|
The Case of XX v. XX on Dispute over the Joint Operation of XX Garden Limited Company
Jurisdiction: Arbitration CIETAC Shenzhen
1.Case brief
The claimant and the respondent concluded a contract on joint operation of XX garden development limited company (hereinafter referred to as the joint operation contract) on September 2, 1986. The municipal people's government approved this joint operation contract on May 11, 1987 and the operation period of the contractual joint enterprise was five years. The administration for industry and commerce signed and issued the business license to XX garden development limited company (hereinafter referred to as the contractual joint company) as a contractual joint enterprise on May 28, 1987.
Article 2 of the joint operation contract stipulated that the claimant should take charge of supplying all funds needed to construct commercial and residential houses in the construction scope and the respondent should provide the necessary land needed within the construction scope as stipulated in the contractual joint contract.
Article 10 of the articles of association of the contractual joint enterprise stipulated that the cooperative conditions offered by both parties were as follows: the respondent should provide the use right of land of 30,000 square meters (namely 3 hectares) while the claimant should provide the fund of RMB 4,200,000 Yuan as needed for the development and construction.
Article 3 of the joint operation contract stipulated that the claimant and the respondent should cooperate to construct the first project of the garden cottages. The project should include 24 advanced dwelling houses of town houses, detached houses and apartment houses, which should take 3 hectares of land factually. The contractual joint company invested totally RMB 4,200,000 Yuan, which was the same as the registered fund. The claimant should devote the RMB 4,200,000 Yuan in three batches within ten months as of the joint operation contract gets official approval and goes into effect.
Section 1 of article 5 of the joint operation contract provisioned that the operation period of the contractual joint enterprise should be five years.
Section 3 of article 5 of the joint operation contract provisioned that when the construction of the houses was finished, the income of the sale subtracting all the cost (including the cost of standard infrastructures such as water, electricity, road, communication and site leveling, cost of drilling and surveying, cost for constructing the project, cost of water and electricity project, cost of landscaping and its designing, premiums of the project, executive administration fees, wages for the employees, labor insurance and welfare, drumbeating fees, taxes, etc.) was the net benefit, of which 2% should be reserved as the fund of development, reservation and welfare of the company. And the other 98% should be distributed as 60% to the respondent and 40% to the claimant.
Section 4 of article 5 of the joint operation contract provisioned that the fund obtained from selling the houses should be settled immediately after the completion of each batch of houses and the house purchasers finish the procedures concerning their joining in and mortgage loan in relevant banks. The benefit should be shared by party A and party B as provisioned in the agreement. The saved fund should be used upon both party's consent and signing, and the profit after turning back the principal each year should be distributed at a six-four ratio.
Article 11 of the joint operation contract provisioned that in case the operation period expires or the contract is terminated, all the properties of the contractual joint enterprise, after liquidation, should be shared by the respondent and the claimant at a six-four ratio.
After the conclusion of the joint operation contract, the claimant and the respondent, without the permission of the municipal government, started the biding and preparation of the garden cottages together. The claimant and the respondent together as party A signed the construction contract concerning the first project with the constructive unit as party B, and then the project was started in March of 1987. In respect of the first project, 24 cottages of 39 series were built in total, which were all sold out.
Afterwards, the two parties cooperated to build 6 cottages, all of which were sold out.
According to the statement of the respondent when hearing, the 24 cottages in the first project covered almost 2,438 hectares factually and the 6 cottages built later covered 0.6 hectares factually. The claimant agreed on this point.
On September 3, 1987, the claimant and the respondent concluded a supplementary contract on enlarging the business scale of XX garden development limited company and its investment. The municipal people's government approved the supplementary contract on October 16, 1987. And the municipal government approved to rescind the supplementary contract on December 28, 1988.
The claimant and the respondent had disputes over the settlement of the first project, and the claimant submitted the relevant disputes to the CIETAC Shenzhen for arbitration on July 25, 1989.
The claimant claimed as follows:
(1) The registered fund of 4,200,000 of the first project should be confirmed being constituted by the investment of the claimant, which also constituted the corresponding construction cost of the first project. So the registered fund should not be the joint property of the contractual joint enterprise.
(2) All the vouchers for the establishment of accounts of the first project should be confirmed legal.
The respondent presented the counterclaims as follows:
(1) The registered fund of the first project should be the property of the enterprise owned by the contractual joint enterprise, which should be shared by both parties of the contractual joint enterprise.
(2) The claimant failed to invest as provisioned in the contract, which constituted a breach of contract. According to the provision of the article 12 of the joint operation contract, the claimant should pay RMB 4,000 Yuan as damages to the respondent.
(3) The illegal income of HKD 607,980 obtained by the claimant in the manner of falsification and misstatement should be deducted from the accounts already reported to the enterprise.
(4) The claimant violated the joint operation contract, sought illegal income through deception and then lost the basis for keeping cooperation with the respondent. Therefore, the respondent claimed to terminate the joint operation contract ahead of time. The assets, creditor's rights and debts of the contractual joint enterprise should be settled according to Article 24 of the Law of Chinese-Foreign Contractual Joint Ventures, and then should be shared by the respondent and the claimant at a six-four ratio according to Article 11 of the joint operation contract.
(5) The arbitration fee and the attorney fee of the respondent should be assumed by the claimant.
The main points of dispute and the reasons presented by each party were as follows:
(1) The registered capital
(a) The claimant stated that the registered capital was the total amount of the capital the enterprise owned and registered in the governmental department as well as the total amount of the capital written on the contracts and the articles of association and was examined and registered by the competent department. It was stipulated in the joint operation contract that the total investment was RMB 4,200,000 Yuan and the registered capital was RMB 4,200,000 Yuan, which was determined according to the rule promulgated by the State Council that in case the total investment was below USD 3,000,000, the registered capital should be consistent with the total amount of investment. The registered fund of RMB 4,200,000 Yuan of the contractual joint enterprise was the total amount of the investment from the claimant actually, which was also the constructive cost ascertained according to the constructive scale. Section 4 of Article 2 and article 3 of the joint operation contract clearly provisioned that the claimant should take charge of providing the registered capital. The registered capital of the contractual joint enterprise was constituted by the RMB 4,200,000 Yuan invested by the claimant and it was irrelevant to the respondent. So the registered capital should not be the joint property of the contractual joint enterprise.
The claimant also stated in the documents it provided and in the statement of hearing that Section 4 of Article 5 of the joint operation contract provisioned that the fund obtained from selling the houses should be distributed at a six-four ratio after repaying the principal. The repaying of principal mentioned in this Section referred to repaying the investment cost of the claimant, and the method for the claimant to recover the investment was to get it back from the fund of selling houses year by year. The contractual joint enterprise should repay the claimant the investment of RMB 4,200,000 Yuan at first, and then distribute the profit at a six-four ratio.
(b) The respondent presented that according to the provisions in the Laws of Chinese-Foreign Contractual Joint Ventures and Section 4 of article 2 and Article 3 in the joint operation contract, the claimant's supply of the cash of RMB 4,200,000 Yuan and the respondent's supply of the usufruct of the land were regarded as the condition for cooperation. The cash investment and the usufruct aforesaid should be the property of the contractual joint enterprise after being provided to it. That the two parties agreed to make the claimant's cash registered fund was the arrangement of the claimant's investment by the contractual joint enterprise. Once the registered fund was contributed, it became the property of the contractual joint enterprise.
The respondent also stated that according to Article 22 of the Law of Chinese-Foreign Contractual Joint Ventures, in case the foreign investor tends to get back the investment in advance, all the fixed assets of the joint venture should remain with the Chinese cooperator, while XX garden cooperative project does not belong to this mode at all. The claimant's allegation that it should get back the investment before sharing the profit at a six-four ratio violated the provisions of the law, contract and the articles of association mentioned above.
(2) Vouchers for the establishment of accounts
(a) The respondent presented that among the vouchers rendered to the enterprise, there were some invoices issued by some enterprises, companies etc., 6 companies in total. All these 6 companies were unlimited companies hold by the claimant's legal representative or his relatives etc. who issued invoices with price added, yielding an account to the contractual joint enterprise for the claimant. They made a false report of HKD 607,980, which should be deducted from the account of the contractual joint enterprise in accordance with the audit conclusion and the disposal decision made by the State Audit Office on October 11, 1989.
(b) The claimant considered that the requirement of the respondent could not be established for the reason that the 6 companies were registered as independent legal persons. It was common commercial conduct for them to add the operation expenses to the selling price when purchasing the constructive materials for the contractual joint enterprise. The vouchers of all the materials and equipment imported were confirmed by signatures of general manager and associate general manager of the contractual joint enterprise, and the audit report made by Shekou Zhonghua accountant firm also confirmed the legality of all the financial reports of the contractual joint company. The respondent had no reason to deny it.
(3) The investment mode
(a) The respondent alleged that the claimant's conduct of adopting other ways to contribute fund, such as settling the construction fee with the constructive crew by itself, instead of the cash investment, violated the provision of Article 3 relevant to investment in the contract. That the claimant failed to establish accounts in the territory of China violated the relevant laws of China. The claimant failed to contribute the capital on time. As a result, the respondent had to prepay the construction fee of as much as RMB 1,633,422.60 Yuan in foreign exchange certificate and nearly HKD 400,000. Because the conducts mentioned above of the claimant constituted a breach of contract, the claimant should pay the damages to the respondent according to Article 12 of the contract.
(b) The claimant claimed that it did not change the investment mode, just the investment form. The changing of cash investment was performed with the respondent's participation according to the direction of the local construction headquarters under the special historical condition and was confirmed by the respondent in advance. It was not stipulated by law that it must be reported for approval to change the investment form of cash paying. Even if it was necessary, the responsibility should be assumed by the respondent.
The claimant considered that when starting the construction of the first project of the garden, the joint operation contract did not go into effect formally and the contractual joint enterprise did not be established either. Therefore, it was impossible to establish accounts within the territory of China in the name of the contractual joint enterprise. Not long after the establishment of the contractual joint enterprise, the claimant had presented the relevant financial documents to the financial organ of the contractual joint enterprise according to the decision of the board of directors for examination and receipt.
The claimant considered that both the verification of registered fund reported by the account firm and the audit report made by the audit group of the State Audit Office recognized that the total amount the claimant invested had exceeded the registered fund. There was no basis for the respondent to allege that the investment of the claimant was not enough.
(4). The termination of the contract in advance
a. The respondent alleged that because the claimant violated the provisions of the joint operation contract and sought illegal profit through deception, it lost the basis for keeping cooperation with the respondent. The respondent required to terminate the joint operation contract in advance and distribute the left assets of the enterprise at a six-four ratio after liquidation.
b. The claimant stated when hearing that only if the contractual joint enterprise repaid the claimant's investment of RMB 4,200,000 Yuan, it would agree to terminate the joint operation contract in advance.
2.Awards
(1)
The registered fund of RMB 4,200,000 Yuan of the contractual joint enterprise shall be confirmed as the property owned by the contractual joint enterprise. The requirement of the claimant that the registered fund should not be confirmed as property owned by the contractual joint enterprise shall be overruled.
(2)
The capital of HKD 576,726.07 shall be deducted from the constructive cost and inventory of the contractual joint enterprise according to the audit decision of the State Audit Office. The claim of the claimant to confirm the legality of all the vouchers of the first project to establish the accounts shall be overruled.
(3)
The claim of the respondent that the claimant should pay the damages of RMB 84,000 Yuan shall be overruled.
(4)
The contract concerning the joint operation of XX garden development limited company concluded by the claimant and the respondent shall be terminated. The assets, creditor's rights and the debts of the contractual joint enterprise shall be liquidated in accordance with the provisions of relevant laws, regulations and the joint operation contract.
(5)
The respondent's requirement that the claimant should assume the attorney fee of the respondent shall be overruled.
(6)
The arbitration fee of this case was RMB 120,360 Yuan and the legal cost of this case was RMB 8,000 Yuan. The claimant shall assume the arbitration fee of RMB 117,690 Yuan and the legal cost of RMB 4,000 Yuan while the respondent shall assume the arbitration fee of RMB 2,670 Yuan and the legal cost of RMB 4,000 Yuan.
3.Comments
Legal matters in relation to this case are mainly as follows:
(1)
The registered fund
The arbitral tribunal holds that the contractual joint enterprise has gained the qualification of legal person as it was examined and registered by the industry and commercial executive department in May of 1987. Article 37 of the General Principles of the Civil Law of the People's Republic of China stipulates that a legal person shall possess necessary property or funds. Section 1 of Article 12 of the Regulations of the People's Republic of China on Administration of the Registration of Enterprises as Legal Persons stipulates that the registered fund of an enterprise as a legal person represents the total value of the property the State entrusts to it for operation and management or that of the property owned by the enterprise itself. According to the provisions of the Law and Regulations mentioned above, the registered fund of RMB 4,200,000 Yuan should be the self-owned property of the contractual joint enterprise. Therefore, the claimant's claim of confirming the registered fund not the joint owned property of the contractual joint enterprise could not be established.
(2)
Getting back the investment in advance
The claimant declared during the arbitration that according to the relevant provisions of the joint operation contract, the claimant should take back the investment of RMB 4,200,000 Yuan from the fund of selling the houses, against which the respondent had demurrer. The arbitral tribunal considered that the different opinions of both parties concerning the repayment method of the investment was another issue different from whether the registered fund was the joint owned property of the contractual joint enterprise. The claimant failed to make it a claim in the application for arbitration presented to CIETAC Shenzhen in accordance with the provisions in the Arbitration Rules of the China International Economic and Trade Arbitration Committee and until the date of the completion of this case, the claimant did not add it as one of its claims. Therefore, the arbitral tribunal did not hear the issue of the claimant's taking back investment in advance.
(3)
Vouchers for the establishment of accounts
The dispute between the two parties over the vouchers for the establishment of accounts was that whether to enforce the audit conclusion and disposal decision made by the State Audit Office that the vouchers issued by the 6 companies could not be the vouchers for rendering an account and the HKD 576,726.07 should be deducted from the constructive cost. The arbitral tribunal holds that:
(a) According to the relevant provisions in Articles 2, 12 and 14 of the Audit Regulations of the People's Republic of China, the State Audit Office had the power to audit the contractual joint enterprise.
(b) According to the provision of Article 24 in the Audit Regulations of the People's Republic of China, in case the organ under audit was dissatisfied with the audit conclusion and the decision, it may appeal to the final auditing organ. However, the claimant failed to present any evidence to prove that the claimant or the contractual joint enterprise once appealed.
(c) The claimant failed to present sufficient evidence to the arbitral tribunal to prove that the audit conclusion and the decision of the State Audit Office should not be enforced.
Therefore, the audit decision that the vouchers issued by the 6 companies of Hong Kong could not be the vouchers for rendering an account and that the HKD 576,726.07 should be deducted from the constructive cost and the original materials of the contractual joint enterprise should be enforced. The claimant's claim to confirm the legality of the vouchers for the establishment of accounts should not be established.
(4)
The investment mode
The arbitral tribunal considers that, after the conclusion of the joint operation contract and before getting the approval of the competent department, both parties required to build the cottages in advance and on March 16, 1987, the claimant and the respondent as party A concluded 3 constructive contracts of the first project of the garden cottages with 3 project construction battalions as part B. It was provisioned in the contract that within five days after the contract coming into effect, party A should prepay the imprest not less than 30% of the total amount of the contract price to party B. The construction should start as soon as the contract being effective and some sum of the construction fee was paid. In 1988, a notice signed by the chairman of the board of directors (appointed by the respondent) and the general manager (appointed by the claimant) of the contractual joint enterprise was sent in the name of the board of directors of the contractual joint enterprise to the entrusted account firm to verify the registered fund, reading: upon the study of the party A and party B (referred to the respondent and the claimant), in order to carry out the project in a smooth and rapid way, the both parties agreed that party B should appropriate the fund the construction of the houses needed to the constructive crew directly and this project fund should be regarded as the investment of party B. Besides, the expenses of a new microbus and relevant fees of transportation, loading, unloading etc. party B prepaid should also be regarded as the investment of the party B. These aforesaid indicated that the changing of the investment mode was negotiated and agreed by both parties, not presumed to by the claimant. Therefore, the counterclaim of the respondent that the claimant should pay the damages of RMB 84,000 Yuan could not be established.
(5)
The termination of the contract in advance
The arbitral tribunal considers that the business scope of the contractual joint enterprise as stipulated in Article 3 of the joint operation contract by the claimant and the respondent was: the claimant and the respondent jointly build the first project of garden cottages which should include 24 cottages of town houses, detached houses and apartment dwelling houses with 3 hectares of land actually. Both party should jointly sell the commercial and dwelling houses of the first project and jointly operate the accessorial facilities relevant to the daily life, entertainment and the traffic service. However, the business scale in the approval paper of the joint operation contract made by the municipal government was: within the cottages area of 3 hectares, jointly built and sold 24 commercial and dwelling houses which occupy 7,000 square meters. The business license signed and issued by the industry and commerce executive administrative department provisioned that the business scale of the contractual joint enterprise was to build and sell commercial and dwelling houses. Therefore, the business scale of the contractual joint enterprise should be confirmed according to the approval paper of the municipal government and the business license signed and issued by the industry and commerce executive administrative department.
After the conclusion of the joint operation contract, the claimant and the respondent jointly built 24 houses, which were sold out after construction. The operation goal was achieved within the business scale.
Because the municipal government approved to dismiss the supplementary contract on enlarging the business scale and the investment, the contractual joint enterprise could not keep running.
The arbitral tribunal holds that although the operation period does not expire, the reasons aforesaid should be enough to prove the contract should be terminated in advance.
(6)
The assuming of the attorney fee
Concerning the requirement of the respondent that its attorney fee should be assumed by the claimant, the arbitral tribunal holds that the respondent failed to state his requirement specifically and clearly or present any reason and evidence to prove the rationality of its claim, so the requirement of the respondent should be overruled.
(7)
The 2 complaints the claimant presented
Based on the analysis mentioned above, the 2 complaints the claimant presented should be overruled. Therefore, the claimant should assume all the arbitration fee and legal expenses it prepaid. The respondent alleged five counterclaims, part of which were overruled and the other part were supported by the arbitral tribunal. Therefore, the arbitration fee and legal expenses for counterclaim the respondent prepaid should be assumed by the respondent and the claimant at the ratio of the amount on dispute relevant to the counterclaim.
|
|
|
|
|
|
