Nanjing Intermediate People

Cases

Nanjing Intermediate People’s Court

Decided June 28, 1996

Nanjing Feilong
v.
Sanjing Korea

Claim for losses
Due to cancellation of Joint Venture Enterprises
By ex parte application

Note: This is an edited English translation of one case from Selected Cases of People’s Court (No.31 of Volume 23), including a true introduction to the facts and trial.

Facts:

Plaintiff: Nanjing Modern Feilong Company, Ltd., Nanjing, Jiangsu Province, China (“Feilong”)
Defendant: Sanjing General Equipment Company, Ltd., the Republic of Korea (“Sanjing”)

On Oct. 26, 1994, Feilong and Sanjing concluded a Letter of Intent to establish a Sino-foreign joint venture enterprise with annual producing capacity of 360 tons of bleached cotton cloth. On the same day both parties also concluded a contract whereby it is provided that: (1) a cooperative joint venture enterprise Nanjing Akabang Knitting Limited Co. (later renamed as Nanjing Beinong Co.) was to be established; (2) total investment of the cooperative company was to be USD 200,000.00, of which Feilong was to contribute USD 100,000.00 with use right of 720 square meters of plant and water and electric facilities, accounting for 50% of total shares, and Sanjing was to contribute USD 100,000.00 with 3 sets of knitting equipment, accounting for 50% of total shares; (3) supplementary investment with 7 sets of knitting equipment would be made by both parties, ratio of the investment would be separately discussed; (4) both parties were to obtain the profits and undertake risks according to the ratio of investment; (5) Feilong was to be responsible for carrying out the relevant procedures including applying and obtaining the business license of the cooperative company.

At the end of Nov. 1994, Sanjing had 3 sets of equipment transported to Shanghai and Feilong arranged half of 720 square meters of leased house used for the cooperative company. On Dec. 1, 1994 Feilong unilaterally drafted the Joint Venture Contract, Articles of Association and Feasibility Study Report of the cooperative company and had the signature and stamp of the foreign party on the contract of Oct 26, 1994 duplicated on the Joint Venture Contract, and meantime signed in the name of An Xi Ying, the representative of Sanjing, on the Articles of Association and the Feasibility Study Report. Feilong had made in its favor the material amendment concerning the investment forms, contribution amount and ratio of investment by both parties. The said documents were submitted to the competent authority for examination and approval.

On Dec. 6, 1994 Sanjing sent by fax a Letter of Authorization to Feilong whereby Sanjing authorized Feilong on behalf of Sanjing to handle relevant matters in connection with establishment of Nanjing Beinong, the new name of cooperative company. On Dec 9, 1994 Nanjing Municipal People’s Government issued Approval Certificate for Nanjing Beinong, in which the content of investment forms, contribution amount and ratio of investment was not consistent each other in different documents. On Dec. 12, 1994 Nanjing Beinong obtained Business of License for a legal entity. In Apr. 1995 Sanjing after investigation put forward the dissenting opinion of contribution amount and ratio of investment by both parties indicated in the Joint Venture Contract. Then the meeting of Board of Directors by Nanjing Beinong was held on Apr. 19, 1995 and it was agreed that the original Joint Venture Contract and Articles of Association of Dec. 1, 1994 were to be amended. On Apr. 29, 1995 both parties through consultation resigned the Joint Venture Contract and Articles of Association.

Before revised documents was submitted to the competent authority, Sanjing on May 15,1995 sent Feilong a written notice whereby Sanjing requested to rescind the Joint Venture Contract because that Feilong had fraudulent act in the course of application for establishment of Nanjing Beinong and had not completed its contribution up to that date. On June 2, 1995 Sanjing presented to the competent authority a report on application for cancellation of the Nanjing Beinong. Both parties had reached no agreement after the coordination by the relevant authorities. Finally, the examining and approving authority sent a notice of cancellation and Nanjing Administration for Industry and Commence cancelled the Business of License for Nanjing Beinong.

On Oct. 31, 1995 Feilong brought an action in Nanjing Intermediate People’s Court, alleged that:

The cooperative Joint Venture Nanjing Beinong was established at the end of 1994 by Feilong and Sanjing through consultation after approval by the competent authorities. It had brought about us significant economic losses that the Joint Venture was unexpectedly cancelled due to the defendant’s request and application for cancellation in the course of performance of the Joint Venture Contract. Thus Feilong requested a judgement that Sanjing was to compensate Feilong for losses of RMB Yuan 980,000.00.

Sanjing defended itself and alleged that:

The plaintiff falsified our signature and amended without authorization the content of the cooperative contract in the course of Feilong’s application for the establishment of the Joint Venture, and Feilong’s contribution was not qualified. It was for protection of our interests that we applied for cancellation of Nanjing Beinong. Sanjing requested Feilong to compensate for the losses of RMB Yuan1,210,000.00 caused to Sanjing due to the cancellation of the Joint Venture and to reject the claim by the plaintiff.

Trial:

Nanjing Intermediate People’s Court after hearing held that:

Feilong was in breach of not only the related provisions of China law concerning the Sino-foreign joint venture and but also the agreement by both parties in the following acts: (1) Feilong amended, without authorization by Sanjing, the content of the contract of Oct. 26,1994 concluded by both parties; (2) Feilong falsified the signature of the foreign party on the documents submitted to the competent authorities; and (3) Feilong made its contributions to the Joint Venture with the leased house. Therefore Feilong should undertake main liability for the arising of dispute between both parties and cancellation of the Joint Venture. Sanjing should undertake some liability for the arising of the dispute in the case because that it was not proper for Sanjing (1) not to clarify the authorization during the application for establishment of the Joint Venture; (2) not to examine in time the related details after the establishment of the Joint Venture; and (3) to put forward the dissenting opinion and applied for cancellation of the Joint Venture immediately after concluding the new contract and articles of association through consultation by both parties. Feilong and Snajing should separately undertake the losses caused to them arising from the cancellation of the Joint Venture because great was the difference between the amounts of significant losses claimed by both parties, respective evidences were insufficient and both parties all had fault.

In accordance with the provisions of Article 4, 6, 113 of General Principles of Civil Law of the People’s Republic of China, Nanjing Intermediate People’s Court gave on June 28, 1996 a judgement as follows:

(1) The claim by Feilong against Sanjing for compensation for the losses of 980,000.00 was to be rejected; and

(2) The claim by Sanjing against Feilong for compensation for the losses of 1,210,000.00 was to be rejected.

No party brought an appeal after the judgement was pronounced.

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