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The Case of XX v. XX on Dispute over Contract Concerning Cooperative Operation of XX Real Estate Limited Company
Jurisdiction: Arbitration; CIETAC Shenzhen
Date of Decision: April 1st, 1999
1.Case Brief
On March 12, 1993, the claimant and the respondent concluded the "Contract on Cooperative Operation of XX Real Estate Limited Company", which stipulated to jointly establish a cooperative enterprise in XX city, China. The contract that the two parties submitted to the foreign trade commission in XX city for approval was the XX Real Estate Limited Company Contract (hereinafter referred to as the cooperative contract) as entered into by the aforesaid two parties at the same day.
As the cooperative contract stipulated, the two parties agreed to establish a cooperative company within the territory of China, which should be named as XX Real Estate Limited Company. The business scope of the cooperative company was to develop, construct, sell, rent and manage the self-building comprehensive building (as prescribed by the state, the use term of residency land was 70 years while 50 years for business land) in the field of No. X Yard in XX Road XX District as approved by the planning bureau in the city through the Letter (Sui Cheng Gui Di [92] No. 0093). The investment sum of the cooperative company should be 17, 000, 000 USD and the registered capital 6, 800, 000 USD (converted into RMB in line with the foreign exchange rate as publicized by the State Administration of Foreign Exchange under the People's Republic of China on the day when they are paid). The respondent should provide paid land use right for this project as the condition of cooperation. The claimant should be in charge of investing in all construction funds, and should pay 15% of the registered capital within 3 months as of the issuance of the business license, and pay off all registered capital within half year. As regards the construction funds to be provided by the claimant, the respondent was required to provide no pledge or mortgage in any form. The construction funds might be used for paid land use fees, construction expenses, preparation fees, business start fees and building sale fees as stipulated in the cooperative contract, in addition, for importing necessary materials and office supplies within the construction and business scope as stipulated in the cooperative contract. The part beyond the registered capital but within the investment sum should be paid off within 3 years as of the obtaining of the business license.
The respondent was obliged to assist the cooperative company to handle compensation for land value, and should take charge of providing the land use right for construction of the No. X Yard in XX Road XX District as well as relevant certification documents and materials and should handle all formalities thereof and hand over to the cooperative company.
The claimant should, according to the Progress Schedule of the Whole Project and the actual progress, provide all construction funds needed by the project to the cooperative company. As regards the land use right provided by the respondent, the claimant should pay the invested pre-expenses, deposits for compensation and each variety of expenses, amounting to RMB 6,000, 000. The expenses for making up land value of this project levied by the government should be assumed by the claimant and be delivered by the respondent according to the payment date and form notified by the government.
The arbitration clause in the cooperative contract stipulated that all disputes arising from the performance of this contract or in relation with this contract, the two parties should settle through friendly negotiation, if failed, either party might, within 60 days as of negotiation, file disputes to CIETAC for arbitration according to the arbitration rules thereof. The arbitration award was final and bonding upon the two parties. All the arbitration fees should be assumed by the losing part or otherwise determined by the arbitral tribunal. Any award of the arbitral tribunal should be enforced by any people's court that enjoyed jurisdiction upon the punished party or upon the locality of the punished party's properties. During the period of disputes, other articles without disputes should be performed continuously.
The two parties also made stipulations in the cooperative contract upon the board of directors, operation and management organs, labor management, finance, accounting, taxation, insurance, foreign exchange management item and so on.
During the performance of the cooperative contract, disputes occurred between the two parties, and then the claimant filed an application to CIETAC Shenzhen for arbitration on March 31, 1998, and brought the claims as follows:
(1) The respondent should return and compensate the claimant's investment sum and interests thereof, amounting to RMB 24,450,757.03.
(2) The respondent should bare the arbitration fees in this case and all actual expenses paid by the claimant for this case including the retaining fees.
The claimant definitely required the respondent to compensate RMB 26,643,153.05 in its materials provided on August 18, 1998.
Against the claimant's claims, the respondent submitted written defense and put forward the following counter-claims:
(1) The cooperative contract concluded by the claimant and the respondent should be terminated.
(2) The claimant should be identified as fundamental breach of contract, and should assume the liabilities for breach of contract as stipulated in the cooperative contract.
(3) The claimant should compensate the respondent partial penalties for breach of contract of RMB 8, 000,000.
(4) With respect to the penalties for breach of contract beyond RMB 8, 000,000 and losses that should be assumed by the claimant, the right to ledge arbitration or lawsuit for claiming should remain with the respondent, and a written claim was made here to require payment.
(5) The claimant should undertake all arbitration fees for the principle suit and the counter-claim in this case.
On June 7, 1998, the respondent sent a letter to CIETAC Shenzhen for canceling its Counter-claim (a).
The claimant claimed as follows:
On March 28, 1992, the respondent had concluded the Cooperative Construction of Building Protocol with Guangzhou Branch of China XX Parent Company and Guangzhou XX Limited Company, which stipulated that, Guangzhou Branch of China XX Parent Company should provide the land use right it had on No. X Yard, XX Road for cooperative construction of building, while the claimant and Guangzhou XX Limited Company should be in charge of all fees for infrastructure investments. After the conclusion of Protocol, because the respondent had no ability to perform it, in addition, the geological situation of the construction land was complicated, construction expenses augmented, the investment risk added, etc., disputes arising among the original three cooperative parties and the cooperation was difficult to continue. Under this condition, the respondent contacted with the claimant and negotiated the issues about cooperative construction with a view to protecting its own obtained interests and shifting the investment. Since the respondent hided the aforesaid fact and was seized of obviously subjective animus to shift investment risk, the claimant made a wrong acquaintance thereof, based on which, the claimant concluded XX Real Estate Limited Company Contract with the respondent on March 12, 1993, and officially established XX Real Estate Limited Company under Chinese-foreign cooperative operation in August 1994. In fact, this cooperative contract was concluded against the claimant's genuine intention. What should be noticed was, when this cooperative contract was concluded, the Cooperative Construction of Building Protocol concluded between the respondent and Guangzhou Branch of China XX Parent Company was under performance, and parties to this Protocol did not cancel and terminate it. More serious, after concluding the Contract Concerning Cooperative Operation of XX Real Estate Limited Company with the claimant, the respondent, without noticing the claimant, entered into the Supplementary Protocol on Cooperative Construction of Building with Guangzhou Branch of China XX Parent Company on December 7, 1993, which definitely stipulated the distribution proportion of each party of this Protocol after the building was accomplished. The aforesaid acts of the respondent not only breached the contract but also violated laws, so were civil fraud obviously.
As stipulated in the cooperative contract concluded between the claimant and the respondent, the respondent was obliged to provide the land use right for construction of the No. X Yard in XX Road XX District as well as relevant certification documents and materials and should go through all formalities thereof and hand over to the cooperative company, while the claimant should be in charge of providing all construction funds necessary for the cooperative project. After concluding the contract, the claimant actively performed its obligations as stipulated therein. As from 1993 to October 1997, the claimant successively invested in pre-expenses, rents, wages, designing fees and engineering fees as well as interests thereof, amounting to RMB 24,450,757.03 to the cooperative company. But the respondent, with a view to viciously shifting investment risk, lacked faith for performing the contract as of its conclusion, so it illegally conducted another cooperation with the claimant by No. X Yard it had used for cooperative construction with others, in addition, it failed to transfer the land use right of No. X Yard under the cooperative company's name, which had seriously impact the operation of the cooperative project and instituted severe breach of contract. More seriously, the respondent, without negotiating with the claimant and obtaining the claimant's written consent, unilaterally conveyed XX Mansion, the cooperative project of the cooperative company, to XX Industry Development Company, XX city, and had accepted part of prices. This act had grossly infringed upon legal rights and interests of the claimant, was a tort act. For the purpose of protecting legal rights and interests of the claimant and the cooperative company, respectively on September 18 and November 21 in 1997 and January 1998, the claimant had send letters to the respondent for three times requiring for negotiation upon disputes between the two parties and for reasonable explanation, however, the respondent turned a deaf ear to this and ignored until now.
The claimant held, the cooperative contract was established according to law, should be provided with legal force, as well as observed and performed strictly by any party to this contract. All aforesaid acts of the respondent had not only breached stipulations in the contract but also seriously violated provisions in Chinese laws, both breach of contract and law-violation, which had caused gross losses to the claimant. Under this condition, business target of the cooperative operation was unavailable, and the cooperative company was unable to continue existing and operating.
The respondent defended as follows:
The conclusion of the cooperative contract was under true will of both parties. The respondent, before concluding the cooperative contract with the claimant, had entered into the Cooperative Construction of Building Protocol upon No. X Yard, XX Road with Guangzhou branch of China XX Parent Company, with which the claimant was acquaint all the way. In the Supplementary Protocol for the Cooperative Construction of XX Mansion, the two parties agreed on issues of XX Company. The claimant was clear about the relationship between the respondent and XX Company as well as the status of XX Company in the project, also knew well rights and obligations of XX Company in the development of this project. As for geologic issues, the respondent had handed over the geologic materials upon this land to the claimant in advance, and the claimant also entrusted designing on the strength of such materials, even wholly accomplished by extension, and then submitted to the planning bureau in XX city. After the cooperative company was established, it was the claimant who took charge of conducting prospecting again, project designing, etc., and fees provided with the arbitral tribunal by the claimant included the prospecting fees, earthquake test fees, etc. Moreover, the letter sent to the respondent by the claimant on April 19, 1995 read, "the geologic prospecting of the project will start on April 20, 1995 or so, about 20 days for processing, and will be finished on May 10, 1995." The letter on May 3, 1995 read, "We have commenced prospecting work upon XX Mansion in No. X Road XX, and will conduct project of Three-Stake consequently and will accomplish about the middle or last ten-day of June 1995." So it was clear that the claimant was aware of the geologic station all along. But the claimant did not indicate the complicated geologic station any time before as from the conclusion of the cooperative contract to the submission of this arbitration. So the claimant faked the thing that the respondent hided truth as it ascertained in its arbitration application form.
As regards the land use right, the respondent had fully performed the contract. The land use right had been under the respondent's name and used by the cooperative company actually. According to the Cooperative Construction Agreement concluded by the respondent and Guangzhou Branch of China XX Parent Company, the Permit on Construction Land Planning (Hui Cheng Gui Di [1992] No. 0093), the Notice for Construction Land in XX City ( Hui Guo Tu Jian Yong Tong Zi [1994] No. 323), the Reply of the planning bureau in XX City ( Hui Cheng Gui Dong Pian Fa Zi [1995] No. 155), the Letter of the dismantlement office in XX City (Chai Guan Zhun Zi [1995] No. 019) and the Reply of the Health and Epidemic Prevention Station in XX City ( Hui Wei Fang Jian [1995] No. 200), the respondent had actually invested this field to the cooperative company for use, and accomplished the submission for construction. The claimant recognized this all the time and conducted works jointly with the respondent. The claimant stated in its Letter on March 6, 1995, "We have reported the primary designing picture of XX Mansion to the planning bureau under the name of XX Real Estate Limited Company on March 3, but was refused. The reason was that the land did not belong to XX Company, and only should be reported under the name of your Company and XX. So we require your Company in Hong Kong handle the report formalities for the primary designing of XX Mansion. We have decided upon the construction institute for XX Mansion." All above proved that the land of No. X Yard in XX Road had been delivered to the cooperative company for actual use, just reported for construction under the mane of the respondent and XX.
In this case, the two parties' cooperative enterprise, XX Real Estate Limited Company, obtained the business license on August 9, 1995, but the claimant failed to invest within stipulated time limit. Therefore, with a view of situations then, the land use right might not be transferred to the cooperative company whose legal status was vague then. Three months later, the cooperative company dissolved automatically because the foreign party failed to invest, so it was more impossible to transfer the land use right to the cooperative company.
The cooperative contract failed to stipulate specific time for transferring the land use right to the cooperative company. Meanwhile, due to the breach of contract of the claimant, it was unavailable to make the name transfer of the land use right. Article 14 of the cooperative contract stipulated that the respondent was obliged to provide the land use right for construction of the No. X Yard in XX Road XX District as well as relevant certification documents and materials and should go through all formalities thereof and hand over to the cooperative company, but failed to stipulate specific time for performing this obligation. So the performance should be deemed as being made within a reasonable period, which should be at least after the claimant invested in the first batch of registered capital and the status of the cooperative company was determined down.
There was no basis in fact for the calculation of compensation sum claimed by the claimant, it had claimed even more than RMB 24, 000, 000 in its arbitration application form, but majority of which lacked basis in fact and law ground and was false claim. Firstly, rents were for the claimant's offices in Guangzhou, were not the cooperative company's expenditures, and had in no relation with this case, also, the respondent encountered rent issues in Guangzhou during the cooperative term. Secondly, wages for personnel hired by the claimant should be assumed by the claimant, only wages for personnel hired by the board of directors of the cooperative company should be deemed as the company's expenditures. Thirdly, fees for prospecting, designing, reporting for construction, etc. should be listed as losses of the cooperative company, which should be assumed by the breaching party, namely, the claimant in accordance with the principle of fault liability. Fourthly, the interests were wrongly calculated, as the rate of 50% was used by the claimant. Since the claimant was not financial institute and had no right to grant loan outside, rate for current deposit other than loan rate might apply to calculate interests. Fifthly, RMB 6, 000, 000 paid by the claimant served as land expenses in advance, was not deposited in bank, and generated no interests, so interests calculated at the rate for current deposit should be listed as the cooperative company's losses and assumed by the breached claimant. Sixthly, land compensation RMB 6, 000, 000 should be offset by penalties for breach of contract that should be paid by the claimant. Therefore, there were no fact and law basis for the claimant's claim sum.
The respondent also advanced that the claimant had breached the contract fundamentally.
As the cooperative contract stipulated, the claimant should pay 30% of registered capital within 3 months as of the issuance of the business license and pay off all within half year, in addition, it should, according to the Progress Schedule of the Whole Project and the actual progress, provide the cooperative company for all construction funds needed by this project. The cooperative contract also stipulated that the claimant should pay the respondent RMB 6, 000, 000 for compensating investments in advance. After the cooperative contract was concluded, the cooperative company obtained the business license on August 9, 1994. The claimant should pay RMB 12,000, 000 within three months, i.e. prior to November 9, 1994, and RMB 28,000, 000 within half year, i.e. before May 9, 1995. However, the claimant failed to pay on schedule, namely, it failed to pay the first installment of RMB 12,000, 000 and the second RMB 28,000, 000, also failed to pay all construction funds in light of the project progress. Therefore, the claimant had constituted fundamental breach of contract.
The claimant should assume liquidated damages according to stipulations in the cooperative contract. As regards liquidated damages, Article 48 of the cooperative contract stipulated, should Party B (the claimant) fail to provide all registered capital or perform obligations as stipulated in this Article within half year as of the registration of the cooperative company, Party B should pay liquidated damages to Party A (the respondent), and the calculation formula thereof was: amount that should be invested for this term × 10% × delaying months… These damages should be calculated from February 9, 1995 to January 14, 1997, 23 months in total. So the delayed liquidated damages of registered capital were RMB 40, 000, 000×10%×23＝RMB 92, 000, 000. Damages for total investment sum should be calculated separately. According to stipulations in Article 48 of the cooperative contract, the claimant should pay liquidated damages for not invested funds, in addition, 1% late fees monthly. So the claimant should pay late fees, RMB 40, 000, 000×1%×23＝RMB 9, 200, 000. Losses suffered by the respondent in this case were the invested valued land, RMB 58,000, 000×15‰×28＝RMB 24, 360, 000, at the rate of 15‰ daily until January 1997 when the respondent found the new cooperative party. Such losses were omitted because liquidated damages were over these. The claimant was supposed to compensate the respondent liquidated damages of RMB 92, 000, 000 and late fees of RMB 9, 200, 000. With a view to the bad asset situation of the claimant, the respondent only claimed part of liquidated damages of RMB 8, 000, 000 through arbitration for now.
But the claimant argued:
According to stipulations in the cooperative contract, the claimant should, within one month as of the conclusion of the cooperative contract, pay expenses in advance, deposits for compensation and each variety of expenses of RMB 6, 000, 000 that the respondent had invested in. Afterwards, the claimant invested rents, wages, designing fees, engineering fees, etc. to the cooperative company. However, in performance of the contract, the claimant was gradually aware of the respondent's fraud and malice of shifting investment risk. Especially the respondent refused to provide and transfer the land use right to the cooperative company, although was urged many times by the claimant, it rejected to go through alteration registration formalities all along, which made the claimant certainly believe that it must suffer more risk and losses if continued to invest. Especially when the designing drawing submitted by the claimant to the planning bureau under the name of the cooperative company suffered rejection, the claimant realized, that the claimant failed to transfer the land use right to the cooperative company had made the performance of the cooperative contract, signed between the claimant and the respondent, impossible, therefore, under the condition of knowing the respondent had no faith for performance and had obviously breached the contract, the claimant decided to not invest any more so as to reduce own risk and prevent extension of losses. The Meeting Summary for Informal Discussion upon Nationwide Economic Trials, issued by the Supreme People's Court in May 1993, prescribed that, "Risks and losses that shall be assumed by one party may not shifted to others, and reasonable measures took for self-protection under the condition of serious breach shall be supported." As mentioned above, in this case, risks of the development of No. X Yard was supposed to be undertaken by the three parties to the Cooperative Construction Agreement, but the respondent intended to shift them to the claimant through the conclusion of cooperative contract under malice, which violated laws obviously. Under this circumstance, especially that the respondent seriously breached the contract, the claimant adopted reasonable self-protection measures, which should be surely supported.
The Detailed Implementation Rules for the Law of People's Republic of China on Chinese-foreign Cooperative Enterprises definitely prescribed, "The party who fails to pay investment or provide cooperative condition according to the cooperative enterprise contract shall assume liabilities for breach of contract to other parties who have done so."(Article 21) The Several Provisions on Contributions of Each party to Cooperative Enterprises prescribed, "The observant party may legally require the breaching party compensate economic losses caused by its failure to pay or pay off."(Article 7) Obviously, both the two laws definitely prescribed only the observant party had the right to investigate the liability for breach of contract for contribution against the breaching party. As mentioned above, in this case, the respondent failed to provide cooperative conditions until now, which had breached the contract fundamentally. The respondent was not the observant party upon contribution, but the severe and radical breaching party, so had no right to advance counter-claim for compensation for breach of contract by the claimant.
2.Award
(1)
The claimant's claims shall be overruled.
(1)
All counter-claims of the respondent shall be overruled. And
(1)
Arbitration fees and fees for counter-claims in this case shall be undertaken by the claimant and the respondent respectively.
3.Comment
The legal matters in relation to this case are mainly as follows:
(1)
The applicable laws
Disputes between the two parties in this case fell into disputes arising during performance of the Chinese-foreign cooperative company contract within the territory of China. According to provisions in the Law of the People's Republic of China on Foreign-related Economic Contract (this Law has been repealed by the Contract Law of the People's Republic of China and doesn't apply as of October 1st, 1999), laws of the People's Republic of China should apply to settle disputes in this case.
(2)
The effectiveness of the contract
In the annex to the arbitration application form, the claimant provided the Contract on Cooperative Operation of XX Real Estate Limited Company concluded by the two parties on March 12, 1993. But the arbitral tribunal noticed that it was the XX Real Estate Limited Company Contract concluded by the two parties at the same day that was approved by the foreign economic and trade commission in XX city through the Reply "Sui Wai Jing Mao Ye [1994] No. 166". Since this contract had been approved according to provisions in laws of China, it was legal and valid and should be bonding upon the two parties.
(3)
With respect to the claim as advanced by the claimant that the respondent might commit fraud.
As regards the claim as advanced by the claimant that the respondent failed to provide the prospecting report made on November 23, 1992 when concluding the cooperative contract, which constituted a fraud, the arbitral tribunal did not respect.
(4)
As for the claim of the claimant that the respondent should return and compensate it for the investment sum and interests thereof.
According to stipulations in the cooperative contract, the claimant should be responsible for investing in the registered capital of USD 6, 800, 000, 15% of which should be paid within 3 months as of the issuance of the business license and all within half year. The cooperative company obtained its business license on August 9, 1994, so the claimant should pay USD 6, 800, 000 prior to February 9, 1995.
On March 15, 1993, the claimant paid RMB 6, 000, 000 for expenses of the cooperative project in advance. As indicated in the audit report issued by XX auditing firm, the management fees of the cooperative company as from 1994 to March 1998 amounted to RMB 3,817,881.
The claimant had directly paid the construction expenses in advance of RMB 3,145,600.66 in total.
As regard the aforesaid expenses in advance of RMB 6, 000, 000 and construction expenses in advance of RMB 3,145,600.66, although the claimant did not invest them in the cooperative company, all were used for expenditures of the cooperative project. So these two sums should be confirmed as the claimant's investments. Concerning the management fees of RMB 3,817,881 of the cooperative company, because the cooperative contract stipulated that all funds should be invested by the claimant, they should be confirmed as the claimant's investment. The arbitral tribunal noticed, the claimant had listed the owed engineering funds payable, RMB 1,526,609.70 in total, as investment sum, but the claimant failed to provide relevant evidences to prove this sum had been paid actually, so this sum might not be deemed as the claimant's investment. Therefore, RMB 12,963,481.66 should be confirmed as the claimant's total investment sum, which indicated the claimant failed to perform its investment obligations according to the amount and time limit as stipulated in the cooperative contract.
The arbitral tribunal held that the relationship between the claimant and the cooperative company was investment relation; now that the aforesaid sum belonged to investment, it should be attributed to the cooperative company's assets. Because the cooperative company might loss or owe, before the cooperative contract was terminated and the cooperative company was liquidated legally, any party had no right to require for returning investments and cooperative conditions in advance except for conveying legally. So it was ungrounded that the claimant required the respondent to return and compensate the investment sum and interests thereof, so the arbitral tribunal did not honor.
(5)
With respect to counter-claims (b) and (d) of the respondent
As the respondent failed to transfer the land use right it should provide to the cooperative company as stipulated in the cooperative contract, it had no right to require the claimant to pay liquidated damages on the strength of observant status. The arbitral tribunal did not support the respondent's counter-claim that the claimant should pay partial liquidated damages of RMB 8, 000, 000.
By virtue of the ambiguity of counter-claims (b) and (d) of the respondent, the arbitral tribunal refused the said two counter-claim.
(6)
As for the respondent's counter-claim for terminating the original cooperative contract.
The cooperative contract between the claimant and the respondent did not terminate, but the respondent thought it had been terminated in its own conceit, and transferred the cooperative project to a third party without notifying the claimant, which had obviously breached the contract. The respondent should make compensation if its aforesaid acts had caused any loss to the cooperative company and the claimant, but the claimant might not require the respondent to return and compensate the investment sum and interests thereof based on this.
The claimant had referred to in its statement that the respondent not only breached the contract but also violated laws and made it suffer a gross loss, so the goal of cooperative operation was unavailable and the cooperative company was unable to continue existing and operating, but it did not advance to terminate the cooperative contract officially. The respondent advanced a counter-claim to terminate the cooperative contract and then cancel such counter-claim, so the arbitral tribunal refused to hear this.
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