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The Case of XX v. XX on Dispute over the Payment for the Exported Products of the Equity joint venture XX Plastic Co., Ltd
Jurisdiction: Arbitration; CIETAC Shenzhen
1.Case Brief
On August 28, 1989, the claimant as Party A and the respondent as Party B concluded the contract of the equity joint venture XX Plastics Co., Ltd. (hereinafter referred to as the equity joint venture contract). The main contents of the contract are as follows:
(1) Upon friendly consultations, the two parties agreed to set up an equity joint venture, XX Plastics Co., Ltd. (hereinafter referred to as the equity joint venture), in Guangdong XX, PRC. The organization form of the equity joint venture is a limited liability company. Each party is liable for the debts of the equity joint venture within the limit of the capital subscribed. The parties shall share the profits and assume the risks and losses in proportion to their contribution to the registered capital.
(2) The business scope of the equity joint venture is the production and operation of plastic shutters, profiled materials, assorted plastic packaging films, raw materials and auxiliary materials both for self-use. The annual production shall be 100 million square meters of plastic shutters or 500 tons of profiled materials and sorted packaging films.
(3) The total investment of the equity joint venture is RMB 1.95 million (including current funds RMB one million) and $ 1.02 million, of which Party A accounts for 75% and Party B 25%. The registered capital of the equity joint venture is $ 1.02 million, of which Party A shall pay $ 0.765 and Party B $ 0.255. Concerning the insufficient section to the aforesaid aggregate investment, except for the registered capital, Party A shall assist the equity joint venture in getting the loan from the bank. The interest of the loan shall be incorporated into the cost and expense of the equity joint venture.
(4) Obligations of each party to the equity joint venture (Article 17 of the equity joint venture contract)
The obligations of Party A: to make its investment contributions on schedule according to the proportion of subscribed capital; to handle applications for approval, registration, business license and other matters concerning the establishment of the equity joint venture; to apply for the preferential treatment concerning the equity joint venture in accordance with the relevant regulations of Shenzhen; to take the responsibility of the preparation of the project entrusted by the board of directors of the equity joint venture; to process import customs declaration for the machinery and equipment introduced and to arrange the transportation within the territory of China; to recruit workers and to recommend management personnel; to provide information concerning the domestic market; to supply the raw materials as required for production and to arrange the transportation of the materials within the territory of China; to take the responsibility of the purchase and freight of the domestic equipments and materials; to take the responsibility of the domestic sales of products; to be responsible for handling other matters as entrusted by the equity joint venture.
The obligations of Party B: to make its investment contributions on schedule in light of the proportion of subscribed capital; to solve problems occurring in the preparation of the project; to be responsible for introducing equipments and handling other matters on foreign business; to be responsible for selection, purchase, transportation and other procedures of the materials, equipments, instruments and spare parts outside the territory of China as required by the equity joint venture; to be responsible for the import of raw materials, auxiliary materials, machine parts, cargo conveyance and office stationery, and exporting products, entrusted by the equity joint venture; to provide working conditions for business in Hong Kong to the assigning personnel of the equity joint venture; to supply information concerning the market and product development outside the territory of China (including Hong Kong and Macau); to train the technical personnel and workers of the equity joint venture, and to bear the corresponding expenses; to be responsible for handling other matters as entrusted by the equity joint venture.
(5) In order to balance the foreign exchange receipt and payment of the equity joint venture and improve the benefits, at the beginning of the equity joint venture, over 95% of the products shall be exported by Party B, of which the price shall be determined by the board of directors according to the final offer of Party B while consulting the market prices provided by both parties; the other 5% of products shall be given a trial sale on the domestic market by Party A to establish the domestic market gradually, of which the price shall be determined by the board of directors according to the factory price for export sales, while adding custom duties and other expenses, and consulting the home market price.
(6) This contract shall be terminated under the following circumstances:
(a) expiry of duration of the equity joint venture;
(b) inability to continue operations of the equity joint venture due to heavy losses;
(c) inability to continue operations of the equity joint venture due to the failure of one of the parties to perform the contract;
(d) occurrence of force majeure such as natural calamities and wars etc.
(e) other reasons.
In the circumstance (c) described above, the party which failed to perform the contract shall be liable for compensation for the losses incurred.
(7) Provided that all or part of the contract and its appendices are unable to be fulfilled owing to the fault of one party, the party in breach shall bear the liability therefore. Should it be the fault of both parties, they shall bear their liabilities respectively upon the actual situation.
(8) Any disputes arising from the execution of, or in connection with, the contract shall be settled upon friendly consultations between both parties. If no settlement can be reached through consultations, the disputes shall be submitted to the China International Economic and Trade Arbitration Commission for arbitration. (Article 46 of the equity joint venture contract)
The equity joint venture contract was approved by XX Municipal People's Government on October 18, 1989. Business License for Enterprise Legal Person of the PRC was issued by the State Administration for Industry and Commerce on Nov 9, 1989.
In the process of the performance of the equity joint venture contract, disputes occurred between the two parties. Thus, on October 9, 1992, the claimant submitted the arbitration application and relevant evidence to CIETAC Shenzhen. Its arbitration requests are as follows:
(1) to terminate the contract of the equity joint venture XX Plastics Co., Ltd.;
(2) the respondent should assume the losses of the equity joint venture, $ 102042.86 and RMB 549488 all alone, and pay them to the equity joint venture immediately;
(3) the arbitration fees should be assumed by the respondent.
The respondent counter-claimed in its defense as follows:
(1) The equity joint venture should pay the respondent $ 112713.71, which was the payment of goods the former owed the latter.
(2) On August 31, 1992, the claimant determined to stop the production, close the factory and lay off workers without the decision of the board of directors of the equity joint venture. It breached Article 20 of the equity joint venture contract which prescribed that the equity joint venture's stopping production should be on the basis of the unanimous agreement of the directors of the board. The wrong decision caused the losses of the respondent, RMB 58161.5 yuan and $ 34141.08. Thus, the claimant should compensate for the aforesaid losses and the respondent should retain the right of recourse for other losses.
Disputes between the two parties:
(1) With respect to the jurisdiction of the arbitration term
The respondent held that, the claimant resorted to the arbitration according to the arbitration term in the equity joint venture contract which prescribed that only disputes between parties to the equity joint venture came under the jurisdiction of arbitration; thus, any disputes between the equity joint venture and XX Hong Kong A Company (thereinafter referred to as Hong Kong A Company) or between the former and the respondent were not under the jurisdiction of the arbitral tribunal.
The claimant held that it was well-founded to ask the respondent to return the payment of exported goods of the equity joint venture. Although the payment should be paid to the equity joint venture not the claimant, failure of returning the payment affected the interests of the claimant whose contributions accounted for 75% of the investment of the equity joint venture. In addition, the import contract for raw material and auxiliary material were concluded by the equity joint venture and the respondent, so the payment of goods should be made by the equity joint venture rather than the claimant.
(2) With respect to the termination of the equity joint venture contract
The claimant deemed that, the equity joint venture was at a loss from the second half of 1990, when starting production, to June of 1992. The accumulated losses were RMB 2532000 including the losses RMB 831000 in 1990, RMB 119900 in 1991 and RMB 502000 in 1992. At present, the heavy losses could not be reversed; for the worse, the losses were increasing at the speed of RMB 100000 monthly, which led to the equity joint venture on the brink of insolvency. Regarding the bleak look-out of the equity joint venture, the difficulties to cooperate between the two parties and the inability to continue running the equity joint venture, and in order to effectively prevent the emergency that the losses were increasing at a speed of RMB 100000 monthly, the equity joint venture contract should be terminated, in accordance with relevant provisions prescribed in Regulations for the Implementation of the Law of the People's Republic of China on Chinese-foreign Equity joint ventures and stipulations in the equity joint venture contract.
The respondent disagreed to terminate the equity joint venture contract. It deemed that it took a great deal of hard work to establish the equity joint venture including selecting projects, applying for approval, importing, installing and testing mechanical equipments, and starting the factory. To terminate the equity joint venture contract would destroy the enterprise as established by the respondent himself, who could not accept it. In addition, the products produced by the enterprise could find the market. The previous losses were mainly caused by the problems in the management and operation. Thus, should the management personnel keep stable, raw material and various consumption be saved, the labor productivity be increased and the cost be reduced, the quantity requirement could be met. Thus, in spite of the present low price of plastic shutter, the enterprise could make profits.
(3) With respect to the payment of goods sold overseas
The claimant stated that, taking advantage of the liability for export sales, the respondent took a set of measures that damaged the interests of the equity joint venture and infringed the rights of the claimant. Thus the respondent should assume the losses as follows:
(a) In 1990, the respondent delivered 1285618 Cai of goods from the equity joint venture, for which the former paid the latter $ 286661.52 and the average price was only $ 0.22-0.225 per Cai. Even if it was calculated at the lowest price prescribed in the buyback contract for PVC horizontal shutter signed by the respondent and equipments suppliers, the difference between the contractual price and the actual price was at least $ 37442.9.
(b) On January 29, 1991, the respondent ordered 3350 packs of products as produced by the equity joint venture with the price $ 14268.13. While it actually delivered only 1072 packs with the price $ 4564.8, accounting for only 32% of the order. The remaining products were stocked in the warehouse for a long term and a large number of them were scrapped due to their certain colors and sizes, which led to direct losses of $ 9703.33.
(c) In 1991, the respondent sold 6 batches of shutters overseas with the aggregate price $ 168288.19, from which the advance $ 112713.71 that it paid for the raw materials and spare parts on behalf of the equity joint venture was deducted, so the respondent should pay the equity joint venture $ 55574.48. However, the respondent defaulted on the payment and deferred for over one year until the present.
The respondent argued:
Article 29 of the equity joint venture contract prescribed that "at the beginning of the equity joint venture, over 95% of the products shall be exported by Party B". Subparagraph 5 of Article 19 (actually Article 17) prescribed that, the respondent as entrusted by the equity joint venture was responsible for importing raw materials, auxiliary materials, machine parts, cargo conveyance and office stationery, and exporting products. The above articles clearly indicated that, the obligation of the respondent was to address the export sales rather than to sell products exclusively. In addition, the respondent noted that Article 11.2 of the equipments-sales contract concluded by the equity joint venture and the equipment suppliers stipulated "the buyback agreement is an inseparable part of this contract". The contract also stipulated that the prerequisite of the equity joint venture purchasing equipments from the equipments suppliers should be that the latter distributes the products of the former exclusively. Furthermore, this equipments-sales contract stipulated that "for the purpose of guaranteeing the interests of the equity joint venture, the respondent shall be entrusted to supervise the implementation of the equipments-sales contract and its appendices". In accordance with all above stipulations, entrusted by the equity joint venture, the respondent, representing the former, and the equipments suppliers concluded the Buyback Contract for PVC Horizontal Shutters (hereinafter referred to as the buyback contract) in December 1989, which stipulated that 80-100% of products of the equity joint venture should be sold overseas by the equipments supplies. Now that the buyback contract was an inseparable part of the equipments-sales contract and the respondent was entrusted by the equity joint venture to sign the buyback contract, the buyback contract was between the equity joint venture and the equipments suppliers and the latter was the exclusive distributor of the former. To perform the obligations in the equity joint venture contract, the respondent, on behalf of the equity joint venture, concluded 8 sales contracts with Hong Kong A Company successively, each of which had been obtained the instruction and authority of the general manager and president of the equity joint venture before their conclusion. These sales contracts became the only ground that the equity joint venture could arrange production and delivery and collect money. After manufacture, the products were delivered directly to Hong Kong A Company from the equity joint venture, which could be verified by the cargo manifest declared by the equity joint venture to the customs. Therefore, the claimant deemed that the respondent failed to fulfill the task of export sales under the equity joint venture contract and took advantage of the liability for export sales to take a set of measures damaging the interests of the equity joint venture and infringing the rights of the claimant. This claim was totally groundless.
The claimant held that the provision in the equity joint venture contract, i.e. "at the beginning of the equity joint venture, over 95% of the products shall be exported by Party B", actually stipulated the obligation of the respondent for the exclusive distribution. The tax authority of a city stated in its circular that "the raw materials of the equity joint venture were purchased by XX Company (i.e. the respondent), which also distributed products exclusively". At the second session of the second board meeting on November 25, 1990, the two parties reached an agreement that Hong Kong side (the respondent) should transfer the payment for the goods to the equity joint venture within 10 days after the goods left Shenzhen since the order No.008. This agreement definitely defined the payer and the payment time, which indicated the seller-buyer relationship between the equity joint venture and the respondent concerning the products. Therefore, the deals on the 6 batches of products in 1991 were all between the equity joint venture and the respondent, of which the aggregate price for export sales amounted to $ 168288.19 and the equity joint venture invoiced the respondent.
(4) With respect to the losses of the plant rent, loan interest and suspended operation
The claimant held, the fact that the respondent had deferred the payment for a long term affected the fund turnover and imposed heavier interest burden on the equity joint venture. More seriously, the fact led to the failure of writing off the foreign exchanges, which made the foreign exchange control declaration was ceased to be issued to the equity joint venture and the procedure of Deferred Payment could not be gone through. In the end, the business could not carry on since there was no raw materials and production. The claimant repeatedly asked the respondent for payment by telex in order to write off the foreign exchanges, which was tossed aside by the respondent. The acts of the respondent brought severe losses of suspended operations to the equity joint venture. Since 1992, the losses of plant rent had been up to RMB 285488 and the losses of the loan interest up to RMB 264000.
The respondent argued:
The more important reasons for the failure to continue business and make the heavy losses were the facts as follows: the claimant replaced the president and directors of the equity joint venture frequently and dismissed the general manager unilaterally; the board did not hold meetings for a long time; new leaders were not adept at supervising production and often broke faith with clients by raising the price of products on their own, which made the equity joint venture lose the exclusive distributors and other clients for export sales; the management was ineffective; the cost was high ; the qualities of products deteriorated; the products kept in stock for a long time and were wasted and stolen. In addition, the claimant decided to stop production unilaterally without any decisions of the board of directors of the equity joint venture on September 1, 1992, which led to the respondent's losses of RMB 58161.5 and $ 34141.08.
(5) With respect to the payment for importing raw materials and spare parts
The respondent claimed that, many facts and evidences showed that it stuck to the equity joint venture contract strictly, selling products to the equipments suppliers on behalf of the equity joint venture and purchasing raw materials, auxiliary materials and fittings for the equity joint venture. The equity joint venture owed the respondent payment $ 112713.71 yet.
The claimant argued that, the advance of $ 112713.71 that the respondent paid for the raw materials and spare parts on behalf of the equity joint venture in 1991 had been deducted from the aggregate payment for exported products of $ 168288.19 that the respondent should pay the equity joint venture.
2.Award
(1)
The contract of the equity joint venture XX Plastics Co., Ltd. shall be terminated;
(2)
Within 30 days after this award is rendered, the president of the equity joint venture shall hold the board meeting at the location of the equity joint venture to discuss the establishment of the liquidation organization and the liquidation of the assets and creditor's rights and liabilities of the equity joint venture, and to make decisions concerning them according to relevant law and regulations of China;
(3)
The respondent shall make the payment of goods $ 62633.99 to the equity joint venture within 30 days as of this award is rendered. If overdue, an annual interest rate of 10% shall be applied to calculate the payable interest;
(4)
To overrule the claimant's claim that the respondent should exclusively assume the losses of the equity joint venture of $ 39408.87 and RMB 549488;
(5)
The advance of $ 112713.71, which was asked the equity joint venture to pay by the respondent, has been deducted from the payment of goods that the respondent should pay the equity joint venture, and the equity joint venture shall not pay the respondent $ 112713.71.
(6)
To overrule the respondent's claim that the claimant should pay it RMB 58161.5 and $ 34141.08 due to the claimant's unilateral decision of stopping production.
3.Comments
The major legal matters in relation to this case are mainly as follows:
(1)
The jurisdiction of the arbitration terms
The equity joint venture contract stipulated that, any disputes arising from the execution of, or in connection with, the contract should be settled upon friendly consultations therebetween; In case no settlement can be reached through consultations, the disputes should be submitted to the China International Economic and Trade Arbitration Commission for arbitration. The claimant raised the request that the respondent should pay the equity joint venture the payment of goods for export sales, which was the dispute between the two parties, in accordance with the provisions concerning the respondent's obligation of export sales in the equity joint venture contract. Meanwhile, the respondent raised the request that the equity joint venture should pay the respondent the advance, which was the dispute between the respondent and the claimant, in accordance with the provisions concerning the obligation of the respondent for importing raw materials and auxiliary materials and spare parts in the equity joint venture contract. The arbitral tribunal holds that, both above requests are under the jurisdiction of the arbitration term in the equity joint venture contract i.e. "any disputes arising from the execution of, or in connection with, the contract", so they both are entitled to resort to arbitration.
(2)
To terminate the equity joint venture contract
Facts indicate that the equity joint venture is unable to continue operations because of heavy losses. Therefore, in accordance with the Subparagraph 2 of Paragraph one of Article 102 of Regulations for the Implementation of the Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures and Paragraph 2 of Article 41 of the equity joint venture contract, the circumstance led to the termination of the equity joint venture contract occurred. The arbitral tribunal holds that the claimant's request to terminate the equity joint venture contract shall be supported.
(3)
The payment of the exported products
(a) According to the evidences presented by both parties and the investigation conducted by the arbitral tribunal, the arbitral tribunal holds that there was buyer-supplier relationship between the respondent and the equity joint venture concerning the export sales.
There was buyer-supplier relationship, not the agency relationship between the equity joint venture and the respondent, which can be indicated by the following facts: the agreement of the equity joint venture contract, the contracts and orders for purchasing products offered to the equity joint venture by the respondent and the respondent's acts to deliver the goods, sell them overseas and make the payment. Therefore, the respondent should make the payment to the equity joint venture since it has accepted the goods of the equity joint venture. The arbitral tribunal deems that it is groundless that the respondent failed to make the payment to the equity joint venture due to Hong Kong A Company's failure to make the payment.
(b) The claimant stated that, in 1991, the respondent collected 6 batches of the goods from the equity joint venture valued at $ 168288.19, from which the advance $ 112713.71 that the respondent paid for the raw materials and spare parts and the freight on behalf of the equity joint venture was deducted, so the respondent still owed the equity joint venture $ 55574.48, at which the respondent did not demur. The arbitral tribunal deems that the respondent should pay the equity joint venture the aforesaid delinquent payment.
(c) The request that the respondent should pay the equity joint venture the goods price difference $ 37442.9 in 1990 raised by the claimant cannot be supported by the arbitral tribunal. The reasons are as follows: the price difference stated by the claimant was calculated according to the lowest price of $ 0.25 per Cai in the buyback contract, a separate sales contract between the respondent and the equipments suppliers which can only bind up the parties thereof; the price of the exported goods of the equity joint venture was determined with the consent of the then head of the equity joint venture. Therefore, the losses due to the low price shall be born by the equity joint venture not the respondent.
(d) In January 1991, the respondent ordered 3350 packs of products produced by the equity joint venture and actually collected only 1072 packs. The remaining products were stocked in the warehouse for a long time and a large number of them were scrapped, which led to losses of $ 9703.33 that the claimant asked the respondent to bear. It is reviewed and found by the arbitral tribunal that the remaining 2278 packs of products have residual value $ 2643.82. Thus, the actual loss is $ 7059.51, which should be paid to the equity joint venture by the respondent.
(4)
The matter to assume the losses after the equity joint venture stopped productions
According to evidences as submitted by both parties and their statements when hearing, the arbitral tribunal deems that, the equity joint venture has been unable to continue operations since September, 1992 and in the end stopped operations, which was caused by various facts such as: failure in getting orders, ineffective management of the equity joint venture, the poor cooperation between the two parties, the downside of the market price and the losses of the products sales, all which can not been considered caused by the unilateral direct fault of the claimant or the respondent. Therefore, it is not well-founded that the claimant asked the respondent to exclusively assume the losses of the equity joint venture due to the suspended operation. The losses shall be born by the equity joint venture. Thus, the arbitral tribunal cannot support the claimant's request to ask the respondent to hold the losses of the equity joint venture due to the suspended operation.
For the abovementioned reasons, it is reasonable that the claimant decided to stop operations after informing the respondent in order to reduce losses of the parties to the equity joint venture. Therefore, the arbitral tribunal cannot support the respondent's claim to ask the claimant to compensate for the losses.
(5)
The matter on the advance that the respondent paid on behalf of the equity joint venture
The respondent claimed that the equity joint venture should pay the advance $ 112713.71 which had been paid for the spare parts and raw materials by the respondent on behalf of the equity joint venture. The claimant did not demur at the above fund. However, the evidences submitted by the claimant show that, the abovementioned advance has been deducted from the payment of $ 168288.19 in 1991 that should be paid to the equity joint venture by the respondent. Therefore, the equity joint venture shall not pay the advance.
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The Case of XX v. XX on Dispute over the Payment for the Exported Products of the Equity joint venture XX Plastic Co., Ltd
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