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The Case of XX v. XX on Dispute over Contribution to Joint Venture Enterprise
Jurisdiction: Arbitration; CIETAC Shenzhen
1.Case Brief
On March 23, 1992, the claimant concluded the joint venture contract with the respondent and the third party.
On August 4, 1992, the joint venture acquired the business license. The joint venture failed to produce qualified products and was unable to continue its business since the establishment. Thus disputes between the claimant and the respondent occurred. The claimant then submitted the arbitration application to CIETAC Shenzhen.
The claimant filed the arbitration applications that the respondent compensate the claimant for the loss of 604,000 USD.
The respondent counterclaimed as follows:
(1)The claimant should pay the equipment in arrears immediately, i.e. 69,772 USD;
(2)The claimant should pay the respondent for the deserved transportation fees, premium and engineering service fees from June 30, 1993 to December 31, 1993, i.e. 110,960 USD in total.
The main issues of the disputes concerning the facts and reasons between the claimant and the respondent were listed as follows:
(1) As for the text of the joint venture contract, in the supplementary defense materials that was submitted by the respondent on October 27,1994, the respondent held that it was found that the "contract" submitted by the claimant to CIETAC was inconsistent with the original contract preserved by the legal representative of the respondent in seven articles and the respondent's signature. The claimant deceived the arbitration tribunal and the respondent by juggling the contract.
The claimant argued that the "contract" submitted by the claimant to the arbitration tribunal was valid and effective, which was approved by the management committee of bonded zone after the three parties of the joint venture consented unanimously, and registered in the city administration for industry and commerce. While the "original contract" submitted by the respondent was merely a draft conducted by the three parties which had never been effective. The competent authority advanced modification opinion on relevant clauses during the approval process, such as the issue that the foreign party changed the means of investment contribution. As the respondent did not have the relevant legal procedures for technology contribution in fact at all, it had to change the means of investment contribution to equipment contribution. Therefore, the problem that the claimant deceived the arbitration tribunal and the respondent simply did not exist.
The respondent further argued that:
Its legal representative did not understand Chinese that it is not reasonable for him to know the text he received was different from the "approved text", or the "approved text" did not include the consensus reached through the negotiation.
(2)As for the technology contribution, the claimant alleged that the respondent should provide comprehensive, integral and advanced technology to the equipment, manufacture, process and inspection of the products of the joint venture, as well as bear the legal consequences, according to Paragraph 3, Paragraph 16 and Paragraph 17 of Article 14 in the contract. However, the respondent actually failed to provide comprehensive, integral, accurate, credible and advanced technology in accordance with the contract. With respect to designing, the respondent provided "product pattern", but failed to provide other design documents, such as "product standard", "product design calculation", "product design specification", nor did the process design documents. As for the process designing, the respondent only provided "production process", but failed to provide Process Design Program and its feasibility and credibility authentication, nor did the fixed technology or other documents. With respect to product manufacturing, only documents relevant to punch operating condition were submitted, without the procedure files and different procedures such as technology document specification necessary to the production process, especially the code and operating instructions of laser welding, cleaning and heat treatment during the working procedure. As for test and inspection, documents such as "standard of test and inspection", ways of test and inspection of different procedures and control of computation test were not submitted. From the documents provided by the respondent we can draw the conclusion that these documents were fragmented, far from comprehensive and integral.
As the manufacture of the computer needle hanging slider required preferable technical condition, the contract stipulated that "Laser precision welding is the technical key of the product" throughout the production process, for this technology, what did the respondent provide actually? Besides the 350(w) laser and relevant equipment purchased in America (turned out to be unfit for needle hanging welding after inspection), entrusted by the joint venture, the technology provided by the respondent was just its president's technical guidance on the spot, and yellow circles appeared around the solder joints of welding head hanging out the needles (needle hanging yellow circles around the solder joints proved to be caused by chloride according to physical testing). Therefore, the respondent proposed using chemical medicine to clean, which was so-called "purification cleansing formula used by air force" brought from America. However, such chemical failed to clean the yellow circles after repeated tests, while the chemical prescribed by the respondent turned out ineffective during the period of three months. The respondent then had to bring the needles back to America to clean while the result was still a failure.
The respondent did not submit the copy of patent certificate and property certificate of its technology to the joint venture pursuant to the contract, while the fragmentary, half-baked technology provided was not the advanced, which directly resulted in the failure of the joint venture to produce the eligible needle hanging slider till now, not to mention the order even for a penny.
The respondent argued that
the joint venture contract stipulated that to "provide relevant technical information to the joint venture in time", which means written technical information should be provided in time once the equipment purchased by the respondent in the name of the joint venture and the technical staff hired by the claimant arrived. Specific guidance required a physical demonstration because the technical material was written in English.
The written material and specific guidance provided by the respondent are in accordance with the seven detailed regulations on technology of Article 16 in the joint venture contract. The respondent sent eight batches of equipment in all from November, 1992 to May, 1993, only after which the respondent could arrive at the company on July 21, 1993. Once arriving at the company, the respondent provided complete written technical material which includes:
(a)hundreds of equipment blueprint of needle hanging slider in all, which were translated from imperial measurement system to metric system, costing three months of tracers of the joint venture to finish replication of the designing blueprint.
(b) material specifications on the needle hanging slider.
(c) specifications of 004-needle hanging slider and working procedures.
(d) inspection regulations of needle hanging slider.
(e) inspection regulations of single-product.
(f) quality manual of XX computer production limited company, of which the head page was printed by the respondent itself. Moreover, the respondent arranged an interpreter to study in America to assure the translation of such quality manual.
(g) The respondent also provided a written proposal that divided the company into four sectors, i.e. engineering technology, inspection, manufacture and market.
The claimant, transferee of the technology, forgot that the most crucial element in receiving advanced technology was people. Without training the qualified persons to learn and understand the technology would lead to the futility of the advanced equipment and technology.
The claimant held that the two laser welding machines were in bad quality, which was confirmed by an expert. Whereas the fact was that these two laser welding machines were exported by XX laser company in New York, a professional company in laser technology. The claimant sent two persons to study in such company for two weeks that it was reasonable to expect that they had understood such a thick manual and learnt how to operate, or they would not sign to order these two laser welding machines, with which there was quality guarantee printed and distributed by such laser company. Unfortunately, the claimant's personnel failed to operate the machine in deed after they were delivered to the company, or the situation that machine could not work regularly would not come into being.
With regard to the yellow circles around the laser welding points, it is normal because of the high temperature of the welding points and non-pureness nitrogen with oxygen, thus the cleaning process was required. However, the size, color and depth of yellow circle is relevant with the operator's skill, purity of Nitrogen system, metal material, welder temperature and the choice of timing, all of which was dependent on people. The yellow circles would be lessened by the operators, who should select the conditions, check the equipment (such as Nitrogen system) and enhance proficiency. During the cleaning process, elements such as concentration of cleaning agent, temperature, time of baptism and vibration required adjustment, resulting in that different yellow circles called for different cleaning condition, which depended on the summarization of people. As a matter of fact, the claimant did not recruit any professional and willing-to-learn mechanic in due form to learn, nor did it try under the condition by cleaning groove formally. The yellow circles around the solder joints were of all sizes and shades of color, indicating that the element of person did play a role. After the respondent brought the weldment back to America, it found that 90% of the weldment could be cleaned completely, while the remaining could not be cleaned completely because the yellow circles around them were too deep, showing that the sticking point is the operators, not the immature technology.
(3)As for the equipment contribution, the claimant held that the claimant had made the payment of 940,000 USD to the joint venture account on time under the contract, while the respondent did not make its equipment contribution to the joint venture up to now. The board chairman and the staff of the joint venture went to America to investigate and study in March, 1993. During the investigation, two persons asked the respondent for inspection on the equipment that the respondent planned to invest into the joint venture. They saw six machines then and signed on the equipment list offered by the respondent. These inspected equipment valued 249,850 USD, 270460 USD in total including taxes, of which the actual value was about 113,680 USD, 123,059 USD in total including taxes. These equipment were just witnessed by the two persons in the respondent's workshop in America and were never handed over to the joint venture, which could not be counted as the formal investment thereby.
The respondent violated the contract and law and failed to make contribution till now, which had constituted a breach of contract. That is another important reason why the joint venture so far was unable to operate normally.
The respondent argued that the respondent should contribute 600,000 USD, accounting for 35% of the total share in accordance with the joint venture contract on March 23, 1994. The joint venture produced computer needle hanging slider, of which the process was so complicated that the first half of the final products should be accomplished in American company, with the respondent purchasing the equipment in America, then these semi-manufactured goods that accomplished in America would be transported to the joint venture to be processed into final products. Article 21 of the contract expressly stipulated such actual situation "pursuant to the two procedures of the production process of the needle hanging slider, the first phase, i.e. the pre-production process of the needle hanging slider should be accomplished in America within the first two years of the joint venture production; in the second phase production, the needle hanging slider would be transferred to the joint venture as soon as the production and technical conditions were met."
The memorandum, signed by the three parties on September 30, 1992, stipulated clearly that regarding the 600,000 USD contribution under the joint venture contract, technology contribution accounted for 350,000 USD and the equipment contribution 250,000 USD when semi-manufactured goods were produced in America. At that time, the claimant sent people to America to check and accept 6 machines, while the other 6 machines were still on order, of which the total price was 294,580 USD. The board chairman of the joint venture, appointed by the claimant, signed on the whole acceptance list and made the statement on item 2 that "the machine tool, as part of the cooperation project in California for the use and maintenance, may be transferred to China in the future."
The claimant put forward the defense as follows:
It is crystal clear that it was in late March to early April of 1993 when we went to America to check and accept the equipment, rather than on September 30, 1992, which exceeded the contribution time limit under the contract. The discrepancy of time period was as long as 6 months, and both the location and situation differed. Moreover, the inspection and acceptance of the equipment in America only indicated that we agreed the respondent to transport such equipment to the joint venture as its contribution. We never agreed to leave the joint venture's assets in America. Actually, these 6 machines have not been transported to China up to now.
We only inspected 6 machines in America, which were worth of 113,680 USD and 123,059 USD including taxes, calculated according to the quotation of the respondent. In accordance with the contract, the real contribution of the respondent should be 600,000 USD. Until the end of March, 1993, the seventh month after the joint venture registered, the respondent admitted that "the other 6 machines were still on order". According to the argument of the respondent, the equipment, with the value of 600,000 USD in all as contribution, included the 6 purchased machines which were detained in America arbitrarily, and the other equipment which were barely "on order". Until it was found that it was unable to continue the operation of the joint venture, none of the equipment valued 600,000 USD the respondent should contribute was ever put into the joint venture, which constituted serious breach of contract.
The respondent's argument about the signature of the inspection and acceptance was completely false. In order to shirk the responsibilities, the respondent even reached to the extent of ignoring the facts that the second letter of "Appendix II" submitted by the respondent was just signed by the respondent alone, with no signature of the claimant, nor any legal proof of effectiveness. The so-called "the machine tool, as part of the cooperation project in California for the use and maintenance, may be transferred to China in the future." was merely the wishful thinking of the respondent. On reading the date of the two documents of "Appendix II", any sensible people would notice the disaccord. We signed on the price list of the 6 machines in March 1993, while the letter of the second item was on August 2, 1992. Such two dates were fundamentally inconsistent that how the claimant ratified them at the same time?
The joint venture contract did not stipulate that the equipment regarded as the respondent's contribution could be left in America, nor did it stipulate that the joint venture would set workshop or the branch company in America. Therefore, the only legal sign that the respondent made the equipment contribution was whether such equipment was delivered to the joint venture. The respondent considered Article 21 in the joint venture contract as the special regulation of foreign party's contribution reached between the parties, which actually is the respondent's significant distortion of the joint venture contract. Such article lied in Chapter VIII in the contract, which stipulated issues on raw material supply, production and sales rather than agreed to change the ways of foreign party's contribution. "Pre-production process" referred to the process carried out in American company, rather than the joint venture.
(4) As for the dispute over equipment purchased by the joint venture,
the claimant alleged as follows:
(a) Pursuant to the joint venture contract, the respondent was entrusted to purchase the equipment the joint venture needed abroad. However the respondent abused such authority of agency. According to the invoice provided by the respondent, at least 296,815 USD of the equipment purchased was the product of the respondent's company, which means the respondent purchased its own products in the name of the joint venture, and the respondent became the buyer and the seller at the same time. The law act to do business with itself as an agent was the abuse of the authority of the agency, only resulting in the damage to client interests.
(b) Many of the purchased equipment had quality problems, of which the most crucial point was the short of the intensity of the needle hanging slider solder joints produced by the two 350W welding machines, totally valued 246,750 USD. Meanwhile, there always were black and yellow circles around the solder joints that could not meet the standards even after cleaning. According to the technical experts authentication from the Eleventh Laser Institute of Ministry of electronics industry, the authority in laser welding field in China up till now, "the laser output power of the laser machine was far below the factory specifications, resulting in the extreme low energy of the laser beam, which would cause the huge heat affection area on the working surface when welding for a long time, then brought on the yellow circles." Besides the laser machines, the respondent sold 12 used microscopes without pedestal to the joint venture, as well as an used photographed microscope and two welding positioning plate with poor precision without the approval of the joint venture, which were forcibly transported to Shenzhen then sold to the joint venture, creating a de facto. Obviously it breached the guaranty that "the selection of the equipment, as well as the performance and the quality are good" stipulated in the contract. Moreover, after the installation and commissioning, many quality problems were found in the molds and fixtures purchased from the respondent. Ever since the joint venture began the installation and commissioning, the die technicians of the joint venture had spent three months adjusting them, and more seriously the 205 Die Feeding gauges were waste, which the respondent had to admit.
(c) Although the joint venture regulated clearly that the respondent should provide original invoice when purchasing equipment, the respondent failed to provide the original invoice of the 500,000 USD machinery and equipment which the respondent purchased from other companies. Even if the claimant asked for many times, the respondent did not provided the invoice with all kinds of excuses. Moreover, the respondent intended to substitute photocopies of invoices for the original ones so as to making a profit on secretly altering invoices by means of copying. With respect to the two copies of the same invoice, one being 204,349 USD, the other 211,516 USD, there was a difference of 7,161 USD.
The respondent argued as follows:
The claimant held "the respondent was the buyer and the seller at the same time, and the law act to do business with itself as an agent was the abuse of the authority of the agency". The claimant's claim distorted the facts and misinterpreted the law. Since the buyer is the joint venture and the seller is the American company, i.e. the respondent, how could the situation that "the seller is the buyer at the same time" come into being in the equipment business between these two different companies set in two countries? The fact was that the seller was the technology exporter as well as the shareholder in the buyer company, which concluded the special equipment business contract with the seller company upon negotiations. There was nothing improper during the process.
The total contract value of total purchase was 705,918 USD, while the total price of goods exported by the respondent was 860,003 USD, including the fees of fittings, United States sales tax, new ordered equipment by the joint venture and so on, of which there were 9 invoices. The claimant paid the amount of 7 invoices from November 5, 1992 to April 30, 1993, as well as part of the amount of the invoice on May 20, 1993, leaving the amount of the invoice issued on May 10, 1993 unpaid. The claimant paid 790,231 USD actually and still should pay 69,772 USD.
The claimant alleged that the respondent intended to make a profit because the amount of the two invoices on May 28, 1993 differed, which was actually resulted from the miscounted calculation of the taxes. California's exports sales tax rate was 0.0825, and the third item, i.e. basic accessories, was not included. Thus the taxes should be (235,000.00+5,200.00)×8.28% = 19,816.00. The respondent delivered 8 batches of goods in all from November 5, 1992 to May 20, 1993, each of which was attached with an invoice. Due to time constraints, the taxes of these invoices had not been audited by certified accountant. The accountant subscribed 9 invoices formally on July 7 and 10, 1993. The respondent delivered the goods in line with the contract and did not miscount the taxes on purpose. Clearly knowing that the difference between the taxes was small, the claimant raised no objection after the inspection and acceptance of the goods. The general manager of the joint venture faxed the respondent on November 8, 1993 saying that it planned to buy power analyzer and asked the respondent to inquire the price. Meanwhile, the manager also negotiated with the respondent the payment of the abovementioned equipment in particular, that is, "2. Regarding the unpaid invoice--I need to go back to the board of directors and pay you after I got the money", which indicated that the Chinese party always admitted its obligation to pay the due payment of equipment valued 69,772 USD.
Regarding the above transport charges, premium and annual salary of 150,000 USD the joint venture should pay the respondent according to the Article 11 in the first minutes of the board of directors on September 11, 1992, the joint venture only paid part of them, leaving the due transport charges, premium and engineering service charges during June 30, 1993 to December 31, 1993 unpaid, the total amount of which was 110,960 USD. The claimant could not shirk the responsibility to pay the surplus amount by means of claiming the "false prices".
(5)As for the dispute over loss claims, the claimant held as follows:
On account of the respondent breaching the contract, the joint venture, which was only invested by the claimant, faced major economic losses:
(a)The loss of fixed assets was about 617,600 USD.
(b)The loss of deferred assets was 132,812 USD while the start-up costs were 231,366 USD by August 31, 1994, 364,178 USD in total.
(c)The loss of the claimant's investment was 940,000 USD and the loss of interests for more than two years was about 88,000 USD.
The total loss amounted to about 1,069,700 USD.
The respondent should bear the legal responsibility of the breach of contract and compensate the claimant for the total economic loss (1,069,700 USD). In view of 600,000 USD the respondent should invest into the joint venture according to the contract, the claimant agreed to reduce and remit the liability of the respondent appropriately, and only requested the respondent to bear the responsibility to compensate 600,000 USD and assume the arbitration fee of this case.
The respondent argued that the requests and the contract basis of the claimant were so confusing that it was difficult to tell whether it was the investment dispute as the contribution was not in place, or a sales agreement dispute. The application, asking for 604,000 USD by the claimant, had no calculation proof. However, at the hearing the claimant claimed that the registered capital of the respondent was 600,000 USD, and the 4,000 USD arbitration fees which was the basis for arbitration. Once the foreign party encountered disputes when operating joint venture in China, it just need to sacrifice the contribution, compensate the arbitration fee, leave the joint venture and return to the motherland. All above was unreasonable. We believed that China's arbitration system would not support such "brief" of the claimant.
2.Award
(1)
The respondent shall compensate the claimant for the economic loss of 256,707.39 USD caused by its breach of the contract within 45 days after this award is made; if overdue, an annual interest rate of 8% shall be applied to calculate the payable interest.
(2)
The respondent shall assume all of the arbitration fees for the case.
3.Comment
The legal matters in relation to this case are mainly as follows:
(1)
The text of the contract
The claimant and the respondent submitted two different text of the joint venture contract to the arbitral tribunal respectively. Evidence showed that the contract submitted by the respondent was signed earlier which was not approved by the approving authority. Then the three parties of the joint venture modified the text and signed a new contract, which was submitted by the claimant. The uppermost difference between the two contracts lies in the stipulation of the means of investment contribution of the party B (the respondent).The former contract stated that "party B shall make the contribution in forms of equipment and technology, of which technology accounts for 350,000 USD". However, the latter contract stipulated that "party B shall make the contribution in forms of equipment", which was ratified by the approving authority in the light of the evidence submitted by the claimant.
The arbitral tribunal notices that the Article one in the memorandum, concluded by the three parties of the joint venture on September 30, 1992, stated that:
"The three parties of the joint venture agree that the American party adds 350,000 USD, the original technology contribution, to equipment contribution together. Therefore, the original equipment contribution, 250,000 USD, increases to 600,000 USD, as the total contribution of the American party of the joint venture."
The Article one in the memorandum demonstrated two points as follows: (a) the text of the contract submitted by the respondent was signed earlier; (b) the respondent could not be unaware of the change of its contribution method ever since September 30, 1992.
Article 17 in Regulations for the Implementation of the Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures stipulates that "Joint venture agreements, contracts and articles of association enter into force after they are approved by the approving authority, and the same as the modification."
According to such regulation, only the joint venture contract submitted by the claimant, which was approved by the management committee of bonded zone, is valid and should serve as the basis to determine the rights and obligations of the joint venture partners in the case. The text of the contract, submitted by the respondent, was not approved by the approving authority, thus has no legal effect which can only serve as the evidence of contract signing process.
(2)
The obligation of contribution
(a) Article 10, 11, 12 of the valid joint venture contract, signed by the three parties of the joint venture and approved by the approving authority, stipulated that:
The total amount of three parties' contribution shall be 1,710,000 USD as the registered capital of the joint venture. Party A (the claimant) accounts for 55% of the registered capital, i.e. 940,000 USD, Party B (the respondent) 35%, i.e. 600,000 USD, and Party C 10%, i.e. 170,000 USD.
The contribution of Party A and Party C are in dollar cash for the purchase of machinery and equipment for production, office equipment and transportation vehicles of the joint venture, while Party B shall make the contribution in the form of equipment.
The registered capital of the joint venture shall be paid up within three months after registered in the city administration for industry and commerce by the three parties in proportion to their subscriptions.
(b) The claimant should make the contribution of 940,000 USD in cash according to the contract above. The evidence submitted by the claimant showed that the claimant had fulfilled its obligation under the contract.
(c) According to the contract above, the respondent should make the contribution of 600,000 USD in the form of equipment, which accounts for 35% of the registered capital. The same stipulation was also prescribed in Article one of the memorandum signed by the three parties of the joint venture on September 30, 1992, which stipulated that the respondent must provide the equipment inventory valued 600,000 USD.
However, the arbitral tribunal notices that what the claimant claimed is that the respondent breached the joint venture contract in Article 16. 17 of Chapter 7, which stipulate that:
"Article 16 Party B provides technical guarantee as follows:
1. The technology provided by Party B shall be in lawful and non-controversial possession of Party B.
2. Party B shall assure that the entire technology provided to the joint venture, such as the product design, manufacturing technology, process and test and inspection of the needle hanging slider, is comprehensive, integral, credible, competent to meet the need of management objectives of the joint venture and can undoubtedly meet the contractual requirements for product quality and production capacity.
3. Party B shall guarantee the technology provided is the most advanced among the similar technology; the selection, capability and quality of the equipment is eminent; and the production capacity of the equipment can fit to the production scale stipulated in the contract and meet the requirements for technical operation and the actual use.
4. Party B shall be responsible for the technical guidance and quality control during the production process of the joint venture;
5. Party B shall submit the relevant blueprint and technical materials to the joint venture on time, and assure them clear and inerrable;
6. Party B shall assure that the technical staff, managers and workers of the joint venture master the technology within the prescribed time limit.
7. Party B shall ensure the designing and development of new products and to improve the old products.
Article 17 Should Party B fail to fulfill the obligation stipulated in Article 16, Party B shall compensate the losses brought to the joint venture."
Merely looking at the above text of the contract, such stipulations seem to be inconsistent with that of the contribution obligation of the respondent of the contract. However, the arbitral tribunal also notices that the sixth item of the decision, adopted unanimously in the first board meeting of the joint venture on September 1st, 1992, stipulated that:
"6. Determination of composition of the intangible assets
Intangible assets shall be included in the signed contract, which shall give clear indication of its composition in detail, thereinto includes:
The scope of technology transfer;
The content of technology transfer;
The price of technology transfer
The obligation and responsibility of technology transfer.
The transfer price shall include various fees derived from the entire materials of special techniques, the full set of technology equipment and follow-up developed product, technology, training, installation of the equipment and so on."
Analyzing from the above contract as well as the determination of the board meetings, the arbitral tribunal holds that the reasonable explanation is: when the claimant and the respondent concluded the joint venture contract, it has been ascertained that the respondent would transfer technology to the future joint venture. Therefore, the respondent made above guarantee to the claimant in the joint venture contract. The determination of the first board meeting further stipulated clearly that technology transfer requires the signing of a separate contract. However, the joint venture did not sign any technology transfer contract in any form with the respondent afterward actually.
Under the circumstances that there is no agreement between the joint venture and the respondent on relevant issues, such as the scope, content, price of technology transfer, which should be included in the technology transfer contract, the claimant put forward the request that the respondent should provide technical materials according to its guarantee in the joint venture contract, which lacks basis and is difficult to implement.
Based on the above analysis, the arbitral tribunal deems that:
(i) The obligation of the respondent in the joint venture contract is to make the contribution od 600,000 USD in the form of the equipment, which does not include transferring technology to the joint venture.
(ii) It is difficult to implement the guarantee the respondent made to the claimant without the technology transfer contract. Therefore, the reason, brought forward by the claimant, that the respondent breached the contract for its failure of providing integral technology, is untenable.
(4) Equipment contribution of the respondent
The respondent held that:
(a) It should make the equipment contribution of 250,000 USD. The claimant sent people to America to inspect and accept 6 machines, while the other 6 were still on order, the total value of which was 294,580 USD. The board chairman of the joint venture signed on the entire acceptance list.
(b) The equipment above should stay in American for pre-production according to Article 21 in the joint venture contract and the second item of acceptance list.
The arbitral tribunal deems that:
(a) Article 21 of the joint venture contract only stipulated that "the pre-production process of the needle hanging slider should be accomplished in America within the first two years of the joint venture production, and then transferred to the joint venture as soon as the production and technical conditions were ready". There is no clear stipulation that the equipment, which served as the contribution of the respondent, can remain in America for pre-production.
(b) The board chairman of the joint venture and the legal representative of the respondent signed on a contributive equipment list of the respondent, while the office clerk of the joint venture signed behind the six machines on such list and gave clear indication of the date"1993" or "March, 1993 (1993.3)". However, the date signed on the second page of the list referred by the respondent is "August 2, 1992", and there is only the signature of the respondent, while there is no signature of any representative of the joint venture or the claimant. Therefore, the arbitral tribunal can not affirm that the second page of list referred by the respondent is part of the contributive equipment list, or the second page of the list has been approved by the claimant.
(c) The arbitral tribunal also notices the third article of memorandum signed by the three parties of the joint venture on September 30, 1992:
"3. For the verification of the capital of the joint venture, the American party shall provide the following documents as soon as possible:
1. The equipment list and the original invoice valued 600,000 USD as contributed by American party.
2. Supporting documents of the American law firm, which must prove:
(1) The correctness and validity of the 600,000 USD equipment list and the original invoice;
(2) The above equipment of 600,000 USD, as well as the property right of such equipment, belongs to the joint venture."
The third article of memorandum above shows that:(i) the value of the equipment which serves as the contribution of the respondent should be 600,000 USD rather than 250,000 USD held by the respondent; (ii) even if the respondent's claim that its contributive equipment should remain in America had ground, the respondent still should provide the equipment list, the original invoice and the supporting documents of American law firm to the joint venture for the verification.
However, the respondent merely submitted the equipment list and the photocopies of invoice of some equipment, but failed to submit any supporting documents showing the property right to the said equipment belongs to the joint venture. Therefore, the six machines, which the respondent claimed its purchase, could not be affirmed as its contribution to the joint venture.
(d) Based on the aforesaid reasons, the arbitral tribunal deems that the respondent does not fulfill its obligation to make the contribution of 600,000 USD in the form of equipment, which constitutes fundamental breach of contract.
(5) The respondent's failure to fulfill the obligation of making the contribution constitutes the breach of the contract. According to Article 18 and19 in Law of The People's Republic of China on Economic Contracts involving Foreign Interest (This law is repealed by Contract Law of the People's Republic of China and is null and void as of Oct. 1st, 1999.) and Article 47 in the joint venture contract, the respondent shall compensate the claimant for the losses.
The claimant held that although the respondent's act of breach of the contract resulted in a total economic loss of 1,069,700 USD to the claimant, the claimant only asked for a compensation of 600,000 USD from the respondent. The arbitral tribunal deems that such method to calculate the loss brought by the claimant couldn't be accepted absolutely for the following reasons: (a) The loss of the joint venture could not directly be counted as the claimant's loss; (b) Even adding the interest loss for more than two years, with the value of 88,000 USD, referred to by the claimant, to the contribution of the claimant, i.e. 940,000 USD, the total value could not reach 1,069,700 USD. (c) Apparently, such amount 1,069,700 USD, exceeds the loss by breach of contract that should be foreseen by the respondent when concluding the contract.
The arbitral tribunal holds that most of the contribution of the claimant, valued at 940,000 USD has been used to purchase equipment after put into the joint venture. It is difficult to accurately calculate the economic losses of the claimant caused by the respondent's breach of contract under the circumstances that no liquidation has ever been carried out in the joint venture. But it does not mean that the respondent can be exempted. The arbitral tribunal deems that under the circumstances that the joint venture has not started liquidation, based on several elements as follows:
(a) The claimant has made the contribution of 940,000 USD while the respondent has not fulfilled any obligation to contribute to the company;
(b) Part of the contribution of the claimant was used to purchase equipment that not all of them were damnified;
(c) The joint venture failed to put into operation till now, and had no revenue at all.
The economic loss suffered by the claimant can be calculated reasonably, including as follows:
(a) All equipment depreciation amounts.
The total amount of the equipment paid by the joint venture is 809,795.54 USD. According to the principle that "the depreciation of tangible assets should be calculated as 8 years", which was confirmed in the first board meeting of the joint venture, from the date when the last batch of equipment delivered to the joint venture, i.e. July 28, 1993, to the date when the award is made, the amount of depreciation, calculated with straight-line depreciation method, is 809795.54 USD ×l/8×20 months/12 months = 168,707.39 USD.
(b) The interests loss i.e. $88000 of the claimant's contribution i.e. $940000
These two amounts was 256,707.39 USD in total, which shall be the amount of the economic loss the respondent shall compensate to the claimant.
(6) The arbitral tribunal notices that the seller of the equipment purchase contract, concluded by the joint venture and the respondent on September 1st, 1992, is the respondent, while the buyer is the joint venture. The arbitral tribunal holds that the legal relationship involved in such equipment purchase contract is different from that of the joint venture contract in the subject and content. Although the joint venture contract stipulated that the claimant and the respondent should handle relevant matters entrusted by the joint venture together, such as purchasing machine, equipment and raw material within and out the territory of China. Actually, the joint venture purchased the equipment from the respondent directly, rather than from the third party by entrusting the respondent. The claimant did not oppose to this. Therefore, the claim put forward by the claimant that the respondent abused the agency authority and made a false report of the equipment price couldn't stand. Similarly, the counter-claim put forward by the respondent that the claimant should pay the deferred amount of equipment of 69,772 USD, transport fees, premium and engineering service fees of 110,960 USD, does not lie in the scope of the arbitral tribunal's jurisdiction, therefore it is not considered.
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