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The Case of XX Company, Hong Kong v. XX Company, Guangzhou on Dispute over Cooperative Operation of XX Hotel
Jurisdiction: Arbitration; CIETAC Shenzhen
1.Case Brief
In July 1981, the Agreement on Cooperative Operation of XX Hotel(hereinafter referred to as the Agreement) was signed by authorized representatives of XX Company, Guangdong as Party A and XX Company, Hong Kong(i.e. the claimant) as Party B. The main items thereof were as follows:
(1) Party A shall, for building the hotel, provide non-evaluated land of 66,000 square inches, while Party B shall invest in funds of USD4, 800, 000 and introduce building materials and equipments, and both parties shall cooperate to build and operate XX Hotel.
(2) XX Hotel shall establish board of directors as the top governing body thereof, which shall take charge of deliberating and determining operation policy, appointing and dismissing staff, examining financial budget and account, and solving significant business issues as well. Members of the board shall be jointly recommended by Party A and Party B. The chairman of the board shall be from Party A while the vice chairmen from Party B. Under the governing of the board, the companies shall be entitled with the power of decision, managers shall be given administrative power, and the daily operation shall be handled specifically by the general manager and the vice manager. The general manager shall be from Party B while the vice manager from Party A.
(3) The cooperative operation shall be last for 15 years since the operation starts, and fixed assets might not be depreciated and not listed as cost. After paying income taxes in accordance with the tax law of the People's Republic of China, 5% of the reserved fund for equipments' full repair, equipment renewal fund, and 10% for staff award and welfare fund shall be deducted from the annual gross profit, and the remained were net profits, which shall be distributed at the following rates: the second five years, Party A for 50% and Party B for 50%; the third five years, Party A for 60% and Party B for 40%.
(4) In the first five years of cooperative operation, party B shall reinvest all obtained profits after paying interests payable for its loan so as to enlarge the business scope of the hotel and the amusement park, and the hotel would not separately withdraw any enterprise development fund.
(5) With regard to the hotel's operation, financial settlement shall be made annually. If any loss for the present year, Party B shall assume all while Party A shall make no subsidy.
(6) The cooperation term shall be 15 years. When expired, all assets and interests of the hotel shall be attributed to Party A.
(7) If any dispute aroused during the performance of this Agreement, or one party caused any economic loss to the other by violating this Agreement, the two parties shall, according to the principle of mutual benefits, settle through friendly negotiation. In case of failure of negotiation, any party might submit to Chinese arbitration institute, whose award shall be final and binding upon both parties.
(8) Anything not covered in this Agreement shall be amended and supplemented by both parties through negotiation.
On July 30, 1981, the above-mentioned Agreement was approved by the Administration Commission of Guangdong Special Economic Zone through the Document (Te Guan Pi [1981] No. 028).
On Sep. 25, 1982, representatives of the two parties concluded the Supplementary Agreement on the Agreement on Cooperative Operation of XX Hotel in Shenzhen (hereinafter referred to as the Supplementary Agreement, the XX Hotel here was just the hotel in the aforesaid contract), which made supplementary specifications upon the building scale, investment sum and operation term of the cooperative XX Hotel (hereinafter referred to as the hotel). The main contents of the Supplementary Agreement were as follows:
(1) The two parties agreed to increase the investment of HK$60, 000, 000 in order to enlarge building scale and increase standards for decoration materials. That was to say, the total investment of the hotel was HK$90, 000, 000, which shall be raised by Party B, and Party A shall provide non-evaluated land of 150 mu for building the hotel.
(2) The whole investment sum shall be arranged for use for two installments, and HK$60, 000, 000 shall be invested for the first installment while HK$30, 000, 000 for the second.
(3) Since the investment sum was increased twice as the original agreement, only principles and interests of the investment might be taken back within the cooperation term of 15 years as specified in the original agreement. Therefore, according to the principle of mutual benefits, the cooperation term was extended by 5 years through negotiation, namely, the term for cooperative operation of the hotel was determined as 20 years.
(4) In accordance with the extension of the cooperation term, net profits generated from the hotel's business shall be distributed at the following proportion for each period: the first seven years, Party A accounting for 30% and Party B for 70%; the second seven years, Party A for 50% and Party B for 50%; the third six years, Party A for 60% and Party B for 40%.
(5) The cooperation term shall be 20 years. When expired, all assets and interests of the hotel shall be attributed to Party A
(6) As the two parties considered, decoration and equipments of the hotel shall be renewed during the cooperation term. They unanimously decided that depreciation shall be calculated in accordance with the depreciation period of fixed assets as stipulated by the Finance Ministry of the People's Republic of China, and all depreciation funds shall be used for renewing and rebuilding the hotel.
(7) This Supplementary Agreement shall be the indivisible part of the Agreement on Cooperative Operation of XX Hotel sighed in July 1981.
On Sep.29, 1982, the above-mentioned Supplementary Agreement was approved by the people's government of Shenzhen through the Document (Shen Fu Han [1982] No.181).
In May 1984, Party A and Party B entered into the Supplementary Agreement II on the Cooperative Operation of the Hotel, which enlarged partial business items on the basis of the business scope as prescribed in the original agreement. On May 30, 1984, the Supplementary Agreement II was approved by the people's government of Shenzhen.
On Aug.10, 1983, Wu XX, the chairman of the board of directors, as well as the general manager of the claimant, signed the Irrevocable Confirmation Letter for Repaying addressed to x Company in Guangdong, stating x Company in Guangdong borrowed HK$60, 000, 000 from the Australian Empery Commercial Bank in Hong Kong, which should be used as borrowed money of the claimant for building the hotel. The borrowed fund shall be wholly invested in the capital construction project and be repaid with its self-owned capital and distributed profits from the hotel by the claimant prior to August 1986.
On April 21, 1984, a resolution was made on the fifth meeting of the board of directors of the hotel that preparation fees as paid by the claimant in Hong Kong should be listed into the investment sum, but original documents and vouchers should be examined and recognized by accountants of Party A, and the chairman of the board of directors should issue a contribution certificate and hand it over to the claimant and the board of directors for record.
On Jun.29, 1984, The determination was made on the meeting of the board of directors of the hotel that interests payable for HK$90, 000, 000 invested by the claimant should be assumed by the hotel and listed into operation cost, while the principle should be repaid by the claimant itself with its self-owned funds and distributed profits.
On April 28, 1984, the State Administration for Industry and Commerce issued the business license, which stated that Wu XX was appointed as the vice chairman of the board and the general manager of the hotel. Oct.1, 1985 witnessed the hotel's business inception.
On Oct.30, 1986, the claimant, X Company in Guangdong together with X Company in Shenzhen Special Economic Zone signed the Certification letter on Transferring the Status of Economic Legal Person in Foreign-related Economic Agreement, which replaced Party A to the contract of cooperative operation of the hotel with X Company in Shenzhen Special Economic Zone, and all clauses of the original agreement should be performed.
On Nov.1, 1986, the hotel convened the second meeting of the second term of board of directors, on which Wu XX proposed to transfer part or all of stock right because of the inability to repay HK$60, 000, 000 which was borrowed from the Australian Empire Commercial Bank, and the board determined that the two parties should conduct a negotiation upon this issue. With regard to issues of preparation fees as proposed by Wu XX, the negotiation between Wu XX and the last board should be made firstly because of being left by the last board, and the conclusion thereof should be handed over to the present board for being discussed.
On Dec.9, 1986, the claimant and the first respondent signed an agreement, where the claimant agreed to deliver HK$60, 000, 000, as part of the total investment sum it invested in the hotel through borrowing, to the first respondent and also consented the first respondent transferred this investment to the second respondent. Article 4 of the present agreement stated, "By virtue of Party B's (the claimant) participation in the cooperative operation of the hotel for many years, Party A (the first respondent) should fully confirm the efforts and works made by Party B in terms of the preparation and operation of the hotel. Therefore, preference to Party B should be taken into account when settling the remained problems of the hotel through negotiation."
On Dec.22, 1986, the first and the second respondent signed the Agreement upon Transferring Investment HK$60, 000, 000 of the Hotel, based on which the second respondent shall enjoy all rights after it invested HK$60, 000, 000 to the hotel and bare all corresponding liabilities. This agreement also prescribed that the three parties shall restructure the old board of directors and set up a new one.
On Dec.29, 1986, the people's government of Shenzhen issued the Reply on Permitting the transfer and acceptance of investment HK$60, 000, 000 of the Hotel through Document(Shen Fu [1986] No.791).
On Jan.26, 1987, the third board of directors was set up, and the first respondent appointed Yin XX as the chairman thereof and Zeng XX as a director, while the second respondent appointed Liang XX as a director, and the claimant appointed Wu XX as a director.
On May 30, 1988, the auditing bureau of Guangdong province sent the Document (Yue Shen Wai Zi[1988] No.88) to the board of directors of the hotel and handed over the List of Receivable Fund from X Company in Hong Kong (the claimant) by the Hotel until Dec. 29, 1986 to the board of directors of the hotel, which was made after the finance of the hotel was audited by the auditing group of the auditing bureau in Guangdong. However, the board of directors of the hotel failed to hand it over to the claimant.
On July 29, 1988, the fourth board of directors of the hotel convened the second meeting, when the claimant indicated that it was unable to pay the owed investment, and was willing to transfer the owed investment HK$25,231,533.64 for the construction of the hotel to the second respondent, and the second respondent consented to accept, while the first respondent didn't object this. On the same day, the three parties signed the Agreement on Transferring the Investment HK$25,231,533.64 of the Hotel by X Company in Hong Kong. On Oct.18, 1988, the people's government of Shenzhen approved this Agreement through the Document (Wai Fu [1998] No. 657)
On Aug.24, 1988 the fourth board of directors of the hotel convened the third meeting. As recorded by the meeting summary, Yu XX, the chairman of the board presided over this meeting, directors Liang XX, Fan XX, Lei XX and Zeng XX were present, while director Wu XX was absent and his name was marked with "notified but absent" in the record. The contents of the summary were as follows:
"All present directors have carefully read and discussed the Document (Yue Shen Wai Zi [1988] No. 88) made by the auditing bureau of Guangdong province and the capital verification report of the hotel issued by Huayue Auditing Firm in Guangzhou in accordance with foreign-related economic regulations in China and through checking all financial archives and original documents, unanimously adopted the following resolution:
(1) Confirm the auditing result made by the auditing bureau of Guangdong province through the Document (Yue Shen Wai Zi [1988] No. 88) inerrable, thus X Company in Hong Kong (the claimant) shall pay back HK$ 64,178,708.05 to the hotel.
(2) Confirm X Company in Hong Kong (the claimant) has invested HK$4,768,446.36 in the hotel as indicated in the report on the capital verification
(3) In accordance with the two items mentioned above and related laws of the state, X Company in Hong Kong (the claimant) shall be the debtor to the hotel and enjoy no right or interest in this hotel, and the director status of Wu XX is canceled.
(4) Considering that Wu XX received no wage when assuming the general manager in this hotel as from August 1981 to January 1987, the meeting decided to pay for his wages of 66 months (HK$ 3, 0000 each month), amounting to HK$1, 980, 000. This sum shall be deducted from that overdue payment of X Company in Hong Kong (the claimant) to the hotel.
(5) Wu XX, during his office of general manager, appropriated RMB 1,786,260.83 as his distributed profits from the hotel to invest in X Service Company in Guangzhou as from March 1983 to July 1985. This act violated the Chinese-foreign joint venture law and caused economic losses to the hotel, thus the sum shall be returned.
(6) The meeting summary shall be reported to the city government and gone through necessary legal formalities as soon as the meeting ends. Meanwhile, X Company in Hong Kong (the claimant) and Wu XX are required to pay all debts to the hotel immediately. Lawsuit shall be filed when necessary."
This summary was affixed with signatures of the chairman of the board and the four directors who attend the meeting. The following day, members of the board sent this summary to Wu XX in Guangzhou (Wu was being under supervision of residences by the public security department in Guangzhou at that time.). Wu XX marked，in the top right corner of the summary， "having received the resolution of the board and disagreeing with Item (e)".
Afterwards, the respondent submitted the people's government of Shenzhen the application and the affixes of returning deferred payment of X Company in Hong Kong (the claimant) to the hotel. The people's government of Shenzhen made the following reply through the Document (Shen Fu Wai Fu [1988] No.658):
"(1) Agree to the summary of the third meeting of the fourth board of directors as adopted by your company (the first respondent), X Hotel Management Company in Hong Kong (the second respondent) and X Company in Hong Kong (the claimant) on Aug.24, 1988.
(2) In accordance with the meeting summary, X Company in Hong Kong (the claimant) shall pay back deferred payment of HK$ 57,430,261.69 to the hotel after deducting its investment of HK$4,768,446.36 and Wu XX's wages of HK$1, 980, 000.
(3) In accordance with the foreign-related economic regulations, X Company in Hong Kong shall be debtor to the hotel and enjoy no right or interest in the hotel, and Wu XX's director status shall be canceled.
(4) Your company (the first respondent) and X Hotel Management Company in Hong Kong (the second respondent) were required to immediately work out specific measures to pay back the owed sum with X Company in Hong Kong (the claimant)so as to safeguard legitimate rights and interests of the hotel.
(5) Because of the foreign cooperative party was changed, your company (the first respondent) and
X Hotel Management Company in Hong Kong (the second respondent) were required to sign a cooperative contract and articles of association separately and submitted for approval. Other issues might be handled in relevant departments directly."
On Nov. 28, 1988, the claimant sent a letter to the Foreign Chinese Affairs Office under the State Council, in which it raised an objection to the third meeting summary of the fourth board of directors and did not recognize it.
On Jan.11, 1989, the board of the hotel made a reply to the Letter sent by the claimant on Nov. 28, 1988, with main points as follows: (a) the third meeting summary of the fourth board of directors was legal and effective, and had been sent to Wu XX in Guangzhou on Aug.25, 1988, and Wu XX made no objection to other items except for Item (5) and affixed seal personally, for which there were on-the-spot tapes and photos on the spot. (b) The board still held the auditing result made by the Auditing Bureau of Guangdong through the Document (Yue Shen Wai Zi [1988] No.88) is inerrable. (c) The Shenzhen government had made the reply: with the contents that the claimant enjoyed no interests in this hotel and Wu XX's director status was canceled. (d)The claimant was debtor to the hotel, and shall pay back owed debt as quickly as possible. (e) With regard to the preparation fees, the board only confirmed the original documents.
Based on the report of the capital verification that was provided by the respondent and made by the Shenzhen Special Economic Zone Accounting Firm on Mar.10, 1990, the second respondent invested HK$ 4,768,446.36 in the hotel for the third installment so as to replace the shares held by the claimant.
On May 19, 1990, the claimant submitted to the CIETAC Shenzhen for arbitration, requiring the respondent to give a compensation
(1) HK$4,768,446.36 that the claimant had invested in the hotel and had been legally recognized.
(2) HK$1,980,000, unpaid wages for 66 months.
(3) HK$12,207,640.39, accounting for 5% investment sum, preparation fees which were promised by the board of directors of the hotel to pay the claimant.
(4) HK$8,566,885.32 (until May, 1990 for the present), total interests for the above-mentioned compensation.
(5) All arbitration fees.
On June1, 1991, the respondent made defenses and raised a counterclaim, requiring that: the claimant should pay back HK$47,731,521.05, its owed partial sum, to the respondent. Afterwards, because the respondent failed to handle the counterclaim procedures based on related provisions in the Arbitration Rules of the China International Economic and Trade Arbitration Commission and its agency declared not to raise counterclaim any more in hearing, the counterclaim requirement was dismissal by the CIETAC Shenzhen.
Disputes between the claimant and the respondent focused on:
(1) On the validity of the resolution of the second meeting of the fourth board of directors of the hotel.
The claimant believed that the resolution of the third meeting of the fourth board of directors of the hotel was illegal and invalid. Because director Wu XX of the claimant was being under supervision of residence in Guangzhou in August 1988, and could not go in and out freely. The board of directors convened meeting under the condition of knowing well that Wu XX was unable to attend, and proposed a lot of motions affecting the claimant's interests. Moreover the claimant was not notified of the meeting. Wu XX was in the process of supervision of residence, compelled to sign the meeting summary.
The respondent held Wu XX had, within his undertaking the post of general manager, appropriated the hotel's funds of a large amount by using illegal means, which had damaged the respondent's legitimate right and interest seriously. Based on the auditing document of the Auditing Bureau of Guangdong, the claimant should return HK$64,178,708.05 to the hotel. The sixth resolution was adopted on the third meeting of the fourth board, and Wu XX signed " disagree with Item 5" in the meeting summary after reading, and indicated no objection to other five resolutions, which proved that Wu XX expressed his intentions freely when signing, thus "compelled to sign" was used to disavow afterwards. However, Shenzhen government confirmed the third meeting summary of the fourth board via the Document (Shen Fu Wai Fu [1988] No.658) after examining the written report and materials provided by the respondent.
The respondent stated, in the hearing on Sep. 12, 1991, the claimant was informed of the third meeting of the fourth board by phone, and always by phone, never in a written form.
The claimant put forward that,
(a) Contents of this meeting summary extended resolution items right enjoyed by the board. According to provisions upon power of the board of directors in the Law of China upon Chinese-foreign Joint Venture Enterprises and the Regulations of Guangdong Special Economic Zone upon Foreign-related Companies, it was not the board's right to make resolutions upon rights and interests of any joint venture party or disposal of qualification of director and other items. The nature of the resolution of board was really different from agreements and contracts between joint venture parties, because of different legal subjects, contents of effective decisions and signers. The claimant held that decisions on investment interests and qualification of directors were results of equal negotiation between joint venture parties rather than resolutions of the board.
(b) Wu XX had never received notification of holding the board meeting, thus the meeting was, in terms of procedure, illegally held and resolutions thereof were invalid. The respondent faked that Wu XX had been notified by phone and always done in this way, so the claimant provided a written notice for informing Wu XX of board meeting.
(c) Wu XX was compelled to sign on the meeting summary and the signature might not be deemed as confirmation. On Aug. 22, 1988, Wu XX was under the residential supervision by public security bureau in Guangzhou because of assisting the investigation of a fraud case. On Dec. 25, when the meeting summary was sent to Wu XX, policemen were on the spot. In this context, considering the longer time detaining and other troubles might be caused by refusing signing, it could be confirmed that he signed under pressure other than freely as sated by the respondent. Signature by Wu XX on the meeting summary indicated receiving rather than signing in the name of director. The reason for specially stating "disagreed with Item 5" was that, under that condition, confirmation of Item 5 equaled to reorganization of being involved in the crime of fraud, which would cause the postponing of residential supervision. The claimant expressed its genuine intention in the letter addressed to the Chinese Resided abroad Office under the State Council after the residential supervision was removed and freedom was retrieved. The claimant also stated that the respondent ascertained it had tapes and photos for proving Wu XX was compelled to sign and made the same statement in the hearing in June, but only four months later, it said both tapes and photos disappeared. Obviously, then respondent dared not to take tapes and photos as evidences, because voices of persons present at that time and various unusual situations had been recorded in such tapes and photos.
The respondent argued that:
(a) The third meeting of the fourth board was convened in accordance with the Agreement upon the Transfer of investment HK$60, 000, 000 by X Company of Hong Kong (i.e. the claimant), Item 3 of which authorized the new board of directors to dispose the remained investment invested into the hotel.
(b) The board of directors of a Chinese-foreign joint venture enterprise was natured with the shareholders' assembly, should be composed with representatives from each party, and it was not only the top governing body, also the standing organ for coordinating each party's interests, thus it had the right to make decisions upon major issues about shareholders' interests.
(c) The third meeting of the fourth board was convened under legal procedures, with the claimant informed via phone prior to the meeting, and two thirds of the directors attending, and adopting each resolution unanimously. Wu XX signed the meeting summary afterwards upon examination although not attending the meeting. And these resolutions were also approved by Shenzhen government.
(d) Wu XX signed the meeting summary from his genuine intentions; no force was made by the Chinese party, which could be strongly proved by Wu XX's objection to Item 5. Until the arbitration was raised, Wu XX had no objection to his status of director.
The respondent also stated that the claimant did not require the retrieve of its status of shareholder, but only requested credit right on its investment, which proved the claimant had no objection to the resolution of the meeting of the board upon revoking its shareholder status. In fact, the claimant had intended to withdraw from the hotel at early stage. A shareholder should clear up debts and credit rights it had with the company when withdrawing from a company. In this case, the claimant's credit rights had been offset by its debts to the hotel; it not only withdrew all its investment, but also illegally appropriated the hotel's capital HK$11, 000, 000 or so. Therefore, the claimant's requirement upon credit right actually had no ground.
The claimant stated, provided that resolutions made by the third meeting of the fourth board were illegal and invalid, in terms of logics, Wu XX should retrieve his director status after awards of the tribunal, and enjoyed his legal interests from investment. But considering this fact, the cooperation between Wu XX and the other two parties could not continue after such major twists and turns. Continuing the cooperation reluctantly would barely resulted in disagreeable incidents and new disputes. Therefore, the claimant held that the respondent had breached the contract materially, by confiscating the claimant's properties, dropping Wu XX out of the board of directors so as to make him unable to participate in operations of the hotel. It was impossible for the claimant to continue the cooperation, and the respondent should make a compensation for losses of the claimant.
(2) On preparation fees
The claimant held, in the stage of conduct the negotiation on setting up the joint venture company, the Chinese party had agreed to pay the claimant 5% of the total investment of the hotel as preparation fees. At the same time, the preparers shall obtain 5% total investment as preparation fees based on practices. The preparation fees as claimed by the claimant were definitely referred to in each meeting of the board, and resolutions of the board also clearly agreed to pay the claimant such fees but the respondent had never agreed to pay. Disputes focused upon how to calculate the fees and how much to be paid. The claimant had provided vouchers of more than HK$ 8, 000, 000 as evidences through its Hong Kong accounting organ so as to solve this problem.
The respondent held, let alone the so-called preparation fees as required by the claimant referred to fees of the preparer or that actually used for preparing the hotel, whether to confirm, pay and write off should be determined by the hotel. Thus the claimant claimed to a wrong object for requiring the respondent to pay the preparation fees. The claimant said the respondent had agreed to pay preparation fees, but it had no evidence to prove this. Documents signed between joint venture parties had made no specification upon preparation fees. Although preparation fees had been discussed in the meetings of the board of directors, no result and no agreement was made. Thus there might not be any right and obligation between joint venture parties. With regard to preparation fees, the respondent always requested settling according to laws of China. Firstly, preparation fees should be prescribed in the contract and consented by joint venture partied upon negotiation, but no such prescription or consent. Secondly, even if there were such prescription and consent, such fees still should be paid by the enterprise and listed into cost after the enterprise's business inception. Therefore, if there is any preparation fee, it should be paid by the joint venture enterprise other than any joint venture party. The respondent advanced that the claimant's claims with the contents of which it had given vouchers of preparation fees HK$8, 000, 000 to the respondent had no ground, but there actually were record upon preparation fees HK$3, 500, 000 offset in accounts of the hotel.
(3) On Wu XX's wages
The claimant stated, Wu XX, as the general manger appointed by the claimant (one party of the joint venture company )of the hotel, had the right to obtain reasonable wages, but he gained none just because of the resolution made by the respondent. Wu XX did not require wages, but required the respondent to bear compensation liabilities for breaching contract, which caused Wu XX could not obtain wages.
The respondent believed, wages were generated from employment relationship. Since Wu XX was hired as general manager by the hotel and had employment relationship with the hotel, Wu XX should claim wages personally against the hotel.
(4) On making up losses of the hotel
The claimant held although the cooperation agreement prescribed, "Party B shall bear any losses occurring in the present year, and Party A shall make no subsidy", no prescription was made thereby that the foreign party should make up immediately. As everyone knows, suffering losses was normal for a new established hotel to in its first-several-year operation, and the losses might be made up by its profits a period of time later, which complied with both the international practices and laws of China. During the period that the claimant and the respondent got along well with each other, both parties regarded that the claimant had no need to make subsidies to losses annually, which shall be handled in the operation of next year. In fact, the hotel did so in its primary operation. In accordance with the agreement, the claimant had transferred major number of its investment, and the second respondent benefited ultimately. Therefore rights and obligations of the hotel including losses should be assumed in proportion to the investment ratio.
The respondent believed, as specified in the agreement, losses of the hotel should be made up by the claimant year by year, other than postponed to the year when the hotel made profits and the claimant benefited for the sake of maintaining the enterprise energetic. But the hotel suffered losses amounting to HK$32,219,213.26 as from its business-inception in November 1985 to December 29, 1986. In this regard, the claimant did not act according to the agreement. The claimant argued it would make up such losses occurring several years ago by profits gained after the hotel made profits, which was distorted related specifications in the agreement.
(5) On assumption of loan interest resulted from the investment by the claimant
The claimant held that considering that investments for enlarging the hotel would not make profits in the first three years' operation, the claimant would have difficulties in paying interests thereof. Thus the board of directors made resolutions on June 29, 1984 that interests which should be paid by the claimant for its investments of HK$ 90, 000, 000 should be assumed by the hotel and integrated into the operation cost.
The respondent believed the claimant invested HK$64, 760, 000 totally into the hotel successively, HK$60, 000, 000 of which was lent from the Chinese party for investment. Afterwards, according to the agreement between the two parties, the Chinese party transferred this investment of HK$60, 000, 000 to the second respondent because of the claimant's inability to pay off this debt. But in accordance with legal provisions of the state and prescriptions of the agreement, interests for this debt should still be paid by the claimant, while the claimant did not do so. However it was the hotel that paid more than HK$15, 000, 000 for such interests.
(6) On the jurisdiction of arbitration
On May 30, 1992, as the third hearing held by this tribunal for this case, the second respondent presented the Declaration on Arbitration Jurisdiction over Cooperative Operation of XX Hotel Contract Disputes, believing that it was wrong for the claimant to list x Hotel Management Company of Hong Kong as the second respondent, as there was no arbitration agreement between them and the claimant. CIETAC Shenzhen had no jurisdiction over their disputes. The reason was that the arbitration between the claimant and the second respondent was limited into disputes over the two transfers of HK$85, 240, 000. The requirement of the claimant in this case upon the returning of HK$4, 760, 000 did not belong to such two transfers, thus it exceeded rights and obligations of the second respondent according to the original contract. Therefore, the arbitration clause in the original contract might not bind upon the second respondent.
2.Award
(1)
Agreements (the agreement, the supplementary agreement and the transfer agreement) between the clamant, the first respondent and the second respondent shall be terminated;
(2)
The first and second respondent shall jointly compensate the claimant HK$4,768,446.36, which shall be paid within one month since this award is made; If the payment is overdue, the respondents shall pay the claimant for the overdue interest at the annual rate of 10%;
(3)
Interests for the compensation sum as decided in Award 2 shall be calculated as from September 1, 1988 to the paid off time, and paid by the first and second respondent. The rate shall be 8% annually;
(4)
The requirement of the claimant that the respondent should compensate unpaid wages of 66 months, HK$ 1,980,000 shall be overruled;
(5)
The requirement of the claimant that the respondent should compensate preparation fees, namely, HK$12,207,640.39 accounting 5% total investment sum shall be overruled; And
(6)
Arbitration fees and case fees in this case shall be fairly assumed by the claimant and the respondent, namely, the claimant for 50% while the first and second respondents jointly for 50%.
3.Comment
Legal issues in relation to this case were mainly as follows:
(1)
On the validity of the third meeting of the fourth board of directors
(a) This meeting was convened by the board of directors of the investment subject (i.e. the hotel) hotel that was set up and registered in accordance with the agreement.
In accordance with Section 3 of the agreement, the board of the directors of the hotel was "the top governing organ of the hotel, to deliberate and determine the business guideline, hire and fire the main staff, to check the finance budget and settlement, and to deal with important business matters". Therefore, the right of the board might not be enlarged to determine rights and obligations enjoyed by each party in the hotel. Any determination upon this was to extend power of the board and violate prescriptions in the agreement, also had no legal validity.
Relationship between the three parties to the cooperation enterprise was different from that between the enterprise and any party. The claimant, the first respondent and the second respondent jointly invested to operate the hotel cooperatively, which was cooperative-operation-contract relationship between the three parties, while the claimant owed the hotel, which was the debt relationship between the claimant and the hotel. The board decided to offset the debt owed by the claimant to the hotel by the investment of one party of the cooperation enterprise, and it had confused two different legal relationships and exceeded power of the board. And wages the cooperation enterprise should be paid to Wu XX was salaries it should pay to its employees. It was also wrong to deduct Wu XX's wages to offset debt the claimant owed to the hotel.
Therefore, resolution made upon revoking rights and interests of the claimant in the hotel by this board meeting was invalid.
(b) On procedures of this board meeting
In accordance with Article 17 of the Regulations of Guangdong Special Economic Zone upon Foreign-related Companies concerning provisions "to hold board meeting, the convening notice shall be sent 10 days before, and the agenda and place shall be notified", the convening notice should be made in a written manner and sent to the claimant's address. The respondent indicated this meeting was informed orally and always did in this way and no written notice was made. The respondent did not state definitely how many days the convening notice was made. ahead of But the agent of the claimant, in hearing, provided a piece of evidence of a written notice for convening a board meeting, from which, we could see that the convening notice had ever been made in a written manner.
And, when the meeting was held, the respondent knew that Wu XX was under residential supervision by the public police bureau in Guangzhou because of assisting the investigation of a fraud case, and might not come to Shenzhen to attend this meeting.
By virtue of the situations mentioned above, the tribunal held the claimant did not receive the convening notice that should be sent timely and in legal form, which violated provisions upon procedures for holding board meeting. Therefore, resolutions of this meeting (namely, the third meeting of the fourth board on August 24, 1988) were not in force.
(c) The tribunal believed Wu XX's signature on the meeting summary when sent to the supervised lobby in Guangzhou might not be used as the confirmation of the summary. The agent of the respondent, in hearing, emphasized Wu XX signed the summary freely, which could be proved by on-the-spot tapes and photos. But the respondent provided none when the tribunal required such tapes and photos, and afterwards stated they could not be founded. Obviously, the respondent could not prove the situation it asserted.
The tribunal also believed Wu XX's signature on the meeting summary might not prove the claimant had given up its investment interests. The act to give up investment interests is alteration of the cooperative operation agreement, which was a kind of foreign-related contracts. In accordance with Article 32 the Law of the People's Republic of China upon Foreign-related Economy Contracts (noted: this Law had been abolished by the Contract Law of the People's Republic of China and did not apply as of October 1, 1999), alteration of contract shall be made in the written form. Therefore, to alter the contract should be signed by the legal representatives or authorized ones of the claimant and the two respondents jointly. The meeting summary was just an abstract of the board meeting, so it obviously was not a valid document for the alteration of the cooperative operation contract.
But the problems did not end so. The two respondents had performed resolution made by this board meeting. Firstly, they had submitted a report of the meeting summary to Shenzhen government and it had been approved thereby. Secondly, they had canceled Wu XX's director post, and only the two respondents had, as from the last ten days of August in 1988, participated in the operation of the hotel. In fact, the two respondents had disregarded the claimant and its representative totally, so attributed all investment interests and participation right of the claimant to themselves. Therefore, d, the two respondents' activities afterwards had made them become the unique parties to the joint venture enterprise, and in fact confiscated all investment interests of the claimant although the third meeting of the fourth board was invalid
(d) The facts mentioned above might obviously prove the two respondents had violated their contractual obligations. Any signer to the agreement, impacted by these contract-breach acts, had the right to choose to maintain the contract and urge the breach parties to perform or to terminate the contract and claim compensation. The claimant request the tribunal, considering that the claimant and the two respondents might not cooperate continuously after such a big twist and turns, and the unwilling cooperation could only cause disagreeable incidents and new disputes. The claimant believed, the respondent confiscated its investments and dropped Wu XX out of the board, so it was impossible to conduct a continuous cooperation." The claimant had expressed its determination upon terminating the contract. The respondents had confiscated all investment interests of the claimant in fact. So the tribunal held the three parties to the agreements had no requirement and possibility to continue the cooperation, and the cooperation operation contract should be terminated in accordance with Article 31 of the Contract Law of the People's Republic of China.
Under usual conditions, the tribunal would, when terminating a cooperation operation contract, order the cooperation parties to liquidate the cooperative operation enterprise. But the tribunal believed liquidation was not the reasonable relief here because situations in this case differed from the usual ones. For which reasons were as follows:
(i) The respondents had in fact confiscated the claimant's interests.
(ii) The hotel had operated for a very long time business thereof would be affected if liquidated.
(iii) No party had required liquidation.
In accordance with Law of the People's Republic of China upon Foreign-related Economy Contracts, the breach party should compensate the actual losses of the injured party. This Law did not stipulate the specific methods for determining the actual losses, but permitted to adopt international practices (Article 5). The tribunal adopted the principle as early set up in international arbitrations as the basis for determining the actual losses in this case. This principle, established by judge Max Huber in an international arbitration case early in 1925, was "the final losses to be compensate may not exceed the direct losses, namely, the value of the lost or damaged goods."(Melilla-Ziat，Ben Kirm Case，U.N. Reports of lnternational Arbitration Awards，Vol.II，p.732). And the original was as follows:
"Le dommage eventuellement remboursable ne pourrait etre que ledommage directe，savoir la valeur de marchandises detruites ou disparues"(Melilla-Ziat，Ben Kirm Case，U.N. Reports of lnternational Arbitration Awards，Vol.II，p.732)
The above-mentioned principle had been used in international arbitration cases on compensation for investment confiscation. The latest case awarded in the latest years was AAPLv. Republic of Sri Lanka made in 1990 by the international Center for Settling Investment Disputes(ICSID)set up in the International Recovering and Development Bank.(International Law Materials, Vol.III，p.580, 30ILM 580)
For the losses it suffered, the claimant required the respondents to compensate HK$4,768,446.36 it had invested into the hotel in its arbitration application form. In the third meeting summary of the fourth board, the two respondents had also confirmed this HK$4,768,446.36 invested by the claimant. On hearing, the agent of the respondent also confirmed this investment. Therefore, the tribunal believed, the claimant suffered losses with a value of HK$4,768,446.36.
On which party of the two respondents should assume the compensation liability. The two respondents should compensate jointly since the claimant's losses were caused by their joint occupation. Article 87 of the General Principles of the Civil Law of the People's Republic of China stipulated: "Each of the joint creditors shall be entitled to demand the debtor fulfill his obligations; each of the joint debtors shall be obliged to perform the entire debt, and the debtor who performs the entire debt shall be entitled to ask the other joint debtors to reimburse him for their shares of the debt." According to this, the claimant might require either respondent compensate HK$4,768,446.36., the respondent may, when making entire payment, claim the other reimburse shares it should bare.
The two respondents had, as from September 1, 1988,deprived the claimant of all its investment interests valued HK$4,768,446.36 as determined above. Interests for this compensation sum should be calculated as from September 1, 1988 to the paid off time, and paid by the respondents. The rate should be calculated at 8% annually;
(e) Other two matters involved in the third meeting of the fourth board of directors were as follows: (i) With regard to the matter that the hotel required the claimant pay back HK$64,178,708.0. The tribunal believed, it did not belong to the cooperative operation contract, so it was not under the tribunal's jurisdiction and shall not be used to offset the compensation by the respondent.
(ii) With regard to the matter that the hotel required the claimant pay back HK$1,786,260.83. The tribunal gave the same opinion with the above-mentioned item (i).
(2)
On the jurisdiction over requirement of the claimant upon paying wages
With regard to requirement 2 of the claimant in its arbitration application form, namely, Wu XX's 66-month wages HK$1,980,000 should be paid. The tribunal believed, such wages were generated from the employment contract between Wu XX and the hotel, and had no relation with the cooperative operation contract. So the tribunal had no jurisdiction over this.
(3)
On the jurisdiction over requirement of the claimant upon paying the preparation fees it had paid
With regard to Requirement 3 of the claimant in its arbitration application form, namely, the preparation fees that had been paid by the claimant, should be calculated at 50% of the total investment sum and amounted to HK$ 12,207,640.39. The tribunal believed, this sum happened between the claimant and the hotel and had no relation with obligations that should be assumed by the three parties in the cooperative operation contract. Therefore, the tribunal had no jurisdiction over this.
(4)
On arbitration jurisdiction
On Dec.9, 1986, the claimant and the first respondent signed the Agreement between X Company in Shenzhen Special Economic Zone and X Company in Hong Kong on Transferring investment HK$ 60, 000, 000 of the Hotel, in which both parties consented to transfer HK$ 60, 000, 000, which is part of the sum invested into the hotel by the claimant, to the first respondent, and the claimant also permitted the first respondent to transfer this sum to the second respondent. On Dec.22, 1986, the first respondent and the second respondent entered into the Agreement on Transferring investment HK$ 60, 000, 000 of the Hotel, in which both parties consented to transfer investment HK$ 60, 000, 000 of the Hotel to the second respondent. The two above-mentioned transfer agreements had been set up legally and performed, and the second respondent had become one party to the hotel jointly operated by the three parties. After the two above-mentioned transfer agreements were set up, they had turned an essential part of the Agreement on Cooperative Operation of Hotel and the two supplementary agreements as signed subsequently. So the claimant, the first respondent and the second respondent should, according to the aforesaid agreement, supplementary agreements and the transfer agreements, enjoy rights and assume obligations. In this context, the arbitral tribunal believed, the arbitration clause (Article 5) in the agreement shall binding upon the claimant, the first respondent and the second respondent, and the CIETAC Shenzhen had arbitration jurisdiction upon disputes between the three parties according to the aforesaid agreements.
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The Case of XX Company, Hong Kong v. XX Company, Guangzhou on Dispute over Cooperative Operation of XX Hotel
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