Hengsheng Company v. Japan "WIN" Co., Ltd. International Arbitration Case over a Research and Development Contract Dispute
[Lead Attorney: Zhiming Law Firm]
I. Case Recap
In September 1999, the Applicant, Shenzhen Hengsheng Industrial Co., Ltd. (in the preparatory stage), and the Respondent, Japanese corporation “WIN” Co., Ltd., reached a mutual agreement whereby the Applicant entrusted the Respondent to enter into a technology development contract with Japanese research institutions for the development of X-ray and electromagnetic wave-related products—part of a series of conductive film products suitable for the Chinese market. Within 30 days after execution of the development contract, the Respondent was required to assign to the Applicant (the entrusting party) 50% of the patent rights and 100% of the worldwide commercialization rights arising from the “Conductive Film Technology Development” project, and to deliver all original copies of the relevant contracts to the Applicant. In the event of breach, full reimbursement was mandatory. To this end, the parties signed three cooperation agreements on September 8, September 9, and November 14, 1999, respectively. Concurrently, the Applicant’s shareholders paid the Respondent’s legal representative, Mr. Masao Shitachi (hereinafter “Shitachi”), a total of RMB 387,500 and HKD 1,500,000 in three installments as technology development funds. After the Applicant’s lawful registration (on December 15, 1999), the parties entered into a formal entrustment agreement (i.e., a “Memorandum of Understanding”) on March 7, 2000, explicitly stipulating:
1. The Respondent, on behalf of the Applicant, entered into a technical development contract concerning conductive film products with Ishida Technical Office, Japan.
2. Within 30 days after the execution of the formal contract referred to above, the Respondent shall assign to the Applicant, as the entrusting party, 50% of the patent rights and 100% of the global operational rights relating to the “Conductive Film Technology Development” obtained from the technology development party, and shall submit to the Applicant all original copies of the relevant contracts.
3. No contract shall be entered into with the technology development party, Ishida Technical Office (Japan), in the name of any other entity or individual without the consent of the Applicant’s Board of Directors.
4. The contract shall include a clause whereby the technology developer, Japan Ishida Technical Office, guarantees to the applicant the transfer and delivery of 50% of the patent rights and 100% of the global operational rights.
5. In the event of any dispute, the parties shall first attempt to resolve it through consultation. If consultation fails, both parties shall jointly submit the dispute to the China International Economic and Trade Arbitration Commission for arbitration.
A dispute arose between the parties during the performance of the above-mentioned “Memorandum of Understanding.” As the dispute could not be resolved through consultation, the Claimant filed for arbitration with the Shenzhen Sub-Commission of the China International Economic and Trade Arbitration Commission (CIETAC) on August 2, 2000, pursuant to the arbitration clause contained in the “Memorandum of Understanding.” The arbitration claims are as follows:
1. The Respondent shall refund the Applicant’s investment funds amounting to HKD 1,500,000 and RMB 387,500;
2. Order the Respondent to bear the legal fees;
3. Order the Respondent to bear the arbitration costs.
II. Case Outcome
After holding a hearing, the arbitral tribunal rendered an award, which is documented in the Award [(2001) Shen Guo Zhong Jie Zi No. 18]:
“按照委托合同的有关法律规定和惯例，委托人有权知道有关事宜的进展情况，受托人有义务向委托人报告自己处理事项的进展情况，并将有关的收益转交给委托人。但 据申请人提供的资料，被申请人仅提供了部分导电膜样品，既无进度情况报告，也没有其他成果拿出。又据双方提供的资料，在申请人反复要求下，被申请人仍然不 愿交出有关的资料和合同原件，没有向申请人提供有关‘导电膜产品’技术的资料。——作为被申请人法人代表称胁内，应当依据‘备忘记录’的约定，将 有关合同原件和与‘导电膜产品’有关的技术资料提交给申请人。
——申请人第1项请求中所涉的投资款人民币38.75万元与‘备忘记录’项 下的‘导电膜产品’无关，申请人要求被申请人退赔这些投资款项的请求不属本案仲裁条款约定的争议范围，仲裁庭无权审理，当事人有权通过其他法律途径解决有 关争议。——对于申请人在第1项仲裁请求中要求裁决被申请人返还投资款港币150万元的请求，仲裁庭予以支持。
The applicant is, to a certain extent, the prevailing party in this case; pursuant to Article 59 of the Arbitration Rules, the respondent shall bear part of the applicant’s legal fees incurred in this case, amounting to RMB 40,000.
Since the applicant’s arbitration claims in this case were not fully upheld, the arbitration costs shall be borne 40% by the applicant and 60% by the respondent.
1. The Respondent shall repay the investment amount of HKD 1,500,000 to the Claimant within 30 days from the date of this Award.
2. The Respondent shall pay the Applicant legal fees of RMB 40,000 within 30 days from the date of this Award.
3. The arbitration fees for this case amount to RMB 46,050, of which the applicant shall bear RMB 18,420 and the respondent shall bear RMB 27,630.
4. Dismiss the applicant’s other claims.
This award is final and binding.
III. Case Focus
This case involves numerous complex and highly sophisticated technical specifications related to environmental protection high-tech products, with the primary dispute centering on:
(I) Was the cause of the development failure attributable to the applicant or the respondent?
The Respondent contends that:
The development failure was caused by the Applicant’s provision of an incorrect technical specification—namely, an erroneous wavelength—for the product “X-ray Blocking Liquid,” resulting in the failure of development and causing significant losses; consequently, the invested funds—HKD 1.5 million and RMB 387,500—cannot be refunded.
Attorney Zhiming believes:
1. The Respondent shall bear full responsibility for the failure of the “X-ray Blocking Liquid” project. The Respondent, originally engaged in the business of infrared- and ultraviolet-blocking liquid products, discussed with a shareholder of the Claimant in May 1999 the feasibility of developing a liquid product that could be directly applied to televisions or computers to block X-rays. Subsequently, the Respondent contacted a Japanese research institution, which reportedly assured them that it could develop an X-ray-blocking coating liquid. However, by the end of October 1999, the Japanese research institution explicitly stated that the “X-ray Blocking Liquid” could not be successfully developed. The Claimant proposed changing the wavelength on November 3, 1999; yet, according to expert opinion, even without such a change, success would have been unattainable. Therefore, the change in wavelength bears no causal relationship to the project’s failure. The Respondent communicated directly with the Japanese research institution and possessed greater knowledge than the Claimant regarding the product’s name, technical parameters, and related technologies. During the commissioned development process, the Claimant obtained most of its documentation and information from the Respondent. Consequently, the Respondent bears inescapable responsibility for the failure of the “X-ray Blocking Liquid” project.
2. After the “X-ray Blocking Liquid” failed, the Respondent coerced the Applicant into accepting that the conductive film product belonged to the same series as the original “X-ray Blocking Liquid” and claimed its performance was superior and its electromagnetic wave blocking range broader. Acting on the Respondent’s recommendation, the parties decided to jointly develop additional products, including conductive films and electromagnetic wave-related products. Thereafter, the Respondent again extorted HK$1.5 million from Liu XX, a shareholder of the Applicant, under the pretext of “supplementary development fees.” In fact, conductive films had already been manufactured in Japan ten years earlier; such products no longer required development, and the Respondent’s recommendation may have been motivated by deception.
(II) Whether the Respondent has completed the work entrusted under the “Memorandum,” and whether there exists any obvious breach of contract or fault?
The Respondent contends that:
Continuing development requires more than five research institutions, and the salaries of Japanese researchers are relatively high; substantial expenditures are also needed to purchase supporting research equipment, materials, and other resources. Without additional investment, development cannot proceed.
Attorney Zhiming believes:
The Respondent failed to complete the other tasks entrusted under the “Memorandum.” To date, the Respondent has provided only a partial batch of conductive film samples, which, upon inspection, were found entirely nonconforming. For the other projects, there have been no deliverables, no progress reports, and none of the technical documentation or original contract documents stipulated in the “Memorandum.”
IV. Analysis Opinions
(I) The Respondent has clearly breached the contract.
The arbitral tribunal upheld the legal opinion provided by Zhiming Lawyers, and the award states:
“本案证据表明，在开发‘X射线阻挡液’失败的情况下，胁内收取了申请人股东刘XX港币150万元;该港币150万元用于开发‘备案记录’项下的‘导电膜产 品’，对此，申请人和被申请人均没有异议，刘XX作为申请人的法定代表人也没有提出异议。——由于被申请人违背了‘备忘记录’第二条的规定，未在 ‘备忘记录’约定的30天内向申请人提供有关技术资料，包括未将‘备忘记录’约定的‘所有有关合同原件’提交申请人，属于明显违约，并损害了申请人的经济 利益，对于申请人在第一项仲裁请求中要求裁决被申请人返还投资款港币150万元的请求，仲裁庭予以支持。” 仲裁庭并依法裁决了申请方追索的律师费、仲裁费等。
(II) The applicant suffers losses due to the absence of an arbitration agreement.
The arbitral tribunal’s acceptance of cases is explicitly stipulated by law:
The Arbitration Law of the People’s Republic of China: “Article 4 Where the parties choose arbitration to resolve a dispute, such choice shall be voluntary on both sides and an arbitration agreement shall be concluded. Where no arbitration agreement exists, the arbitration commission shall not accept an arbitration application filed by one party.”
China International Economic and Trade Arbitration Commission Arbitration Rules: Article 5 Arbitration Agreement:
(I) The Arbitration Commission shall accept a case upon receipt of an arbitration agreement between the parties to submit the dispute to the Arbitration Commission—entered into either prior to or after the dispute arises—and a written application submitted by one of the parties.
(ii) “Arbitration agreement” refers to an arbitration clause stipulated by the parties in a contract or a written agreement reached by the parties in any other manner to submit disputes to arbitration.
The legal documents submitted by the Claimant in this case include three agreements and one memorandum of understanding. Only the memorandum of understanding contains an arbitration agreement; the three agreements do not contain any arbitration agreement. Therefore, disputes arising from the three agreements fall outside the scope of the arbitration agreement in this case. The arbitral tribunal will not hear the Claimant’s first claim concerning the investment amount of RMB 387,500, which must be resolved through other legal avenues. This is a consequence of the Claimant’s lack of legal knowledge, and no lawyer can assist in this regard.
(Compiled and commented by Guo Tianxi)
Zhiming Office
March 19, 2001
