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The Case of XX International Trust & Investment Company v. XX Plastic Products limited Company, on Dispute over XX Plastic Electronics Company Contract
Jurisdiction: Arbitration; CIETAC Shenzhen
1.Case Brief
On December 8th, 1992, the claimant International Trust & Investment Company (hereinafter referred to as party A) and the respondent XX Plastic Products limited Company (hereinafter referred to as party B) entered into the contract of the contract for Sino-Foreign equity joint venture of XX Plastic Electronics Company (hereinafter referred to as contract) . The main contents of the contract in relation to the dispute of this case are as follows:
(1) The form of the joint-venture company is a limited liability company, and the two parties should be liable for the debts of the company within the limit of the capital subscribed respectively. The profits, risks and losses should be shared by the parties in the proportion to their capital contributions to the registered capital of the company.
(2) The contributions of the two parties are totally 7,500,000 HKD, as the registered capital of the joint-venture company, among which: 30% are 2,250,000 HKD from party A, and 70% are 5,250,000 HKD from party B. Party A contributed to the company as cash, while party B contributed to the company as equipment, pattern valued 5, 250,000 HKD. The registered capital of the joint-venture company was transferred to the company one-time after the register according to the contribution of the two parties respectively within 3 months. Where one party intends to transfer its contribution to the third party, it shall be submitted to the original examined and approved department for approval upon the consent of the other party. While one party transfers part or the whole contribution, the other party possesses a preemptive right to purchase the contribution.
(3) All the equipment the joint-venture company manufactures needs was provided by party B as a form of contribution, and should be transferred to the company in accordance with the time limit of contribution and list of sale as stipulated in Article 12 of the contract. The period of validity should be 10 years. All the equipment (type, capability, quality) and product techniques (advanced, applicable) as provided by party B should conform to the purpose of sale, technical operation and the requirement of practical use of the company. If party B failed to provide the equipment and technique according to the contract or was found to behave deceitfully and disguisedly, party B should compensate all the direct losses of the company.
(4) On the conditions that any of the parties fails to offer the contribution according to the time limit and number as stipulated in Chapter 5 of the contract, the party who breaches the contract should pay 0.5% of its contribution as the damages to the party who respects the contract each month since the first month exceeding the stipulated one. If the party has not paid the damages exceeding three months, besides 1.5% of the contribution as the damages having been accumulated which should be paid, the party who respects the contract should be entitled to terminate the contract according to the provisions of the contract, and to require the party who breached the contract to compensate the losses.
(5) If the contract and the annex cannot be implemented totally or partially due to the negligence of one party, the said party should assume the liability of the breach of contract; if the negligence belongs to both parties, the two parties should bear the liability respectively according to the actuality.
(6) The establishment, effectiveness, termination, implementation and resolution to the dispute of the contract should be all governed by Chinese law.
(7) The disputes arising from the implementation of the contract or in relation to the contract should be resolved upon friendly negotiation; If not, the disputes should be submitted to the CIETAC Shenzhen, and awarded in accordance with Provisional Rules of Arbitration procedure. The award is final, and the two parties should be forced.
The contract was approved by the document of Shenzhen government "Shen Fu Wai Fu [1993] No.24" after the subscription of the contract. On February 2nd, 1993, the joint-venture company obtained a Business License of Enterprise Legal Person as issued by National Administration of industry and commerce.
The disputes occurred in the process of the implementation of the contract, and could not be resolved by negotiation. The claimant submitted to the CIETAC Shenzhen for arbitration according to the arbitration terms in the contract. The requirements are as follows:
(1) Rescind the "XX Plastic Electronics limited Company Contract" as approved by the document "Shen Fu Wai Fu [1993] No.24".
(2) Require the respondent to turn back 240,000 USD and the interest the claimant invested, and compensate the losses;
(3) The arbitration fee should be afforded by respondent.
Afterwards, the claimant added some requirements as follows:
(1) requiring to terminate the contract and ask for the claimant to pay for the damages of 45,000 USD in accordance with article 47 in the "the contract for Sino-Foreign equity joint venture of XX Plastic Electronics Company"that is stipulated in article 47 of the contract;
(2) requiring the respondent to pay for the interest of sum 18,395.60 USD as transferred by respondent illegally
(3) the joint-venture company was terminated half-way since that the respondent took away the sum of investment illegally. The claimant required the respondent to compensate the possible benefit of 360,000 HKD as accounted by "available search report".
The requirements of the claimant are as follows:
(1) On April 12th, 1993, after the contract entered into force, the claimant transferred 180,000 USD into the account of the joint-venture company in accordance with the contract, and then put 60,000 USD into the account, totally 240,000 USD. At the beginning of May, the act that on April 16th, 1993, the respondent transferred 170,000 USD privately, was found, the claimant had to stop to put into the account to protect himself and terminated performing the obligation of the contract temporarily. All the responsibilities should be assumed by the respondent. However, the respondent had never performed the obligation of contribution in accordance with the provisions in the contract, and had not provided the ownership of the equipment and patterns which were used to be sold to the company. The reasons were as follows: the respondent had not completed the relevant procedure with the cooperated original company that processes raw materials on clients' demands, assembles parts for the clients and processes according to the clients' samples, had not completed examined and approved procedure to terminate the agreement of the abovementioned original company as well as relevant procedure of cancellation register by administration of industry and commerce. The procedure of cancellation by customs for the equipment and patterns imported by the abovementioned original company used themselves had not been completed；up to now, those equipment and patterns had not been through customs declaration and commercial examination. On the condition that it fails to be approved by the customs, the respondent transferred the equipment and patterns which are under the supervision of the customs to the factory and used to establish the joint-venture company. Those acts were in violation of the regulations of customs, which were void. Since the equipment and patterns which were provided by the respondent as contributions were not contributed actually and legally, the examination of capital could not be available. Up to now, the joint-venture company had not been operated, thus the respondent should assume all the responsibilities.
(2) Using the chance of opening the account, the respondent bought the check, sealed privately and transferred capitals many times. The respondent transferred for 15 times and withdrew cash of 238,500 USD totally, in the proportion of 99.33% of the investment by claimant. Since the respondent transferred the capital privately, acquired the illegal benefit, and did harm to the operation of the company, thus benefit that could be acquired were not available, and the claimant suffered from serious losses. The respondent should bear all the liabilities accordingly. The respondent should pay for the interest of bank of the sum that was transferred illegally accounting to 18,359.60 USD.
(3) On January 2nd, the company obtained the operation license, but in fact it had not operated in accordance with law of Sino-Foreign equity joint venture, the contract for Sino-Foreign equity joint venture and chapter actually. The original company that processes raw materials on clients' demands, assembles parts for the clients and processes according to the clients' samples was controlled by the respondent continued actually within the short period of joint-venture, while the joint-venture company only existed in name but not in fact. Under the conditions that the behavior the respondent breached the contract is up to now, the purpose of the joint-venture company could not be available, and it is not necessary that the company continues to exist, thus the claimant required to terminate the contract according to relevant laws and the provisions of the contract, and asked for the respondent to turn back the sum of investment of 240,000 USD, and compensated all the losses due to the breach of the contract.
The arguments of the respondent are as follows:
(1) The contract, which was not established upon the real will by both parties, should be void. The respondent had ever set up XX manufacture factory on Bao'an district in Shenzhen, which was a company that processes raw materials on clients' demands, assembles parts for the clients and processes according to the clients' samples. In 1992, the claimant and respondent negotiated the cooperated project through other's introduction. The claimant requested to buy 30% of the shares of the factory by 300,000 USD, and the respondent show the agreement, but the claimant argued that the form of the establishment of the joint-venture contract was good, thus the contract which should have been concluded in form of transferring the shares were established in form of joint-venture, misleading that it was only for improving the procedure of report and approval and on the conditions that 300,000 USD the sum the claimant invested could be took away by the respondent, which was promised orally by the claimant. In view of form, the joint-venture contract which was signed and approved by the government was actually that the claimant bought 30% of the shares of the XX manufacture factory. Therefore, the contract did not reflect the real will of the two parties, but on the form the joint venture on the disguise of the essence of shares purchase. Thus, the joint-venture contract is void in accordance with the law.
Moreover, the terms of the contract unfair also resulted in the invalidity of the contract. It was stipulated that the respondent provided the equipment and patterns valued 5,250,000 HKD (equal value 700，000 USD according to the exchange rate of 1∶7.5) as investment. While, the equipment and patterns were estimated by XX accounting affair office in Shenzhen of 805,996 USD. It was obvious that the value of the equipment and patterns exceeded the value of the investment greatly, which was obviously unfair towards the respondent, easily resulting in the invalidity of the contract.
(2) Even if the contract was established legally, the claimant also should assume the responsibilities of the breach of the contract since the claimant had not subscripted the contribution according to the contract resulting in serious breach of the contract. In accordance with the stipulation of the contract, the registered capital of the joint-venture company was 7,500,000 HKD, of which 30% was from the claimant, that is, 2,250,000 HKD(equal value 300，000 USD according to the exchange rate of 1∶7.5) that should be subscribed one-time within three months since registered. On February 2nd, 1993, the joint-venture company obtained the business license，on April, 12th, the claimant invested 120,000 USD, and on May, 11th ,of the third month since registered invested 60,000 USD, while the rest 60,000 USD had not been subscribed up to now. Thus, the claimant did not subscribe its contribution accordingly, and should assume the liability of the breach of the contract.
(3) The claimant proclaimed that the equipment the respondent ought to invest had not arrived, which was not the fact. The estimate made by XX accounting affair office in Shenzhen on the equipment and patterns was legal and effective. On April 1st, 1993, the joint-venture company was on operation formally, and the equipment and patterns the respondent invested had been put into use, thus the facilities had been there. The substantial reason why the facilities had not been through capital examination was that the claimant did not sign on the capital examination report resulting that the procedure could not been completed. Mention that the company that processes raw materials on clients' demands, assembles parts for the clients and processes according to the clients' samples did not change the form of investment, which was just a matter of procedure. All those were delayed due to that the capital had not been examined, and it did not influence the real investment.
(4) Since the claimant did not invest according to the contract, the act breached the contract seriously; meanwhile, both of the parties indicated that they could not cooperate continually, they claimed for arbitration of terminating the contract. However, the situation of the operation and right and debt since of the establishment of the company should be balanced then the investment could be turned back to the parties. In addition, the claimant must assume the liability of the breach of the contract, and compensate all the losses the respondent suffered from.
2.Award
(1)
The "contract for Sino-Foreign equity joint venture of XX Plastic Electronics Company"was terminated as of the date when the award is rendered. All the credit's right and debt of the joint-venture shall be assumed by the respondent.
(2)
The respondent shall compensate for the claimant of the sum of the investment 240,000 USD and the interest of 22,953 USD within 20 days as of the date of the award. If delay, the interest shall be added to 12% yearly.
(3)
The requirement that the claimant claimed the respondent to pay for the damages of 45,500 USD and the requirement that the respondent should pay for the possible benefit of 360,000 HKD the claimant loss according to the "available search report" shall be overruled.
(4)
The arbitration fee and the fee in relation to handle the case shall be assumed by the respondent.
3.Comment
The legal matters in relation to the case are mainly as follows:
(1)
The validity of the Contract
It is proved that the letter of intent for possible contract had been signed on the matter of operating the joint-venture company prior to the conclusion of the contract. On the letter of intent for possible contract, it is not stipulated or even mentioned in any term that the claimant bought the 30% of the shares of the original company that processes raw materials on clients' demands, assembles parts for the clients and processes according to the clients' samples by 300,000 USD. The matters in relation to the letter of intent for possible contract were the plan of founding joint-venture company in Shenzhen. Until now, the respondent had not provided the evidence to prove that the claimant had ever promised to purchase the shares by 300,000 USD. It is indicated through the evidence both parties provided that the purpose of the cooperation is to set up the joint-venture company and the contract is concluded upon the agreement by the two parties, showing the real will. The claim that the claimant intended to purchase the shares of XX manufacture factory by 300,000 USD can not be supported by the fact.
Moreover, the respondent argued it was indicated on the contract that the equipment and patterns were valued 5,250,000 HKD (equal value 700,000 USD) as the investment, but through the estimate by relevant accounting office, it was said that the value of the equipment and pattern is 805,996 USD exceeding the investment greatly. Thus the terms of the contract are obviously unfair resulting in the invalidity of the contract. However, the arbitration tribunal holds that the stipulation of the contract is not referred to the equipment and patterns the respondent carried now to invest but subscribed as more as 5,250,000 HKD by the equipment and patterns. Thus, the term of the contract is not unfair. Moreover, the contract was approved by the document "Shen Fu Wai Fu [1993] No.24"; and the joint-venture company registered in Shenzhen Administration Bureau of Industry and Commerce in time. Accordingly, the tribunal holds that the contract reflects the real will of the two parties, and has been approved by Shenzhen government, the unfair terms not existing. Therefore, the contract is valid and legal according to the law since having all the effective conditions, and shall be implemented by both parties.
(2)
The liabilities of the contribution
On the matter of contribution, the registered capital of the joint-venture company is 7,500,000 HKD, among which: 30% are 2,250,000 HKD from party A, and 70% are 5,250,000 HKD from party B. Party A subscribed to the company as cash, while party B contributed to the company as equipment, patterns valued 5,250,000 HKD. The registered capital of the joint-venture company was transferred to the company one-time according to the contribution of the two parties respectively within three months after the registration.
In accordance with the stipulation of the contract, party B shall contribute to the company by equipment, patterns valued 5, 250,000 HKD one-time within three months after the registration. It is proved by evidence that the equipment and patterns the respondent subscribed to the company as investment were the facilities of the company of original company that processes raw materials on clients' demands, assembles parts for the clients and processes according to the clients' samples -- XX manufacture factory in Shenzhen, but up to now, the respondent has not handled the credit's right and debt with the formed cooperator resulting from the contract that processes raw materials on clients' demands, has not completed the procedure of examination and approval of termination of the original contract and the relevant procedure of cancellation registration; the procedure of customs balance concerning the respondent input the equipment and patterns for the company that processes raw materials on clients' demands, assembles parts for the clients and processes according to the clients' samples. The respondent argued that the value of equipment and patterns as the investment had been subscribed to the company sufficiently and the equipment and patterns had been put into practical use. However, the respondent had not transferred the ownership of the equipment and patterns to the company accordingly actually, since the respondent had not completed some essential procedures, which means that the respondent had never invested into the company. Under the situation that the respondent had not completed the essential procedure, he regarded the equipment and patterns that under the supervision of the customs as the property invested into the company. The preceding behavior does not comply with the law of China. The arbitration tribunal examines that the respondent took away 238,500 USD the claimant invested into the company, in the proportion of 99.33% of the investment by claimant. Accordingly, the respondent argued during the arbitration procedure, the investment that were took away by the respondent had been approved by the claimant since the claimant had promised that 300,000 USD could be took away as the sum of purchase on the shares of the original company that processes raw materials on clients' demands, assembles parts for the clients and processes according to the clients' samples. However, the tribunal holds that it cannot be proved by any evidence that the preceding promise exists. The act the respondent took away the investment privately shall be regarded as failure of establishment of the joint-venture company resulting in serious losses the other party suffered from. Moreover, the mentioned act violates the law of China.
The tribunal examines and confirms that on April 12th, 1993, the claimant invested into the joint-venture company for 180,000 USD, and then on May 11th, 1993, invested 60,000 USD, totally 240,000 USD, 80% of the proportion of the investment, while 60,000 USD had not been subscribed. Since the date of the register was February 2nd, 1993, the deadline of the subscription by both parties was May 2nd, 1993. Thus, the claimant did not subscribe to the company one-time which was not in accordance with the contract, and the second investment had been exceeding the deadline. Accordingly, the arbitration holds that the claimant stopped to subscribe the rest amount of investment which was reasonable protection, not considered as the breach of the contract. Under such conditions, the claimant has no right to claim that the party who postponed the investment should pay for the other party damages in some proportions that is indicated on the contract, but only could acquire the compensation in a reasonable amount.
(3)
The requirements for arbitration of the claimant
Since the contract is void, both parties shall perform the obligation according to the contract strictly. While the respondent had never has no good faith to implement the contract. The respondent not only had never invested into the company, but also took away great part of investment, resulting that the company existed namely, and damaged the legal benefit of the other party, substantially breaching the contract. Accordingly, the respondent shall assume all the responsibilities. Therefore, since the condition of termination of the contract had occurred, the tribunal holds, the contract shall be terminated. The respondent shall compensate for the claimant the whole amount of investment of 240,000 USD, and the interest of 7.1878% yearly from May 11th, 1993 to the day this award is rendered. The credit's right and the debt of the joint-venture shall be assumed by the respondent.
With respect to the requirement that the respondent shall compensate for the claimant possible benefit 360,000 HKD according to the "available search report", the tribunal holds that available search report is not the agreement between the two parties, and the content of the report has no force binding on the parties. Thus, the requirement, which cannot be supported by sufficient evidence, shall not be satisfied by arbitration tribunal.
The respondent shall assume the entire arbitration fee.
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The Case of XX International Trust & Investment Company v. XX Plastic Products limited Company, on Dispute over XX Plastic Electronics Company Contract
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