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The Case of XX v. XX on Dispute over Operating and Contracting of XX Ritzy Hotel Ltd. Company
Jurisdiction: CIETAC Shenzhen
Date of Decision: December 9, 1999
1.Case Brief
On September 20, 1992, the claimant as Party A, and the respondent as Party B, signed the cooperation contract in XX Company in XX county of XX province. The main clauses of the contract were as follows:
(1) The name of the contractual joint venture is XXXX Ritzy Hotel Limited Company (hereinafter referred to as contractual joint venture) (Article 2).
(2) In the principle of equality, mutual benefit and friendly cooperation, the purpose of the cooperation is to develop tourism industry in XX county and improve its investment environment, to strengthen the management and operation and improve service so as to get the largest economic interests in conformity with the law. (Article 5)
(3) The scope of business of the contractual joint venture is to provide guest rooms, dining rooms, marketplaces, bars, dancing halls, business service centers, beauty treatment, gymnastic halls, and other service.
(4) The total amount of investment of the contractual joint venture is RMB 28,000,000, and its registered capital is RMB 28,000,000, of which Party A's investment shall take up 38 percents, comprising monetary fund of RMB 10,480 and evaluated value of RMB 160,000 for its 1,400 square meters land use right, and Party B's investment shall take up 62 percent by monetary fund of RMB 17,360,000 (calculated by the listed HK dollar rate of exchange on the day of capital subscription). The contractual joint venture may apply for bank loan to get the liquid fund and pay the loan interests disbursed from operating expenses. (Article 8, Article 9, and Article 10).
(5) The transfer of the whole or part of cooperation terms by either party shall be agreed upon by the other party, who possesses pre-emptive right. The transfer should be approved by the original examining and approving authority (Article 11).
(6) Party A and Party B shall be respectively responsible for the following matters: the responsibilities of Party A are as follows: (a) to apply for the relevant authority's approval, get the registration, claim the business license for the establishment of the joint venture and so on. (b) to invest in the contractual joint venture according to its cooperation terms within 3 months after the business license is issued. (c) to assist the contractual joint venture in employing local managing staff, workers, and other staffs needed by the company. (d) to arrange other items as entrusted by the contractual joint venture. The responsibilities of Party B are: (a) to assist Party A in applying for approval of establishment of the contractual joint venture, getting registration, claiming the business license and so on. (b) to make its due cooperation contribution within 6 months since the contractual joint venture obtain its business license.(c) to select and purchase machinery equipment, materials outside the territory of China, and so on. (d) to arrange other items as entrusted by contractual joint venture. (Article 12)
(7) Profits shall not be distributed if the deficit in the previous year is not covered. The profits not distributed in the previous years shall be distributed in the current year. The two parties shall get the profits and bear the losses in proportion to their contribution to the registered capital after paying the tax and appropriating three items of funds (Article 13 and Article 14).
(8) The board of directors is composed of 5 directors, of which 2 shall be assigned by Party A, and 3 by Party B. The chairman of the board shall be appointed by Party B, and its vice-chairman of the board shall be appointed by Party A. The terms of the chairman and directors shall be 4 years, and they may continue to serve their offices if they are re-appointed by entrusting parties upon the expiration of their terms.
(9) Decorating materials, equipment, spare and accessory parts, conveyance, office appliances and so on, must be purchased on a selective basis of economy and technology. Their quality specifications, usability, and other technical conditions shall satisfy the company's requirements; in addition the prices are fair. The equipment that is purchased by Party B as entrusted and verified by the broad meeting upon consultation must pass the examination made by commodity inspection authorities, and the price of which should be confirmed by Party A. (Article 21)
(10) The term of the contractual joint venture shall be 20 years as of the date when the business license is issued. This contract shall automatically terminate when the term of cooperation expires; within 6 months before the expiration of the term of cooperation, if one party proposes to extend the term, which is unanimously agreed in the board meeting and approved by the original examining and approving authority, the term of cooperation shall be extended and this contract shall continue to be in force. Before the expiration of the term of cooperation, either party that is willing to terminate the contract may submit written application to the board meeting within 3 months before expiration, and the contract and cooperation shall be terminated before the time of expiration if unanimous agreed upon in the board meeting and approved by the original examining and approving authority. After liquidation, remaining properties shall be distributed between the two parties in proportion to their contribution, to which either party shall possess preemptive right. (Articles 35, 36, 37, and 38)
(11) Any dispute arising from or in relation to this contract shall be solved by friendly consultation and conciliation. Should it not be solved by above means, the dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration under the temporary bylaws of the arbitration procedure. The arbitral award shall be final and binding upon both parties. In the course of arbitration, this contract shall continue to be implemented excluding those related to the disputes under arbitration. (Articles 46, 47) The cooperation contract also prescribes other items, such as preparation and construction, laboring management, tax, finance, auditing and so on.
On July 5, 1993, the claimant as Party A, and the respondent as Party B, signed "agreement on contracted management on XXXX Ritzy Hotel Limited Company" (hereinafter referred to as "1993 contracting agreement"). The main clauses in 1993 contracting agreement were as follows:
(1) The term of contracting management is 10 years, from August 1st, 1993 to July 31, 2003. Before one year of the expiration of this agreement, the two parties shall consult and negotiate for a new operating schedule.
(2) During the period of contracting management, each month Party B shall pay back Party A 1.85% of profits from the capital contribution invested by Party A in Nan Ao Jin Ye Ritzy Hotel, and the amount of profits paid by Party B shall increase by 0.03% annually, that is, the contracting amount per month is 1.85% of contributed capital in the first year, 1.88% in the second year, 1.91% in the third year, and such analogy continues annually, till 2.12% in the tenth year.
(3) Before the eighth day of each month, Party B shall pay Party A the profits deserved by Party A in the last month. Should Party B fail to pay the profits to Party A on schedule, Party B shall pay one percent of default interests per day within one month's delay, and 2 percent of default interests per day beyond one month's delay. Should Party B delay to pay Party A the profits in successive two months, Party A shall be entitled to terminate the contracting agreement in addition to claiming default interests.
(4) During the period of contracting management, the contracting party shall bear all the expenses, profits and losses besides paying contracting amount to Party A. During the period of contracting management, Party B shall operate within the approved business scope and pay taxes in accordance with law.
(5) Contracting party shall be independent to operate XXXX Ritzy Hotel under the support of Party A.
(6) Should the assets of XXXX Ritzy Hotel invested by the two parties be written off or transferred, it shall be confirmed or agreed upon by the two parties.
(7) The amount of capital contributed by the two parties shall be calculated in proportion to their contribution to the total amount of investment prescribed in the cooperation contract that was signed on September 20, 1992. The foreign exchange contributed by Party B shall be converted to Renminbi according to the price in the foreign exchange adjustment market on the day of submission. During the period of contracting management, contracting party shall manage foreign exchange balance by itself.
(8) Insurance premium insured by XXXX Ritzy Hotel shall be afforded by the two parties in proportion to their investment, and insurance compensation shall be used to restore the hotel.
(9) Should operation be affected by the force majeure, it shall be executed according to prescription of Article 45, Chapter 8 on "force majeure" in the original contract.
(10) The hotel before operation and the assets of XX Mountain Villa shall be registered in detailed lists and confirmed by the representatives appointed by the two parties.
(11) XX Mountain Villa shall be invested on installments, and profits of capital contribution of Party A shall be calculated as of the date when the installment was put into use.
(12) Credits and debts arising in the period of contracting management shall be borne by Party B.
(13) The matters not prescribed in this contract shall be complemented upon the negotiation between the two parties, which shall be of equal force in law.
On April 24, 1996, the claimant as Party A, and the respondent as Party B, signed "agreement on contracting management on XXXX Ritzy Hotel Limited Company" (hereinafter referred to as "1996 contracting agreement"). The main clauses of 1996 contracting agreement were as follows:
(1) The term of the contracting management is 5 years from May 1st, 1996 to April 30, 2001. Within one year before expiration of this contract, the two parties shall consult and negotiate for a new schedule.
(2) During the period of contracting management, each month Party A shall pay back Party B 1.85% of profits from the capital contribution invested by Party B in XXXX Ritzy Hotel (capital contribution of Party B shall be verified by both parties and confirmed by Party A), and the amount of profits paid by Party A shall be increased by 0.03% annually, that is, the contracting amount per month is 1.85% of contributed capital in the first year, 1.88% in the second year, such analogy continues annually, till 1.92% in the fifth year.
(3) Upon negotiation and agreement of both parties, it is clear that 8% of the two parties' total paid-up capital shall be withdrawn once and for all so as to be used as contracting management and maintenance expense of Party A, which shall be offset from actual investment from both parties.
(4) It is clear that 2.5% charges for the use of Party A's profits (till April 1996, the total amount shall be confirmed by the two parties), which would have been paid to Party A in the last term of contracting management, shall be paid by Party B. Party A shall be entitled to use the profits deserved by Party B (calculated from May 1996) to offset Party B's original debts and charges for the use of Party A's profits till paid off. After all the debts and charges are offset, before the eighth day of each month, Party A shall pay Party B profits that would have been paid to Party B in the last month. Should Party A fail to pay Party B the profits deserved by Party B within the time limit, Party A shall pay 2.5% of default interests per day within one month's delay. Should Party A delay to pay Party B the profits in successive two months, Party B shall be entitled to terminate the contracting agreement in addition to claiming default interests.
(5) During the period of contracting management, the contracting party shall bear all the expenses, profits and losses. Party A shall operate within the approved business scope and pay taxes in accordance with law. All the credits and debts arising from the last term of contracting management made in the name of "XXXX Ritzy Hotel Limited Company" and "XXXX Ritzy Hotel" shall be borne by Party B.
(6) Should the assets of XXXX Ritzy Hotel invested by the two parties be written off or transferred, it shall be confirmed and agreed upon by the two parties, or else the contracting party shall compensate according to the original value.
(7) The amount of capital contributed by the two parties shall be calculated in proportion to their contribution to the total amount of investment prescribed in the "contract for XXXX Ritzy Hotel Sino-Foreign Contractual Joint Venture Company". The foreign exchange contributed by Party B shall be converted to Renminbi according to the price in the foreign exchange adjustment market on the day of submission. Party B shall manage foreign exchange balance by itself.
(8) Insurance premium insured by XXXX Ritzy Hotel shall be afforded by the two parties in proportion to their contribution, and insurance compensation shall be used to restore the hotel.
(9) Should operation be affected by the force majeure, it shall be executed according to prescription of Article 45, Chapter 8 on "force majeure" in the original contract.
(10) The assets of XXXX Ritzy Hotel shall be registered in detailed lists and confirmed by representatives appointed by the two parties.
(11) During the period of contracting management, the general manager and the legal representative of "XXXX Ritzy Hotel Limited Company" and "XXXX Ritzy Hotel" shall be appointed by Party A, who shall be in full charge of management and administration on XXXX Ritzy Hotel Limited Company and XXXX Ritzy Hotel. Party B shall assist the operation. All the credits, debts, and liabilities arising in the period of operation shall be borne by Party A.
(12) "Agreement on contracting management of XXXX Ritzy Hotel Limited Company" signed on July 5, 1993 by Party A and Party B shall be invalidated at the same time when this contract enters into force.
(13) The matters not prescribed in this contract shall be complemented upon the negotiation between the two parties, which shall be of equal force in law.
The disputes arose from the performance of abovementioned contracts.
On April 24, 1998, the claimant submitted the dispute to CIETAC Shenzhen according to the arbitration clauses in the cooperation contract. There were several claims proposed in the application for arbitration submitted on April 24, 1998. On August 17, 1998 and September 4, 1998, the claimant amended its arbitration claims. On February 27, 1999, the claimant finally proposed following 14 arbitration claims as follows:
(1) The "contract for XXXX Ritzy Hotel Sino-Foreign Contractual Joint Venture Company" should be terminated.
(2) The respondent should compensate liquidated damages of RMB 4,140,000 due to its failure in making HK dollar investment on schedule; the contract should be terminated, and the respondent should compensate the losses of the claimant.
(3)The respondent should bear liabilities for breach of contract due to its failure in making capital contribution in the form of foreign exchange according to the contract and relevant regulations after the respondent obtained the mortgage loan and returned to other domestic enterprises the amount of RMB 22,500,000 capital invested by those enterprises in the form of Renminbi, and should pay the liquidated damages of RMB 11,810,000, the contract should be terminated, and the respondent should compensate the claimant's losses.
(4) The respondent should pay liquidated damages of RMB 5,060,000 due to the respondent's withdrawal of its capital contribution.
(5) The respondent should pay liquidated damages of RMB 5,620,000 arising from the respondent's failure in making full capital contribution.
(6) The respondent should hand in the certificate of land use right to XXXX Ritzy Hotel, withdraw certificate of title to house property co-owned by the contractual joint venture and the contractual joint venture's mortgage guarantee policy from Shantou Branch of Bank of China, and bear all the liabilities, so as to eliminate the risks to the contractual joint venture.
(7) The respondent should pay damages of RMB 904,000 arising from decoration of the second and third floors of the gymnastic hall demolished by the respondent unauthorizedly, and compensate operating losses of RMB 1,920,000.
(8) The respondent should return or compensate RMB 2,630,000 due to its discretion on equipment assets of the contractual joint venture.
(9) The respondent should take back defective equipment bought by the respondent without undergoing complete procedures and could not be used to offset RMB 830,000 from the respondent's investment accordingly.
(10) The respondent should pay the claimant RMB 4,970,000 for financial losses.
(11) The arbitral tribunal should appoint a capital verification institution to carry out capital verification and identify the two parties' actual paid-up capital contribution, based on which assets of the contractual joint venture shall be distributed.
(12) The "agreement on contracting management on XXXX Ritzy Hotel" on April 24, 1996 should be confirmed invalid.
(13) The respondent should pay back the claimant the loan of RMB 400,000 and its interests of RMB 256,000, the aggregated amount of which is RMB 656,000.
(14)The respondent should bear all the arbitration expenses arising from this case.
Upon responding to the claimant's arbitration claims, the respondent proposed counter-claims on July 28, 1998, amended its counter-claims on January 1st, 1999, and finally organized its counter-claims on March 22, 1999 as follows:
(1) The claimant should pay damages of RMB 4,040,000 to the respondent inasmuch as the claimant failed to make full capital contribution.
(2) The claimant should pay back the interests of RMB 20,420,000 to the respondent (the contracting contract was performed from May 1996 to February 28, 1999) and compensate the respondent's losses of RMB 10,968,200 (the unperformed period of contracting contract: from March 1st, 1999 to April 30, 2001), the aggregated amount of which is RMB 31,388,200.
(3) As the claimant unilaterally required to rescind the cooperation contract, the claimant should pay RMB 1,200,000 for the respondent's financial losses (referring to 12 years from expiration of contracting to expiration of cooperation).
(4) As the claimant unilaterally sub-contracted XXXX Ritzy Hotel's dancing halls, dinning rooms, gymnastic halls to the third party to operate, the claimant should pay liquidated damages of RMB 1,907,100 to the respondent.
(5) The claimant should pay the respondent for financial losses of RMB 310,000 as the claimant demolished the dinning rooms on the second floor of the main building of XXXX Ritzy Hotel unauthorizedly. The aggregated amount of above five items in the counter-claim is RMB 38,845,300.
(6) The claimant should bear legal and economic liabilities for importation of large quantity of duty-free private materials to make illegal profits in the name of the contractual joint venture.
(7) The claimant should hand over the certificates of XXXX Ritzy Hotel comprehensive land use right and XX Mountain Villa land use right, and immediately carry out procedures to transfer the ownership of the certificates to the contractual joint venture.
(8) The claimant should bear all the arbitration expenses arising from this counter-claim.
As for the claims of the claimants involved in this arbitration, the main disputes were as follows:
(1) As for the termination of the cooperation contract, the claimant held the following statements:
(a) According to the cooperation contract, articles of association, agreement for capital increase, and relevant approving documents, the respondent should have invested the total amount of RMB 34,100,000 (including the increased capital) in the form of foreign exchanges (RMB 17,360,000 in the form of foreign exchanges before capital increase) before March 1995. If converted by 0.743, the listed HK dollar rate of exchange from January, 1993 to December, 1993, HK dollar 45,900,000 should have been invested (RMB 34,100,000÷0.743＝HK dollar 45,900,000). But the respondent has only invested HK dollar 8,500,000 till now. The respondent should have invested HK dollar 37,400,000 (HK dollar 45,900,000－HK dollar 8,500,000＝HK dollar 37,400,000), and the amount of capital owed by the respondent takes up 81% of the total amount of investment. Therein, RMB 22,000,000 of capital was invested by other enterprises invested by the respondent. In June 1996, RMB 22,500,000 of capital was withdrawn by the respondent in the form of mortgage loan, but the respondent has not made up capital contribution equivalent of RMB 22,500,000 in the form of foreign exchanges. The respondent seriously breached the cooperation contract, the document "X Wai Mao Zi Tou Zi [1993] No. XX" made by XX province Foreign Trade Commission, Article 3 of agreement for capital increase, the document "No. XX [1994] Reply to capital increase" made by Foreign Trade Commission in XX city, certificate of approving foreign-funded enterprises made by XX government on June 2, 1993, and certificate of approving foreign-funded enterprises made by XX government on June 29, 1996. According to Article 43 of the cooperation contract, the claimant required to terminate the contract and claim for damages to the respondent.
(b) In June 1996, the respondent put its total unilateral title to properties on mortgage, i.e. the value of RMB 34,100,000, and obtained the loan of RMB 22,500,000 by mortgage loan rate of 66% (RMB 22,500,000÷RMB 34,100,000=0.66). The claimant originally only agreed that 70% of the 62% of the respondent's unilateral title to properties was put on mortgage (the part of capital made up by HK dollar in substitution of returned Renminbi), and 30% of mortgage was more than that agreed upon by the claimant, so the loan of RMB 6,750,000 obtained from that 30% of mortgage (RMB 34,100,000×30%×0.66＝RMB 6,750,000) was the capital contribution withdrawn by the respondent and the registered capital of RMB 6,750,000 was deducted. This act breached Article 4 of the cooperation contract.
(c) The respondent breached Article 12 of the cooperation contract and Article 10 of articles of association. The amount of RMB 5,120,000 capital should have been invested by the respondent. The claimant held that the amount of owed capital contribution and damages that should be paid by the respondent was as follows: on April 30, 1996, the two parties preliminarily settled accounts: RMB 36,104,000 (including capital contribution RMB 22 million in the form of Renminbi). The deducted amount of money paid for review from May, 1996 to May, 1997: (i) the money deducted for foreign exchange conversion: HK dollar 8,500,000×（1.25 yuan-0.743 yuan）＝RMB 4,300,000. (ii) the money deducted for price verification by Shantou Commodity Inspection and Testing Bureau: RMB 1,280,000. (iii) the money deducted for the two parties' joint review: RMB 635,000. (iv) the money deducted for decoration of the gymnastic hall on the second and third floors in Ritzy Hotel that was unilaterally demolished: RMB 904,000. The aggregated amount of above items is RMB 7,120,000. The difference of owed capital contribution was RMB 34,100,000 -(RMB 36,104,000-RMB 7,120,000)＝RMB 5,120,000. The amount of unpaid damages was RMB 5,120,000: (from April 1995 to December 1998, 44 months in total) RMB 5,120,000×5%×44 months＝RMB 11,250,000. The claimant further explained that part of capital contribution made by the respondent has not been verified or reviewed yet.
(d) The respondent unilaterally provided the mortgage guarantee by using the title to house property co-owned by the contractual joint venture in the name of the contractual joint venture for other enterprises in XX county invested by the respondent to obtain loan, which violated the provisions of Article 17 in the cooperation contract, Paragraph 2 of Article 16 and Article 19 of Detailed Rules on the Implementation of the Law of People's Republic of China on Sino-Foreign Contractual Joint Ventures. Meanwhile, by mortgage guarantee and registration of other titles, 62% of titles to properties of contractual joint venture owned by the respondent have been transferred to XX branch of Bank of China, and there was nothing in relation to the respondent's rights to the contractual joint venture and cooperation terms provided by the respondent. Therefore there are no cooperation terms to continue the cooperation.
(e) In order to gain illicit short term interests, the respondent unilaterally reconstructed the gymnastic hall on the second and third floors, which destructed accessory functions of the Ritzy Hotel and ruined the interests of contractual joint venture in the long term. The respondent violated the provisions of Article 17 of the cooperation contract and Article 15 of the articles of association.
(f) The respondent unilaterally disposed equipment assets of RMB 2,630,000 that was entrusted by the contractual joint venture to import, which breached Article 17 of the cooperation contract and infringed legal interests of the claimant in the contractual joint venture.
(g) Without agreement of the board meeting, the respondent unilaterally purchased large quantities of defective equipment and materials without formal invoices and verification by the commodity inspection and testing bureau, and the prices and quality of which were not identified by the claimant. The respondent breached Article 21 of the cooperation contract and paragraph one of Article 5 in Law of the People's Republic of China on Import and Export Commodity Inspection.
(h) Since the establishment of the contractual joint venture in August 1993, the company has not gone through the procedure of capital verification, which violated Article 12 of articles of association, Paragraph 2 of Article 9 in Law of the People's Republic of China on Sino-Foreign Contractual Joint Venture, and Paragraph 22 of Article 22 in Detailed Rules on the Implementation of the Law of People's Republic of China on Sino-Foreign Contractual Joint Ventures. As the company did not go through the procedure of capital verification, the Ritzy Hotel was compelled to stop operation for its failure in annual survey on business registration.
In sum, the respondent's numerous serious breach of contract, negligence, and infringements led to severe deficit arising in the contractual joint venture and the claimant's losses of interests of subscribed capital and operating losses have amounted to RMB 18,000,000 since the cooperation and contracting management. According to the cooperation contract, articles of association, Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, and Detailed Rules on the Implementation of the Law of People's Republic of China on Sino-Foreign Contractual Joint Ventures, the claimant requested the arbitral tribunal to rescind the cooperation contract.
The respondent argued as follows: there was no grounding for the claimant's request for termination of the cooperation contract. Because it has been 6 years for the operation of the contractual joint venture since August 28, 1993, while the claimant has never proposed any problem about the cooperation contract during that period and either party has contracted the company for 3 years. Now the claimant suddenly unilaterally claimed to rescind the cooperation contract, which was serious breach of contract. According to General Principles of the Civil Law of the People's Republic of China and Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, the claimant should pay the respondent for financial losses of RMB 1,042,100 (RMB 10,420,900×10%). The detailed calculation should be referred to the second item in the counter-claim.
(2) Regarding the claim that the respondent should pay the claimant damages arising from the respondent's failure in making capital contribution in the form of HK dollar on schedule, the claimant held as follows: on June 15, 1993, the business license of the contractual joint venture was issued, and according to the cooperation contract, the respondent should have made capital contribution of RMB 17,360,000 in the form of foreign exchanges. But the respondent made capital contribution in the form of Renminbi so as to reduce its investment, which was against the contract as well as law. Capital contribution in the form of Renminbi made by the respondent caused the contractual joint venture lack of foreign exchanges to import equipment, decorating materials, building materials, which increased the cost of investment. In addition, the respondent only invested HK dollar 8,500,000 in foreign exchange, equivalent to RMB 6,310,000= HK dollar 8,500,000×0.743 yuan (average state exchange rate of HK dollar to Renminbi from January 1993 to August 1993). In fact, the respondent still has not made capital contribution of RMB 11,040,000 in the form of foreign exchanges (RMB 17,360,000-RMB 6,310,000=RMB 11,040,000).
Thus, according to Article 43 in the cooperation contract, the respondent should pay the claimant damages of RMB 4,140,000 (RMB 11,040,000×5%×7.5 months＝RMB 4,140,000), and the term of breach of contract was 7.5 months from January 15, 1994 to August 31, 1994 before the reply to capital increase was made. In addition, the claimant claimed that the respondent should have made capital contribution of RMB 34,100,000 in the form of foreign exchanges before March 1995, which was HK dollar 45,900,000 converted by listed HK dollar rate of exchange of 0.743, but the respondent still has not invested HK dollar 37,400,000, of which RMB 22,000,000 was input by domestic enterprises invested by the respondent in the form of Renminbi.
The respondent stated as follows: the respondent invested in the contractual joint venture in the form of Renminbi, which was in accordance with No. 048220-5012 XX County Written Approval for Amendments to Sino-foreign Contractual Joint Venture made by Shantou government on September 1st, 1994. In addition, under Article 7 of two copies of "Agreement on Contracting Management on XXXX Ritzy Hotel Limited Company" signed on July 5, 1993 and April 24, 1996, HK dollar invested by the respondent could be converted to Renminbi according to foreign exchange adjustment market price, while, one HK dollar could be converted to 1.25 Renminbi from the year 1993 to 1994. It was the genuine expression of two parties' mutual agreement that HK dollar would be converted to Renminbi according to foreign exchange adjustment market price, which was in accordance with Paragraph one of Article 7 in Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, stipulating that "if written agreement on contract terms is signed and sealed by the parties, the contract shall be considered as established." The respondent's investment was completely in accordance with relevant regulations as to the form of investment and the amount of investment (actually exceeding the planned investment), thus there was no legal basis for the claimant to claim for damages to the respondent.
(3) With respect to the respondent's mortgage loan, damages for withdrawal from the investment, damages for under-paid capital contribution, certificate of land use right, and certificate of title to house property, the claimant held as follows:
(a) In May 1996, when the claimant reviewed the account of the respondent's investment in the contractual joint venture provided by the respondent on April 30, 1996, it found that RMB 22,000,000 of the respondent's capital contribution was made in the form of Renmibi by the enterprises which were invested by the respondent in China. That is against the cooperation contract and relevant provisions, which was admitted by the respondent. And then the respondent requested to provide its unilaterally owned estate under mortgage for XX branch of Bank of China to obtain loan for those enterprises that made capital contribution for the respondent before, withdraw its capital contribution in the form of Renminbi, and make supplementary capital contribution in the form of foreign exchange according to the contract. The claimant agreed that the respondent would put 70% of the 62% of its unilateral title to estate on mortgage and required the respondent to make supplementary capital contribution according to the cooperation contract and relevant provisions. But after the respondent's enterprises obtained the mortgage loan of RMB 22,500,000 and withdrew their investment, the respondent has not made capital investment of HK dollar 30,280,000 in the form of foreign exchange, which was against the cooperation contract, agreement on capital increase and regulations in the relevant documents. The respondent has not only deceived the Chinese party, but also severely breached the cooperation contract, "agreement on capital increase" signed by the two parties in June 1994, the document "Reply to capital increase [1994] No. XX" made by XX county Foreign Trade Commission, Certificate of Approving Foreign-funded Enterprises made by XX county government on June 2, 1993, and Certificate of Approving Foreign-funded Enterprises made by XX county government on June 29, 1996. According to the cooperation contract, the respondent should pay damages of RMB 11,810,000 (RMB 22,500,000－RMB6,750,000＝RMB15,750,000×5%×30 months＝RMB 23,620,000, 50% of which is RMB 11,810,000).
(b) In June 1996, the respondent provided RMB 34,100,000 of its full unilateral property right (without capital verification) as mortgage for other enterprises to get loan, which was of 30% in excess of originally agreed limit of the claimant, i.e., exceeded 70% of its unilateral property right. If the amount of mortgage for loans provided by the respondent was RMB 22,500,000, the mortgage loan rate was RMB 22,500,000÷RMB 34,100,000＝0.66（that is 66%）, and the excess amount of mortgage loan obtained by the other party was 30%×RMB 34,100,000×66%＝RMB 6,750,000, that's how the respondent withdrew its capital contribution and registered capital on purpose. According to the cooperation contract, the respondent should pay damages of RMB 5,060,000 (namely RMB6,750,000×5%×30 months＝RMB 10,120,000, 50% of which is RMB 5,060,000. It is 30 months from July 1996 to December 1998.)
(c) According to the amount of capital contribution agreed by two parties on April 30, 1996, and the review made during the period of May 1996 to May 1997 (Part of amount was not verified or deducted.), the amount of the respondent's capital contribution was not more than RMB 28,980,000 (including RMB 22,000,000 invested by other enterprises). The respondent did not make full capital contribution and still owed RMB 5,120,000 (that is RMB 34,100,000-RMB 28,980,000=RMB 5,120,000). According to the cooperation contract, the respondent should pay RMB 5,620,000, namely RMB 5,120,000×5%×43 months＝RMB 11,250,000, 50% of which was RMB 5,620,000. It was 43 months from May 1995 to December 1998.
(d) Without resolution made at the board meeting nor with the claimant's agreement, the respondent unilaterally provided certificate of title to house property co-owned by the two parties as mortgage for XX branch of Bank of China in the name of the contractual joint venture, which severely infringed the claimant's interests and breached the provisions of Article 4 and Article 17 in the cooperation contract, Paragraph 4 of Article 15 in articles of association, and Article 19 in Detailed Rules on the Implementation of the Law of People's Republic of China on Sino-Foreign Contractual Joint Ventures. Moreover, the loans have been overdue for more than 8 months. Since the certificate of title to house property was put in the bank as mortgage for a long term and certificate of land use right was unreasonably seized, the contractual joint venture was unable to keep normal operation due to lack of certificates. The respondent's infringements and breach of contract caused losses to the claimant, and the respondent should be totally liable for that.
The respondent stated as follows: Registered capital was completely different from mortgage. Registered capital invested by the respondent in XXXX Ritzy Hotel was the title of ownership. The respondent used the aforesaid title of ownership for the mortgage upon the claimant's agreement, and XX branch of Bank of China, i.e. the mortgagee should not have the ownership to the property of XXXX Ritzy Hotel before materializing the right to mortgage. Since there was the hypothec, XX branch of Bank of China, the mortgagee, had nothing to acquire. If X Company paid back the loan and interests, the hypothec would be extinguished. It was incorrect for the claimant in the supplementary arbitral to claim that the respondent withdrew the registered capital on purpose by providing its own property right as mortgage loan for other enterprises. XXXX Ritzy Hotel was in the claimant's solitary island and the volume of credit provided by XX county bank was very small, from which it was impossible to obtain liquid capital. XX county bank did not agree to offer loans to the enterprise in XX Island. In order to obtain liquid capital, there was no choice but to entrust X Company invested by the respondent in XX county to obtain the loans. XXXX Ritzy Hotel was in deficit of RMB 21,889,703.05 excluding the interests of the loan from the date of establishment to April 30, 1996. In order to deal with the deficit and keep routine operation, XXXX Ritzy Hotel borrowed liquid capital, amounting to RMB 22,312,867.91, from the respondent's affiliated company X from the date of establishment to April 30, 1996. Loans mentioned above, which were offered by the respondent's affiliated company X on installments, provided liquid capital to XXXX Ritzy Hotel and made up XXXX Ritzy Hotel' deficits in recent 3 years, or else XXXX Ritzy Hotel would have been closed. The above loans were mainly used in the following items: (i) to pay the contracting fee of RMB 3,793,070.46 to the claimant; (ii) to advance XXXX Ritzy Hotel's routine expenses (namely deficit) of RMB 10,049,703.25; (iii) to pay RMB 5,551,271.35 for purchase of hotel appliances; (iv) to pay RMB 944,698.96 for materials stockpiled for routine use; (v) to cover fees of RMB 218,664.38 that was not distributed. The above 5 items were recorded in the book account of XXXX Ritzy Hotel as RMB 20,488,976.94. As to those not recorded in the book account, such as operation costs, salaries paid to senior managers hired from Hong Kong, travel expenses, they were not disbursed here. As the interests that should have been paid to XX branch of Bank of China were unable to be repaid, they were not recorded in the book accounts, either. From the amount of deficits and the loans' applications, it is shown that the respondent's affiliated company did not hesitate to bear the big risks so as to revitalize Jin Ye Ritzy Hotel. The loans for XXXX Ritzy Hotel's liquid capital mentioned above were all used to solve the problem of lack of business fund due to its serious deficit, so the loans were in no relation with the respondent's registered capital and there was no fact that the respondent withdrew registered capital. The respondent had made full capital contribution before October 30, 1994, which was proved by investment document. The respondent's affiliated company borrowed loans for XXXX Ritzy Hotel from December 29, 1994, and the amount of loans was RMB 17,750,000, which was on installments. Due to failure to pay the interests, the aggregated amount of loans and interests was RMB 22,500,000. XX Industrial Development Corporation of XX county was entrusted to provide credit guaranty for the loans. Therefore, the loans were irrelevant to registered capital.
Since May 1996, XXXX Ritzy Hotel has been received by the claimant to keep contracted management. XX branch of Bank of China required increasing mortgage in kind for XXXX Ritzy Hotel's loans obtained by X Company. After negotiating with the respondent, the claimant agreed that 70% of the 62% of the property right to Jin Ye Ritzy Hotel, which was invested in XXXX Ritzy Hotel by the respondent, could be provided for XX branch of Bank of China as mortgage for the loans originally obtained by X Company for XXXX Ritzy Hotel as well as the interests. After the claimant verified and confirmed the amount of the respondent's capital subscription, it produced the document to demonstrate its agreement on the respondent's providing 70% of the 62% of the property right to Jin Ye Ritzy Hotel as mortgage for loans on May 21, 1996. That's exactly the fact that why the claimant agreed the respondent to provide 70% of the 62% of the property right as mortgage for loans to XX branch of Bank of China and the utilization of the loan. Therefore, the respondent requested the arbitral tribunal to overrule the claimant's unreasonable claim under the fact and law.
As to the claim proposed by the claimant in its original application for arbitration that the claimant was unable to raise fund from banks due to the counterfoil of certificates of title to house property right of XXXX Ritzy Hotel's main building and attached building in XX branch of Bank of China, the respondent held as follows: (a) the mortgage provide by the respondent was 70% of the 62% of equity owned by the respondent; (b) that was agreed by the claimant in written form; (c) it was not mentioned in the "contracting contract" for the claimant's contracting management of XXXX Ritzy Hotel that certificate of house property right to general house property should be transferred to the claimant for mortgage or keeping; (d) the claimant had never asked the respondent to help to solve the problem of mortgage loans till the day when the claimant applied for arbitration. Even though it was impossible to raise fund by loans, it is the business of Claimant, which was in no relation with the respondent.
(4) As to the issue concerning the gymnastic halls on the second and third floors, the claimant held as follows: in the period of the respondent's contracting management, the respondent demolished the gymnastic halls on the second and third floors to provide service of electronic gambling games (The service was proscribed in November 1995.) without the agreement of the board meeting and the claimant. RMB 904,000 was paid for decoration of destructed gymnastic halls (original amount of money paid for decoration RMB 2,130,000-subsequent amount of clearing RMB 1,226,000=RMB 904,000). These acts were severely against Article 17 and Article 15 of the cooperation contract. When the claimant reviewed the respondent's accounts in May 1996, it found that it was inscribed as investment about the cost for decorating the demolished part, which was quite unreasonable. That backout decorating cost should be covered by the respondent or deducted from the respondent's capital contribution (RMB 904,000).
As gymnastic halls were wrecked due to the second and the third floors were demolished, they were frequently out of business and its operating benefits severely went down. Monthly operating income was not more than RMB 10,000, and monthly loss was more than RMB 60,000 (Monthly operating income was RMB 80,000 before reconstruction.) compared with the income got before demolishment, so the operating losses in 32 months amounted to RMB 1,920,000, which should be compensated by the respondent. In addition, there was also chain negative effect due to insufficiency of accessory facilities.
The respondent stated as follows: in the period of the respondent's contracting management on XXXX Ritzy Hotel, in view of special measure on providing service for electronic games in XX Island and the waste of land occupied by gymnastic halls in XXXX Ritzy Hotel, the respondent reconstructed the gymnastic halls on the second and third floors of the attached building to provide electronic games so that the supporting hotel facilities were completed, and economic benefits were increased. It was just because of high profits gained from electronic games that the claimant proposed to terminate the respondent's contracting contract for management on XXXX Ritzy Hotel so as to conduct contracting manage on the hotel by the claimant. On April 30, 1996, when the respondent transferred contracting management on XXXX Ritzy Hotel to the claimant, it was willing to accept the transfer and pay the respondent RMB 80,000 for the cost of rebuilding and decorating the electronic game halls. Now the claimant required restoring gymnastic halls to the original scale, decoration and accessory facilities, and claimed for damages of RMB 904,000, which made no sense.
(5) As to return of resale of the assets of contractual joint venture's equipment, the claimant held as follows: according to Article 12 of the cooperation contract, the respondent, representing the contractual joint venture, imported equipment and materials upon the approval of relevant departments, which were the assets of the contractual joint venture. The amount of foreign exchange paid by the respondent for them should be part of the respondent's capital contribution. Since the contractual joint venture did not keep accounts, the claimant was not clear of the equipment and materials imported by the respondent representing the contractual joint venture. In May 1996, after taking charge of the Ritzy Hotel, the claimant found that some of equipment was sold unilaterally by the respondent. After further checking with relevant departments, the claimant found that the respondent unilaterally sold equipment, such as cars, split air-conditioning units, portable dwellings, which were imported by the respondent under entrustment of the contractual joint venture, aggregated amount of which was RMB 2,630,000. That caused the contractual joint venture lack of accessory facilities and unable to reach required standard, so the business benefits were affected and there were chain negative effects.
The respondent argued as follows: the claimant claimed that the respondent resold imported equipment and materials owned by the contractual joint venture, and presented in three lists to illustrate the act, which was just fabricated by the claimant. For example, as a generating set has been used by XXXX Ritzy Hotel since its establishment, why did the claimant said it had been resold? The cars such as Benz 300, Crown 3.0 were bought by foreign investors A and C for private use pursuant to state policies, and the contractual joint venture did not pay any penny for them. The facts demonstrated that the respondent did not resell the contractual joint venture's equipment and materials, and there were no factual basis for the claimant's claim.
(6) As to defective equipment, the claimant held as follows: (a) the respondent bought a telephone exchange of RMB 280,000 for the contractual joint venture, which was credited as the respondent's capital contribution. But the equipment did not undergo the procedure of inspection and testing, and the price was not confirmed by the claimant. Moreover, the important technique (maintaining code) was controlled by the foreign provider. Once the telephone exchange broke down, there would be no choice but to employ the foreign provider to repair it, and the maintenance price was too high. So that telephone exchange has been in disuse since 1997, and the claimant had to buy another domestic telephone exchange, which caused loss to the contractual joint venture.
(b) The respondent bought 50 split air conditioning units for the contractual joint venture, which were unilaterally disposed of by the respondent. The respondent bought another 21 split air conditioning units from XX city, the price of which was RMB 280,000. But those units were without formal invoices and the prices were not consulted by the board meeting. When the claimant took over the units, they were out of operation.
(c) The respondent imported 15 computers for the contractual joint venture, the total price of which was RMB 270,000. The computers were without commodity inspection certificate and could not be assembled to use, so the computers have been stocked in the warehouse for 6 years. The above equipment, which was out of operation and without full commercial instruments, was not in accordance with Article 21 of the cooperation contract, the document of "X Jing Mao Zi Tou Zi [1993] No.XX" made by XX province Foreign Trade Commission, and Item 1 of Article 5 of Law of the People's Republic of China on Import and Export Commodity Inspection. The equipment should be taken back by the respondent and its price of RMB 830,000 (defective telephone exchanges RMB 280,000+defective air conditioning units RMB 280,000+defective computers RMB 270,000=RMB 830,000), which has been credited as the respondent's capital contribution, should be deducted from it.
The respondent held as follows: 21 air conditioning units, 16 computers, and the system of telephone exchange mentioned above were all new when bought in 1993. The equipment had been used till November 12, 1996, when the claimant entrusted Commodity Inspection and Testing Bureau of XX province to make inspection, and the commodity inspection certificate showed that the equipment was in proper operation at present. Thus, why did the claimant say the equipment was defective despite that air conditioning units, computers, and the system of telephone exchange were still well running after 4 years' operation? As to the stored materials, from the stock list provided by the claimant, it was clear to show that so-called defective stored materials were from the operation of XXXX Ritzy Hotel, such as room reservation agreements, notice of accommodation, plates and bowls, envelopes for the Ritzy Hotel and so on. Why could these materials be called defective stored materials?
(7) As to compensation to the claimant's financial losses, the claimant held as follows: due to the respondent's serious breach of contract, negligence, infringement, gaining profits while ruining others, and failing to keep its words, the contractual joint venture had to increase the cost of investment and maintenance charges, and was unable to obtain interim liquid cash fund and afford the costs for maintenance, purchasing raw materials, electric charge. Now the contractual joint venture was out of power and had to pay the deferred electric charge due to failure to pay electric charge. In addition, as the respondent did not carry out and assist in the procedure of capital verification, the contractual joint venture did not have complete certificates, which made the contractual joint venture fail to go through the procedures, such as reports and annual survey on business registrations, and the Ritzy Hotel had been out of business till then. Due to poor economic performance and serious losses, the contractual joint venture was unable to reach anticipated economic benefits and the claimant was under severe losses. The loss of interests arising from the respondent's investment was RMB 13,370,000 (that is RMB 20,900,000×1%×64 months＝RMB 13,370,000), 20% of which (calculated as RMB 2,670,000) should be borne by the respondent. The loss of contracting management was approximately RMB 4,600,000, 50% of which (calculated as RMB 2,300,000) should be borne by the respondent, and the total losses amount to RMB 4,970,000. According to Article 42 of the contractual joint venture, the respondent should make compensation.
The respondent held as follows: Firstly, XXXX Ritzy Hotel was sound in accessory facilities and equipment and there were no defective materials that were out of use. The diminished area of gymnastic halls were changed into electronic game center which improved the operating benefits of XXXX Ritzy Hotel; the liquid operating fund was the business of the contracting party, which was irrelevant to the respondent; Secondly, the investment return of the claimant had been clearly balanced when the respondent began contracting management. Thirdly, according to the contracting contract, all the costs and losses arising in the period of contracting management should be borne by the contracting party. The loss of RMB 9,960,000 arising from contracting management and the deferred electric charge of RMB 300,000 should be afforded by the claimant.
(8) As to the issue concerning capital verification and assets division, the claimant requested the arbitral tribunal to appoint a capital verification institute to verify the contractual joint venture's capital and confirm the two parties' paid-in capital so as to divide the assets.
The respondent held as follows: On April 30, 1996, when the claimant took over the contractual joint venture and made contracting management, the two parties confirmed the amount of investment. From the clearing sheet, it is clear that the respondent made total capital contribution of RMB 40,470,500, which was RMB 36,104,000 after deducted 8% depreciation cost and reduced value of some equipment and materials at the time of the claimant's starting the contracting management. These could be demonstrated by the clearing sheet, which was confirmed and signed by the representatives of the two parties. Now the claimant proposed to re-examine and re-verify the two parties' capital contribution, which should be decided by the arbitration tribunal in the respondent's opinion.
Article 38 of the cooperation contract stipulated that when the term of the contractual joint venture expired, the remaining assets should be distributed in proportion to two parties' contribution. Now the claimant put forward dividing the contractual joint venture assets according to their investment proportion, the respondent held that it only could be realized after the claimant assumed the liabilities of breach, compensated the loss of the respondent and returned the contracting payment to the respondent.
(9) As to the issue concerning contracting agreement, the claimant held as follows: the contracting agreement was against Regulations for Contracted Operation of Sino-Foreign Equity Joint Ventures promulgated by the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce on September 13, 1990. The unconformities were as follows: (a) The contracting agreement was signed under the situation that the foreign party did not make capital contribution on schedule and there was no report on the verification of capital, thus there were no competent contracted operation terms.
(b) Before the contracting management, there was no assets verification and capital verification by Chinese certified accountant.
(c) This contracting agreement was signed between the two investing parties, which was against the prescription of the contract signed between the contractual joint venture and contracting party, i.e. "investing parties shall not sign the contract for contracting profits."
(d) The prescription in the contracting agreement that HK dollar invested by the respondent shall be converted into Renminbi according to foreign exchange market price was inconsistent with the prescription in the cooperation contract that HK dollar shall be converted into Renminbi according to listed foreign exchange rate, which violated the provision that contractual agreement should not modify the cooperation agreement.
(e) The contracting agreement was not approved by the original examining and approval authority.
(f) It did not apply for or provide the documents that are prepared to be submitted for approval during the contracting management.
As for the abovementioned illegal acts arising from the contracting agreement, it meant the contracting agreement violated Article 3 of the cooperation contract and Article 5 of articles of association. The arbitral tribunal should declare the agreement invalid.
The respondent considered that result was due to the claimant's fault, and the claimant should assume all the financial and legal liabilities accordingly. The reasons were as follows:
(i) Article 12 of the cooperation contract signed by the respondent and the claimant definitely prescribed that the claimant should be responsible for the matters relevant to Chinese government such as establishment of the contractual joint venture, application for approval, obtaining the business license. (ii) The claimant knew perfectly well that the contracting agreement should be submitted to the original examining and approval authority for approval and registration, but it did not apply for registration and examination on purpose. For example, on March 27, 1996, the claimant wrote a letter to the respondent saying "if the respondent does not give back contracting profits before April 5, 1996, the claimant will apply to the relevant competent authority for suspending the contracting agreement"; the claimant held in the third item of its supplementary arbitration claiming that "after the contracting agreement was signed by the two parties, the law counselor pointed that the contracting agreement was against Regulations for Contracted Operation of Sino-Foreign Equity Joint Ventures promulgated by the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce on September 13, 1990.
The respondent claimed as follows: 1993 contracting agreement and 1996 contracting agreement were the true expression of the two parties and were signed under two parties' mutual agreement. Moreover, either party has contracted for 3 years, and the implementation of the contracting agreements was consistent with Article 4 of General Principles of the Civil Law of the People's Republic of China which stipulated that "In civil activities, the principles of free-will, fairness, making compensation for equal value, honesty and credibility shall be observed". The dispute should be handled pursuant to the established fact which arose from the implementation of the contracting agreement. The respondent made contracting operation on XXXX Ritzy Hotel from August 1993 to April 1996 and paid the contracting profits of RMB 3,793,070.46 (in cash) to the claimant. The remaining money was deducted from the contracting profits that should be paid by the claimant according to 1996 contracting agreement. The claimant also made contracting operation on XXXX Ritzy Hotel for nearly 3 years. The respondent and the claimant owned different amounts of shares in XXXX Ritzy Hotel, that is, the respondent's share took up 62% and the claimant 38%. But the claimant kept contracting operation for a longer time than the respondent. Therefore, the dispute that the claimant should pay the respondent the contracting profits and default interests should be solved according to the implemented contracting agreements.
(10) As to the issue concerning the loans and interests, the claimant held as follows: the respondent borrowed RMB 300,000 from the claimant in the name of the contractual joint venture on August 4, 1993, and borrowed RMB 100,000 from the claimant in the name of X Company of XX city, the total amount of which was RMB 400,000. The respondent has not paid back the abovementioned loans. It had been 64 months since the respondent borrowed money. If the interest rate per month was calculated at one percent, the interests were RMB 256,000. The loans and interests amounted to RMB 656,000. The Respondent should repay the abovementioned payment to the claimant.
The respondent held as follows: The claimant's claim was obviously contradictory to the fact stated in Appendix 12 provided by it. According to the appendix provided by the claimant and further investigation on relevant documents, it is clear that the two items of money was just as what the appendix illustrated. The money was paid by the claimant for the respondent made advance payment for Crown 3.0 and acquisition expenditure, the total of which was RMB 400,000. This car was bought by the respondent as entrusted by the claimant under the approving documents for the contractual joint venture to import cars for private use. As the facts were clear and there were no disputes, the respondent agreed to give up the fifth item in its counter-claim that "the claimant should pay back the respondent the money of RMB 425,500 for purchasing the car", and applied to the arbitral tribunal to overrule this claim supplemented by the claimant.
With respect to the respondent's counter-claims, the main disputes were as follows:
(1) As to the claimant's investment, the respondent claimed as follows: (a) The claimant did not make capital contribution according to the provisions. In accordance with the reply of the cooperation contract and articles of association, the claimant should make capital contribution of RMB 20,090,000 to the contractual joint venture not later than December 15, 1994 in the form of 1,400 square meters land use right (calculated as RMB 160,000) and cash investment of RMB 20,074,000. But the claimant did not make capital contribution according to above prescriptions. (i) The registrant of the land use right, which was supposed to be invested into the contractual joint venture by the claimant, was still "XX County Tobacco Monopoly Bureau", instead of being changed to be the contractual joint venture. Thus the claimant did not make full capital contribution concerning its cooperation terms. (ii) The claimant has never made capital contribution in cash. Paragraph one, Article 20 of Chapter IV of the Accounting Regulations of the People's Republic of China for the Joint Ventures Using Chinese and Foreign Investment prescribes that "as for investment made in cash, the amount and date as received or as deposited into the Bank of China or other banks where the joint venture has opened its bank account shall be the basis for recording the capital contribution". However, it is shown from investment statistics provided by the claimant that the so-called contributed capital was all used to pay to construction brigade that contracted to build XXXX Ritzy Hotel and the claimant's inside staff for dinner expenses, operation cost, travel expenses, subsidies and so on. The claimant seriously breached the cooperation contract and articles of association, for it did not make capital contribution of RMB 20,900,000 in cash as prescribed.
(b) The claimant did not make full capital contribution. According to "investment statistics" provided by the claimant in December 1994, the claimant unilaterally compiled the account that the amount of capital contributed by the claimant was RMB 20,186,916.45. In fact the claimant kept the contracting profits of RMB 2,100,000 paid by the respondent as its investment, which was prohibited by law. The claimant had only actually invested capital of RMB 18,187,000 till December 1994, and still had to invest capital of RMB 2,710,000.
The respondent has urged the claimant to make up the balance of invest for several times, but the claimant delayed to make capital contribution with various excuses.
As the claimant did not make full capital contribution, the respondent had to make more capital contribution to complete the auxiliary functions of the ritzy hotel. Thus the amount of capital contributed by the respondent was excessive. That could be demonstrated by the facts as follows: (i) Till December 1994, the respondent had made capital contribution of RMB 36,379,360.44. (ii) On December 16, 1994, the contractual joint venture entrusted accounting firm in XX District of XX City to make capital verification according to Article 12 of the articles of association and the relevant provisions stipulated in Law of the People's Republic of China on Sino-Foreign Contractual Joint Ventures. The accounting firm produced report on capital verification according to investing materials provided by the two parties. It was verified that the respondent had not only made full capital contribution but also made excessive capital contribution. The report was distributed to the claimant and relevant industry and commercial competent authority, to which no party proposed objection.
(iii) On April 30, 1996, amount of investment, clearing situation of contracting amount, and the balance sheet about the respondent's investment as signed by the respondent and the claimant, the claimant confirmed that the amount of actual capital contribution made by the respondent was RMB 36,100,000 after depreciation. (iv) XXXX Ritzy Hotel's book account of "paid-in capital" and "contributed surplus" showed that the remaining amount of capital actually contributed by the respondent was RMB 40,260,000. As the claimant seriously breached the contract, the respondent was lack of liquid capital and suffered severe financial losses, which caused serious losses in the respondent's contracting period.
According to prescriptions of relevant laws and cooperation contract, the claimant should compensate the respondent the following losses: (a) The claimant should pay damages of RMB 1,045,000 （RMB 20,900,000×5%＝RMB 1,045,000）according to Article 43 of the cooperation contract for breach of contract. (b) Loss arising from fund possession costs was RMB 2,995,000 (RMB 2,710,000×possession costs 2.3%×48 months＝RMB 2,995,000). The aggregate amount of two items was RMB 4,040,000(RMB 2,995,000＋RMB 1,045,000＝RMB 4,040,000).
The claimant held as follows: (a) There was no incomplete investment by the claimant. Till the end of December 1994, the claimant should invest capital of RMB 20,900,000 in the contractual joint venture, while it had contributed capital of RMB 20,180,000 till March 1994, and contributed capital of RMB 770,000 in October 1994. On January 5, 1995, the two parties signed agreement for transfer of shares of XXXX Ritzy Hotel Limited Company. Article 1 prescribed "it is agreed that the original Party A, now Party C, (note: claimant) transfers its investment which takes up 38% of total investment of XXXX Ritzy Hotel (paid-in capital was confirmed to be RMB 20,900,000 by Party A, B and C.)…" Thus there was no problem about the incomplete investment.
(b) Since the ritzy hotel has been constructed and available to be under contracted operation, there was no problem about the claimant's underinvestment, incomplete accessory facilities, and delay of construction.
(2) As to the issue concerning contracting, the respondent held as follows: provided that the claimant's investment has been fully funded according to approving certificate, from September 1993 to December 1994, the registered capital should be RMB 10,640,000; after capital increase, from December 1994 to April 30, 1996, the registered capital should be RMB 20,900,000. Based on above calculation, the contracting profits of the both sides should be calculated according to the calculation method as prescribed in contracting agreement and other relevant provisions. After the respondent's review, the calculation result was the contracting profits of RMB 7,700,978.92 the respondent owed to the claimant in the first stage had been fully cleared. Since February 1997, the claimant should have paid contracting profits to the respondent, but it has not made payment till now. Till February 28, 1999, the claimant had owed contracting profits of RMB 20,420,000 to the respondent (actual period of the implemented part: from May 1996 to February 1999). If the contract had been completely executed, according to the cooperation contract and agreed calculation method, the respondent would get contracting profits of RMB 16,244,700 for the remaining 26 months (from March 1st, 1999 to April 30, 2001) excluding executed part. Considering the factors of interests and advanced drawing of contracting profits, the respondent required the claimant to compensate the losses of RMB 10,968,200.
The claimant held as follows: (a) The respondent should assume main liabilities for invalidity of contracting agreement. The facts and arguments were as follows: (i) From June 1993 to April 1996, the legal representative of the contractual joint venture was Mr. A, who was the legal representative of the respondent. Both contracting agreements were signed in that period. Mr. A, as the legal representative of the contractual joint venture, did not conduct sound management on the contractual joint venture and violated relevant state provisions before capital verification, which misled the parties to sign the invalid contracting agreements that were against relevant regulations and rules. It caused serious losses to the contractual joint venture and the claimant. As legal representative, Mr. A should assume the inescapable liabilities.
(ii) Both contracting agreements were signed out of the Respondent's trick. (iii) The claimant requested to confirm the contracting agreement signed in 1996 invalid. One reason was that the agreement did not go through the approval procedure and was signed between two investors; The other reason was that the agreement was against the regulations that the contractual joint venture which has not been through capital verification by certified accountant registered in China should not be contracted, as well as that the contracting agreement should not change the clauses of original cooperation contract. Abovementioned facts demonstrated that the main reason of the conclusion of invalid contracting agreement lied in the respondent.
(b) The calculation of contracting profits by the respondent was based on false investment amount of RMB 36,100,000 in the manipulated account, which should not be considered as the calculating basis. That amount was without certificate of capital verification issued by any capital verification institute, and the facts and arguments were as follows: (i) The contractual joint venture have not been through the procedure of capital verification and there was no legitimate report on capital verification by any capital verification institute. (ii) On April 30, 1996, though the two parties cleared calculations on capital contribution made by two parties and contracting amount, both parties admitted that the preliminary amount of clearing was not true and agreed upon making review. On May 21, 1996, the two parties signed supplementary agreement after review, and disaffirmed the clearing amount made on April 30, 1996.
On March 20, 1998, the two parties signed agreement which stated that clearing about two parties' investment and contracting amount had not completed and further clearing need to be made. As to the failure to complete clearing within 3 months originally agreed by the two parties, the respondent should assume main liabilities. Meanwhile, the facts demonstrated that both parties were unwilling to be bound by originally agreed time limit of 3 months. On one hand, it was due to the respondent that the clearing of the decorating project was not finished until December 1997, so the respondent should be liable for that. On the other hand, the review was carried out from May 1996 to May 1997. In addition, the agreement signed on March 20, 1998 also demonstrated this point.
However, during review and the second clearing process, as to the investment of RMB 7,120,000 including the amount that should be deducted and the extra amount arising from foreign exchange conversion, among which, RMB 6,500,000 was not agreed to be deducted by the respondent, which caused the two parties unable to make reconfirmation, especially when the claimant knew that the two parties' investment would not be legitimate unless it was verified by the capital verification institute. Meanwhile, the two parties had disagreement on some amounts. The claimant proposed that the two parties jointly entrust a capital verification institute to verify the investment, but the respondent was not supportive (The reason was that the respondent wanted to avoid the fact that it did not make full capital contribution and its form of investment was inconsistent with the requirement of the contract.). The ritzy hotel has not been through capital verification yet and both parties' capital contribution was not verified. Thus the claimant requested that the arbitral tribunal should appoint a capital verification institute to make capital verification to confirm the amount of two parties' actual paid-in capital.
It was no factual or legal basis for the respondent to calculate the amount of its investment as RMB 36,100,000. After two parties' review and the claimant's review according to the contract, the amount of the respondent's actual paid-in capital was not more than RMB 28,980,000 (including the part that was invested by other enterprises in the form of Renminbi).
(c) The contracting operation profits and default interests owed by the respondent arising from the first term of contracting operation was RMB 59,616,000, but not RMB 7,700,000 as claimed by the respondent. According to Article 4 of the second contracting agreement, the possession costs should be calculated by 2.5%, so the contracting profits and possession costs owed by the respondent to the claimant could only be on the increase. Now the respondent claimed that the claimant owed the respondent contracting operation profits of RMB 18,669,200, which confused right and wrong. The fact was that the respondent should make a plan to pay back the contracting profits and possession costs to the claimant on installments.
(d) During the period of the claimant's contracting operation, the respondent had no right but to be liable to compensate the claimant and the contractual joint venture for its breach of contract, negligence and infringements.
(3) As to the issue concerning terminating the cooperation contract, the respondent claimed as follows: the cooperation contract signed in September 1992 and articles of association specified that the cooperation term was 20 years. In June 1993, the contractual joint venture obtained the business license. The cooperation term should be from June 1993 to May 2013, and it has been nearly 6 years since Jin Ye Ritzy Hotel started business on August 28, 1993. In recent 6 years, the initial term was under the respondent's contracting operation. According to the contracting agreement signed in 1993, the term of operation under the respondent was 10 years. During the period of the respondent's management, the situation of operation was becoming good and the ritzy hotel was probable to make profits, but the claimant required to terminate the respondent's management and take over the ritzy hotel. For the overall interests, the respondent agreed that the claimant took over management. In April 1996, the two parties signed the agreement which stipulated that the claimant would operate the hotel for 5 years. It has been nearly 3 years since the claimant took over XXXX Ritzy Hotel. During this period, the claimant unilaterally breached the contract several times and delayed to pay the contracting profits. However, the two parties have never had disputes over the cooperation contract. Now the claimant suddenly proposed to terminate the cooperation contract, which seriously breached the contract. That would make the respondent unable to gain returns from its actual capital contribution of RMB 41,000,000 in the XXXX Ritzy Hotel (RMB 36,100,000 has been confirmed by the other party with its signature.).
According to Paragraph one of Article 6 concerning the breach of contract in the Response of the Supreme People's Court to Certain Questions Concerning the Application of the Foreign Economic Contract Law that "if the parties fail to implement the contract or the implementation is inconsistent with the agreed terms, the breaching party shall compensate the other's party's losses otherwise the contract has other provisions or remedial measures are taken. The losses mentioned above include any damage, reduction or missing of the property, costs paid for diminishing or clearing up the losses, and any benefit that may be gained from performance of the contract". According to Article 42 in the cooperation contract, and a research report on feasibility, the claimant should pay the loss of RMB 1,200,000 to the respondent arising from benefits that may be gained in further 12 years' performance of the contract (calculated by RMB 100,000 of proceeds per year).
The claimant held as follows: both parties have admitted the serious losses of the contractual joint venture. Now the respondent claimed future profits to the claimant based on predicted proceeds but not on the fact and law, which is ridiculous.
(4) As to the issue on subcontract, the respondent held as follows: the claimant took advantage of the chance of unilateral contracting operation to subcontract the operation of XXXX Ritzy Hotel's dancing hall, gymnastics, and dining hall to the third party, which severely violated the provisions of Article 24 and Article 29 in Detailed Rules on the Implementation of the Law of People's Republic of China on Sino-Foreign Contractual Joint Ventures, Article 17 in the cooperation contract and Article 15 in articles of association. While the claimant proposed many arguments in written defense submitted on February 12, 1999, but the ritzy hotel was not contracted by the inside staff, which was evidenced by personnel files. So the respondent made following claims: (a) The claimant should give back 62% of the income of RMB 601,000, calculated as RMB 372,620 (601,000×62%=372,620) to the respondent. (b) The claimant should pay damages of RMB 1,534,500 (RMB 34,100,000×4.5%（depreciation rate）×1 year=RMB 1,534,500). The two items amounted to RMB 1,907,100 (RMB 372,620+RMB 1,534,500=RMB 1,907,100). (3) The claimant should immediately stop subcontracting operation.
The claimant held as follows: (a) The claimant did not breach the contract. The contracting agreement specified that Party A is XXXX Ritzy Hotel Limited Company other than the tobacco company. (b) The contracted operation was applied by the inside staff of the ritzy hotel, which was an effective management style to perfect the responsibility system for operation. (c) Article 6 of the contracting agreement specified "Party B is a subordinate operation department of Party A and under supervision of Party A". (d) Article 11 of 1996 contracting agreement specified the claimant is "totally responsible for management on XXXX Ritzy Hotel Limited Company and XXXX Ritzy Hotel". Subcontracting part of operation items was just the way of management taken by the claimant. (e) Inside subcontracting was not the major issue that should be agreed by the board meeting, and it did not breach the two parties' contract, articles of association, and law. The regulations referred to by the respondent should not be applied to abovementioned issue. (f) The ritzy hotel collected money from inside contracting, and the total amount from three departments only comprised over RMB 30,000 per month in winter and over RMB 50,000 per month in summer, which was the gross income but not net profits. The collected money was far from enough to pay salaries of the staff in managerial departments and fees for operation, such as the maintenance fee for water and electricity. (g) The respondent did not assume full responsibilities in the period of cooperation, which caused serious losses to some operation departments, and made those departments out of business. In order to make use of the abandoned operation sites, the claimant took effective measures to perfect responsibility system for operation. (h) If following the respondent's logic, the respondent should assume 62% of the losses of RMB 4,600,000, which occurred during the claimant's contracting operation (the respondent should also assume other liabilities for breach of contract.). In sum, the respondent's counter-claim on this point had no legal basis and did not make any sense.
(5) As to the issues concerning reconstruction and demolishment, the respondent held as follows: during its contracting operation on XXXX Ritzy Hotel, the claimant unilaterally reconstructed Chinese dinning hall on the second floor, demolished luxurious offices and multi-functional seafood pond of which the total value amounted to RMB 500,000. The claimant changed the total area of the hall and destructed the main structure of Chinese dining hall, which deteriorate the operation environment. The claimant should pay the losses of RMB 310,000 to the respondent (RMB 500,000×62%＝RMB 310,000).
The claimant held as follows: (a) The claimant did not demolish dining halls, luxurious offices, and multi-functional seafood pond of which the total value was RMB 500,000. There were no luxurious offices in the dining hall but a small seafood pool of not more than 2.5 square meters (2 meters×2 meters×0.6 meters) outside the door. During the contracting operation, the claimant found that the original fish pond, which was at the door of dining hall, leaking, inappropriate and unsanitary because dead fish always could be found there. In addition, the seafood often was stolen. In order to solve these problems, the claimant spent more than RMB 30,000 reconstructing the seafood pond, demolished the wall (less than 8 square meters) outside the door of dining hall that was connected to the seafood pond and installed an antitheft sliding door outside the pond, which was approved and praised by many people. The respondent referred to a stockroom as luxurious office, which was less than 8 square meters, referred to the value of the wall of less than 8 square meters as RMB 500,000, and distorted the good thing that the claimant spent more than RMB 30,000 to reconstruct the hotel.
(b) The seafood pond was outside the door of the dining hall, which has no connection with the main structure of Chinese dining hall. So the respondent forged the problem about destruction of the main structure of Chinese dining hall.
(6) As to the issue concerning resale of the duty-free import materials for private use, the respondent held as follows: Taking advantage of the chance of unilateral contracted operation on XXXX Ritzy Hotel the claimant unilaterally imported duty-free materials in huge amount without agreement of the board meeting, such as 9 elevators, steel of 500 tones, aluminum products of 400 tones, 4 sets of central air conditioning equipment on December 3, 1997, which had been resold by the claimant secretly to make big profits. That seriously infringed the respondent's legitimate rights and interests, and was against the contract as well as the law.
The claimant held as follows: (a) the claimant imported goods in the name of the contractual joint venture, which was claimed by the respondent, was because that XX customs authority allowed the goods to enter in November 1997. The customs authority wanted to be supportive for the economic construction of XX County and the county foreign trade commission followed the instruction of the county government to made customs declaration, while the procedure was carried out by the subordinate company B. The claimant did not know whether there was importation at all, or made any money from importation, of which there were no illegal facts. In April 1998, when the contractual joint venture held the board meeting, legal representative of the respondent, Mr. A, asked that affair, and the claimant made explanation. When the respondent designated someone to get the information about that issue, the foreign trade commission also made explanation. (b) The contractual joint venture did not pay for the import materials.
(7) As to the issues concerning comprehensive land use of the contractual joint venture and land use right certificate of XX mountain villa, the respondent held as follows: The contractual joint venture totally owned 3 pieces of land with 3 different certificates of land use right (a) before the establishment of the contractual joint venture, the claimant invested RMB 160,000 for the land of 1,400 square meters for the construction of ritzy hotel's main building and attached building as the cooperation term. (b) After establishment of the contractual joint venture, the two parties made further capital contribution for the land of more than 1,000 square meters to construct the ritzy hotel's parking lot, stock rooms and staff dormitories. (c) In April 1993, the two parties again made capital contribution for the land of more than 10,000 square meters for the construction of XX Mountain Villa. When applying for the use of above three pieces of land, the contractual joint venture had not been established. The claimant applied for the use of land for the contractual joint venture. But the contract for the land transfer specified "after the ritzy hotel is established, the transferee of the land use right shall be changed." But the claimant unilaterally registered the land user as "Tobacco Monopoly Bureau (Tobacco Company) in XX County of XX province". Till now, the claimant has not been through the procedure of transferring the land use right to the contractual joint venture. The claimant's above acts did not only violate relevant regulations, but also seriously infringed the rights and interests of the contractual joint venture and the respondent. As to three certificates of land use right mentioned above, the claimant said that the certificate of the right to the use of land for attached building of the ritzy hotel was handed over to the general office of XXXX Ritzy Hotel, which was waiting to be verified. The two certificates of the right to the use of land for the ritzy hotel's parking lot and XX Mountain Villa have been long possessed by the claimant without any reason. So the respondent required the claimant to hand over the certificates of the right to the use of land for XXXX Ritzy Hotel and XX Mountain Villa, and immediately carried out the procedure to transfer the certificates mentioned above to the contractual joint venture.
The claimant held as follows: (a) the claimant made capital contribution of RMB 160,000 for 1,400 square meters land, which was administratively allotted by XX County government to the claimant as building lot, and the claimant made that as the cooperation term. There was no problem about transferee of certificates. However, certificates of land use right have been possessed by the respondent for a long time without any reason (there was the receipt of the respondent's possession as evidence.). (b) As to the land of more than 1,000 square meters, the respondent held that it was for the construction of the ritzy hotel's parking lot, stock rooms, and staff dormitories, which was also administratively allotted by XX County government to the claimant as building lot (there are minutes of the meeting held by XX County construction commission on April 13, 1994, as evidence.). This land was provided by the claimant for the ritzy hotel for temporary use to build parking lot and temporary facilities in view of friendly cooperation. So there was no problem about transfer of title. The respondent used to apply to XX County construction authority to transfer the land use right to the contractual joint venture, which was not approved by Nan'ao county Construction Authority.
(c) As to the right to the use of land for mountain villa. According to Article 25 of "contract for the transfer of the land", "the transferee of the land use right is XXXX Ritzy Hotel. But the ritzy hotel has not been established, so the transferee temporarily is XX County Tobacco Company. After the ritzy hotel opens, the name of transferee shall be instantly changed." But during the period of June 1993 when the contractual joint venture was established to May 1996, legal representative of the respondent, Mr. A, was chairman and general manager of the contractual joint venture. During such period, the respondent should bear the responsibility to handle the formalities of land use right transfer of mountain villa. However, the respondent did not handle the formalities until now. Therefore the respondent should assume liabilities for that. The claim made by the respondent that when three pieces of land was applied for use, the contractual joint venture had not been established, was contradictory to the claim that the claimant unilaterally registered the land user as itself.
2.Award
(1)
The claimant shall pay its deferred contracting interests and penalty interests for the period from May 1st, 1996 to December 8, 1999 to the respondent. The total amount is RMB 20,455,567.86. The claimant shall pay off within 45 days as of the date when this award is made, and afford 5% of interests per year if overdue.
(2)
Contract for Sino-foreign cooperation on XXXX Ritzy Hotel Limited Company signed in 1993 shall be terminated. The contractual joint venture shall enter into liquidation according to law.
(3)
The land use right, which was calculated as RMB 160,000 and provided by the claimant, shall be transferred to the contractual joint venture, and be part of the contractual joint venture's liquidation assets.
(4)
The respondent shall immediately pay back the loan, take back original certificates of land use right that were used as mortgage for loan, and return the certificates to the contractual joint venture for liquidation.
(5)
As 1996 contracting agreement was not submitted to the competent authority for approval, the agreement is not valid. The claimant shall assume liabilities for this fault.
(6)
The claimant's other claims and the respondent's counter-claims shall be overruled.
(7)
The costs of arbitration include fees for application for arbitration and counter-claims, the total of which is RMB 1,001,538. The claimant shall afford 65% and the respondent 35%
3.Comment
Legal issues in relation to the case are mainly as follows:
(1)
Law application
According to Law of People's Republic of China on Sino-Foreign Economic Contracts Involving Foreign Interest (note: This law has been nullified by Law of People's Republic of China on October 1st, 1999.) and the cooperation contract, the applicable law of the cooperation contract and the law to settle the disputes are Chinese domestic law.
(2)
Validity of the contract.
The arbitral tribunal considers that the cooperation contract and "agreements" were signed through consultation between the two parties on the basis of equality, which have been approved by the competent authority of the government. Therefore they are valid and binding.
(3)
As to the issue whether the two parties made full capital contribution.
The arbitral tribunal holds that both parties confirmed the invested capital, which should be considered as the recognition to the verification result. The claimant and the respondent have made full capital contribution. The arbitral tribunal does not support claims made by two parties that the other party should pay damages for breach of contract based on the argument that the other party did not make full capital contribution.
(4)
As to the issue concerning the respondent's capital contribution in the form of Renminbi.
According to the document "No. XX written approval for amendments to Sino-foreign contractual joint venture" made by XX County government on September 1st, 1994, the respondent's capital contribution of RMB 34,100,000 in the form of Renminbi was approved by the government, and the claimant did not propose objection to that then. Moreover, the contractual joint venture had been under the respondent's contracting operation since the contractual joint venture was established. There is no evidence to prove that the capital contribution in the form of Renminbi affected the company's operation, and the claimant never presented any evidence to show that capital contribution actually caused loss. In addition, according to 1993 contracting agreement and 1996 contracting agreement, the respondent's capital contribution in the form of HK dollar could be converted to Renminbi according to foreign exchange adjusting market price at that time (according to the materials provided by Shantou branch of Chinese Foreign Exchange Center, the foreign exchange rate of HK to Renminbi was one HK dollar to 1.25 Renminbi from 1993 to 1994.). The arbitral tribunal considers that conversion is the expression of two parties' true will and the result of two parties' consultation on the basis of equality. The arbitral tribunal does not support the claimant's claim that the respondent should pay damages for its making capital contribution in the form of Renminbi according to the schedule rather than the investment in the form of HK dollar.
(5)
As to the certificates of land use right.
According to the cooperation contract, the claimant should make capital contribution in the form of land use right, the value of which is RMB 160,000. After examination, the claimant did not change the holder of the certificates of land use right to be the contractual joint venture after the company was established. The respondent should transfer certificate of the land use right to the land to be the contractual joint venture's name.
(6)
As to the issue that the respondent made its title to the contractual joint venture's property as mortgage for bank loans.
After examination the arbitral tribunal finds that the respondent made 70% of its 62% of title to the contractual joint venture's property as mortgage for X Company in XX Special Economic Zone to obtain loans, the total amount of which is RMB 22,500,000, from XX branch of Bank of People's Republic of China. This act was agreed by the claimant. Though the respondent provided its total 62% (equivalent to RMB 34,100,000) of title to property as mortgage, after examination, it was found that the value of 70% of the respondent's 62% of title to property has been in excessive of the amount of loans, and indirect loans obtained by the contractual joint venture from X Company were all used to solve the contractual joint venture's lack of operation funds arising from losses.
In fact, that is only a kind of debit and credit relationship between the contractual joint venture and X Company. The claimant's claim that the respondent withdrew fund is ungrounded. According to the explanation presented by the respondent on April 30, 1996, original certificates of title to the contractual joint venture's main building and attached building are preserved by the respondent temporarily. As what was mentioned above, it was agreed upon by the claimant that the respondent made 70% of its 62% of the contractual joint venture's shares as mortgage for loans. There is no enough factual evidence to support the claimant's claim that the respondent possessed the certificates without any justifiable reason. But the arbitral tribunal notes that when the respondent provided the mortgage for loans, it handed over the certificates to the bank, but has not yet got back the certificates due to failure to pay the loans in time. Therefore, the respondent could not hand over the certificate to the claimant when the claimant began its contracting management. The arbitral tribunal decides that the respondent shall immediately pay back the loans, get back the mortgage of original certificates of title to real estate, and give the certificates back to the contractual joint venture. Thus the arbitral tribunal overrules item 3 and item 4 of the claimant's claims.
(7)
As to the issue that the respondent bought defective equipment.
The claimant accused that the respondent bought the value of RMB 830,000 of defective equipment, including telephone exchange (RMB 280,000), air conditioning (RMB 280,000) and computers (RMB 270,000). The arbitral tribunal notes that the aforesaid equipment were bought in 1993, and had been kept in use for 4 years till November 12, 1996 when XX province Import and Export Commodity Inspection and Testing Bureau made inspection on the equipment. The certificate of inspection shows that the equipment was still in proper operation. The claimant's claim that the equipment bought by the respondent was defective is ungrounded for lack of firm evidence. Thus the arbitral tribunal overrules item 9 of the claimant's claims.
(8)
As to the issue that the respondent unilaterally resold the contractual joint venture's equipment and assets during the period of contracted operation. The claimant did not provide persuasive evidence, thus the arbitral tribunal considers that the evidence is not enough to support that claim and overrules item 8 of the claimant's claims.
(9)
As to the claimant's subcontracting act.
The evidence shows that the claimant subcontracted the operation on XXXX Ritzy Hotel to the staff member B, which lies in the category of inside contracting, i.e. the employee of the contractual joint venture is the contractor. The arbitral tribunal considers this act is one of operation measures taken by the claimant and within the claimant's authority of contracting operation. There is no enough evidence to support the respondent's claim that the claimant's subcontracting act breached the contract. Therefore the arbitral tribunal overrules the respondent's item 4 of counter-claims.
(10)
As to the issue that each party reconstructed facilities of the contractual joint venture.
After examination, it is proved that each party did demolish and reconstruct original facilities and each party did not propose objection to the other party's action. Especially on April 30, 1996, when the respondent transferred contracting operation of the contractual joint venture to the claimant, the claimant expressed to accept the respondent's reconstruction of gymnastic halls on the second and third floors of attached building to be the electronic game hall, and paid RMB 80,000 to the respondent for the decoration of the electronic game hall. The arbitral tribunal considers that each party's reconstruction was for satisfying the needs of business development and agreed upon by the other party. Therefore the arbitral tribunal overrules item 7 of the claimant's claims and item 5 of the respondent's counter-claims.
(11)
As to the issue that the claimant claimed for damages to the respondent for financial losses arising from the respondent's numerous breach of contract out of fault.
After examination, the claimant transferred its right to management and operation to the respondent after the contractual joint venture was established. While the respondent kept contracting operation on the contractual joint venture, the claimant just got a certain amount of contracted profits from the respondent, but the respondent got other proceeds. According to the principles of fairness and making compensation for equal value specified in General Principles of the Civil Law of the People's Republic of China, the claimant (contracting party) should be responsible for all the costs, profits and losses arising from the period of its contracting operation. Moreover, large part of the compensation amount in the claim arose from recalculation, and there are no enough factual and legal grounds. Therefore the arbitral tribunal overrules item 10 of the claimant's claims.
(12)
As to the compensation for anticipatory proceeds.
The nature of the contractual joint venture is that both parties are equal, have mutual benefits, and jointly bear risks. Moreover, as various situations may appear due to various subjective and objective elements in the period of operation, the anticipatory proceeds predicted in the research report of feasibility is not destined to be realized and cannot be used as the basis for claiming for compensation. Therefore the arbitral tribunal overrules item 3 of the respondent's counter-claims.
(13)
As to loans and making illicit profits from duty-free import materials.
The claimant held that the respondent borrowed RMB 400,000 from the claimant. The arbitral tribunal considers that this dispute is about debit and credit relationship between the claimant and the respondent and is not related to the dispute arising from this contract. Then the arbitral tribunal overrules item 13 of the claimant's claims. As to the respondent's claim that the claimant unilaterally imported a large quantity of duty-free materials to make illicit profits and requested the arbitral tribunal to rule that the claimant should assume legal and financial liabilities, the arbitral tribunal considers that the claim is ungrounded for lack of evidence. Therefore the arbitral tribunal overrules item 6 of the respondent's counter-claims.
(14)
As to the claimant's request to reappoint a capital verification institute to verify the contractual joint venture's capital once again, the arbitral tribunal has made analysis and confirmation in its former opinion, so the arbitral tribunal does not support that request and overrules item 11 of the claimant's claim.
(15)
As to the claimant's delay to pay contracting profits to the respondent
(a) As to the validity of 1996 contracting agreement, the arbitral tribunal considers that agreement was not approved or registered by original examining and approval authority, which is inconsistent with Regulations for Contracted Operation of Sino-Foreign Equity Joint Ventures promulgated by the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce on September 13, 1990. Therefore the agreement was invalid. But according to Article 12 in the cooperation contract, the claimant should assume the responsibility of application for approval, and the respondent, as a foreign party to the contractual joint venture, is not responsible for application for approval. Even though the contracting agreement was invalid due to failure to obtain approval, the claimant should also assume liabilities for this fault. The claimant is not entitled to claim invalidity of the agreement to exempt its liabilities due to its failure to make application. Both parties, upon equal consultation, signed 1996 contracting agreement voluntarily, and it was the expression of two parties' true will. In addition, 1996 contracting agreement had been implemented for more than 3 years. It should be handled according to the principle of fairness, reasonability, and making compensation for equal value. Thus, the arbitral tribunal considers the rights and interests arising from 1996 contracting agreement should be protected according to above principle.
(b) As to the issue that the claimant was delayed to pay contracting profits to the respondent. After examination, the return arising from the period of the respondent's contracting operation has been cleared up after the claimant transferred its right to contracting operation to the respondent. It is proved that during the period of the respondent's contracting operation on XXXX Ritzy Hotel from August 1993 to April 1996, the respondent paid contracting profits of RMB 3,793,970.46 (in cash) to the claimant, and the remaining money was deducted from contracting profits that the claimant should pay back to the respondent according to the 1996 contracting agreement.
According to "report on the situation about two parties' investment and contracting amount" signed on April 30, 1996 and 1996 contracting agreement, when the respondent transferred the right to contracting operation to the claimant and the contractual joint venture was taken over by the claimant, the respondent should pay RMB 9,705,081.67 to the claimant for owed fund and possession costs. RMB 2,004,102.75 was deducted for the excessive amount of capital invested by the respondent, so the respondent should actually pay total amount of RMB 7,700,978.92 to the claimant for owed fund and possession costs, which should be deducted from the contracting profits and penalty interests owed by the claimant to the respondent. Therefore, the arbitral tribunal rules that the contracting profits and penalty interests, which should be calculated from May 1st, 1996 to the date of arbitral award that is made on December 8, 1999, shall be deducted from the contracting profits and possession costs, which were owed by the respondent to the claimant arising from the period of the respondent's contracting operation. The total amount is RMB 20,455,567.86.
(16)
As to the termination of the cooperation contract.
In view that there are serious disputes and disagreement between two parties about XXXX Ritzy Hotel's operation and the claimant has not implemented the contracting agreement for a long time, the contractual joint venture is unable to keep normal operation and the purpose of cooperation is unable to be realized. Therefore the arbitral tribunal rules that the cooperation contract signed by two parties shall be terminated and the contractual joint venture shall enter into liquidation.
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