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The Case of XX Company v. XX Company on Dispute over Equity Joint Venture XX Industrial Ltd. Co. in Shenzhen
Jurisdiction: Arbitration; CIETAC Shenzhen
1.Case Brief
On June 12, 1986, the claimant and the respondent entered into the Contract on Equity Joint Venture Shenzhen XX Industrial Ltd. Co. (hereinafter referred to as Joint Venture Contract). On October 30 of the same year, the People's Government of Shenzhen City approved the joint venture contract. On November 14 of the same year, Shenzhen XX Industrial Ltd. Co. (hereinafter referred to as Joint Venture Company) was approved and registered by Shenzhen Municipal Administration for Industry and Commerce.
The joint venture contract stipulated that:
(1) The joint venture company' s production scope should be hot-press flowers and the term of joint venture should be 10 years.
(2) The registered capital of the joint venture company should be HKD 3 million, of which the claimant should contribute HKD 1.8 million( including HKD 1.5 million for purchasing equipment), accounting for 60% of the registered capital; the respondent should contribute HKD 1.2 million ( including HKD one million for purchasing equipment), accounting for 40%.
(3) The term of the contribution should be within 90 days since the joint venture company obtained its business license, the contribution should be paid by the two parties on three installments.
(4) The type and manufacturer of equipment should be examined and decided by the two parties of the joint venture company.
(5) The respondent, as entrusted by the joint venture, should be responsible for the sale of 70% of the productions abroad.
(6) The two parties should share the profits and assume the losses in proportion to their contribution.
Before the conclusion of the joint venture contract, the two parties had negotiated the relevant issues about importing two suits hot-press mold machines and supplementary molds, and had achieved an agreement that the respondent should have represent the joint venture company to contact the equipment supplier. Therefore, the respondent inquired and then negotiated with West Germany's M Company on this matter. On June 9, 1986 ( 3 days before the conclusion of the joint venture contract), Mr. L, representative of the respondent applied to M company a letter, the content of which was as follows: "The issues concerning purchasing two suits hot-press mold machines have arranged specially with our company' s clients in mainland, our company will issue a credit letter, the beneficiary of which is your honor company and amount is DM 545,701(the AHV-BT-1721 mold machine' s price is DM 308,456 and the AHV-BT-1316 mold machine' s price is DM 237,245). The difference between the amount of the credit letter and your honor company' s inquired quotation DM 216,048(the AHV-BT-1721 mold machine' s price is DM 121,396 and the AHV-BT-1316 mold machine' s price is DM 96,652) is DM 329,653, which will be used for purchasing raw materials. Since our company' s clients in mainland have difficulties in applying for foreign exchange, please remit aforementioned variance to lady W' s account in HSBC within 7 days. Please remit variances of the molds together if any. Aforementioned arrangement is a part of the whole sale campaign. Therefore, our company hopes that your honor company could cooperate with us in this way, we make a promise to sell your company' s machines and receive their payments. Please sign and confirm aforementioned arrangement letter and deliver this letter' s copy to our company.
The representative of M company signed and confirmed this letter.
After the conclusion of the joint venture contract, Mr. L, on behalf of the joint venture company, signed separately two confirmed orders concerning purchasing hot-press mold machines, supplementary molds and spare parts with M company on June 27 and 28, 1986. The confirmed order one stipulated: M company should sell AHV-BT-1721 mold machines to the joint venture company at a price of DM 308,456, should sell Paris molds at a price of DM 30,000, should sell 3 years' spare parts at a price of DM 46,268.40 (calculated by 15% of AHV-BT-1721 mold machine' s single price), the aggregated price amounted to DM 384,724.40 and the trade term should be C+F Hong Kong. The confirmed order two stipulated: M company should sell AHV-BT-1316 mold machine to the joint venture company at a price of DM 237,245, should sell Mucnchen mold at a price of DM 28,000, the aggregated price amounted to DM 265,245 and the trade term should be C+F Hong Kong. Aforementioned two confirmed orders should be paid in 100% confirmed irrevocable L/C.
With respect to the payment of aforementioned two confirmed orders, the claimant and the respondent made an agreement that, the claimant should pay to M company based on the price confirmed by order one, which part should be regarded as a part of its investments to the joint venture company; the respondent should pay to M company based on the price confirmed by order two, which part should be regarded as a part of its investments. On July 4, 1986, according to confirmed order one, the claimant issued a credit letter through Hong Kong branch of Southern China Bank, the beneficiary of which was M company and amount was DM 384,724.40, and the claimant should get documents against payment on December 1st of the same year. On June 30, 1986, under confirmed order two, the respondent applied HSBC to issue an irrevocable credit letter, the beneficiary of which was M company and amount was DM 265,245; however, on the same day of applying a consent letter to issue the credit letter by HSBC on July 4, 1986, the respondent applied to cancel the aforementioned credit letter. On July 16, 1986, M company informed the respondent by fax: the original copy of the credit letter amounted DM 265,245 will be retreated to HSBC through our company' s relation bank in order to make your honor company available to obtain the fund for particular use; the other fund that should be retreated will be remitted to lady W' s account appointed by your honor company as soon as possible; ordered machines will be arranged to cargo respectively.
Thereafter, AHV-BT-1721, AHV-BT-1316 hot-press mold machines, the supplementary molds and three years spare parts arrived in joint venture company on December 18, 1986. Besides that, from December 1986 to March 1987, the claimant contributed of HKD 380,484.71 in cash to the joint venture company. From December 1986 to March 1987, the respondent contributed HKD 235,834.43 in cash to the joint venture company.
After establishment of the joint venture company, the respondent not only failed to assign its representative to engage in routine operation and management of the joint venture company, but also failed to involve in decision making of the board of directors. During this period, the claimant found out evidences that the respondent misappropriated the purchasing fund that should be paid to M company by deception, and the claimant required the respondent come to the joint venture company to solve the disputes for several times, however, that did not work. On January 15, 1990, the claimant applied arbitration to CIETAC Shenzhen. The claimant' s requirements were as follows:
(1) The respondent should pay off its deferred contribution of HKD 964,165.57.
(2) The respondent should repay the deceived purchasing fund for hot-press mold machines of DM 127,260.50(equivalent to HKD 462,591.92).
(3) The respondent should assume part of the joint venture company' s losses of HKD 3,390.70.
(4) The respondent should bear all arbitration fees in this case.
On February 3, 1990, Shenzhen Accounting Firm, as entrusted by the joint venture company, issued a Checking Account Report, which examined and confirmed the accumulated losses of the joint venture company from its establishment to December 31, 1989 of RMB 165,912.09.
On June 17, 1990, the claimant submitted a Notice on Implement and Redress of the Arbitration Application to the arbitral tribunal. The claimant changed Article 3 of the arbitration application in this paper, required that the respondent should assume part of joint venture company' s losses of RMB 19,212.62.
The reasons of this arbitration requirement presented by the claimant in written and oral were as follows:
(1) The claimant have contributed all its investment of HKD 1.8 million under the joint venture contract, including that: HKD 380,484.71 in cash paid to the joint venture company; equipment payment of DM 384,724.40 paid for hot-press mold machine for the joint venture company (equivalent to HKD 1,398,473.19 at exchange rate of 1:3.635) and goods marine insurance premium and tariff expense of HKD 21,042.34 under confirmed order one.
The respondent paid HKD of 205,475.50 in cash to the joint venture company and paid goods' marine insurance premium and tariff expense of HKD 16,474.43 under confirmed order two for the joint venture company, paid relevant expense of HKD 13,884.50 for West German trip to check and examine the equipment for the joint venture company, the aggregated investment was HKD 235,834.43 actually, accounting for 8% of registered capital of the joint venture company; its overdue contribution was HKD 964,165.57, accounting for 32% of the registered capital of the joint venture company; while the virtual investment was HKD 1.2 million, accounting for 40% of the joint venture company' s shares. The reasons were as follows: it was false that the respondent paid the joint venture company the purchase payment of DM 265,245(equivalent to HKD 964,165.57 at exchange rate of 1: 3.635) for AHV-BT-1316 hot-press mold machines under confirmed order two. During the period of the conclusion of the joint venture contract, the respondent conspired with M company behind the claimant' s back and changed the price of AHV-BT-1721 mold machine from DM 121,396 faxed from M company to DM 308,456 written in confirmed order (254% increase), changed the price of AHV-BT-1316 mold machine from DM 94,652 faxed from M company to DM 237,245 written in confirmed order (250% increase), the difference between the two prices was deceived by the respondent. Accordingly, the actual prices of Paris mold, Muenchen mold and the three years' spare parts should be lower 250% than the confirmed price in order, the actual price should be DM 12,000, DM 11,200 and DM 18,215.90 respectively. In conclusion, the actual value of 2 hot-press mold machines, 2 suits molds and three years' spare parts should be DM 257,463.90 totally. The goods payment of DM 384,724.40 from the claimant to M company on the price of confirmed order one was more than actual value amount for all equipment aforementioned, and the difference between the prices of DM 127,260.50 was remitted to the respondent from M company. M company also repaid the credit letter amount of DM 265,245 issued from HSBC to the respondent, therefore, the respondent not only failed to pay one penny for equipment, but also cheated 32% shares of the joint venture company accordingly and misappropriated left goods payment of DM 127,260.50 for purchasing the hot-press mold machines from the claimant to M company (equivalent to HKD 462,591.92 at exchange rate of 1:3.635). Therefore, the respondent should pay off its deferred contribution fund of HKD 964,165.57 to the joint venture company and repay its misappropriated HKD 462,591.92 to the claimant.
(2) Two parties had contributed HKD 2,035,834.43 to the joint venture company till now, the claimant had contributed HKD 1.8 million, took up 88.42%, the respondent had contributed HKD 235,834.43, took up 11.58%. According to the Check Account Report issued from Shenzhen Accounting Firm on February 3, 1990, the respondent should assume 11.58% of the amount losses of RMB 165,912.09 of the joint venture company, i.e. RMB 19,212.62.
2.Award
(1)
The respondent shall pay off its deferred contribution fund of HKD 964,165.57 to the joint venture company. This fund shall be paid to the joint venture company within 30 days since the award is issued. The claimant shall exercise its rights according to Provisions for the Contribution of Capital by Parties to Joint Ventures Using Chinese and Foreign Investment and Regulations on Foreign-related Company in Special Economic Zones in Guangdong Province if the respondent fails to that.
(2)
The respondent shall repay the left payment of the hot-press mold machine of HKD 462,591.92 to the joint venture company. This fund shall be remitted to the joint venture company within 30 days since the award is issued. The interest shall be calculated at the rate of 7% per year if term of payment expires.
(3)
The respondent shall assume 11.58% of amount losses of the joint venture company, i.e. RMB 19,212.62. This fund shall be paid to the joint venture company within 30 days since the award is issued. The interest shall be calculated at the rate of 7% per year if that the term of payment expires.
(4)
The respondent shall bear the arbitration fee of this case.
3.Comments
The legal matters in relation to this case are mainly as follows:
(1)
The identification on equipment investment
Under the joint venture contract, the full amount contribution to the joint venture company from the claimant and the respondent should be HKD 3 million, of which HKD 2.5 million should be used for purchasing equipments needed by the joint venture company, that are hot-press mold machines for producing hot-press flowers productions and supplementary molds, etc.( the claimant should assume HKD 1.5 million and the respondent HKD one million), accounting for 83.3% of two parties' contribution. Therefore, investments for the equipment are main part of the registered capital of the joint venture company, also are the basic content of the contribution liabilities that should be performed by the claimant and the respondent.
(2)
The performance of the claimant' s contribution liabilities
According to the agreement between the two parties, the claimant and the respondent should issue the credit letter to M company for goods payments to perform respective contribution liabilities under the prices and conditions written in confirmed order one and two signed by Mr. L, the respondent' s representative, and M company. The claimant had paid DM 384,724.40 to M company under aforementioned agreement (equivalent to HKD 1,398,473.19) and also paid the goods transportation insurance premium and the tariff expense of HKD 21,042.34, which meant the claimant had already fully performed its contribution liabilities.
(3)
The confirmation on purchase deal from M company by the joint venture company for two suits hot-press mold machines supplementary molds, and spare parts
The evidences of this case showed that, this deal for purchasing two suits hot-press mold machines, supplementary molds and spare parts from M company by the joint venture company was performed under a conspired cheat game from the beginning and the conspirer of this game was the respondent. The letter delivered from Mr. L, the respondent' s representative, to M company contained all schemes of this cheat.
(4)
On the respondent' s activities
Thereafter, all the things, including signing two confirmed order for equipments, remitting DM 384,724.40 from the claimant and withdrawing the credit letter by the respondent, are contained in the cheat game conspired by the respondent.
Due to this cheat, the payment of DM 384,724.40 paid by the claimant only bought the equipment, supplementary molds and spare parts with actual value of DM 257,463.90, which caused gross losses to the joint venture company and the claimant; due to this cheat, the respondent not only failed to pay one penny for the equipment or perform its contribution liabilities, but also misappropriated the equipment payment of DM 127,260.50.
(5)
With respect to the issues concerning assuming the liabilities and arbitration fee of this case
Under China laws, any client involved civil activities within the territory of China shall observe the principles of fairness, honesty and credibility and also shall respect social ethics in civil activities. The respondent as a joint venture party of the joint venture company is supposed to perform its contribution liabilities honestly and obtain justified and lawful interest through its hard work in investing and operating the joint venture company. However, the case brief showed that, the respondent had no will to establish a joint venture company. In the name of performing the contribution liabilities, the respondent' s activities, setting the trap with M company in order to cheat the payment, are totally commercial frauds. The respondent' s activities not only violate China law, but also fail to observe universally recognized basic commercial ethics.
In conclusion, the respondent should assume its liabilities for its commercial fraud activities in this case. The respondent' s so-called 32% shares contributed in the form of equipment to the joint venture company are false and shall not be recognized. The respondent shall pay off its contribution under the joint venture contract, and shall repay the equipment payment of DM 127,260,50(equivalent to HKD 462,591.92), which is misappropriated unlawfully by the respondent, it shall assume part of the losses of the joint venture company, and also bear the arbitration fee of this case.
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