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The Case of Thailand XX Limited Partnership v. Hong Kong XX International Investment Co., Ltd. on Dispute over Joint-operating Shenzhen XX Building Co., Ltd Jurisdiction: Arbitration; CIETAC Shenzhen 1.Case Brief

The claimant Thailand A Limited Partnership (Party A) and the respondent Hong Kong B International Investment Co., Ltd. (Party B) concluded an agreement on 9 May, 1992. The disputes between the two parties are in relation to the following clauses of the said agreement: Shenzhen C Building Co., Ltd. (hereinafter referred to as the cooperative company) was established upon the strength of approval of Shenzhen Municipal Government on 28 March, 1989 and after registration with Shenzhen Administration for Industry and Commerce on 13 April, 1989. The cooperative company was operated by the foreign party Thailand A Limited Partnership (hereinafter referred to as Limited Partnership) together with XX Industrial Company, XX Garment Company, XX Art and Crafts Garment Company and XX Light Industrial Products Trading Company (hereinafter referred to as Four Chinese Cooperators). The period of cooperation was five years and the registered capital was RMB 38,480,000 Yuan." The amount of the foreign party contributed should be RMB 96,200,000 Yuan, and up to 24 December, 1991, the foreign exchange it had invested was equivalent to RMB 73,372,284.14 Yuan.

For various reasons, party B Hong Kong B International Investment Co., Ltd decided to quit from the Limited Partnership. After discussion, the shareholders meeting consented to divide all rights and interests owned by the limited partnership of Shenzhen C Building Co., Ltd according to the proportion of the equity shares the shareholders had.

(1) As regards all rights and obligations of the limited partnership to the cooperative company, 50% shall belong to Party A and the other 50% shall belong to party B. There shall not be any payment between the two parties.

(2) According to the distributive proportion stipulated by article 1 of this agreement (each party owns 50%), Party A should contribute RMB 48,100,000 Yuan to the cooperative company and RMB 36,686,142.07 Yuan had been done, while party B should contribute RMB 48,100,000 Yuan to the cooperative company and RMB 36,686,142.07 Yuan had been done. Both parties should pay off the investment according to the schedule stipulated in the contract and supplementary contract of the cooperative company.

(3) According to article 3 of the supplementary contract signed by the Limited Partnership and the Four Chinese Cooperators on 23 November, 1990, the construction management and the operating risk of Shenzhen C building should be borne by the Limited Partnership. From 1 may, 1992 on, the rights and obligations of the original Limited Partnership began to be equally shared by Party A and party B, i.e. 50% respectively.

(4) Party A shall ensure that the rights and interests which will be distributed to party B are fully and validly possessed by it and there were not pledges as well as recourse by a third party. Otherwise, all economic and legal liabilities engendered thereof shall be assumed by Party A.

(5) Party A and Party B confirmed that it was true about all the assets and liabilities including credits, debts and operating losses and profits listed in the appendix attached to this agreement. The two parties consented to share the aforesaid assets and liabilities, including credits and debts and operative loss and gain listed in the appendix, according to the proportion stipulated by article 1 of this agreement (50% each). As for any debts outside the appendix, whether in the name of the cooperative company or in the name of the Limited Partnership, all economic and legal liabilities shall be assumed by the conductor. In case it leads to economic losses to the cooperative company or other parties thereof, the conductor shall assume the liability for damages.

(6) For the purposes of this agreement and the appendix thereof, "Limited Partnership" refers to the limited partnership before Party B‘s quitting, and Party A refers to the limited partnership company after Party B's quitting.

(7) …

(8) All the disputes happened during the performance of the contract should be resolved through friendly negotiation. Otherwise, the disputes shall be submitted to CIETAC Shenzhen for arbitration. The arbitral award shall be final.

(9) …

(10) This agreement shall be signed by both parties, and then be submitted to the Public Notary of Shenzhen for notarization and to the Shenzhen Municipal Government for approval. Finally, both parties shall go through the procedures for the change of the registration with the relevant administrative department for industry and commerce. The agreement and the 4 financial tables attached thereto [i.e. "Balance Sheet of Shenzhen C Building Co., Ltd", "Statement of Fixed Assets of Shenzhen C Building Co., Ltd", "Statement of Paid-in Capital of Shenzhen C Building Co., Ltd (foreign)" and "Statement of Current Accounts of Shenzhen C Building Co., Ltd" (all of these four tables were indicated 30 April, 1992)] should have the signatures of the representative of the claimant Mr. N and the respondent Mr. W.

On 10 June, 1992, the Four Chinese Cooperators of Shenzhen C Building Co., Ltd. as Party A, and the claimant and the respondent as Party B, concluded Supplementary Contract II on Joint-Operating Shenzhen C Building Co., Ltd. (hereinafter referred to as Supplementary Contract II). The contents in Supplementary Contract II in relation to the disputes between the two parties were mainly as follows:

"For the purpose of confirming the ascription of the rights and interests of equity shares of the cooperative company Party B [Shenzhen C Building Co., Ltd (hereinafter referred to as cooperative company], [1. Limited Partnership, 2. Hong Kong B International Investment Limited Company], each owns 50%, the cooperative company makes the following alteration and supplementation over the original contract:

Article 1 Party B, the Limited Partnership, in article 1 of the original supplementary contract now shall be altered to as: the Limited Partnership and Hong Kong B International Investment Company (Hong Kong B International Investment Company was one of the main shareholders of the Limited Partnership and owned 50% of the rights and interests of that company).

Article 2 The parties of the cooperative company are:

Party A (Four Chinese Cooperators): (omitted)

Party B:

(1) The Limited Partnership(legal representative: Mr. N);

(2) Hong Kong B international investment company(legal representative: Mr. W)

Article 3

(1) Article 3 of the original supplementary contract was supplemented as: All expenditure of the construction of Shenzhen C building shall be jointly assumed by the Limited Partnership and Hong Kong B International Investment Company. Each party shall own 50% of the capital and its distribution of rights and interests.

(2) Article 2 of the original supplementary contract shall be supplemented as: After the building is completed, except the assets which should be gratuitously distributed to Party A according to the original supplementary contract, all the rights and interests of the foreign party (Party B) shall be shared, 50% by the Limited Partnership and 50% by Hong Kong B international investment company.

…

Article 5 …

(3) The board of directors should be composed of 6 directors among whom two shall be appointed by Party A and two by Hong Kong B International Investment Company.

(4) The chairman of the board of directors shall be Mr. N from Party B while the deputy chairman of the board of directors shall be Mr. W from Hong Kong B International Co., Ltd.

…

(6) The position of general manager of the company shall be occupied by the deputy chairman of the board of directors Mr. W and there shall be 2 posts of associate general managers, which shall be respectively occupied by director Mr. E and Mr. Z.

…

Supplementary Contract II shall be signed by representatives of both parties of the operative company and come into effect upon the approval of relevant departments of Shenzhen Municipality.

As for Supplementary Contract II, both parties respectively presented duplicated copies to the arbitral tribunal. On the signature blank of Party A and Party B, there were only the signatures of representatives of the claimant (Mr. N), the respondent (Mr. W), XX Industrial Company and XX Light Industrial Products Trading Company, the latter two of which were members of Party A under the contract. However, on the document the respondent presented, all representatives of Party A and Party B under the contract signed. Upon the investigation to XX Garment Company and XX Art & Crafts Garment Company by the arbitral tribunal, the two companies respectively sent letters on 13 May, 1994 and 14 May, 1994 to CIETAC Shenzhen to clarify the situation about the contract signing. They stated in the letters that they did not sign when Supplementary Contract II was concluded on 10 June, 1992, for the Limited Partnership did not negotiate with them ahead of time. They didn't know that the respondent was the actual investor of Shenzhen C building until the Four In the situation that the respondent expressed to consent to enlarge the area of C building distributed to the Chinese party, the two companies signed and sealed on Supplementary Contract II respectively on 7 September, 1993 and 5 October, 1993.

Because the claimant and the respondent had disputes concerning the rights and interests upon the investment in Shenzhen C building, Supplementary Contract II and Agreement were not submitted to the competent department for approval all the while. The respondent filed a claim to the people's court of Luohu District, Shenzhen on 16 August, 1993, stating that the claimant failed to perform the obligation and infringed his legal rights and interests, and required the court to confirm the equity shares of Shenzhen C Building Limited Company it held. The legal representative of the claimant Mr. N submitted a Declaration to the competent department of Shenzhen on 18 August, 1993 which stated that the claimant found serious mistakes in Supplementary Contract II and the respondent participating in the conclusion of the contract was not the share holder of the Limited Partnership all the while; In addition, considering the alteration of the situation in more than one year, it was meaningless to conclude Supplementary Contract II. Therefore, Mr. N, on behalf of the claimant, declared to dismiss the seal and the signature on Supplementary Contract II signed on 10 June, 1992, so that the claimant and himself would not be bound by Supplementary Contract II.

The claimant submitted the case to CIETAC Shenzhen for arbitration according to the arbitration clause in Agreement on 20 December, 1993. The respondent defended and presented counterclaims. Both parties added to or altered the claims or counterclaims during arbitration. The claims the claimant confirmed were:

(1) Agreement signed by the claimant and the respondent on 9 May, 1992 should be void and null;

(2) The respondent should have no equity shares or rights and interests in Shenzhen C Building Limited Company;

(3) The respondent should have no actual equity shares of Shenzhen C Building Limited Company because it failed to invest actually which had no legal effect of specific performance.

(4) The conducts of the claimant and the respondent before and after the conclusion of Agreement on 9 May, 1992 should be not fraudulent or tortuous.

The counterclaims the respondent confirmed were:

(1) Supplementary Contract II signed by all cooperative parties of Shenzhen C Building Limited Company on 10 June, 1992 should be valid;

(2) B international investment limited company of Hong Kong should own 50% of the rights and interests of foreign party;

(3) Any results engendered by the suspension of the construction of the building due to the failure of investment should be assumed by the Limited Partnership;

(4) The loss of the respondent resulting from the delay of the constructive schedule should be compensated.

The disputes focuses of this case are on two issues as follows.

(1) The validness of Agreement and Supplementary Contract II

The claimant considered that the agreement and Supplementary Contract II were both void and null for the reasons that:

(a) Agreement and Supplementary Contract II were born on the base of the claimant's material misunderstanding. The claimant deemed the legal representative of the respondent Mr. W and the respondent B international investment limited company the same thing by mistake, which was caused by the respondent and Mr. W's deliberate mixing up between the two. The Limited Partnership was registered by Mr. N in Thailand in 1980 which had good reputation on operation and bright prospects on building and operating C building. Mr. W made a decision to purchase 50% of the shares of the Limited Partnership, namely, the claimant. On 11 December, 1991, Mr. N as Party A and Mr. W as Party B concluded Shares Agreement which stipulated that Party B agreed to purchase 50% of the shares Party A owned of Shenzhen C building at the price of HKD 110,000,000 and then the two parties cooperate to keep operating the business; In case any loss or profit happened, it should be assumed by Party A and Party B in half etc. According to laws of Thailand, Mr. W's rights and interests as the shareholder of the claimant's company was protected by the law at the moment he finished the legal procedures of purchasing the 50% shares of the claimant. However, Agreement stipulated that all the rights and interests should be shared by Party A and Party B at 50% each, intending to transfer 50% of the claimant's rights and interests to the respondent for the reason that the respondent proposed to quit the Limited Partnership. The claimant mistook that Mr. W's participating in the Limited Partnership was on behalf of the respondent's company and the claimant did not know anything about the respondent. Supplementary Contract II was concluded under the situation that the misunderstandings were not eliminated at all. Being reminded by the lawyer it retained, the claimant got to know that the respondent was an enterprise as legal person in Hong Kong while Mr. W was a natural person and there was much distinction between them. Only if Mr. W and his nephew Mr. T had finished the procedures of quit, could the two persons perform the procedures to transfer the shareholder's rights in Shenzhen C Building Limited Company owned by the Limited Partnership. As for this, the claimant held the shareholders meeting of the Limited Partnership and made the special decision of the special meeting of shareholders as well as the supplementary decision which corrected the mistake of the confusion between Mr. W and the respondent.

(b) Agreement did not get the consent of the four Chinese companies; it was also not notarized by, approved by and registered on industry and commerce according to the stipulation and law. In addition, Mr. W announced publicly that the agreement was repealed. Similarly, Supplementary Contract II did not get the consent and signatures of the other two Chinese cooperators; it was also not submitted to the government for approval and went through the registration procedures for industrial and commercial alteration. Before Supplementary Contract II came into effect, Mr. N had publicized Declaration to the respondent, the four Chinese companies and relevant departments of government stating canceling the claimant's seal and signature on Supplementary Contract II.

The respondent defended that the agreement should be void and null, which actually due to the claimant's intentional omission and tort. Before the conclusion of Agreement, the respondent had contributed more than HKD 100,000,000 into the C building project of Shenzhen，and from 1991 to 1993 it invested HKD145975953 totally. The project of Shenzhen C building was originally constructed by the claimant and the four Chinese companies, who together constituted the Shenzhen C Building Limited Company at the same time. On 18 November, 1991, the respondent and Hong Kong E Development Co., Ltd represented by Mr. N concluded Letter of Transfer Intent, which stipulated that Party B (the respondent) should purchase 50% of equity of the C building property service at the price of HKD 110,000,000 from Party A (E Development Co., Ltd represented by Mr. N) and thereafter the aforesaid property should be joint operated by the two parties.

After the conclusion of Letter of Transfer Intent, the respondent had transferred more than HKD 50,000,000 into the account of Shenzhen C Building Co., Ltd in accordance with the stipulations. Afterwards, Mr. W and Mr. N concluded Share Contract in Thailand which was witnessed by a Thai lawyer. After the conclusion of the contract, the respondent had transferred HKD 35,000,000 into the account of Hong Kong bank appointed by Mr. N and paid Mr. N HKD 5,100,000 in cash as stipulated. In addition, the respondent accepted a credit of investment valued HKD 30,000,000 sold by Hong Kong XX Company all of which were contributed into Shenzhen C building.

After this, on 2 April, 1992, Mr. W and Mr. N signed bargain in Hong Kong, witnessed by 2 Hong Kong lawyers, which restated the contents of Letter of Transfer Intent and Shares Contract, and specified both parties' rights and obligations in the investment of C building project of Shenzhen. All of these were fulfilled in compliance with the stipulations in the Letter of Transfer Intent. The letter of Transfer Intent, Shares Contract and Bargain, and Agreement and Supplementary Contract II were all strong evidences to prove the respondent's investment in C building. Among these, Shares Contract and Bargain signed by Mr. W in the name of himself with Mr. N represent the respondent's interests, which was aware of by the claimant. The so-called significant misunderstanding was absolutely not existed. The intention of concluding Agreement and Supplementary Contract II was to effectively guarantee the investment interests of the respondent under Chinese law. The claimant regretted after the conclusion of Agreement and presumed to draw back Agreement at the notary office, which was signed in the notary's face. Then it publicized declaration announcing Supplementary Contract II, which had been decided to submit to the municipal government for approval, void and null. All of these were severe torts, disclosing the claimant's intention to cheat through contract.

The respondent alleged that Agreement was void and null which could not be basis for arbitration, while Supplementary Contract II was effective which should be basis of the settlement of the disputes between the two parties. The reasons were: (i) The investment confirmed by Agreement was inauthentic. The actual invest of the claimant in the C building project of Shenzhen did not reach RMB 36,686,142.70 Yuan stated in the agreement at all while the invest of the respondent was far beyond the number recorded on Agreement. The aforesaid invest amount was signed in Agreement by the claimant for its own intention and the need for submitting for approval by utilizing the respondent's urgency to go through legal invest formalities to the municipal government. (ii) In order to sue the claimant, the respondent had declared to alter the arbitration clause ahead of Agreement being notarized. (iii) The claimant regretted and stuck to not to go through the notarization procedures after concluding Agreement. All of above indicated that the agreement could not be established at all. Supplementary Contract II was reached upon the parties' agreement on the assignment of the rights and interests of the foreign party in the cooperative company according to LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON CHINESE-FOREIGN CON-TRACTUAL JOINT VENTURES. The contract was signed upon the parties' equality and voluntarism and indicated each party's genuine intention, so the contents of it were authentic. Besides, there were signatures of the claimant and the respondent in the contract and the four China parties agreed with it, which conformed laws on assignment contractual interests.

(2) Whether the respondent actually invest in Shenzhen C Building Co., Ltd

The claimant deemed that the respondent did not actually invest in Shenzhen C Building Co., Ltd for the reasons that:

(a) Mr. W and the respondent were not the same legal person. As for the contractual evidence relevant to this case, only Shares Contract and Bargain had legal effect concluded by Mr. W and Mr. N while Letter of Transfer Intent signed by E Development Co., Ltd and the respondent, Agreement and Supplementary Contract II both signed by the claimant and the respondent were of no legal effect. Shares Contract and Bargain were signed by Mr. W in his name with Mr. N. Moreover, the registered shareholder of the Limited Partnership was not the respondent, but Mr. W and his nephew Mr. T. Although before the conclusion of Shares Contract, Mr. N, on behalf of E Development Co., Ltd, signed Letter of Transfer Intent with Mr. F on behalf of the respondent, the two parties did not conclude formal contract and perform Letter of Transfer Intent because after the conclusion of the letter of intent and before the conclusion of the formal contract, Mr. F put forward that the respondent requested to purchase the equity in china and go through the equity registration procedures while Mr. N did not agree. After this, upon other persons' introduction, Mr. W and Mr. N concluded that Mr. W could purchase the equity of the Limited Partnership in his own name, which should be registered in Thailand, and should transfer HKD 55000000 into the account of Shenzhen C Building Company according to the parties' oral agreement. Under this situation, Mr. N approved to sell his equity of the Limited Partnership and signed Shares Contract with Mr. W. Mr. W and his nephew Mr. T did not declare to represent the respondent in any form when concluding the agreement. As for that Mr. W was entrusted to handle the matters concerning real estate investment in China by the respondent on 22 April, 1992, the claimant did not know until the respondent defended in arbitration. In April of 1992, Mr. W requested Mr. N to consent him to withdraw from Limited Partnership and to be the foreign shareholder of Shenzhen C Building Co., Ltd for the reason that his interests could not be protected well. And he declared over and over again that the respondent and he were the same one. Under the situation that the claimant was not aware of the relation between Mr. W and the respondent, it signed Agreement which stipulated that the claimant would assign 50% of capital authority and the rights and interests it owned of Shenzhen C Building Co., Ltd to the respondent for the fictional excuse that the respondent quit the Limited Partnership. Afterwards, Mr. W considered that only upon the consent of the Chinese shareholders and the approval of the government, could the claimant's equity be transferred to the respondent, so he requested the two parties to conclude a contract with the Chinese shareholders namely the latter Supplementary Contract II. On the meeting discussing Supplementary Contract II, Mr. N presented that just one of Agreement and Supplementary Contract II needed to be concluded. Mr. W then declared Agreement repealed on site. The above facts indicated that Supplementary Contract II was concluded when the claimant still misunderstood that Mr. W and the respondent were the same one.

(b) The HKD 110,000,000 Mr. W paid according to Shares Contract was in fact the payment of the equity to Mr. N himself absolutely not the investment in Shenzhen C Building Co. Ltd.

Article 1 of Shares Contract stipulated that Party A and Party B have registered a Limited Partnership and owned 50% of the equity respectively. Party B, as one of the shareholders, shall assume limited liability to the company. Party A and Party B shall cooperate to invest and construct Shenzhen C Building, the capital of which is HKD 220,000,000. Party B agrees to purchase 50% of the equity Party A owned of Shenzhen C Building at the price of HKD 110,000,000, after which the two parties cooperate to keep on operating the property service business mentioned above. In case any loss or profit happened, it should be assumed by Party A and Party B in half. Party A shall lend HKD 30,000,000 of the payment for equity from Party B to the cooperated company as part of fee of constructing the building. The time limit of the loan shall be confirmed otherwise by the two parties. The true meaning here was that the present share of the Limited Partnership Party A Mr. N owned amounted to HKD 220,000,000 and Party B Mr. W agreed to purchase 50% of the equity of the Limited Partnership at the price of HKD 110,000,000 from Party A, namely 50% of the equity of property service of Shenzhen C building the Limited Partnership owned. When the equity purchase finished, Mr. W and Mr. N should invest together to construct Shenzhen C building through the Limited Partnership. All above explanation was based on the fact that before Mr. W became the share holder of the Limited Partnership, Mr. N and Miss. Y were the shareholders and owned the property rights and interests of the company of which the capital amounted to HKD 220,000,000 including RMB 22,706,412.23 Yuan the claimant devoted into Shenzhen C building and the constructive land of Shenzhen C building assessed as RMB 324,000,000 Yuan by Shenzhen House Exchange on 3 October, 1991, which was indirectly owned by the claimant and the four Chinese companies jointly. Mr. N and Mr. W negotiated to confirm the capital amount as HKD 220,000,000 before Mr. W purchase the equity. Most of the payment Mr. N received of the HKD 110,000,000 was transferred from Mr. W's private account. Moreover, the financial account of Shenzhen C building excluded the HKD 110,000,000 of the respondent from the investment.

All above evidences indicated that the respondent did not invest in Shenzhen C Building legally or factually at all.

The respondent considered that it was the true investor of Shenzhen C Building Co., Ltd and should enjoy the corresponding rights and interests of the company.

As for that Mr. W was on behalf of the respondent to invest in Shenzhen C Building, Mr. N was aware of it from the very beginning and never questioned it. But after the two parties had disputes and started to sue, Mr. N broke with his customary practice and distorted and faked the facts under the inducement of his agent lawyer and other agents. The intention of the respondent to invest Shenzhen C Building was clearly proved in Letter of Transfer Intent. The series contracts including Shares Contract signed afterwards were sequel of Letter of Transfer Intent. Shares Contract was signed by Mr. W in the name of himself not the company for the reason that Mr. W was a Hong Kong businessman who was ignorant of the law of Thailand. The Thai lawyer Mr. C retained by Mr. N told Mr. W that in accordance with Thailand law, any company or individual without nationality of Thailand could not remain 50% of equity of a company. Under the direction of lawyer Mr. C, Mr. W invited his nephew Mr. T, who was in Thailand to join the Limited Partnership together in the name of individual in order to reach equal investment with Mr. N in Shenzhen C Building Co., Ltd representing the respondent. That Mr. W participated in the Limited Partnership in Thailand was for the purpose of making the respondent invest C building as soon as possible. The respondent had entrusted Mr. W through the decision of the meeting of board of directors on 22 April, 1992. It was of no meaning that Mr. W was the shareholder of the Limited Partnership, for Mr. W had not contributed any money into the bank of Thailand nor enjoyed the interests and fulfilled the obligations in the Limited Partnership. Agreement, which confessed that the respondent had actual investment in Shenzhen C Building Co., Ltd, was drafted by the agent of the claimant. The contents of Agreement and Supplementary Contract II indicated that the claimant was aware of the respondent's status as the investor and the investment of the respondent in Shenzhen C Building Co., Ltd was the fact not illusive.

It was a lie of the claimant, wholly deviated from the truth, to state that the HKD 110,000,000 Mr. W paid as the investment in Shenzhen C Building was the payment for purchasing Mr. N's shares in the claimant's company. The payment evidence for the investment fund of more than HKD 145,000,000 the respondent submitted to the arbitral tribunal was enough to prove the fact of the respondent's investment in Shenzhen C Building, which was admitted by Mr. N when hearing. It had not basis in fact of the claimant's statement that the investment of the respondent was the payment for purchasing the shares of its company. The registered capital of the claimant's Limited Partnership prior to the entrance of Mr. W was only Thai 2,000,000 (less than HKD 600,000). It was unlikely that a company with such registered capital to sell a half of its shares at a price of HKD 110,000,000. The claimant distorted the meaning of the clauses of Shares Contract. Actually, when concluding Shares Contract, Mr. N negotiated with Mr. W requesting Mr. W to contribute 50% namely HKD 110,000,000 of the investment of HKD 220,000,000 which was all the contribution capital for Shenzhen C Building. None of the five contracts, i.e. Letter of Transfer Intent, Shares Contract, Bargain, Agreement and Supplementary Contract II, indicated that the respondent purchased the claimant's shares.

2.Award (1) The respondent has actual investment in Shenzhen C Building Co., Ltd. The specific amount of the investment of the claimant and the respondent shall be affirmed after assessed by China certified public accountants entrusted by the cooperative company. (2) The claimant shall together with the four Chinese companies go through the legal procedures concerning the respondent being a cooperator of Shenzhen C Building Co., Ltd within 30 days as of the day this awards being made. And (3) The arbitration fee and legal cost of this case shall be assumed by the claimant for 60% and by the respondent for 40%. 3.Comment

The legal matters in relation to the case are mainly as follows:

(1) To affirm whether Agreement and Supplementary Contract II were two distinctive contracts

Agreement and Supplementary Contract II in the dispute of this case were not two distinctive contracts. In fact, these two contracts were two component elements of the whole course of the dealing between the claimant and the respondent on investment in C building construction project. After a comprehensive survey of the facts of this case, it is found that although there were controversies and confusions in the two parties' conducts during the dealing, the clue of the dealing was clear. That was: the claimant had obtained the contractual rights and interests, and assumed the obligation of large investment concerning cooperating with the four Chinese companies to construct Shenzhen C Building. Under this condition, the claimant was urgent to raise money to fulfill the obligation of invest. The ways for the claimant to raise money included loaning (e.g. borrowing USD 7,700,000 at a monthly rate of 1.1% from Hong Kong G Development Co., Ltd) and searching for cooperators who would share contractual interests and the invest risk with it. The respondent sought to become one of the investors of Shenzhen C Building. Therefore, it should cooperate with the claimant. The question facing the respondent was how to become the claimant's cooperator and obtain the protection of law when investing in Shenzhen C Building.

(2) Concerning Letter of Transfer Intent was the start for the two parties investing in Shenzhen C Building

The arbitral tribunal held that Letter of Transfer Intent signed by Mr. N on behalf of C Development Co., Ltd and Mr. E on behalf of the respondent was the start of the two parties cooperating to invest Shenzhen C building. The two parties expressed their intention clearly in Letter of Transfer Intent, the main points of which were: a. The respondent agreed to purchase 50% of the equity of the property service of Shenzhen C building the claimant owned at a price of HKD 110,000,000; b. In order to secure the performance of the intention of the two parties, the respondent had to transfer HKD 50,000,000 to the bank account in Shenzhen of C Building Co., Ltd; c. The legal formalities, like signing the formal contract on assigning the shareholder's rights, should be handled in Bangkok Thailand and in Hong Kong by retaining lawyers respectively.

After the conclusion of Letter of Transfer Intent, the respondent had transferred HKD 55,000,000 to the account of Shenzhen C Building Co., Ltd as stipulated. The claimant's claim, which denied the fulfillment of Letter of Transfer Intent for the reason that most of the aforesaid capital was transferred from the private account of Mr. W, the legal representative of the respondent, rather than from the respondent's account, could not be established. For most businessmen, substitute payment, shifted payment and credit payment were very common. The acts that Mr. W, as the shareholder and director of the respondent, paid for the investment under the company and the company confessed and approved his conduct were normal commercial activities. The two parties signed Shares Contract in Bangkok Thailand and Bargain in Hong Kong with the purpose to fulfill the contents stipulated in Letter of Transfer Intent, which had been stated in Bargain already. Bargain declared that "5. Because N needs capital to devote in the project mentioned above, for the full swing of the project, N invited W and W agreed to invest to cooperate to construct C building project which is going to start. 6. In order to make the investment effective, N and W signed the letter of intent in Hong Kong on 18 November, 1991, through such companies they registered in Hong Kong as E Development Co., Ltd and Hong Kong B International Investment Co., Ltd. 7. W and N further affirmed the intention of the agreement signed in Bangkok Thailand on 11 December, 1991. Bargain, which was seen as one of the effective contracts, recorded the reason for the two parties' cooperation and the relation between Letter of Transfer Intent and Shares Contract as well as Mr. W and the respondent. Therefore, the statement of the claimant that Letter of Transfer Intent was not fulfilled and he was not aware of the relation between Mr. W and the respondent was not consistent with the truth.

(3) The contestation and reason presented by the claimant that Agreement and Supplementary Contract II were signed under the condition that the claimant had significant misunderstanding upon the respondent's status as the investor.

The arbitral tribunal held that the contestation and reason presented by the claimant that Agreement and Supplementary Contract II were signed under the condition that the claimant had significant misunderstanding upon the respondent's status as the investor could not be established. The facts of this case indicated that after the conclusion of Letter of Transfer Intent, the director of the respondent Mr. E proposed to handle the registration formalities of purchasing the 50% shares of the Shenzhen C building, but was not accepted by the claimant. Under this condition, Mr. W signed Shares Contract and Bargain in his own name with Mr. N and registered as the shareholder of the claimant i.e. the Limited Partnership. The conclusion of Agreement and Supplementary Contract II indicated that the claimant approved the request the respondent presented when reaching the intent of cooperating to invest. The facts proved that Mr. N as the legal representative of the claimant was very clear about the course of the respondent's investing in Shenzhen C Building. Although Shares Contract was signed in the name of Mr. W, investing was not Mr. W's own conduct. The respondent not only invested capital in Shenzhen C Building Co., Ltd, but also assigned, besides Mr. W, another director of the respondent, Mr. E to take up the post of the director of Shenzhen C Building Co., Ltd and participate in the operation and management of it.

The conclusion of Letter of Transfer Intent, Shares Contract, Bargain, Agreement and Supplementary Contract II as well as the decisions made in the temporary meeting of the board of directors of Shenzhen C Building Co., Ltd and the special shareholders' meeting of the claimant i.e. the Limited Partnership, all reflected a course like this: in order to raise fund, Mr. N, the legal representative of the claimant, agreed to transfer 50% of rights and interests of Shenzhen C Building Co., Ltd to the respondent who should be a cooperator to invest. When concluding Shares Contract, the two parties agreed that Mr. W should become a shareholder of the claimant in his own name and attend all investment activities in the name of the claimant. At the same time, Mr. N was willing to accept that the respondent devoted capital to Shenzhen C Building Co., Ltd and appointed someone to participate in the operation and management. However, after the investment the respondent gradually realized that C Building Co., Ltd was a Sino-foreign cooperative enterprise registered and established in Shenzhen according to Chinese law and the investment of each party was within the Chinese jurisdiction, which meant only when it abide by Chinese law could it be protected by Chinese law. Therefore, the respondent requested again to join in Shenzhen C Building Co., Ltd as an independent party and to finish the corresponding legal procedures like modifying contracts and applying for approval. The claimant, which was represented by Mr. N, did not oppose and supported the above conduct of the respondent strongly at the beginning. According to the situation concerning the draft and conclusion of Agreement and Supplementary Contract II as well as the formation of the decisions of relevant meetings, it could be seen that the two parties and the four Chinese companies were willing and cautious about the performance of the legal procedures concerning respondent's joining in Shenzhen C Building Co., Ltd and there was no misunderstanding, cheating, duress or negligence at all.

(4) Whether Agreement and Supplementary Contract II were expression of the two parties' genuine intention

The arbitral tribunal held that the contents of Agreement and Supplementary Contract II were expression of the two parties' genuine intention. Although both parties denied Agreement was expression of their genuine intention out of their interests after the disputes occurred, their arguments were not convincing. As for its nature, Agreement was a bridging contract. According to Chinese law, the assignment of the rights and interests of contract for cooperative joint venture must be approved by all cooperators, while Agreement was lack of the participation of the four Chinese companies. So Agreement was the pre-agreement of Supplementary Contract II but not the legal contractual document for notarization or approval. Agreement lost effect after the conclusion of Supplementary Contract II, but the arbitration clause in Agreement was still in force, for according to China law and international practices the clause for settlement of disputes shall not lose its effect for the termination, dismissal or invalidation of the contract. In order to submit this case to court, the respondent alleged that the arbitration clause in Agreement should be void, which cannot be supported. Therefore, the claimant had the right to submit the case for arbitration according to the arbitration clause in Agreement.

(5) The nature of the contractual relation between the two parties

The arbitral tribunal holds that it shall be based on the facts not on the improper legal words used by the two parties when concluding contracts to confirm the nature of the contractual relation between the two parties. The series contractual relation between the two parties shall be the legal relation that the claimant transferred parts of his contractual rights and obligation about the investment in Shenzhen C Building Co., Ltd to the respondent. In the prophase of cooperation, the two parties did not handle the procedures for assigning contractual rights and obligation according to the law of China, but actualized the respondent's invest through the way that Mr. W joined in the claimant in Thailand. The conclusion of Agreement and Supplementary Contract II as well as the decisions of the meeting of the board of directors of Shenzhen C Building Co., Ltd and the special shareholders' meeting of the claimant were all to make the factual cooperation of investment as well as the assignment of the contractual rights and obligation between the claimant and the respondent in accordance with Chinese law.

(6) The dispute over the nature of the capital paid by the respondent to C building project of Shenzhen

As for the dispute over the nature of the capital paid by the respondent to C building project of Shenzhen, the arbitral tribunal holds that the claimant's claim has no basis in fact. It was stated in Shares Contract that Party A and Party B shall cooperated to invest to construct Shenzhen C Building with the capital of HKD 220,000,000 and Party B shall agree to purchase 50% of the equity of the property service of C building in Shenzhen owned by Party A at the price of HKD 110,000,000. However the HKD 110,000,000 was not the payment for purchasing the 50% of the capital of the Limited Partnership as explained by the claimant. First, the registered capital of the Limited Partnership was only Thai 2,000,000. When alteration registration was made as Mr. W and Mr. T became the shareholders, there was only registration record for increasing capital not for transferring capital or equity. Second, it was not convincing for the claimant to claim it had the capital valued HKD 220,000,000 on the ground of the Appraisal Report on value of Real Estate made by Shenzhen House Exchange on 3 October, 1991. The value of the land used for constructing Shenzhen C Building is not a same financial concept as the capital amount of Shenzhen C Building Co., Ltd, which is further different from the capital of the Limited Partnership. Even if considering the assessment of the land used for constructing C building itself, Shenzhen House Exchange adopted the method of residue, namely, hypothetical development method. According to Appraisal Report on value of Real Estate, the assessment of the land was based on 6 assumed conditions; the basic precondition was that all the expected total investment of HKD 611,130,000 was devoted and the project would complete within 3.5 years; the cost of construction, interest rate, tax, profit and the price of the houses were all estimated amount. The arbitral tribunal hold that, Appraisal Report on value of Real Estate shall not be the ground that the claimant had rights and interests of Shenzhen C Building Co., Ltd, or the evidence of the capital amount of the claimant. Third, according to the capital verification report made by a Shenzhen accountant firm, up to 24 December, 1991, the total amount of the capital of Shenzhen C Building Co., Ltd was RMB 76,084,285.14 Yuan, among which RMB 64,320,792.44 Yuan was devoted by the foreign party, in which, HKD 85,000,000 was contributed by the respondent. This is sufficient to prove that the claimant's statement that it had HKD 220,000,000 capital when concluding the Shares Contract cannot be supported by the fact.

(7) On the establishment, entry into force and the liability of Supplementary Contract II

The facts of this case indicated that the respondent had invested in Shenzhen C Building Co., Ltd since November of 1991. Both Agreement and Supplementary Contract II were confirming the investment already made and dividing rights and interests of the two parties. The claimant did not have reasonable excuse to regret after the conclusion of the contracts. The claimant alleged Supplementary Contract II was void and with no binding force, because the procedure of submitting for approval was not finished. The arbitral tribunal considered that Supplementary Contract II was the expression of the genuine intention of the two parties and the four Chinese companies, the content of which was consistent with the law of China. According to the law of China, the agreement concerning one cooperator transferring the contractual rights and obligation shall come into effective upon the approval of the government. Because the procedures of submitting for approval were not finished, Supplementary Contract II still did not come into effect. After the conclusion of the contract, it would not be approved automatically unless it was submitted to the government by the relevant parties. Therefore, submitting the contract to the government for approval shall be one implied obligation of relevant parties. Moreover, the temporary meeting of the board of directors of Shenzhen C Building Co., Ltd had made decision concerning the affirmation and submitting for approval of Supplementary Contract II. Mr. N, the legal representative of the claimant, as the chairman of the board of directors of Shenzhen C Building Co., Ltd, holding the official seal and legal document of the cooperative company, had the liability to enforce the decision of the board of directors to fulfill the procedures of submitting for approval. Chinese law stipulates that, any individual, legal person or other entity shall abide by the principle of good faith when having civil conducts within the territory of China. The claimant regretted unreasonably after concluding the contract, which violated the aforesaid principle. Although two of the four Chinese companies delayed to sign, the regret of the claimant was the main reason for the failure of submitting for approval. Therefore, the claimant shall assume the liability thereof.

(8) The interests of investment of the respondent

The arbitral tribunal held that according to LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON CHINESE-FOREIGN CON-TRACTUAL JOINT VENTURES, the assignment of contractual rights and obligation shall come into effect upon the approval of government. Before the finish of the legal procedures of the government's approval and/or amendment registration, the respondent still don't have the status of the cooperator of the cooperative company. However, the spirit and fundamental of this law shall be effectively protecting the investors' interests and encouraging investment in China in order to promote the development of China's economy. The respondent had large investment in Shenzhen C Building Co., Ltd in reality, so its interests of investment shall be protected by the law.

The construction of Shenzhen C Building was a large constructive project with the estimated investment of several ten million dollars and the area of more than 100000 square meters. Much capital had been devoted into this project and it is nearly completed. Because of the disputes between the claimant and the respondent as well as other factors, the building constructive project was in suspension at present. With the purpose of completing the construction as the original plan, obtaining the profit it shall have, decreasing economic losses and protecting the legal interests of each party of the cooperators of Shenzhen C building, the claimant shall take the obligation to assist the Chinese four companies to fulfill the procedures of making the respondent the formal cooperator of the cooperative company as soon as possible.

(9) The actual amount the claimant and the respondent respectively contributed to Shenzhen C Building Co., Ltd

As for the actual amount the claimant and the respondent respectively contributed to Shenzhen C Building Co., Ltd, the two parties had stipulated in Agreement, which was not confirmed by the four Chinese companies, so it didn't have the biding force to them. The actual amount of the investment of the two parties in the cooperative company shall be ascertained after the re-verification of capital by the legally authorized institution retained by the cooperative company.

(10) The two requests presented by the respondent

As for the two requests that the claimant should be arbitrated to assume all the consequences of the suspension of the building owing to its failure of investment and that it shall compensate the damages of the respondent due to the postpone of the building schedule, the respondent did not provide the specific amount of loss and evidence, therefore, the arbitral tribunal shall not support these two requests.

Accessories

Title	Restype
The Case of Thailand XX Limited Partnership v. Hong Kong XX International Investment Co., Ltd. on Dispute over Joint-operating Shenzhen XX Building Co., Ltd	PDF File

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