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The Case of XX v. XX on Dispute over Joint Venture Contract in Operating Fabricated Metal Limited Company
Jurisdiction: arbitration; CIETAC Shenzhen
Date of Decision: Dec. 21, 1999
1.Case Brief
On May 18, 1994, the claimant as party B and the respondent as party A concluded Sino-Foreign Equity Joint Venture Contract in XX Special Economic Zone (hereinafter referred to as the joint venture contract). Afterwards, on June 18, 1994 they concluded XXXX Fabricated Mental Limited Company Contract (hereinafter refer to as the supplementary contract). The main articles of the joint venture contract and the supplementary contract relevant to this case are as follows:
(1) The two parties agreed to establish XXXX Fabricated Mental Limited Company (hereinafter refer to as the joint venture company). (Article 2)
(2) The total investment of the joint venture company is USD 1,080,000; the registered capital is USD 756,000, among which the claimant shall contribute USD 378,000, taking up 50% of the registered capital, and the respondent shall contribute USD 378,000, taking up 50% of the registered capital.
The claimant shall invest monetary fund of USD 378,000, and the respondent shall invest monetary fund of USD 206.820 and land use right evaluated as USD 171,180. (please refer to X Tu Rang Zi [199X] No.144). (Article 7 and Article 8)
(3) Registered capital of the joint venture will be contributed by both parties according to their proportions of subscribed capital on schedule. The two parties should fully pay up the capital within 60 days after the contract is signed (The initial investment should take up 50 % of the total registered capital, which shall be paid before May 1994).
Within 30 days after the parties made capital contribution, certified accountants registered in China shall be employed to make the report on the verification of capital, based on which the joint venture will issue investment certificates. (Article 10)
(4) Parties to the joint venture shall respectively complete the following items:
Party A's responsibilities of are as follows:
(a) Issues concerned with application for the establishment and registration of the joint venture company.
(b) Issues concerned with design and construction of the plants and other engineering works, and daily production, operation, marketing, and so on.
(c) To provide monetary capital according to Article 8.
(d) To make import and export customs declaration of machinery equipment, raw materials, and productions of the joint venture company.
(e) To purchase or lease overseas or domestically the equipment, materials, office appliances, means of transportation, communication facilities for the joint venture company.
(f) To arrange operation conditions, such as electricity, water and transportation.
(g) To employ business operation personnel, administrative officers, technicians, workers, and other staff.
(h) To arrange issues concerning the entry visa for the foreign staff to the special economic zone.
(i) To arrange other issues entrusted by the joint venture.
The responsibilities of party B are as follows:
(a) To contribute the monetary capital according to Article 8.
(b) To assist the joint venture company in choosing and purchasing necessary equipment and materials in the international market.
(c) To assist the joint venture company in employing operating personnel, administrative officers, technicians, and other staff.
(d) To assist the joint venture company in training technicians and workers.
(e) To arrange other issues entrusted by the joint venture. (Article 12)
(5) The board of directors is composed of 6 directors, of which 3 shall be appointed by party A, and 3 by party B. Chairman of the board shall be appointed by party A, and its vice-chairman of the board of directors will be appointed by party B. (Article 17)
(6) Term of the joint venture is 20 years. (Article 28)
(7) Modification, alteration, and termination of the contract
The amendment of the contract or its appendices shall come into force only after obtaining the written agreement signed by party A and party B, the approval of the original examining and approving organ, and registration of alternation made in the city administration for industry and commerce.
In case of inability to fulfill the contract or to continue operation due to heavy losses in successive years or due to force majeure, the contract shall be terminated before the time of expiration after unanimously agreed upon by the board of directors and approved by the original examining and approving organ and the cancellation of registration made in the city administration for industry and commerce.
Where the joint venture is unable to continue its operation or achieve the business purpose stipulated in the contract due to the fact that any party to the joint venture contract fails to fulfill the obligations prescribed by the contract and articles of association, or seriously violates the stipulations of the contract and articles of association, the party shall be deemed as unilaterally terminating the contract. The other party shall be entitled to terminate the contract after approved by the original examining and approving organ and to claim damages. (Article 30, Article 31, and Article 32)
(8) Liabilities for breach of contract
Where either party fails to pay on schedule the contributions in accordance with the contract, the breaching party shall pay to the other party 5% of the contribution starting from the first month after exceeding the time limit. Where the breaching party fails to pay after 6 months, an accumulative total of 30% of contribution shall be paid to the other party. In addition, the other party shall be entitled to terminate the contract and to claim damages to the breaching party.
Where all or part of the contract and its appendices is unable to be fulfilled owing to the fault of one party, the breaching party shall bear the liabilities for breach of contract. If it is the fault of both parties, they shall bear their respective liabilities according to actual situations. (Article 33 and Article 34)
(9) Where the joint venture contract expires or is terminated before the time of expiration, the joint venture company shall enter into liquidation according to the regulations of XX Special Economic Zone of People's Republic of China. The post-liquidation assets and debts shall be borne and distributed between the two parties according to their proportions of investment in the registered capital. (Article 29)
(10) The contract shall be protected and subject to the laws of People's Republic of China. (Article 36)
(11) Any dispute arising from or in connection with this Contract shall be solved through friendly consultation or conciliation. In case it is not solved by the aforesaid means, the dispute shall be submitted to China International Economic and Trade Arbitration Commission, Shenzhen Commission for arbitration. The arbitral award is final and binding upon both parties. (Article 37)
There are also stipulations in the joint venture contract and the supplementary contract on other issues, such as the range and scale of operation, products' marketing, management and administrative offices, purchase of materials, and languages.
The dispute occurred in the implementation of the contract. On November 16, 1998, the claimant submitted the dispute for arbitration in accordance with the arbitration clauses in the contract and claimed as follows:
(1) To terminate the joint venture contract and supplementary contract.
(2) To compensate the claimant for losses of its investment of USD 237,000, RMB 1,220,000 and the respective interests (calculated by the concurrent bank's interest rate for the loans of fixed assets till the day of pay-off);
(3) All the costs for this arbitration and the attorney fee paid by the claimant should be borne by the respondent.
The respondent submitted its defense and requested as follows:
To terminate the joint venture contract;
To overrule the claim for damages by the claimant;
All the costs for this arbitration and the attorney fee paid by the respondent should be borne by the claimant.
The points in dispute are as follows:
(1) As for the area of land provided by the respondent as investment
The claimant held as follows:
Though there was no specified stipulation on the area of land provided by the respondent as its investment, it could be inferred that the area agreed by two parties was 10,000 square meters from the situation investigated on the arbitral hearing. The reasons were as follows:
Firstly, the two parties had known and completely agreed on the opinions of the Ministry of Land and Resources on the alternation of No. 144 document of the land area and location before the contract was signed. Before the joint venture contract was concluded in November 1992, the respondent had been granted the land use right by the document of X Guo Tu Rang Zi [199X] No.144. Afterwards, due to program planning, the original ministry of land and resources in XX Town XX City required the respondent to alter the land area and location as specified in the document of No. 144. "The actual land use area shall be calculated after the measurement and it shall be dealt with as a historical problem". At that time, the two parties, i.e. the respondent and Hong Kong XX Company "agreed on the opinion of the ministry of land and resources after discreet study". In June 1993, the Construction authority in xx county approved the building project applied by the respondent, and formally approved the planning graphic for construction after the alternation of the land on September 2, 1993. This illustrated that the respondent had known and completely agreed with the opinion of the ministry of land and resources on the alternation of land area and location made in the document of No. 144 before the contract was signed. Moreover, according to the calculation made in conformity with the planning graphic for construction that provided by the respondent (please refer to No. 10 evidence submitted by the respondent), the respondent was quite aware of land area including the approved and received land and the approved but non-received land.
Secondly, at the time of signing the contract, the two parties' real intention to the area of the land use right should be 10,000 square meters, but not 6,639 square meters. Before the contract was signed, the respondent provided the claimant with one copy of written material, that is Capital Input Situation into XX Fabricated Mental Limited Company by Shenzhen XX Company (hereinafter refer to as the capital input situation). In that material, the respondent committed that he would provide 10,000 square meters land as the investment, and the land would be evaluated at RMB 120 per square meters, the total of which would be RMB 1,200,000, equivalent to USD 171,180,000. The claimant was just on the basis of that land area and evaluation to conclude the contract with the respondent. Therefore, the joint venture contract specified that the respondent would provide the land use right as the investment, which was evaluated at USD 171,180,000. This amount was just equivalent to the amount committed in the capital input situation by the respondent. Therefore, the capital input situation was a major part of the joint venture contract, which was the basis to specify the area of land use right provided by the respondent.
Thirdly, document No.144 could not be used as the evidence for the area of 6,639 square meters land use right provided by the respondent as the investment, but not the total area of land use right provided by the respondent as the investment. The reasons were: (a) At the time of the conclusion of the contract, the respondent did not provide the document of No.144 to the respondent. In accordance with the principle of honesty and trust, the claimant negotiated with the respondent and concluded the contract on the basis of the capital input situation provided by the respondent. The claimant had no knowledge on the content of the document of No.144. If the claimant had known that the area was 6,639 specified by the document, the claimant would agree to evaluate the land at RMB 796,680 (RMB 120/ per square meter × 6,639 square meters) instead of the evaluation of the land at USD 171,180,000 proposed by the respondent;(b) It was just because the claimant did not know the specific content of the document of No.144 that the claimant requested the respondent to provide the document several times, but the claimant was constantly refused by the respondent for some excuses. It was not until May 9, 1998 that the claimant wrote to the auditing group of the joint venture to claim the materials including the document of No.144, and then got the document of No.144 and relevant materials. Thus the document could only be used as the basis for the part of land (6,639 square meters) provided by the respondent as the investment, but not as the basis to specify the total land provided by the respondent as the investment. (c) According to the actual situation, the land of 10,000 square meters was actually assigned by the ministry of land and resources to the respondent and was just enclosed by the respondent, which exactly shows that the respondent provided 10,000 square meters land as the investment.
Fourthly, from the report on verification of capital and the appraisal report on assets, it was also illustrated that the respondent provided 10,000 square meters land as the investment. First of all, according to the report on verification of capital made by XX city XX accounting firm on the establishment of the company (Shen X Yan Zi [199X] No.352), the total amount of capital invested by the claimant is RMB 3,284,926.60, equivalent to USD 381,214.65. After deduction of the excessive investment of USD 3,214.65, the investment is USD 378,000, which was in accordance with the stipulation in the joint venture contract that the respondent should contribute USD 171,180 by land use right and USD 206,820 by cash. The evaluated price of USD 171,180 was just equivalent to the evaluated amount for 10,000 square-meter land use right committed by the respondent to the claimant in writing. The claimant held, for one reason, the report on the verification of capital was made under the condition that the respondent did not provide the land use right; for the other reason, the business license provided by the respondent was the one for the joint venture company operated by the respondent and Hong Kong XX Company. The business license was issued in 1992. So the report verified the registered capital as USD 400,000. Only one point was illustrated that the report on the verification of capital for the evaluation of the land use right was based on the land area of 10,000 square meters, which was committed by the respondent to the claimant. Only in that way could the evaluation of USD 171,180 be calculated. Secondly, the appraisal report made by XX City XX accounting firm (Shen X Ping Zi [199X] No.097, thereinafter called the appraisal report) was made on the basis of the land area specified in the document of No.144, which was contradictory to the evaluation made on the land area committed to provide by the respondent. Therefore, it could not be used as the evidence for the land area and evaluated amount of the land use right provided by the respondent. At that time, the procedures for the appraisal and evaluation were totally arranged by the respondent, and the claimant did not participate in it. The claimant only concerned the evaluated amount of the land. The land area had been promised by the respondent in writing, and the evaluated amount had been specified in the joint venture contract, so the claimant had no doubt on the respondent's promise and credit based on the principle of honesty and trust. If the claimant known that the respondent evaluated 6,639 square meters land as RMB 2,522,858, which was equivalent to USD 315,357.25 by the exchange rate that USD 1 is equivalent to RMB8. That amount was far more than the contributed capital made by the respondent with the land use right, which would not be accepted by the claimant; Moreover, the respondent got the land use right to 6,639 square meters land specified in the document of No.144 by terms of RMB 18 per square meter, the total amount of which was RMB 119,502, and there is 3,000 square meters land agreed by the ministry of land and resources to "deal with the problem about the land use as a historical problem", so the aggregated land area was 10,000 square meters, which was just the land area that the respondent promised to contribute as the investment of RMB 1,200,000 (equivalent to USD 171,180,000) That evaluation was ten times of the original remuneration for assignment of the land use right, which was accepted by the two parties. If the land of per square meter had been evaluated at RMB 380, the land of 6,639 square meters would have been evaluated at RMB 2,522,858, which was impossible to be accepted by the claimant. So the respondent had never provided the appraisal report for the claimant. In fact, the original land price of RMB 120 per square meters specified in the appraisal report was not what the two parties agreed upon, which exactly illustrated that the area of land contributed by the respondent was 10,000 square meters. Only if 10,000 square meters land was evaluated by RMB 120 per square meter, could it be equivalent to USD 171,180,000 (the evaluation of the land use right). Thirdly, according to the report on the verification of capital of XXX Yan Zi [9X] No.103 made by XX County XX accounting firm, the amount of capital invested by the respondent with "intangible assets" (the land use right) was also USD 171,180,000, which was exactly the sum of the evaluation of the right to the use of 10,000 square meters land. That further confirms that the area of land contributed by the respondent was 10,000 square meters, but not 6,638 square meters.
The respondent held as follows:
The area of land contributed by the respondent was 6,639 square meters specified by the document of X Guo Tu Rang Zi No.144. That was definitely stipulated in Article 8 of the contract signed by the two parties, and the summary of verification of capital subscribed by the parties to the joint venture company once again confirmed that relevant documents and the graphic of property line were given to the claimant when the contract was signed. The claimant did not only reject that but also forged or willfully singled out evidential materials so as to realize its illegal purpose. The letter written on December 8, 1993, was only the report that the respondent submitted to its superior. The respondent was not clear about how the letter was in the claimant's hand. If there was anything inconsistent with the contract signed by the two parties, it should be subject to the joint venture contract signed afterwards.
Article 8 of the joint venture contract specifically provided that "please refer to the document of X Tu Rang Zi [199X] No.144", and the content of the document was about the location of the land assigned, land area, purpose, term of use, but not about the price. That proved the joint venture contract had specified that other items excluding the price were subject to the document of No.144. The summary of the verification of capital subscribed by the parties to the joint venture clearly states: "party A shall contribute the land (with reference to the document of X Tu Rang Zi [199X] No.144), which was purchased in the name of the joint venture company, as its investment in the joint venture". That summary was given to the two parties with the report of No.352 on the verification of capital made by XX accounting firm, signed and sealed at the same time by the two parties after examination. Afterwards, one copy was filed in the joint venture, and the other was filed in the accounting firm. The report of No.352 on the verification of capital is in quintuplicate, and either of Chinese party and Hong Kong party held one copy. The report of No.352 clearly addresses that the land area is 6,639.1 square meters. The parties should be bound by the contract and other documents upon which were mutually agreed, and their rights and obligations should be subject to the above contract and documents. Meanwhile, every report on the verification of capital made after 1994 was based on the report of No.352, which means that the land area was recognized as 6,639 square meters. It has never been recognized that 10,000 square meter land was evaluated as capital contribution.
The respondent emphasized that: the materials about the land area of 10,000 square meters and the land price submitted by the claimant to the arbitral tribunal, which were the investment of XXXX Company's in XX Fabricated Mental Limited Company and the summary of aggregated demand money of appropriation for XXXX Fabricated Mental Limited Company, were not the materials for negotiation or the offer made by the respondent, but the situation report submitted by the respondent to its superior company (XX Special Steel Company) , and the Chinese party has never voluntarily given the materials to them, such as Y. Either the land of 10,000 square meters referred in the situation report or the land of 6,639 square meters referred in the document of No.144 that was specified in the contract was evaluated at USD 171,180,000. The reasons for that are: at the beginning of 1994, the two parties involved in this case used to make the report to the leading group for the introduction of foreign capital after they concluded mutual agreement on the joint venture; appropriate persons considered that the evaluation of USD 171,180,000 was much undervalued and re-assessment should be made. According to the preliminary assessment made by XX accounting firm, the value of the land (6,639 square meters) had appreciated to RMB 380 per square meters, and the total value was RMB 2,522,858, equivalent to USD 291,400. That sum could not be accepted by the claimant. The respondent also considered that the approximate land price of USD 300,000 was not consistent with its commitment on the evaluation of USD 171,000. The two parties made the compromise that the evaluation of USD 171,000 was not to change and the land area was calculated according to the document of No.144, so there is specific stipulation in Article 8 of the joint venture contract. Afterwards, it was specified that the land area was 6,639 square meters and the land price was the original evaluated price in the report of No.352 on the verification of capital made by XX accounting firm on August 8, 1994.
The claimant claimed that only in May 1998 did the claimant see the document of No.144 and by means of forging or excluding evidence: (a) The mail to the section chief H and auditing group and the reply from S were forged. (i) The section chief H definitely denied receiving the letter from the claimant or entrusting anyone to make the reply. (ii) The evidence of No.20 was written by the claimant himself, which should not be considered as evidence. S was the accountant appointed by the claimant (the accountants were appointed by the Chinese party), who was the henchman of the claimant, so his testimony is not full of credibility. S was only a member of the auditing group, and was not qualified to represent the auditing group to make statements. (iii) There were flaws in the reply from S: from whom was the document of No.144 got? No other duplication of the document was given to anyone except that one was given to the claimant approximately in March 1994 by X. The report of Da Gong Yan Zi [94] No.352was not given to the claimant, and where was the evidence of No.5 put forward by the claimant from? (iv) Compared with the evidence of No.9 and the evidence of No.20, it was impossible for J and Y to write the concise and logical evidence of No.20, considering J and Y's competence in Chinese and law. (b) Evidence was singled out. There were two pages of the report of XX Yan Zi [94] No.352, and it was specified in the second page that the evaluation of 6,639 square meter land was taken as investment, but the evidence of No.5 submitted to the arbitral tribunal by the claimant was only one page.
In fact, there were a great number of flaws in the claimant's rejection that he did not know the land area was 6,639 square meters: (a) The document of No.144 was filed in the respondent's archives (the arbitral tribunal noted: it should be the respondent, but not "the claimant" as written), which was impossible to get by the members in the joint venture including the foreign party. If the respondent did not give the document to the claimant, where was the evidence submitted to the arbitral tribunal by the claimant from? We have proved in the above that it is a lie that the reply from S includes the document of No.144. (b) The document of No.144 elaborated the rights and obligations of the two parties, and was referred in the joint venture contract and the summary of the verification of capital for three times. Considering years' experience in business and sharp sense of law, it is impossible that the claimant has never seen the document or required to have a look at the document. (c) The claim that not until in the sixth board meeting did the claimant see the document does not make sense, for it is contradictory to the reply from S which said that the document of No.144 was received and faxed to Y. Both sayings are false, and neither is true. (d) The words recorded in the sixth board meeting that "only in this board meeting did the Hong Kong party see the document of No.144" were replenished after the director appointed by the claimant made signature, for Y wrote a brief note to ask someone to replenish the words. The Chinese party witnessed that and kept the brief note written by Y.
(2) Certificate of the land use right
The claimant claimed as follows:
The respondent did not get the certificate of the land use right, which seriously breached the contract, so the respondent should bear all the liabilities.
Firstly, Article 8 of the joint venture contract specifies that the respondent shall make the evaluation of the land use right as part of its investment, of which the prerequisite is that the respondent should get the land use right according to law and assign the right to the joint venture company. But till now, the respondent has not been successful in obtaining the land use right, exchanging the certificate of the land use right, and finishing the legal procedures for contributing the land use right as the investment. Even if the land was considered as 6,639 square meters, the respondent had not obtained the certificate of the right to the use of that land, which made the joint venture company fail to obtain the legal certificate of the right to the use of the land. Thus, the joint venture company was unable to get the bank loan on the mortgage of the land use right so as to liquidize the capital, which led the joint venture company in difficulty for lack of liquid funds. Till now the joint venture company has not gained any profit but losses for successive years.
Secondly, it was not established that the respondent had no fault and liability for his failure in getting the certificate of the land use right. (a) The respondent claimed that before December 20, 1992, all the materials for the application for the certificate of real estate had been well prepared and submitted to XX County Land Bureau. But at that time, since XX County was changed to district from its previous county status, no one was responsible to issue the certificate, which means that the respondent has no fault. However, the respondent failed to provide any evidence to prove that XX County Bureau of State Land and Resources stopped to work and issue certificates. (b) The respondent also claimed that the change of program planning led to the failure in getting the certificate of the land use right, thus the respondent was still of no fault. But according to the materials submitted to the arbitral tribunal by the respondent, the claim could prove that: the change of program planning did not affect the respondent to get through the procedure of getting the certificate. Because the respondent knew the change of program planning and agreed with the opinion of the ministry of land and resources, that was if the respondent completed the additional land premium according to the requirement of the Bureau of the State land and Resources, it could apply for the land use right certificate. However, the respondent did not pay the premium, which was the fault of the respondent. So the respondent should be responsible for the failure in getting the certificate. (c) There was no basis for the claim that the premium should be allocated between the claimant and the respondent according to their proportion of shares. It was the responsibility of the respondent to pay the premium in no relation with the claimant. The joint venture contract and the supplementary contract stipulated that 10,000 square meter land should be evaluated, and there was no saying that "as for the surplus land occupied, the claimant shall only enjoy the rights but afford the land price according to the proportion of shares". There was no clause in the joint venture contract or in the supplementary contract that the claimant should afford the land price.
(d) It had to be made clear that it was in May 1994 that the claimant and the respondent signed the joint venture contract, while the latest time was September 1993 when the respondent agreed that the ministry of land and resources would change the land specified in the document of No.144 and "deal with the problem about the land use as a historical problem". In other words, when the respondent agreed with the above opinion of the ministry of land and resources, the claimant and the respondent had not yet concluded the contract. The so-called "the historical problem about the land use" was of course left to the respondent, not to the claimant, unless there were specific regulations in the joint venture contract. It was the respondent's legal obligation to get the certificate of the land use right and the respondent's failure to do that was its fault and should assume all responsibilities.
Thirdly, under the situation that the respondent did not get the certificate of the land use right, the respondent claimed that he was entitled to the use of above land, which did not only breach the contract but also deceived the claimant. That behavior was not only against business ethics, but also seriously against the law. Article 8 of the joint venture contract definitely stipulates that the respondent shall invest USD 171,180 by the evaluation of the land use right, but the respondent did not get the legal right to the use of land. However, the respondent concluded the joint venture contract with the claimant and got the certification on verification of investment by the land use right. It was obvious that the respondent did not only deceive the claimant but also seriously breached the contract. When the claimant got to know that the respondent had not arranged the certificate of the land use right, the claimant asked the respondent to immediately deal with the matter for several times, but the respondent delayed doing that again and again. Till that time, the certificate had not been issued. As the respondent did not take action to remedy his failure in carrying out the contract, which made the joint venture contract unable to be fulfilled, thus the respondent should assume all the responsibilities.
The respondent held that the respondent should not be responsible for the failure in handling the certificate of real estate.
(1) In the late May 1992, the respondent concluded the contract for assignment of the land use right with XX County Bureau of State Land and Resources, and on December 14, 1992, the respondent paid off the land price, the aggregated amount of which is RMB 398,340.
On November 26, 1992, XX County Bureau of State Land and Resources circulated the document of X Guo Tu Rang Zi [199X] No.144, and agreed to assign the industrial land of 6,639 square meters located at XX County XX Town XXX Village to the respondent for 50 years for the use of land, and issued the graphic of land line (refer to the evidence of No.3). On November 28, 1992, the respondent and XX County Bureau of State Land and Resources concluded the contract for assignment of the land use right of X Guo Tu He Zi [199X] No.230. The contract stipulated: the Bureau of State Land and Resources shall assign the right to the use of 6,639 square meters land located at XX Village XX Town to respondent, the use of which is for industrial purposes; the total remuneration for assignment of the land use right is RMB 119,502, which should be paid off within one month after the date of the execution of the contract. On December 14, 1992, the respondent paid RMB 119,502, the remuneration for assignment of the land use right, and RMB 278,838, the fee for land accessory facilities, the aggregated amount of which is RMB 398,340, to XX County Bureau of State Land and Resources. On December 18, the respondent signed the supplementary contract with XX Land Exchange, the contract for taking up land accessory facilities of X Guo Tu He Zi [199X] No.230. The contract provided that the aggregated amount of fee for land accessory facilities was RMB 278,838, and the fee should be paid off within one month after the date when the contract enters into force. Thus the respondent had paid off the land price before the prescribed time limit, and there was no basis for the claimant's claim that the respondent had not paid off the land price.
After having paid off the land price, the respondent submitted all the materials that had been prepared for applying for the certificate of real estate before December 20, 1992 to XX County Bureau of State Land and Resources (refer to the evidence of No.8). Because the county was changed to district and no one was responsible for the issue of the certificate of real estate, the certificate was not approved. In approximately April 1993, the respondent arranged the procedure of submitting documents and materials for the plants, and XX Suburban Bureau of State Land and Resources acknowledged the respondent that there was difficulty in executing the original contract for the assignment of land according to the comprehensive program planning for the industrial district of XX Village. The reasons were as follows: if the new road was taken as the upper bottom and the margin of the land bought by the respondent as the lower bottom, the whole land should be scalene ladder shaped. As the land covering from the distance of two thirds from the lower bottom to the area of more than 3,000 square meters from the new road should not be assigned to the respondent, there would be no road for the respondent to enter and exit. Since the program planning had been submitted to the district government for approval, it was impossible to change the program or pave a road for the sake of the respondent. In order to solve this problem, the Suburban Bureau of State Land and Resources required the respondent to change the original land occupancy, and the actual land area should be computed after survey, and it would be dealt with as a historical problem. The two parties to the joint venture (the respondent and XX Hong Kong Company) agreed with the opinion of the ministry of land and resources after discreet study. On June 8, 1993, XX Town construction office approved the engineering project applied by the respondent, and on September 2, 1993, the office formally approved the planning graphic for construction that was made after the change of land occupancy, which permitted that the plants should be constructed in the west of the ladder-shaped land and connect the road. Thus only about one third of the original assigned land would be occupied, which took up land of approximately 1,500 square meters land that was not assigned. The other 6,000 square meters (thereof about 4,000 square meters of assigned land, and about 2,000 square meters of unassigned land) should be enclosed by the joint venture company for its in-service use. On September 15, 1993, the respondent handed over the fee of RMB 111,794 for applying for engineering project (refer to the evidence of No.11) and began to build the plants and comprehensive buildings, which was finished at the end of 1994. The fact that the certificate of real estate was not authorized for the change of the program was agreed upon by the original cooperative party XX Company. In terms of jurisprudence, the government program is a legal administrative act, and any engineering should comply with the program. As for the common result that the certificate was not granted because of the legal administrative act, the respondent had no fault and should not bear liabilities for breach of contract. When the claimant accepted the shares of the original Hong Kong XX Company and signed the joint venture contract with the respondent, the claimant was quite clear of the situation and proposed no rejection. From the plants under construction at that time, it could be seen that the program is not consistent with the land approved by the document of No.144. At the beginning of 1996, the State Land Bureau once again measured the land area actually used by the joint venture. On February 29, 1996, Gongming State Bureau of State Land and Resources sent the notice of charge and asked the joint venture to pay the land price of RMB 272,989 (refer to the evidence of No.12), and assigned the right to the use of the additional 3,000 square meters land that was actually used by the joint venture company to the join venture. The respondent proposed this matter several times in the board meeting and claimed that the two parties should afford the land price, but the claimant was not willing to make payment and required the respondent to pay the land price unilaterally, while the claimant wanted to take this part of land as the property of the joint venture company and denied the legal rights of the respondent. The joint venture company was difficult in cash flow and could not pay the land price. Thus the land price of 3,000 square meters had not been paid, and the bureau of state land and resources had not yet issued the certificate of real estate. Moreover, the Bureau of State Land and Resources considered that the 3,000 square meters land was actually used by the joint venture, and the two lands were joined together and could not be divided, so it was impossible to issue two certificates. So the certificate would not be issued unless the land price of 10,000 square meters was paid off. As a company, it is unable to fight against the administrative authority, thus the claimant should bear liabilities for the failure in getting the certificate.
It makes no sense that the claimant claimed damages to the respondent based on the combination of the failure in getting the certificate of real estate with financing and losses, for there are no causal relations among them. It is not sure whether loan on mortgage will be approved even if the certificate were issued. In addition, even if there were liquid cash, it is not definite that the joint venture would be out of losses, even worse the losses might have been more serious. Since the beginning of 1997 when the depression of the whole industry began, XX Company has been serious in debts (The period of making payment should be two or three months after the goods delivered, while, that period was deferred for one or two years till the debt was bad.), and the large number of apportioned charges are the main reason for the book debts. If there were liquid cash and money would be made, there would be no losing bargains.
2.Award
(1)
To terminate the contract and the supplementary contract. The joint venture company shall enter into the liquidation according to the liquidating rule specified in item 4 of the arbitral tribunal agreement.
(2)
As for the arbitration costs, 30 % shall be afforded by the claimant, and 70% by the respondent.
(3)
The two parties shall respectively bear their attorney fees.
(4)
Other claims of the claimant shall be overruled.
3.Comment
Legal issues in relation to this case are mainly as follows:
(1)
As for the area of the land provided by the respondent as its capital contribution
The two parties agreed in the joint venture contract that the land use right should be evaluated at USD 171,180 (refer to X Tu Rang Zi [199X] No.144), and the above document of No.144 specified that 6,639 square meters land use right was assigned to XXXX Fabricated Metal Limited Company. In addition, the document of No.144 mentioned above was issued on November 26, 1992, while the joint venture contract was signed on May 18, 1994. Commonly the claimant knew or should have known the area of the land, the right to the use of which was evaluated as USD 171,180, and when the claimant signed the contract. The claimant claimed that when the respondent signed the contract with the claimant, the respondent had known and completely agreed with the opinion of the state ministry of land and resources on the change of land area and location made in the document of No.144, but that claim could not be inferred from the following signed contract; in contrast, the contract directly stipulated that the land use right was in accordance with the document of No.144, and did not stipulate that the land area of 6,639 square meters specified in the document had been changed into 10,000 square meters. The summary of the verification of capital subscribed by the parties to the joint venture, which was signed and sealed on August 8, 1994, specified that party A (the respondent) should buy the land (refer to X Tu Rang Zi [199X] No.144) in the name the joint venture company as its investment in the joint venture. The claimant claimed that when the respondent signed the contract, the respondent did not produce or provide the document of No.144, so the claimant did not know the specific content of the document. The claimant also claimed that article 4 of the decision made in the sixth board meeting held on May 19, 1998, provided that according to Article 8 in Chapter 5 of the original joint venture contract, Chinese party should provide the land use right as the capital contribution of USD 171,180 (refer to X Tu Rang Zi [199X] No.144), while Hong Kong party had not seen the document of No.144 until in this board meeting. As for the problem related to the land area of 6,639 square meters, Chinese party promised that the land area should be calculated as 10,000 square meters. The respondent held that the words "Hong Kong party had not seen" in the record of the board meeting were supplemented by the note taker, who was asked to do that by director Y that was appointed by the claimant, but the respondent did not provide relevant evidence. The arbitral tribunal held that the joint venture contract did not enter into force until on the day when it was approved by the examining and approving authority, and so did the amendments to the joint venture contract; while only the mutual agreement by the two parties on the amendments to the contract was not of legal binding. Therefore, the words "Hong Kong party had not seen" and "Chinese party promised" could not change the stipulation in the document of No.144 that was examined and approved by the examining and approving authority. The arbitral tribunal held that the act of signing the contract was the legal act of the two parties' true intention; the signature of the claimant represented that there was no defect in civil capacity when the contract was signed, and the claimant was unable to prove that its representative was under force or deceit to sign the contract. As a businessman of normal intelligence, the representative of the claimant should know the importance of the document of No.144 to the content of the contract. Therefore the argument that the claimant did not know the document of No.144 was not established. The evidences provided by the claimant, i.e. capital investment situation and graphic of apportioned fund needed by XXXX Fabricated Metal Limited Company, were made on December 8, 1993. From the content of the above evidences, the two documents was the respondent's unilateral document, but not appendices to the contract; thus the two documents should not be used as the basis to specify the rights and obligations of the two parties under the contract or substitute the later contracts signed on May 18, 1994 and on June 18, 1994. The arbitral tribunal held that those documents should not be used as evidence materials to prove that the respondent promised to supply 10,000 square meters land use right as its investment in the joint venture.
The claimant could not prove its claim, so the arbitral tribunal did not accept the claimant's opinion that the respondent provided the land right of 10,000 square meters as its capital contribution.
(2)
As for the certificate of land use right
Both the joint venture contract and the supplementary contract stipulate that part of the respondent's capital contribution shall be invested as the land use right. The respondent shall arrange the certificate of land use right and transfer the land use right to the joint venture company. Though the respondent has paid the land price to the state ministry of land and resources and the land has been actually used by the joint venture company, the respondent failed to get the certificate of land use right. Though the respondent has paid the land price, transferring the land use right to the joint venture is still its basic obligation under the contract, and the respondent cannot be exempted by above reasons. The respondent did not arrange the certificate of land use right and its arguments cannot exempt itself from the liabilities, therefore the respondent shall be responsible for the failure in getting the certificate of land use right.
(3)
As for the request that the claimant should compensate losses of the investment and interests
The respondent has failed to fulfill its obligation to get the certificate of land use right, and breached the contract for the respondent. But that non-performance is not as serious as making the claimant's investment insecure and the joint venture unable to operate. Article 32 of the joint venture contract stipulates that if the joint venture company is unable to continue its operation or achieve the business purpose as stipulated in the contract due to the fact that one of the contracting parties fails to fulfill the obligations as prescribed in the contract and articles of association, or seriously violates the stipulations of the contract and articles of association, the party shall be deemed as unilaterally terminating the contract. The other party shall be entitled to terminate the contract after approved by the examining and approving organ for approval as well as to claim damages. According to the analysis made in the above Item 1 and Item 2, the respondent has fulfilled its obligation to make capital contribution and paid the land price, and the land has been under the occupancy and use by the joint venture company. The arbitral tribunal held that though the respondent had breached the contract, there was no evidence to prove that the breach of contract was serious enough to substantively cause property losses of the joint venture company and make the joint venture company unable to operate or realize the purpose of operation, so as to cause the claimant to lose its investment. Therefore, the arbitral tribunal overruled the claim that the respondent should compensate the claimant for losses of its investment of USD 237,000 and RMB 1,220,000 and the respective interests.
As for the respondent's liabilities for breach of contract arising from its failure in getting the certificate of land use right, the arbitral tribunal held that the respondent should bear larger proportions of losses of the joint venture, which meant that 30% of losses should be borne by the claimant and 70% by the respondent.
(4)
As for the termination of the contract and liquidation
The claimant requested the arbitral tribunal to terminate the joint venture contract and the supplementary contract in item 1 of its application for arbitration, and the respondent also requested for "terminating the joint venture contract" in its defense. The arbitral tribunal held that the two parties had no intention to continue to operating the joint venture, and there had been no basis for the joint venture contract. Therefore, the joint venture contract and the supplementary contract shall be terminated. The joint venture company shall enter into liquidation. As for the land of 6,639 square meters used by the joint venture company, if the respondent fails to arrange the transferring procedures of the land use right, the land use fee or rent shall be calculated according to the level in the corresponding time period and excluded from the respondent's investment, and the respondent shall make up the balance with USD 171,180 evaluation of the land use right by monetary capital, which shall be part of the liquidation assets.
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