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The Case of XX v. XX on Dispute over Cooperating the Equity Joint Venture XX Resin Product Limited Company
Jurisdiction: Arbitration; CIETAC Shenzhen
Date of decision: May 7, 1998
1.Case Brief
On February 28, 1989, the claimant as party A and the respondent as party B concluded the contract on cooperating the equity joint venture XX Resin Product Limited Company. The equity joint venture contract stipulated that: both parties agreed to set up the equity joint venture enterprise under the name of XX Resin Product Limited Company (hereinafter referred to as the equity joint venture); the business scope of the equity joint venture should be resin products (adhesive); the total investment of the equity joint venture should be USD 1,100,000 among which USD 330,000 should be current fund and USD 770,000 should be the registered capital. The party A should subscribe the contribution of USD 385,000 in imported machine valued USD 277,900 and domestic equipment valued 401,200 (converted into nearly USD 107,100), accounting for 50% of the registered capital, and the party B should subscribe the contribution of USD 385,000 in equipment accounting for 50% of the registered capital; both parties should pay off the contribution within 6 months after the business license was issued.
The arbitration clause of the equity joint venture contract stipulated that any dispute when performing the contract or relevant to the contract should be resolved through friendly negotiation by both parties. If the negotiation was unsuccessful, the dispute should be submitted to the CIETAC for arbitration. The arbitration award should be final and binding on both parties. The arbitration fee shall be assumed by the losing party.
On March 1, 1989, the equity joint venture contract was approved by the foreign trade committee of XX county replied by the reply of XX county foreign trade and economic committee (89) X Wai Jing He Zi No.14 document. The equity joint venture obtained the business license on March 28, 1989.
During the course of performance of the equity joint venture contract, disputes occurred between both parties. The claimant applied to the CIETAC Shenzhen for arbitration in light of the arbitration clause in the equity joint venture contract on January 15, 1997, claiming as follows:
(1) The equity joint venture contract that the claimant and the respondent concluded should be invalid.
(2) The equity joint venture should be dismissed, and all the intangible and tangible properties of the equity joint venture should be owned by the claimant.
(3) The respondent should pay back the payment for the equipments of USD 118,761.84.
(4) The respondent should make compensation to the claimant for its failure of contribution which resulted in loss to the claimant of USD 100,000.
Against the claims the claimant presented, the respondent submitted the written defense which proposed counterclaims as follows:
(1) The claimant should publicize the business operation status and relevant financial accounts of the equity joint venture as of its establishment to the respondent.
(2) The claimant should immediately stop the tortuous conducts to the equity joint venture and recover the name of the equity joint venture and its normal operation before the tortuous conducts.
(3) The claimant should compensate the respondent for all economic loss caused by the claimant's tortuous conducts.
(4) The claimant should assume the entire arbitration fee and other expenses of this case.
On June 19, 1997, the respondent changed the items 2 and 3 of the counterclaims to the item 2 as follows in the supplementary counterclaim of arbitration, and supplemented the item 1 of the claims:
(1) The equity joint venture contract should be terminated and liquidated.
(2) The claimant should make compensation to the respondent for the economic loss suffered due to the claimant's breach of contract (the loss were: a. the profit that the respondent should have gained in light of the proportion of contribution during the period of operation of the equity joint venture; b. the expected profit that the respondent should have been distributed during the period from the date the claimant presumed to suspend the equity joint venture to the date of award (according to the audit result made by an accountant firm, calculate on the base of the average profit of the equity joint venture from 1992 to 1994); c. the reputation and trademark interests of the equity joint venture that the respondent should have enjoyed. The respondent would retain the right to recourse other losses suffered due to the claimant's breach of contract).
On April 6, 1998, the respondent made explanations to the item 2 of the counterclaims as follows:
Because the claimant denied fulfilling the interim award, the respondent had no way to exactly know about the assets of the equity joint venture. The respondent temporarily ascertained the economic loss the respondent requested to compensate in the item 2 of the counterclaims as RMB 32,495,100 including: a. the profit that the respondent should have gained in light of the proportion of contribution during the period of operation was RMB 15,845,600 Yuan; b. the expected profit the respondent that should have been distributed during the period from the date the claimant presumed to suspend the equity joint venture to the date of award was RMB 11,649,500 Yuan; c. the reputation and trademark interests of the equity joint venture that the respondent should have enjoyed was RMB 5,000,000 Yuan.
The claimant stated as follows:
In February1989, the claimant and the respondent planned to establish the equity joint venture with the registered capital of USD 770,000, and each party accounted for 50% of the contribution. The respondent contributed the machine valued USD 385,000 as his contribution and took charge in importing machine. But the respondent made use of the claimant's unawareness of the price in international market for whole-plant equipment of strong adhesive to make a false report on the price of the equipment as USD 614,000 and forced the claimant to sign the equity joint venture contract on February 28 of that year through fraudulent measures.
After the conclusion of the equity joint venture contract, the claimant paid USD 60,000 to the respondent on May 7, 1989 and USD 212,461.84 again on September 6, 1989, which totally amounted to USD 272,461.84 as the fund for purchasing machine of which the respondent made receipts respectively. After the respondent received the funds, it imported a set of machine for the equity joint venture in December 1989 under the price of USD 601,110. After the import of the machine, the claimant inspected and found that the machine was old and part of them was unable to run normally. Then, the claimant formally claimed in the agreement on the Chinese party contract with XX Resin Product Limited Company on September 24, 1990. Being cheated by the fact that the respondent made a false report on the price, the claimant and the respondent concluded a compensation agreement on the outdated fact of the imported machine on December 20, 1990, which stipulated that the respondent should compensate USD 80,000 to the equity joint venture.
Afterwards, when operating the equity joint venture, the claimant gradually got to know about the price of the aforesaid set of machine in international market and found being cheated by the respondent. The claimant applied to XX Administration for Import and Export Commodity Inspection of People's Republic of China in August of1995 to appraise the aforesaid machine. The benchmark date of appraisal was September of 1995. The result of appraisal was that if the aforesaid machine were new, its value should be USD 239,110. In October of 1996, the claimant applied to XX Administration for Import and Export Commodity Inspection of People's Republic of China again, with the benchmark date December of 1989. The result of the appraisal was that if the aforesaid machine was new, its price on the benchmark date should be USD 233,700. Compared with the funds for purchasing the machine the claimant transferred, the claimant had overpaid USD 38,761.84. Furthermore, the respondent admitted the aforesaid machine was old and agreed to compensate USD 80,000. Deducting USD 80,000 from the market price when importing the machine, that was to say, the market price of the imported machine that the respondent took charge of was USD 150,000 at most at that time.
According to the appraisal results, the conclusion was very clear. The respondent not only did not contribute the USD 385,000 for purchasing machine to the equity joint venture, but cheated nearly USD 120,000 out of the USD 272,461.84 that the claimant paid for purchasing machine.
While the respondent stated as follows:
The equity joint venture contract was concluded upon the principle of equality and willingness by both parties and was approved by the state competent department. In accordance with the Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures, the equity joint venture contract was effective and was protected by the law of People's Republic of China. That the claimant claiming the contract was invalid could not be established.
After the establishment of the equity joint venture, both parties of equity joint venture signed the Purchase Affirmance on April 11, 1989, according to article 6 of the equity joint venture contract and the Item 2 spirit of the record of the first enlarged meeting of board of directors of the equity joint venture. And the claimant affirmed the machine purchased through entrusting the respondent. Successively, the claimant paid USD 60,000 and USD 212,461.84 to the respondent respectively on May 7, 1989 and September 6, 1989. The respondent imported the set of machine in December of 1989 for the equity joint venture at the price of USD 613,900. Within the reasonable claiming period, neither the claimant nor the equity joint venture raised any objection towards the value and quality of the machine. Thus, it could be conferred that the respondent had fulfilled the obligation of contribution according to the equity joint venture contract. The claimant and the respondent affirmed clearly in the agreement on the Chinese party contract with XX Resin Product Limited Company signed on September 24, 1990 that: (1) the nature of equity joint venture should not change; (2) both parties should obey the contracts and articles of association relevant to equity joint venture; (3) admitting the actual contribution of the respondent. According to aforesaid facts, it was sufficient to confirm that the respondent had fulfilled the obligation of contribution in pursuance of the equity joint venture contract and should enjoy the 50% of the equity of the equity joint venture.
Truly, part of the machine purchased by the respondent upon the entrustment of the equity joint venture is old. Toward this, the claimant had claimed for compensation in 1990 and both parties signed agreement on XX Resin Product Limited Company requesting the foreign party to compensate for the oldness of the originally imported equipment on December 20, 1990, which dealt with the loss of the equity joint venture caused by the respondent's negligence to purchase old equipment. The agreement recorded that through friendly negotiation between Chinese and foreign parties on December 19, 1990 at XX company, the foreign party agreed to compensate the loss of XX company USD 80,000; both parties agreed to deduct the compensation from the contract fee of 1991 to 1992 the Chinese party should pay to the foreign party for contracting XX Resin Product Limited Company. The board of directors of the equity joint venture made two decisions on the measures to handle the contracting fee and the persistence of the Chinese party contract with XX Resin Product Limited Company on March 28, 1995, which clearly indicated that deducting the USD 80,000 the respondent promised, the claimant owed the respondent the contracting fee of USD 510,000. It was sufficient to prove that the respondent and the claimant had concluded agreement on the old equipment 6 years ago, and the claimant had performed the obligation of compensation subject to the agreement. Then, the claimant did not have right to make claims on equipment any more according to law.
The respondent considered that even if the respondent and the claimant did not conclude any agreement on the old equipment, the respondent imported the equipment upon the entrustment of the equity joint venture in December of 1989, the claimant did not make claim and prove within the reasonable period but after the equipment was imported for nearly 7 years, by using the Value Appraisal Certificate made by violating the Measures on Administration of the Appraisal of Assets Invested by Foreign Businessmen (according to article 6 of these measures, the content of appraisal of assets invested by foreign businessmen including the variety, quality, quantity, value and loss appraisal on the assets invested by foreign businessmen; the value appraisal referred to appraise to the present value of the assets invested by foreign businessmen. The appraisal certificate presented by the claimant was on the benchmark date of 7 years ago, which obviously violated the provisions) to apply for arbitration towards the respondent which was obviously beyond the limitation and could not be supported.
The respondent also made explanation on the facts and reasons that his counterclaims relied on as follows:
After the operation of the equity joint venture for nearly one year and a half, the claimant proposed to contract the equity joint venture. Then, both the parties concluded the agreement on the Chinese party contract with XX Resin Product Limited Company on September 24, 1990, which stipulated that the claimant should contract with the equity joint venture and the period should be 3 years. From that day, the claimant unilaterally fully mastered all the operation and management activities of the equity joint venture. Because the claimant denied obeying the provisions of the equity joint venture contract and the articles of association of the equity joint venture, the respondent could neither execute the rights and interests of shareholders nor know the business operation status of the equity joint venture. Until receiving the application letter of the claimant on February 14, 1997 and through inquiry, the respondent acquired that the claimant had made bold to apply the equity joint venture to suspend in 1996. In order to maintain the legal rights and interests of the claimant, the respondent requested the arbitral tribunal to rule that the claimant should publicize all financial accounts as of the establishment of the equity joint venture to the date of suspension to the arbitral tribunal and the respondent should also assume the respective legal liability for showing false accounts.
Since the conclusion of the Agreement on the Chinese party contracting with XX Resin Product Limited Company in the year of 1990, the claimant started to actualize series of conducts infringing the respondent's rights and interests. These tortuous conducts manifested in the form of not paying the contract fee, not holding the meetings of board of directors or publicizing the financial situation of the equity joint venture of each year according to the equity joint venture contract etc. at the beginning. Since 1995, the claimant's tortuous conducts to the respondent were finished through infringing the rights and interests of the equity joint venture. On February 28, 1995, the claimant held the immigrant ceremony moving the equity joint venture to XX industrial district of XX town of XX city. Later, in order to appropriate the equity joint venture illegally, the claimant professed to avoid the false and fake to publicize the change of the packaging of XX resin products in the name of the equity joint venture stating that XX products were named XX resin after the change of packaging and added the label of the original XX resin after the new name of XX resin. After making these conducts, the claimant convened the opening ceremony for XXXX Resin Product Limited Company (referred to as XX company) inviting the sellers and relevant persons to the equity joint venture and formally pronounced that the equity joint venture changed the name to XX resin. The claimant started to operate the original activities of the equity joint venture in the name of XX company. XX company retained the leading group, personnel, products and even the contact telephone number. While until that moment, XX company did not obtain the approval of alteration registration in the administration of industry and commerce. Therefore, the claimant held that the XX company that opened on July 6, 1995 was the same one with the original company.
For the purpose of legalizing the conduct of appropriating the equity joint venture illegally, the claimant changed the name of XX polyurethane company controlled by the claimant (established in 1992, hereinafter referred to as XX company) into the name of XXXX Resin Product Limited Company (hereinafter referred to as XX company) on August 9,1995, and changed the locality into XXXX industrial district (namely the new address of the equity joint venture) from X west of XX town. Moreover, on August 30, 1995, it changed the business scope of XX company into polyurethane moner, prepolymer, elastomer and their deep process products, resin products from polyurethane moner, prepolymer, elastomer and their deep process products, namely added the business item of resin product. After finishing the series of conducts, the claimant applied to suspend the equity joint venture which was running well without the approval of the board of directors. The claimant occupied all the intangible and tangible properties of XX company changed from the equity joint venture without registration by using the measure of secretly substitution in the name of the present XX company, and consisted of all the tortuous conducts. As investigated by the respondent, XX company was in suspension prior to 1995 without any actual running even producing resin products. XX company had never devoted any capital, technique or equipment to the present XX company.
The propagandizing pictures of 1996 edition of XX company clearly indicated from the other side that the disgusting conducts of the claimant to infringe the equity joint venture's rights and interests. The pictures were exactly the same as the propagandizing pictures of the equity joint venture from the designing spirit, picture composition to the introduction in written etc..
The claimant declared that:
The reply of the foreign trade and economic committee of XX county to the equity joint venture contract and articles of association of this case could only prove the legality of the procedures for establishing the project and reporting for approval, but was not sufficient to prove that there was no such problems as falsely reporting the price and so on. That the competent department did not find the illegal contents of the contract when examining did not mean that there was not illegal contents in the contract.
That the claimant demurred to the respondent's false contribution and the price of equipment it converted to contribution was not restricted by time limitation. The claimant, as the Chinese investor of the equity joint venture, was a different entity from the equity joint venture, and selling and purchasing equipment and operation of equity joint venture were different legal relationships. The relationship related to selling and purchasing equipment happened between the equity joint venture and the respondent. Only when the equity joint venture lodged action or arbitration on the dispute over selling and purchasing equipment, the time limitation should be taken into account to confirm the exact date of the infringement that the equity joint venture knew or should have known. There was no direct selling and purchasing relationship between the claimant and the respondent, but in relationship of operation by equity joint venture. When the equity joint venture contract was not dismissed, any party of the equity joint venture could submit for arbitration on any dispute during the course of performance without time limitation. The respondent denied admitting the false reporting of price and contribution of that year. In the relationship of operation by equity joint venture, the claimant was cheated by the respondent continuously, so there was no time limitation when submitting for arbitration.
As for the tort presented by the respondent, the claimant stated that the tortuous matters stated by the respondent in the counterclaim letter were not consistent with the facts. On May 31, 1995 when the time limit of the contract expired, since the two parties could not get any agreement on the methods of operation, the increase of devotion and the measures for distribution etc., the claimant stopped contracting singularly the equity joint venture from July 1, 1995 and then the equity joint venture entered into suspension. All the assets including the imported equipment devoted when the equity joint venture was set up were sealed up in the equity joint venture. In 1996 and 1997, the claimant still took charge of handling the annual review registration for the equity joint venture, but not applied to suspend the equity joint venture. The claimant did not move the equity joint venture to XX industry district of XX town of XX city. The fact was that XX polyurethane company had held the ceremony of emigration, exchange of producing and name on February 28, 1995. From that day on, the company has used the name of XXXX Resin Product Limited Company outwards, while the equity joint venture was at the original location all the time. As for the claimant's statement that the products of the equity joint venture named XX resin and added the label of original XX resin behind the new packaged products' name XX resin, actually the claimant had never done such things or acquired happening of such things. Furthermore, the claimant had never controlled the operation of XX company, and now, the claimant was not the shareholder of XX company any more. It was unreasonable for the respondent to attribute the various blames of XX company to the claimant.
2.Award
(1)
The claimant shall pay USD 505,234.36 to the respondent within 45 days as of this award was made. Otherwise, the interest shall be calculated at the annual rate of 6%.
(2)
The equity joint venture shall be terminated and liquidated in light of the principles as confirmed in opinion 6 of the arbitral tribunal.
(3)
The claimant shall publicize all the operation situations and financial accounts of the equity joint venture as of the establishment of the equity joint venture to the respondent.
(4)
The other claims of the claimant and part of the counterclaims of the respondent shall be overruled.
(5)
The arbitration fee of this case totally amounts to RMB XXXXXX Yuan, among which RMB XXXXXX Yuan paid by the claimant shall be assumed by the claimant and RMB XXXXXX Yuan paid by the respondent shall be assumed by the claimant for 70% and the respondent for 30%.
3.Comment
Legal matters related to this case are mainly as follows:
(1)
The applicable laws
The dispute of this case occurred due to performance of the Chinese-foreign equity joint venture contract within the territory of China between both parties. According to the Law of the People's Republic of China on Economic Contract involving Foreign Interests, the applicable law for this case shall be the law of People's Republic of China.
(2)
The effectiveness of the contract
The equity joint venture contract concluded by the claimant and the respondent on 28 February 28, 1989 was based on the principle of mutual benefit and through friendly negotiation. On March 1, 1989, the equity joint venture was permitted to be established upon the strength of the reply of XX county foreign trade and economic committee (89) X Wai Jing He Zi No.14 document. The equity joint venture took the business license on March 28, 1989.
The arbitral tribunal holds that regarding the contents of the equity joint venture contract, they do not violate relevant provisions of the law of China, and the procedure of reporting for approval has been fulfilled in accordance with the law. As for the claimant presenting that the respondent fraudulently took old equipment as new one as well as falsely reporting the price was the problem happened when performing the contract, which was irrelevant to the effectiveness of the equity joint venture contract. Therefore, the equity joint venture contract is legal and valid and binding to both parties.
(3)
The claim of the claimant for the repayment of the funds for purchasing equipment and the compensation for the loss resulted from the respondent's failure of contribution
The respondent who was entrusted to import equipment for the equity joint venture should notice the value, quality and technique standard of the equipment. And the claimant also should pay necessary attention to this issue as one party of equity joint venture. The equipment that the respondent imported for the equity joint venture contained five old equipment for sure, but the claimant and the respondent had concluded agreement to this issue which stipulated the respondent should compensate to the equity joint venture. In addition, if the claimant had any objection to the value and price of the imported equipment, he should present or apply to appraise when accepting the contract on June 1, 1990 or when submitting for certificating the capital. But after using for more than 6 years, did the claimant apply to make appraisement and bring forward objections. The arbitral tribunal shall not support its claim accordingly. The respondent had performed the obligation of contribution as stipulated in the equity joint venture contract and there was not matter concerning false reporting of the price and contribution. As for the claim that the claimant requested the respondent to reimburse the funds of USD 118,761.84 for purchasing equipment and to compensate for the loss of USD 100,000 resulted from the respondent's failure of contribution, the arbitral tribunal shall not support.
(4)
Whether the dispute occurred due to the contract agreement was in the inquisition of this case or not
On September 24, 1990, the two parties of equity joint venture signed the agreement on the Chinese party contract with XX Resin Product Limited Company. Afterwards, dispute occurred and was sued to the court. Being mediated by the appellant court, the high People's court of XX province, the disputes occurred from the cooperation between the two parties was submitted to Arbitration CIETAC Shenzhen for arbitration according to the contract they concluded.
The high People's court of XX province made the letter for civil mediation on August 8, 1997 pursuant to the agreement concluded between the two parties.
When hearing for second time on March 5, 1998, the universal agents of both parties confirmed to submit the disputes to CIETAC Shenzhen for arbitration again.
The arbitral tribunal holds that the dispute occurred when performing the aforesaid contract agreement between the claimant and the respondent is within the inquisition of this case, too.
(5)
The affirmance of the effectiveness of the contract agreement as well as the request of profit of the respondent during the period when contracting with the equity joint venture
According to the Provisions for Contracted Operation of Chinese-foreign Equity joint ventures issued by the Ministry of Foreign Economic Relations and Trade and the State Administration for Industry and Commerce, to contract and operate a equity joint venture enterprise, the equity joint venture enterprise must conclude the contracting and operating contract with the contractor and it must report to the original approving organ for approval by the equity joint venture enterprise.
It was investigated that the agreement on the Chinese party contract with XX Resin Product Limited Company was signed by the claimant and the respondent but not the contractor (namely the claimant) and the equity joint venture. As for the fact that the equity joint venture was actually operated by the claimant singularly from June 1, 1993 to May 31, 1995, the board of directors of the equity joint venture had made the decision on the postponing the Chinese party contracting XX Resin Product Limited Company. But concerning that the claimant contracted with the equity joint venture, the equity joint venture did not go through the procedure of reporting for approval to the original examining organ all the time. Therefore, the arbitral tribunal holds that the aforesaid contract agreement shall be invalid.
Although the aforesaid contract agreement was invalid, the arbitral tribunal noticed that concluding this agreement was the true intention of both parties. From June 1, 1990 to May 31, 1995, the equity joint venture was actually operated by the claimant singularly but the respondent did not obtain any profit within the period as the shareholder of the equity joint venture. The arbitral tribunal considers that according to the actual performance and under the principle of equality and reasonability, in light of the stipulations in the contract agreement of both parties, the claimant shall pay some fee to the respondent as compensation. Therefore, within the period of singularly contracting the equity joint venture, the claimant shall compensate the respondent USD 505,234.36. The request of the respondent to distribute the profit of such period shall not be considered.
(6)
The counterclaim of the respondent to request the claimant to publicize the yearly running situation and relevant financial accounts as of the establishment of the equity joint venture
The respondent, as the shareholder of the equity joint venture, was entitled to acquire the yearly running situation and relevant financial accounts as of the establishment of the equity joint venture. Therefore, the arbitral tribunal shall support this counterclaim of the respondent to request the claimant to publicize the yearly running situation and relevant financial accounts as of the establishment of the equity joint venture.
(7)
The request of the respondent to terminate the equity joint venture
Regarding that both parties has expressed the willing of terminating the equity joint venture contract, the arbitral tribunal shall support the request of terminating the equity joint venture contract submitted by the respondent.
The arbitral tribunal considers that the claimant has denied performing the interim ruing made by the arbitral tribunal and the arbitral tribunal can not acquire the running situation of the equity joint venture after May 31, 1995. Therefore, when liquidating the equity joint venture, the liquidating group shall retain an accountant firm to audit the operation of the equity joint venture from May 31, 1995 till now. As for the profit or lost of the equity joint venture after May 31, 1995, both parties shall distribute or assume relevant amount pursuant to the proportion as stipulated in the equity joint venture contract. If there was any property left after liquidation, both parties shall make allocation as the invest proportion. The reputation and trademark shall be included in the liquidating property to deal with.
(8)
The cognizance of the tortuous conducts
The respondent declared that the claimant had done tortuous conducts to the equity joint venture. But the arbitral tribunal notices that the evidence provided by the respondent is not sufficient to prove these conducts have been done by the claimant. So the arbitral tribunal can not make cognizance of it.
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Awarded by CIETAC on 1998-05-07
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