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The Case of XX v. XX on Dispute over Real Estate Limited Company
Jurisdiction: Arbitration; CIETAC Shenzhen
Date of Decision: July 15, 1999
1.Case Brief
On November 26, 1992, the claimant and the two respondents concluded XX Real Estate Limited Company Contract (hereinafter referred to as contractual joint venture contract) in XX city, China, according to the Law of People's Republic China on Contractual Joint Venture Enterprises. The main contents of the contract are as follows:
(1) The three parties shall establish the XX Real Estate Limited Company (hereinafter referred to as contractual joint venture) according to law. The company will keep separate accounts and assume responsible responsibility for its own profits and losses, and will be liable for the debts to the limit of the amount of all the properties. Each party shall be liable for the debts of the company with its own cooperation terms.
(2) The contractual joint venture's scope of business is to develop, construct, sell, lease and manage the commercial housing and accessory facilities in the XX area of XX city.
(3) The total investment of the contractual joint venture is RMB 428,900,000 (equivalent to USD 66,000,000). The scope of the total investment covers various commercial buildings of 240,000 square meters, public accessory facilities of 15,000 square meters including a primary school, child-care centers, commercial serving websites, creation facilities, medical facilities, security arrangements, houses for different uses, roads, gardens, greening areas, municipal accessory facilities for the residential quarters, and so on.
(4) The contractual joint venture's registered capital is RMB 144,000,000 (equivalent to USD 22,150,000). Party A (2) makes land use right as its investment, which is evaluated as RMB 78,000,000 (equivalent to USD 12,100,000) and takes up 55 percent of the registered capital; after the arrangement of the procedure of land approval, party B shall subscribe capital contribution RMB 65,200,000 (equivalent to USD 10,000,000). After the company's registration, party B shall input 30 percent of his subscribed capital contribution within 3 months, 20 percent within 6 months, 10 percent within 9 months, and pay off all his subscribed capital contribution within 2 years. If party B fails to abide by his deadline to make the capital contribution, party A will be entitled to terminate the contract and seek another foreign party.
(5) Each party's cooperation terms are as follows: party A shall make the expropriated land as their capital contribution; all of party B's investment shall be used to construct buildings and accessory facilities. The duration of party B's investment shall begin from the date of finishing the company's registration, and its investment, excluding the registered capital, shall be finished within 8 years from the date when the business license is issued. If party B needs any credit, party A may not provide any guarantee or mortgage.
(6) The way of distributing profits among the three parties is as follows: the contractual joint venture shall offer commercial space of 500 square meters to party A (1) and submit 4 percent of turnover to party A (1) and people's government of XX town as maintenance charge. The post-tax profits of the company shall be distributed between party A (2) and party B according to their proportions of investment, which is to say that party A (2) accounts for 55 percent and party B 45 percent.
(7) Liabilities borne by each party:
The responsibilities of party A (1) are as follows:
(a) In charge of issues of submission concerning the construction project of the commercial housing of the contractual joint venture;
(b) In charge of household registration issues of the residents in the residential quarters; issues regarding the children of the residential quarters to attend primary schools and child-care centers;
(c) In charge of issues concerning the transfer of administration right to the local government after the construction of the residential quarters;
(d) In charge of issues to coordinate the relationship between the contractual joint venture and the local government and the relationship of neighboring residents.
The responsibilities of party A (2) are as follows:
(a) To provide the land use right of 197 mu (approximately equivalent to 131,320 square meters) land in XX area of XX city that has been approved to expropriate as well as the related documents that are issued by the approving authority;
(b) To get the approval for the establishment of the contractual joint venture, handle the registration and business license issues, and arrange the custom procedures of importing various equipment;
(c) In charge of the organization and operation of the contractual joint venture and the project construction.
(d) To handle the domestic items entrusted by the contractual joint venture.
The responsibilities of party B are as follows:
(a) To raise the entire construction fund for the construction project under this contract, and ensure that the construction fund is inputted according to the regulation of this contract and the scheduled plan passed by the board of directors;
(b) To assist the contractual joint venture in purchasing the construction materials, machinery equipment, and kinds of decorating materials abroad, which are needed by the engineering project;
(c) To sell the houses abroad, which are constructed by the contractual joint venture;
(d) To handle other issues entrusted by the contractual joint venture.
(8) 90 percent of the commercial houses constructed by the contractual joint venture should be sold abroad in order to keep the balance of the exchanges.
The sale mode is mainly presale on installments or bank mortgage, and the marketing channels are as follows, which should be performed according to the decision made by the board of directors:
(a) To entrust party B to do the marketing;
(b) To entrust the competent housing corporation to do the marketing.
The retail price will be proposed by the contractual joint venture according to the market conditions and fixed by the board of directors. The contractual joint venture will adjust the retail price according to the market price, but the adjusted price should be approved by the board of directors. The retail price of the houses among insiders should be fixed according to the relevant regulation and approved by the relevant government administrative department.
(9) The contractual joint venture's board of directors should be formally established on the day when the contractual joint venture is registered. The board of directors should be composed of 8 persons, 4 of whom should be appointed by Party A, 1 from Party A (1), 3 from party A (2), and party B will appoint the other 4 person of the board of directors. The chairman of the board of directors should be appointed by party A (2) and the vice chairman of the board of directors will be appointed by party B. The tenure of chairman of the board of directors should be 5 years, and the tenure can be renewed by the reappointment of the entrusting party.
The board of directors should be the highest authority of the contractual joint venture, and should decide all the important issues in the company. The important issues are as follows: the amendment to the articles of association, the increase and transfer of the registered capital, the enlargement of the contractual joint venture, termination of the company, merger with other companies; marketing channel, selling mode, and the price should be decided by the unanimous agreement. Other issues will be decided by the passage of two thirds majority or simple majority.
The chairman of the board of directors is the legal representative of the contractual joint venture. If the chairman is unable to assume the office, the vice chairman or other director will represent the company by interim authority.
The board meeting should be held at least once annually, which will be convened and organized by the chairman of the board of directors. The interim session of the board of directors should be held when more than one third of directors suggest. The meeting record should be filed.
(10) The operation and management organ should be established to take charge of daily operation. The general manager of the operation and management organ should be 1 person and recommended by party B and one deputy general manager recommended by party A (2). The general manager and the deputy general manager should be appointed by the board of directors. Their term of office should be three years and will be renewed by reappointment.
The duty of the general manager is to carry out the decisions made at the board meeting, and organize the daily operation of the company. The duty of the deputy general manager is to assist the general manager.
The operation and management departments may establish the offices of department managers, who take charge of the department work, arrange the issues instructed by the general manager, and are responsible for the general manager.
(11) The term of the contractual joint venture should be 15 years. The date of establishment should be the date when the business license is issued.
If one party proposes to extend the term of the contractual joint venture and that proposal is passed by unanimous agreement at the board meeting, the contractual joint venture should apply to the original organ for extension within six months before the expiration.
(12) If the contractual joint venture contract is unable to be perform due to force majeure, or the contractual joint venture is unable to continue the operation due to the deficit in the consecutive years, the contractual joint venture contract will be rescinded or terminated before the expiration by the unanimous agreement at the board meeting and the approval of the examining and approving organ.
If one party fails to perform the obligations as stipulated in the contractual joint venture contract and articles of association, or severely breaches the regulation of the contractual joint venture contract and articles of association, which makes the contractual joint venture fail to operate or realize the objective of management specified in the contractual joint venture contract, the other two parties should be entitled to claim for compensation and request the original organ for approval to terminate the contractual joint venture contract. If each party agrees to continue the operation of the company, the delinquent party should compensate the losses of the contractual joint venture.
(13) In case one party fails to make the capital contribution or provide the cooperation according to the contractual joint venture contract, from the first month overdue, the delinquent party should submit 3 percent of its subscribed capital contribution to the observant party for each month of the overdue. If the delinquent party is overdue for three months, the observant party should be entitled to terminate the contract according to article 9 of the contractual joint venture contract and request the delinquent party to make compensation in addition that the delinquent party submits the liquidated damages of 3 percent of its aggregated subscribed capital contribution.
If the failure to perform the contractual joint venture contract and accessories is due to one party's negligence, that party should bear the liabilities for breach of contract; if that failure is due to two parties' negligence, the two parties should bear its own liabilities for breach of contract according to the real situation.
(14) The law of People's Republic of China should be applicable to the establishment, effect, interpretation, execution and solution to the dispute of the contractual joint venture contract.
(15) Any dispute arising from the execution of the contractual joint venture contract should be solved through friendly consultation; if the consultation fails, the dispute should be submitted to the CIETAC according to its arbitration rules, and the arbitration award should be final and binding on each party.
The disputes occurred during the execution of the contractual joint venture contract, and the claimant submitted the dispute to CIETAC Shenzhen, with the requests as follows:
(1) To verify that the claimant input RMB 10800000 into the registered capital of the contractual joint venture, and the initial contribution took up 15 percent of the registered capital;
(2) The contractual joint venture contract should be terminated and the contractual joint venture should be dissolved.
At the second hearing, the claimant made supplementary claims. After that hearing, the claimant made a specific written interpretation and claimed that the respondent should bear the following economic liabilities:
(1) Regarding the fixed assets including houses and undeveloped building lots.
(a) According to the receivables of XX park, 73 suites of house should have been sold and 532 buildings should have been constructed (excluding pavilion X), the proportion of which owned by the claimant was: (532-73)*45%=207 suites.
(b) The building area for construction of the aforementioned buildings should be 25,000 square meters, and the total floor space for XX park should be 131,300 square meters, thus the proportion of which owned by the claimant was 45 percent, which was (131,300-25,000)*45%=47,800 square meters;
(c) As for the pavilion X, 104 suites of apartments, 18 stores and 18 garages should have been built. If the proportion of that owned by the claimant was calculated as 45 percent, the claimant should own 47 suites of apartments, 8 stores and 8 garages.
(2) It was reflected from the account of the contractual joint venture that there were unreasonable selling price differences and expenditures, which should not be borne by the contractual joint venture. According to the article 14, chapter 5 of the supplementary clause I, supplementary clause III and supplementary clause VI, the fund that should be returned to the claimant was RMB 6,534,753.24, which covered the following items:
(a) If the market price of the houses sold at the lower price to the staff of the first respondent was calculated as RMB 3,500 per square meter, the price difference was calculated as RMB 1,000 per square meter, and the area of each suite was calculated as 80 square meters, the total should be 23 suites*80 square meters * RMB 1,000 = RMB 18,400,000.
(b) According to the contract, the prophase construction cost (five connections and one levering) of the park XX should be borne by the first respondent, and the total cost was RMB 7,965,784.97. The respondents should cover 45 percent of the total, which was RMB 3,584,603.24. The unreasonable expenditure was RMB 1,120,000, 45 percent of which should be covered by the respondents and equals to RMB 504,000. The first respondent apportioned charges RMB 1230,000 to the contractual joint venture annually, 45 percent of which should be covered by the respondents and equaled to RMB 553,500. The money paid for the high interest loan from the non-financial institutes was RMB 117,000, which was not approved by the board of directors. The respondents should cover 45 percent of the interest, equaling to RMB 52,650. The subtotal was RMB 4,694,753.24.
(3) There was a large amount of income from the sale of the buildings concealed by the first respondent. Since there were two accounts kept by the contractual joint venture, the claimant was unable to propose the specific amount of compensation and only claim 45 percent of the ownership of those properties.
(4) As for the item of building XX, proceeds should be returned to the claimant and the interest losses should be compensated, of which the total was RMB 19,110,123.78. It covered the following items:
(a) The income from the 2,750 square meters area of apartments sold was: {(35,540,677.36÷1,212.1m2)*1.1-[18,000+(10,000,000÷3,063.24m2)]}*1,212.1m2*40%=13,320,021.44*40%=RMB 5,328,008.58.
(b) The income from the rights and interests owned by the claimant, advising fee and other inputs were: (18,668,352-300,000)*1.1-(8,180,000*1.1-4,617,444.91)+{[(1,400,000*1.1+2,500,000)÷（2,750+409]]*2,750}+853,204.29*55%-13,800,883=RMB 6,009,947.20.
(c) The money retained by the second respondent amounted to RMB 11,337,955.78 during the period from July 1, 1994 to April 7, 1998. The first respondent should pay the liquidated damages RMB 7,772,168.
On September 21, 1998, the claimant made the supplementary claims on the third hearing as follows:
(1) As for the supplementary claim of article 1, item 2, it was decided to give up the claim on the construction of park XX of 47800 square meters, which had not been developed before December 1996.
(2) As for the supplementary claim of article 4, since the claimant had afforded the advertising and publicity costs, the first respondent should return the proceeds of RMB 9,931,189.21 and the interest losses calculated by the rate of 0.5‰ per day to the claimant.
(3) The first respondent should bear all the costs of the claimant arising from this arbitration.
On October 12, 1998, the claimant specified his final arbitration claims as follows:
(a) To verify that the claimant's invested RMB 10800000 to the contractual joint venture as the registered capital and its initial capital contribution was 15 percent of the registered capital.
(b) The contractual joint venture contract should be terminated and the contractual joint venture should be dissolved. The first respondent should directly return the registered capital of RMB 10,800,000 invested by the claimant (equivalent to USD 1,249,067.36).
(c) The first respondent should bear the direct economic losses and pay the claimant 45 percent of the profits of the contractual joint venture from November 1996, which was RMB 22,692,555.51 and deserved by the claimant. Meanwhile, the claimant requested the arbitral tribunal to decide that the first claimant should pay the profits of RMB 22,692,555.51 and the losses calculated at the rate of 0.5‰ of the investment RMB 10,800,000 per day.
(d) The first respondent should directly pay the claimant RMB 9,931,189.21 from the proceeds of XX building project and the 0.5‰ of penalty interests per day calculated from December 31, 1996.
(e) The first respondent should bear all the costs arising from this arbitration, the total of which was RMB 1,070,457.70.
The facts and arguments proposed by the claimant were as follows:
After the contractual joint venture contract and articles of association were signed, XX municipal Foreign Trade and Economy Commission issued "the reply for the contractual joint venture contract and articles of association to establish a Sino-foreign limited company on management of property" on December 31, 1992, XX municipal government issued "the certificate of approval" for the contractual joint venture On January 4, 1993, and XX municipal government issued "certificate of building lot for the contractual joint venture" on February 9, 1993, which granted the contractual joint venture to construct 197.67 mu residential quarters in XX area. On June 16, 1993, the State Administration for Industry and Commerce issued the business license to the contractual joint venture. During that period, the claimant invested USD 200,000 (equivalent to RMB 1,730,000) in the contractual joint venture on November 18, 1992, HK USD 44,558.90 (equivalent to RMB 49,414.60) on February 9, 1993, and USD 500,000 (equivalent to RMB 4,325,000) on June 28, 1993.
On September 28, 1993, the claimant and the respondents concluded "the amendment and supplementary clauses to the XX property limited company contract", which provided that the total investment was reduced to RMB 218,000,000 and the registered capital was reduced to RMB 72,000,000. The cooperation conditions provided by each party were "party A should make the expropriated land as its investment, go through the procedures about that land, and arrange the land leveling issues outside and inside the red line. Party B should input the entire construction fund, his capital contribution equivalent to RMB 72,000,000 of foreign exchange as the registered capital. After the registration of the company, party B should input 15 percent of his subscribed capital contribution (equivalent to RMB 10,800,000) from one month after the contract amendment clauses are approved, and input the other capital contribution within 3 years by installments according to the schedule of the building project. After the initial capital is input, the contractual joint venture should employ an accounting firm to make the report on the verification of capital." The profits distributed among the three parties were as follows: "the contractual joint venture will consign 500 square meters of commercial space to the second respondent. According to the relevant regulations of XX city, the maintenance charge should be paid to the second respondent and XX town government. The first respondent should get 55 percent and the claimant 45 percent of the profits after all the costs of investment are deducted. All the current accounts of the contractual joint venture should be invested and cleared in the principle of installments." On November 12, 1993, XX municipal Foreign Trade and Economy Commission approved the amendments and supplementary clauses to the contractual joint venture contract. Afterwards, the claimant continued to fulfill the obligation of capital contribution, and input USD 80,000 (equivalent to RMB 692,000) on December 9, 1993, USD 240,000 (equivalent to RMB 2,076,000) on December 20, 1993, USD 200,000 (equivalent to RMB 1,730,000) on January 26, 1994, USD 23,354 (equivalent to RMB 202,178.98) on March 8, 1994. By seven times of successive input of the above capital, the claimant had performed the duty to make the capital contribution to the contractual joint venture's registered capital, which amounted to RMB 10,800,000 and took up 15 percent of the registered capital. On March 11, 1994, Southeast accounting firm submitted the report on the verification of capital, which confirmed that the claimant had input RMB 10,800,000 as the registered capital, which took up 15 percent of the registered capital of the company, so the claimant fulfilled its duty to make the initial capital contribution. But the claimant had not received any profit or interest yet. First, the contractual joint venture was in fact operated and controlled by the first respondent, and the claimant was excluded; Secondly, the claimant could not get any information about the state of the contractual joint venture's operation, profits and losses, for the above information was controlled and sealed off by the first respondent. Third, according to the contractual joint venture contract and articles of association, the profits should be distributed annually, and the amendments and supplementary clauses provided that all the current accounts should be invested and cleared by installments, but the contractual joint venture had never distributed any profit to the claimant. That situation had continued for several years, so the claimant considered that the contractual joint venture was in abnormal operation and his investment could not be guaranteed. Therefore the claimant asked for the information about the state of the contractual joint venture's finance, schedule of the project, and the use of the investment, but the claimant had never received any reply. On June 1, 1996, Mr. Xda Zhang, representing the claimant, again wrote a letter to the general manager of the first respondent, Xxiu Zhang, and again proposed the same requirement. Mr. Xxiu Zhang said in his reply that "the claimant has not performed its duty to make investment since 1994, and Mr. Xda Zhang does not assume his office. At present, the company is in the total charge of our company in the terms of administration and capital investment, so the contractual joint venture is indeed invested solely by our company. Therefore the information that you asked for is our company's internal trade secret, and we cannot provide that for you." "The claimant considers that since the first respondent disregards the fact that the claimant has invested in the contractual joint venture, refuses to assume the duty specified in the contractual joint venture contract, and takes the contractual joint venture as his exclusive company, there is no sense to continue the cooperation. The fund RMB 10,800,000invested by the claimant has been in circulation for several years, but the claimant has never got any return, so the investment made by the claimant is not guaranteed." Therefore, the claimant claimed the arbitral tribunal to confirm the fact that the claimant invested RMB 10,800,000, and rescind the contractual joint venture contract.
On January 13, 1993, it was the firs time for the contractual joint venture to hold the board meeting, in which it was decided "to change the single operating system to flexible operating system as to adapt to the market and the society, especially to satisfy the requirements of small business proprietors as the investors." In order to perform that decision, the claimant and the first respondent cooperatively invested in the Guangzhou XX building project. As the claimant was an Australian company, the business in Hong Kong had to be dealt with by the associate companies of the claimant, which were was XX Development Limited Company (hereinafter referred to as XX Company) and Creative X Limited Company (hereinafter referred to as Creative X Company). It was a great success of selling commercial housing for stores of XX building, and many profits were earned from that operation. Till June 30, 1994, the total returns had amounted to HK USD 55,971,129.36. According to the agreement signed by the two parties, the proceeds of sale was RMB 15,357,817.60 in total (including cash income of RMB 90,200,000), which would be transferred to the account of the contractual joint venture, and HK USD 42,009,477, which would be first to be transferred to the account of Jin X Real Estate Limited Company (hereinafter referred as Jin X Company) and then transferred to the account of the contractual joint venture pursuant to the written entrustment made by the first respondent on October 6, 1993, among which the cash income was HK 229,000,000. From the above income, the claimant got USD 543,454.68, RMB 2,500,000 and HK USD 8,000,000, and the first respondent RMB 2,000,000 and HK USD 6,000,000. The cooperation project made by the claimant and the first respondent was part of business of the contractual joint venture, which was an important management accomplishment as to solve the problem of the source of fund for the contractual joint venture's internal development. What was more important was that the claimant invested a big deal of fund in the XX building project, and should be entitled to directly collect the money from the sale of the building, but that money was totally collected by the contractual joint venture, which directly proved that the contractual joint venture participated in the cooperation of the XX building project. However, the first respondent unilaterally appointed the lawyer to represent the first respondent to write letters to the small business proprietors, who bought the stores, asked those small business proprietors to send the money to the account controlled by the first respondent, so the first respondent withheld RMB 9,931,189.21 proceeds that should be paid to the claimant.
The first respondent did not keep accounts on the construction and sale of the cooperation project of park XX and pavilion X, and intentionally manipulated accounts. (1) From the accounts of the contractual joint venture made by the first respondent, it was shown that the contractual joint venture should pay RMB 27,144,976.95 to the first respondent till December 31, 1996, which was contrary to the following facts: (a) according to the statistical results told by the sales department manager of park XX, Miss Wang, 532 suites of apartments had been built, which covered 45,000 square meters, and 188 suites had been sold, which covered 15,890.61 square meters, and the presale income was about RMB 46,000,000; (b) till June 30, 1994, RMB 12,820,000 from the sale of the building and RMB 8,140,000 from the future income of the sale of the building should be paid to the claimant, the total of which was RMB 20,960,000. The aggregated sum was RMB 66,960,000. (2) Park XX and pavilion x have been constructed and delivered to the buyers, which comprised 104 suites of apartments, 18 stores, and 18 garages. The total building area was 13,292.34 square meters, and the sales price was RMB 46,000,000. But there were only deposits from 8C and 8D departments and no receivables from the sale of the building on the account of the contractual joint venture, while this fund was kept as the account payable to Guangdong XX Building III Companies Group. As for park XX, a large number of buildings has been constructed and delivered to the buyers, and there was no record of a large amount of debts on the account of the contractual joint venture, so that proved there are large liquid cash funds, proceeds from the XX building project, and investment from the claimant on the account of the contractual joint venture. The first respondent withheld large liquid cash funds, and transferred the fund to the contractual joint venture as creditor during the project so as to turn the funds to the debts of the contractual joint venture.
There were large funds for the contractual joint venture to develop the cooperation projects and distribute the profits. (a) As for the development of the building XX of 409 square meters, the claimant input HK USD 1,000,000, US USD 406,641, and HK USD 1,400,000 and RMB 2,500,000 for advertising and publicity, totally RMB 8,657,444.91. (b) Till June 30, 1994, as for the sale of building of 2,750 square meters, RMB 5,328,008.58 of the proceeds should have been paid to the claimant (associate company); as for the unsold building (calculated by the coequality price), the claimant should get the proceeds (10,989.21*1,851.14 square meters)*40%=RMB 8,137,026.48. The subtotal is RMB 13,465,035.06. (c) As for the sale of 409 square meters of the building, the claimant should get [HKD 18,668,352-300,000 (the maintenance charge paid to the first respondent)]*1.1-4,380,555.09 (minimum guarantee that should be paid HKD8,180,000*1.1-the amount that has been paid 4,617,444.91=the margin that should be paid for the minimum guarantee according to the agreement)=RMB 15,824,632.11. (d) The advertising and publicity costs paid by the claimant were HK USD 1,400,000, RMB 2,500,000, which should be apportioned, and RMB 3,517,250 should be given back to the claimant. (e) The expenditure paid by the claimant is 853,204.29*55%=RMB 469,262.36. To sum up, the claimant should get the proceeds RMB 33,276,179.53. The first respondent respectively got RMB 2,000,000 and HK USD 8,000,000 from the accounts of the contractual joint venture and Jin X company (Jin X Real Estate Limited Company) on July 14, 1994, and on July 15, 1994. As for RMB 15,358,000 on the account of the contractual joint venture, only RMB 4,500,000 was distributed to the two parties. This amount of fund was the proceeds from the sale of the building XX, and the two parties agreed to distribute those proceeds on the account of the contractual joint venture. In addition to the proceeds of RMB 13,800,833 that has distributed to the claimant, there was still RMB 19,475,296.53 that should have been paid to the claimant, which was withheld by the first respondent and not recorded on the account the contractual joint venture by the first respondent on purpose.
After Xiu X Zhang assumed the office of the chairman of the board of directors On June 6, 1993, the claimant's interests in the contractual joint venture was continually encroached by the first respondent. It had not been more than one year since the company was established, when the general manager was compelled to leave the contractual joint venture by Xiu X Zhang. Since then the contractual joint venture had never held the board meeting again. It is easy to see that the first respondent has controlled the company, breached the regulation of People's Republic of China on the finance, and illegally ran the contractual joint venture. As the first respondent severely breached the regulation and the contract and there were no complete records of the contractual joint venture's account, the claimant requested the first respondent directly to compensate the losses of the claimant arising from its investment without liquidation.
As for the claims and arguments submitted by the claimant for several times, the first respondent made the following defense:
(1) The claimant arbitrarily changed the arbitral claims, with the purpose to delay the time of arbitration and distract the arbitral tribunal from knowing the fact of the case, which had severely affected the progress of the arbitration and made the arbitration in suspense after three times of hearing. The arbitral tribunal should refuse the claimant's requests for change of the arbitration claims.
(2) The arbitral tribunal should refuse the claimant's requests that the claimant had finished its obligation of making capital contribution of RMB 10,800,000, which took up 15 percent of the registered capital of the company, and demanded the rescinding of the contractual joint venture contract, because these requests violated the law and the contractual joint venture contract. The fact showed that after the claimant invested the cash of more than USD 540,000 in the contractual joint venture, the claimant withdrew USD 520,000 before the verification of capital, and then the claimant transferred the remaining amount of USD 23,354.68 (including the account opening fee of USD 100) to XX New Real Estate Company which was solely invested and established by the claimant after the verification. As for where USD 540,000 has gone, the claimant offered at least five self-contradictory false statements, and the announcement of "profits distribution" took up the major part of hearing time. Now the analysis is made as follows: The contractual joint venture obtained the certificate for approval on January 4, 1993, and the business license on February 1. It was not until June 28 that the claimant input USD 500,000 and transferred the cash deposit of USD 200,000 into the investment, the total of which was USD 700,000 and lower than one tenth of the investment (USD 1,000,000) that the claimant should have contributed. As the claimant had no enough fund, the cooperative parties signed the supplementary contract on September 28, which was approved by the government on November 12. The claimant reduced its investment to RMB 72,000,000. As for the so-called first board meeting held on January 13, 1993, the contractual joint venture had not yet obtained the business license at that time, and the claimant had not begun to made investment. Then the contractual joint venture was not a subject in the law, and the so-called "board meeting" and "the decision of the board meeting" had no legal effect. Even though we assumed that the so-called "board meeting" and "the decision of the board meeting" had legal effect, there was no content about the distribution of the profits to the claimant in the decision of the board meeting. At the same time, according to the condition of profit distribution as specified in the article 37 of Regulations of the People's Republic of China on the Control of Financial Affairs of Foreign-funded Enterprises, the finance administrative department of the contractual joint venture and the accounting firm had never verified the profits of the contractual joint venture, so it was impossible to distribute profits. On the other hand, the contractual joint venture and XX Company were two independent companies, and the XX building was constructed by XX Company in XX district and sold by XX Company as commercial housing, which was completely different from the land development and operation made by the contractual joint venture in XX City due to the two different legal relations in subject and content aspects. The claimant made use of the information that Da X Zhang participated in the sale of XX Building as the representative of Fan X Company, to confuse the two different legal relations of XX Building project and the contractual joint venture contract, on which its claim of profit distribution was based. In fact, the first respondent had never signed the contract about XX Building project with the claimant and never performed that contract, and it did not sign the arbitration agreement with the claimant. Fan X Company in relation to the sale of XX Building was an independent Hong Kong company, thus this matter did not lie within the jurisdiction.
In summary, as the claimant withdrew the investment which severely violated the law and the contract, the claimant was entitled to rescind the contractual joint venture contract. In this context, according to Certain Regulations on the Subscription of Capital by the Parties to Sino-Foreign Joint Equities Enterprises, only the observant party is entitled to claim the termination of the contract and compensation, and the delinquent party, who does not make or pay off the capital contribution in due time, is considered as giving up all the rights of the contract.
(3) The supplementary claims made by the claimant were beyond the rights of the claimant, so those claims should be overruled. Such problems as clearing the fixed assets and the operation situation of the contractual joint venture were the liquidation problems of a company, and the contractual joint venture had not entered into the stage of liquidation, thus the claimant had no right to make those claims; the claimant had never invested in the contractual joint venture, and there was no ground for the request to withdraw RMB 6,534,753.24; XX Building project and the contractual joint venture contract were of two different legal relations, and the so-called claim as "returning the proceeds of RMB 19,110,123.78 from the XX project to the claimant" was beyond the scope of the contractual joint venture, thus that claim did not lie within the jurisdiction of this arbitration.
2.Award
(1)
The claimant's investment RMB 10,800,000 in the company and its initial capital contribution taking up 15 percent of the company's registered capital shall be confirmed.
(2)
The contractual joint venture contract shall be terminated. The contractual joint venture shall be liquidated according to the liquidating rules as specified in the "Opinion III made by the arbitral tribunal".
(3)
The first respondent shall pay RMB 360,466.70 arising from this arbitration to the claimant within 30 days as from the date when this reward is made. If the first respondent fails to make the aforementioned payment in due time, he shall pay the interests of 7 percent per year as from the overdue time.
(4)
The other requests of the claimant shall be overruled.
(5)
The arbitration fee of the case shall be bore by the claimant and the first respondent in the proportion of 3:7.
3.Comment
Legal issues in relation to this case are mainly as follows:
(1)
As for the applicable law
The parties agreed in the article 46 of the contractual joint venture contract that the law in People's Republic of China was applicable to this dispute, which is in consistent with the Law of People's Republic of China on Sino-Foreign Contractual Joint Ventures, accordingly confirmed by the arbitral tribunal.
(2)
As for the situations of the contractual joint venture's finance and operation
The claims made by the claimant are closely related to the contractual joint venture's finance and operation situation. The arbitral tribunal has entrusted a Beijing accounting firm to make an audit report on the above situation, which has been subject to the examination of the parties. Thus the arbitral tribunal considers that report credible and sufficient to be the evident.
(3)
As for the problems regarding the claimants' initial capital contribution and whether the claimant withdraw the registered capital
According to the report on the verification of the contractual joint venture's paid-up capital made by the Beijing accounting firm, the claimant has invested RMB 10,800,000 in the contractual joint venture as registered capital, which takes up 15 percent of the subscribed capital contribution. According to "amendments and supplementary clauses to the XX Real Estate Limited Company Contract", the claimant should have made the investment within one month from when the supplementary clauses were approved. As the two respondents have never made any objection to the time when the claimant has made the capital contribution, and that capital contribution has been confirmed and verified by the Chinese certified accountant, the arbitral tribunal holds that the claimant has input RMB 10,800,000 into the contractual joint venture as registered capital, and its initial contribution takes up 15 percent of the contractual joint venture's registered capital.
The first respondent claimed that the claimant had withdrawn the registered capital of USD 540,000 after capital verification. But according to the audit report made by the Beijing accounting firm, the parties holds different opinions on USD 540,000 transferred to the New City Company, and there is no evident to prove whether that USD 540,000 is the capital withdrawn by the claimant or the profits distributed between the two parties. The arbitral tribunal notes that there is not enough recording about the arrangement to that USD 540,000. Although the claimant holds that USD 540,000 is the distribution of the profits, the distribution of the profits should be made according to the contractual joint venture contract, and arbitral tribunal does not find there is any legal decision about the distribution of the profits. However, there is evidence to show that USD 540,000 has been transferred to New City Company, and the first respondent knew that fact and got RMB 2,000,000 and HK USD 8,000,000. So the arbitral tribunal holds that there is no evidence to recognize that the claimant has withdrew the registered capital.
(4)
As for rescinding the contractual joint venture contract and returning the investment of RMB 10,800,000 to the claimant.
After the contractual joint venture contract was signed, the contractual joint venture received the business license in June 1993 and was formally established. There is evidence to show that crack has occurred between the two parties' cooperation since the contractual joint venture has been established no more than one year. The claimant claimed that its representative had been pushed out from the contractual joint venture since 1994, while the respondent claimed that the claimant had not discharged the duty to continue to make the investment since 1994 and the general manager appointed by the claimant had not assumed the office, which proved that the disputes during the cooperation had arisen between the claimant and the first respondent at least since 1994. The claimant requested to check the financial situation of the contractual joint venture, which was claimed as the trade secret by the first respondent. Then the claimant was not entitled to do so. The situation continued till this arbitration proceeded. In addition, according to the audit report made by the Beijing XX accounting firm, the first respondent kept two accounting books and the accounting procedure was not authentic besides the supplements to the account, and the accounting items were not complete. In view of the above facts, the arbitral tribunal is reasonable to hold that the contractual joint venture has been controlled by the first respondent since 1994, the cooperation intention between the claimant and the first respondent has been broken, and there is no basis and possibility for the two parties to continue the cooperation. Therefore, the arbitral tribunal upholds the claimant's request to rescind the contractual joint venture contract. After the termination of the contractual joint venture contract, the contractual joint venture should enter into liquidation. As the contractual joint venture has been controlled by the first respondent and the claimant only made the initial capital contribution of RMB 10,800,000, the arbitral tribunal considers that the day of November 30, 1996 when the claimant has applied for arbitration should be the time limit. Before that day, if there are residual assets after paying taxes, such as the constructed buildings and the buildings under construction, the claimant should get 45 percent of them according to its ratio of factual investment, and the first respondent should bear all the losses and debts of the contractual joint venture. After that day, the claimant has no relation with the contractual joint venture's proceeds and losses.
As for the claimant's request to return its investment of RMB 10,800,000, the arbitral tribunal considers that there is no basis for that request and refuses it. As the claimant has made investment, he should bear the commercial risks. Moreover, it is in conformity with the rule of the Law of People's Republic China on Sino-Foreign Contractual Joint Ventures to liquidate the contractual joint venture and distribute the residual assets according to the above rule.
(5)
As for the claim that the claimant should get 45 percent of the contractual joint venture's profits and the interests of that profits and the investment of RMB 10,800,000.
The claimant requested the first respondent to pay 45 percent of the profits (RMB 22,692,555.51) of the contractual joint venture to it before November 1996, with the interests of that profits and the investment of RMB 10,800,000 calculated at 0.5‰ per day. The arbitral tribunal holds, according to the above opinion, under the circumstance that the first respondent should bear the losses of the contractual joint venture, the claimant should get 45 percent of the residual assets, which indeed covers the claimant's investment and proceeds and the so-called contractual joint venture's profits and the interests of the investment. Since the claimant is not entitled to claim the return of its invested registered capital of RMB 10,800,000, there is no reason to return the interests of that investment. Therefore the claimant's claim is refused.
(6)
As for the proceeds that the claimant should get from XX Building project
The arbitral tribunal holds that the jurisdiction for this case is about the disputes of the contractual joint venture contract. XX Building project and the contractual joint venture contract are of two different legal relations. There are no clauses about XX Building in the contractual joint venture contract between the claimant and the respondent, or the relevant arbitration agreement. Moreover, Fan X Company participating in that project is an independent civil subject. Even though the claimant is entitled to claim its rights to the XX Building, the claim is beyond the jurisdiction for this case, so the arbitral tribunal may not consider that claim.
(7)
As for the fees paid by the claimant arising from this case
According to the evidence provided, the claimant considered that RMB 1,070,457.70 paid by him arising from this case comprises the following items: (a) RMB 100,000 paid to the Beijing XX Law Counseling Center for advice; (b) attorney fee RMB 150,000 paid to Shenzhen XX Law Firm; (c) prepayment of arbitration fee of RMB 500,000; (d) travel charge of RMB 46,112.10 and AUD 15,761.20 (equivalent to RMB 86,686.60); (e) auditing fee of RMB 60,000; (f) assessing fee of RMB 100,000; (g) RMB 10,000 for the property preservation filing fee paid to XX Intermediate People's Court; (h) notary fee of HK USD 7,200 (equivalent to 7,668) paid to Hong Kong XX Law Firm; (i) RMB 10,000 paid to Shenzhen XX Accountant's Firm. The arbitral tribunal holds that the arbitration fee that has been paid should be excluded and ruled in separate award. Meanwhile, in view of the fact that the claimant has entrusted the competent lawyer to participate in the arbitration and at the same time the arbitral tribunal has entrusted Beijing XX Accounting Firm to make the report on the contractual joint venture's financial condition and the status of operation based on the request of the claimant, the advising fee paid to the Beijing XX Law Counseling Center and Shenzhen XX Accounting Firm is not necessary for this case, so that fee should not borne by the respondent; The claimant disagreed with the secretariat of CIETAC Shenzhen on the arbitration fee calculated according to the value of the disputed assets and required to make the assessment to the value of the assets, thus the assessing fee should be borne by the claimant. As for the other fees of RMB 360,466.70 that the claimant claimed should be borne by the first respondent, the arbitral tribunal considers it reasonable and upholds this claim according to article 59 of the arbitration rules.
The first respondent also claimed that the claimant should compensate the attorney fee and other reasonable expenses arising from this case. The arbitral tribunal has refused that claim according to the situation involved in the case.
(8)
As for the arbitration fee of which 30 percent is borne by the claimant and 70 percent by the first respondent.
Though the contractual joint venture contract has been signed by three parties, only the claimant and the first respondent are involved in this case, and all the claims made by the claimant are about the first respondent except that the termination of the contractual joint venture contract is concerned with the second respondent. According to the situation of the case, the arbitral tribunal holds that the arbitration fee should be borne by the claimant and the first respondent according to above proportion, and the second respondent may not bear the arbitration fee.
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