute in relation to the performance of this contract or concerning this contract should be settled through friendly negotiation; if failed, it should be filed with CIETAC to be arbitrated according to the arbitration procedures thereof. The arbitration award should be final and binding on both parties(Article 54).
The contract also made stipulations on liabilities of each party, the board of directors, operational and managing organs, staff management, finance system, profit distribution as well as amending, alteration and cancellation of the contract, etc.
The contract was approved by the approval authority after its conclusion, and on Aug.25, 1993, the cooperative company obtained the business license as issued by the State Administration of Industry and Commerce.
Disputes arised among the three parties in the process of performing the contract, then the claimant filed arbitration with CIETAC Shenzhen, requiring:
(1) The cooperative contract concluded by the three parties on Aug.3, 1993 should be terminated.
(2) The losses of the investment worth of RMB 1,048,433,32 the claimant suffered duo to the first respondent's breach of contract should be compensated, and the quota of profits HK$ 100, 000 and RMB 40, 000 (converted into RMB 150, 000 in total) the claimant gave to the respondent as well as interests and other losses RMB 267, 000 should be paid by the respondents.
(3) The respondent should assume the arbitration fees in this case and other expenses caused by this.
The focuses of this dispute are as follows:
(1) As regards whether the cooperative contract was illegal
As the claimant claimed, the "minimum-guarantee profit" clause in the cooperative contract had violated legal provisions. As prescribed in Article 4, "on the minimum-guarantee clause in the cooperative contract", in the Reply on Several Issues Involved in the Trial of Disputes over Joint Venture Contract (Jing Fa [1990]No.27)issued by the Supreme Court, "The minimum-guarantee clause violates the principles of jointly sharing losses, profits and risks that shall be observed during the cooperative operation, and damages the legal rights and interests of other cooperation parties as well as their creditors; therefore this clause shall be confirmed as invalid." According to this provision, the stipulation of Article 37 in the contract that the first respondent should obtain fixed profits was illegal and invalid. Therefore, the first respondent had infringed upon the claimant's legal rights and interests by terminating the contract on the ground of delayed fixed profits.
As the second respondent asserted, the cooperative contract concluded by the three parties, including the minimum-guarantee clause which violates legal provisions, was a land lease in disguised form; therefore the contract was null and void.
As the first respondent proposed, the cooperative contract stipulated that the first respondent should only provide the use right of the invested field and workshop other than the property right thereof and they should be returned when the cooperation term expired; that was to say, the first respondent's investing properties were only handed over to the company for use other than investment. What the first respondent collected was only charges for the usage of the field and workshop other than so-called fixed profits. The Reply of the Supreme Court on Several Issues Involved in the Trial of Disputes over Joint Venture Contract should apply to investment parties who made both investments and operation and obtained profits but did not bear losses. However, the first respondent had never invested in the cooperative company or participated in operation, so the first respondent was the cooperative party other than the joint-venture party of the cooperative company.
(2) As for investment
As the claimant claimed, after the conclusion of the contract, it had totally invested RMB 1,048,433.32. But the first respondent failed to perform the contract. As stipulated in the contract, the first respondent should provide a piece of field with the area of 3,000 sq. meters (including old workshop of 650 sq. meters) and vacant ground of 500 sq. meters. But in fact, only a piece of field with 2,500-sq. meter and an old workshop of 540-sq. meter were provided, and it failed to provide the 500-sq. meter of vacant ground. In addition, the claimant claimed, the actual value of investments by the three parties had not ascertained, because the audit firm of Hainan hired by only one party was unable to confirm interests of the three parties correctly. For the stake of fairness, an audit firm at the place other than any locality of the three parties should be hired to make a new verification.
The first respondent advanced, according to Qiong Shen Suo [1994] No. XX audit report issued by Audit Firm in Hainan, it could be seen that the claimant successively invested RMB 380, 000 in cash and equipments valued RMB 394, 912.82, totally RMB 653,520.50. The overstated investment of RMB 394,912.82 by the claimant was not equipment materials, and the vouchers thereof were issued by the claimant itself, including amount and price. The claimant's act obviously violated stipulations in the contract and articles of association; therefore it was reasonable that other parties and the audit firm refused to accept the claimant's conduct.
The second respondent claimed that its investment sum had reached RMB 1,375,915. Deposit of HK$ 100, 000 was provided by the second respondent not the claimant. This should be returned to the second respondent after the termination of the contract. The contribution status of the claimant stated by itself was not consist with the facts. The claimant failed to contribute half of the investment subscribed until now, and presumed to carry in its idle and remained equipments as investments, to which the other two parties had objection.
(3) As for the termination of the contract
The claimant advanced the cooperative company obtained operating receipt RMB 197,000 as from after trial business in the last four-month of 1993 to Jan.1994, the monthly revenue RMB 104, 000 through 140, 000 for March to April in 1994, the expected revenue for May between RMB 180, 000 and RMB 220,000, and turned losses to profits since the fourth month after opening business. Just because of this, the first respondent and the second respondent started their plan together: firstly, on Apr.25, 1994, Huangjun(the chairman of the board of director of the cooperative company) appointed by the second respondent should convene a meeting of the board of directors under the excuse of deliberating preparation work, use of funds and staff management； secondly, May 3 in the same year, Huangjun forcibly draw away all cashes, official seal, checks, vouchers and accounts on the ground of checking the finance, and suddenly required to control and use all financial funds; thirdly, in meeting of board of directors, requirements of clearing up assets and liquidation was abruptly put forward by going against the original agenda, the claimant reluctantly agreed on this with a view of the first and second respondent's not sincerity for cooperation; fourthly, seven days after the resolution of clearing up and checking assets was made, the first respondent took back the field for operating and the dormitory and drove out staff of Party C thereof for its own use, and required terminate the contract unilaterally; fifthly, to invite new cooperative parties to check the withdrawn field and set about contracting out the cooperative company unilaterally. Reasons for the first respondent to do so were：RMB 600,000 should be paid for a whole year whether profits or losses as stipulated in Article 37 of the contract. The claimant held the first respondent infringed upon its legal rights and interests by terminating the contract on the ground of the delay of fixed profits. With a view that the first and second respondent had no sincerity for cooperation, the claimant agreed to cancel the contract. However, according to provisions of Articles 51 and 52 in the contract, the first respondent ought to compensate for the claimant's losses caused by its fault.
The claimant also advanced that the first respondent said, "this party determines to terminate the contract and withdraw a piece of field now operated by the cooperative company on May 15." in a notice it issued on May 12, 1994. The claimant deemed, since the first respondent had invested its field in the cooperative company, all assets should belong to the cooperative company before the termination of the company and not be attributed to the investment party. Therefore, the act of the first respondent to unilaterally lent assets of the cooperative company to others was one that had infringed upon interests of other cooperation parties.
The first respondent stated:
(a) From the start of the business to May 1994, the cooperative company operated by the claimant lost RMB 680,339.57.
(b) Huang Jun, the chairman of the board of directors issued the notice on holding a temporary meeting of the board of directors on Apr. 25, 1994. A resolution was made after the convention of the temporary meeting of the board of directors, "the company shall commence clearing up and checking assets as from May 6, 1994, and all businesses shall be suspended." Official seal, financial cashes, checks of the company were kept by Party A upon entrustment. This resolution was signed by the present directors and was valid. The "5·5 resolution" had entrusted the first respondent to seal up the official seal, financial cashes, checks of the company for keeping, the claimant could not say Huang Jun forcibly took away cashes, official seal, checks and accounts under the excuse of financial work inspection.
(c) After this resolution to verify the assets and capital was made by the cooperative company, the first respondent sent a notice on May 12, 1994 to the cooperative company in light of the notion that the general manager Zheng Jun, appointed by the claimant to manage operation, "did not rent the dormitory of the first respondent any more", declaring that, the first respondent had to arrange this dormitory for other uses, and the staff of the cooperative company should move out prior to May 15, because the general manager of the cooperative company decided not to rent the dormitory of the first respondent since May and not to pay rent price. The first respondent did the aforesaid act to protect its legal rights and interests.
(d) The claimant asserted that it was no evidence that the first respondent invited new cooperative parties to check the withdrawn field and commenced unilaterally contracting out the cooperative company.
The first respondent held the claimant should bear liabilities for its breach of contract. The first respondent charged the fee for the usage of the field and workshop according to the contract and required to terminate the contract when the claimant seriously breach the contract, which was reasonable and should be protected by law.
The second respondent brought forward that, the cooperative company consecutively suffered losses after founded due to the claimant's bad operation and management. The second respondent required the termination the cooperation relationship among the three parties and the return of all assets. The liable party shall compensate for the second respondent's economic losses of HK$ 300, 000, and the assets invested into the company by the second respondent shall be returned after valued.
The second respondent also stated that, the meeting of the board of directors held on May 5, 1994 was a normal arrangement of the cooperative company. Notice had been issued before the meeting, and resolution of the meeting thereafter was signed by all the directors.
2.Award
(1)
The cooperative contract shall be terminated, and the cooperative company shall be liquidated according to law. The workshop and ground invested by the first respondent should not be listed into liquidation scope and shall be returned to the first respondent. Within 30 days from the date of this award, a meeting of the board of directors shall be convened at the locality of the cooperative company by the chairman thereof to put forward procedures, principles of liquidation and candidates for the liquidation commission according to the stipulations in the cooperative contract upon profit distribution, assumption of risk and losses, assets attribution and remained distribution after the cooperative company terminated, etc., which shall be carried out after verified by competent authorities.
(2)
Requirement (b) of the claimant shall be overruled.
(3)
Arbitration fees and case fees shall be assumed by the claimant for 80% and the second respondent for 20%.
3.Comment
The main legal matters as referred to in this case are as follows:
(1)
On whether the cooperative contract was illegal.
As prescribed in Article 2 of Law of the People's Republic of China on Chinese-foreign Cooperative Enterprises, if any Chinese and foreign party established a cooperative enterprise, they should, according to this law, stipulated investment or cooperation conditions, distribution of profits or products, and bearing of risk and losses in the cooperative contract, as well as the operation and management mode and the attribution of assets when the cooperative company terminated, etc.. As evidences proved, the claimant and the first and second respondent had, according to the aforesaid legal provisions and the principle of equality, mutual benefits and friendly negotiation, made corresponding stipulations in the cooperative contract upon the cooperation condition, profit distribution, assumption of risk and losses, operation and management mode, and assets attribution when the cooperative company terminated, etc.. After signed by the three parties, the cooperative contract was approved by the contract approval authority and the business license for enterprise legal person was issued by the State Administration of Industry and Commerce. After the contract came into effect, the claimant and the first and second respondent performed it. The tribunal held the cooperative contract was legal and valid as well as binding upon the three parties. As regards to the request of the claimant that Article 37 of the cooperative contract was illegal and the request of the second respondent that the cooperative contract was null and void, the tribunal did not support.
(2)
As for the claimant's request that the first respondent should compensate for losses.
On May 31, 1994, an audit firm in Hainan and a certified auditor issued the Audit Report on the assets, investment and financial accounts of the Company upon entrustment (hereinafter referred to as the audit report). The tribunal held that:
(a) In the name of the board of directors of the cooperative company, the audit firm was entrusted to conduct this audit, which was presided by Huang Jun, the chairman of the board of directors, and in which both the first and second respondent appointed persons to participate. This audit was conducted after the board of directors made a resolution upon assets and capital verification of the cooperative company; therefore it was the activity of the cooperative company other than a unilateral act of any party.
(b) As the audit report showed, until May 15, 1994, the claimant and the second respondent had invested RMB 2,029,435.50 in cash and equipments. Thereinto, the claimant invested RMB 380,000 in cash and equipments valued at RMB 273,520.502, which amounted to RMB 653,520.50 in total; the second respondent invested RMB521,185 in cash and equipments valued at HK$ 759,760 converted into RMB 854,730 at the rate of 1∶1.125, which amounted to RMB 1,375,915 in total. The first respondent had invested the field use right, which had been verified on the basis of its area and not been valued or listed into account. According to the paid-up capital, the claimant's invested capital accounts for 43.56% of the subscribed contribution RMB 1, 500, 000; and the second respondent's invested capital (converted into HK$ 1,224,289) was 81.62% of the subscribed contribution RMB 1, 500, 000. It is showed that the first respondent had provided the cooperative conditions as stipulated in the cooperative contract, while the claimant and the second respondent failed to fully perform the obligations of paying their subscribed contribution, which had instituted a breach of contract. Based on this, the tribunal held the claimant's request that the first respondent should compensate for losses of investment, fixed profits as well as interests and other losses should not be supported.
(3)
As for the termination of the cooperative contract.
The audit report showed the cooperative company lost RMB 680,339.57. Whereas the cooperative company had suffered a serious loss, both the first and second respondent agreed to terminate the cooperative contract. Hereby, the tribunal held, the request of the claimant that the cooperative contract should be terminated shall be supported.
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The Case of xx Company, Guangzhou V. xx Company, Haikou and xx Company, Hong Kong on Dispute over Cooperative Operation of xx Imported Car Maintaining Company, Haikou
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