【Lead Attorney: Wang Tengfeng】

I. Case Recap

[2] In September 1999, the applicant, Shenzhen Hengsheng Industrial Co., Ltd. (in its preparatory stage), and the respondent, Japan "WIN" Kabushiki Kaisha, agreed through negotiation that the applicant would entrust the respondent to sign a technology development contract with a Japanese research institution in Japan, to develop X-ray, electromagnetic wave, and related products within the conductive film series suitable for the Chinese market. Within 30 days after the development contract was signed, the respondent would transfer to the applicant, the principal, 50% of the patent rights and 100% of the global operation rights obtained from the Japanese research institution regarding "conductive film technology development," and submit all relevant original contracts to the applicant, the principal. In case of breach, a full refund must be made. To this end, the parties signed three cooperation agreements on September 8, September 9, and November 14, 1999, respectively. The applicant's shareholders also paid a total of RMB 387,500 and HKD 1.5 million to the respondent's legal representative, Masao Wakiuchi (hereinafter referred to as Wakiuchi), in three installments as technology development funds. After the applicant was legally registered as an enterprise (registered on December 15, 1999), it signed a formal entrustment agreement (i.e., "Memorandum of Record") with the respondent on March 7, 2000, which explicitly stipulated:

[3] 1. The respondent shall represent the applicant in signing a technology development contract for conductive film products with Ishida Technical Office of Japan.

[4] 2. After the above formal contract is signed, the respondent shall, within 30 days, transfer to the applicant, the principal, 50% of the patent rights and 100% of the global operation rights obtained from the technology developer regarding "conductive film technology development," and submit all relevant original contracts to the applicant, the principal.

[5] 3. Without the consent of the applicant's board of directors, no contract shall be signed with the technology developer, Ishida Technical Office of Japan, in the name of any other institution or individual.

[6] 4. The contract shall include a clause ensuring that the technology developer, Ishida Technical Office of Japan, transfers and delivers to the applicant 50% of the patent rights and 100% of the global operation rights.

5. In the event of a dispute, it shall be resolved through negotiation. If negotiation fails, both parties shall jointly choose to apply for arbitration with the China International Economic and Trade Arbitration Commission.

In the course of performing the aforementioned "Memorandum," the parties involved in the dispute, unable to resolve it through negotiation, the applicant, based on the arbitration clause in the "Memorandum," filed an application for arbitration with the Shenzhen Sub-Commission of the China International Economic and Trade Arbitration Commission on August 2, 2000. The arbitration requests are as follows:

1. To rule that the respondent refund the applicant's investment funds of HKD 1.5 million and RMB 387,500;

2. To rule that the respondent bear the attorney fees;

3. To rule that the respondent bear the arbitration costs.

II. Case Outcome

After the arbitration tribunal held a hearing and rendered an award, the award document [(2001) Shenzhen International Arbitration Commission Award No. 18] states:

"According to the relevant legal provisions and customary practices of commission contracts, the principal has the right to be informed of the progress of relevant matters, and the agent has the obligation to report to the principal on the progress of handling the matters and to transfer the relevant proceeds to the principal. However, based on the materials provided by the applicant, the respondent only provided some samples of conductive film, with neither a progress report nor any other results. Furthermore, according to the materials provided by both parties, despite repeated requests from the applicant, the respondent still refused to hand over the relevant materials and original contracts, and did not provide the applicant with technical materials related to the 'conductive film product.' — As the legal representative of the respondent, Xie Nei should, in accordance with the agreement in the 'Memorandum,' submit the original contracts and technical materials related to the 'conductive film product' to the applicant."

"— The investment funds of RMB 387,500 involved in the applicant's first claim are unrelated to the 'conductive film product' under the 'Memorandum.' The applicant's request for the respondent to refund these investment funds does not fall within the scope of disputes covered by the arbitration clause in this case, and the arbitration tribunal has no jurisdiction to hear it. The parties have the right to resolve the relevant disputes through other legal channels. — The arbitration tribunal supports the applicant's request in the first arbitration claim for a ruling that the respondent return the investment funds of HKD 1,500,000."

"The applicant is considered 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 supported, the arbitration costs of this case shall be borne 40% by the applicant and 60% by the respondent."

"1. The respondent shall repay the investment funds of HKD 1,500,000 to the applicant 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 fee for this case is RMB 46,050, with the applicant bearing RMB 18,420 and the respondent bearing RMB 27,630.

4. The applicant's other claims are dismissed.

This award is final.

III. Case Focus

This case involves a large number of complex and sophisticated technical indicators of high-tech environmental protection products. The main points of dispute are:

(I) Whether the reason for the development failure lies with the applicant or the respondent?

The respondent believes:

The reason for the development failure is that the applicant provided an incorrect technical standard wavelength for the product "X-ray blocking liquid," leading to the failure and significant losses. Therefore, the relevant investment funds of HKD 1.5 million and RMB 387,500 cannot be returned.

Director Lawyer Wang Tengfeng believes:

1. The respondent should bear full responsibility for the failure of the "X-ray blocking liquid" project. The respondent originally operated a business involving liquid products that block infrared and ultraviolet rays. In May 1999, during a discussion with a shareholder of the applicant, the possibility of developing a liquid product that could be directly applied to televisions or computers to block X-rays was explored. The respondent then contacted a Japanese research institution, which claimed it could develop an X-ray blocking coating liquid. Later, at the end of October 1999, the Japanese research institution explicitly stated that the "X-ray blocking liquid" could not be successfully developed. The applicant proposed changing the wavelength on November 3, 1999, and according to experts, even without changing the wavelength, success was impossible. Therefore, the change in wavelength had no causal relationship with the development failure. The respondent directly communicated with the Japanese research institution and had a greater understanding of the relevant names, parameters, and technologies than the applicant. During the entrusted development process, most of the materials and information obtained by the applicant came from the respondent. The respondent bears an undeniable responsibility for the failure of the "X-ray blocking liquid" project.

2. After the failure of the "X-ray blocking liquid," the respondent claimed that the conductive film product belonged to the same series as the original "X-ray blocking liquid," with better performance and a wider range of electromagnetic wave blocking. Based on the respondent's suggestion, both parties decided to develop other products such as conductive film and electromagnetic waves. The respondent then collected HKD 1.5 million from the applicant's shareholder, Liu XX, under the guise of supplementary development fees. In reality, conductive film had already been produced in Japan ten years earlier, and no further development was needed. The respondent's suggestion cannot rule out the possibility of fraudulent intent.

(2) Did the respondent complete the work entrusted under the "Memorandum," and was there any obvious breach of contract or fault?

The respondent believes:

Continuing development requires more than five research institutions, and the cost of Japanese researchers is quite high, along with substantial expenses for purchasing supporting research equipment and materials. Without additional investment, development cannot proceed.

Director Lawyer Wang Tengfeng believes:

The respondent has not completed the other work entrusted under the "Memorandum." However, to date, the respondent has only provided some conductive film samples, which have been tested and found completely unqualified; for the other projects, there are neither results nor progress reports, nor the relevant technical materials and original contract documents as agreed in the "Memorandum."

IV. Analysis Opinions

(A) The respondent has clearly breached the contract

The arbitral tribunal supported the legal opinion of lead attorney Wang Tengfeng, and the ruling states:

"The evidence in this case shows that after the failure to develop the 'X-ray blocking liquid,' Xie Nei collected HKD 1.5 million from the applicant's shareholder Liu XX; this HKD 1.5 million was used for the development of the 'conductive film product' under the 'Record of Filing,' to which neither the applicant nor the respondent objected, and Liu XX, as the legal representative of the applicant, also raised no objection. — Since the respondent violated Article 2 of the 'Memorandum' by failing to provide the applicant with relevant technical materials within the 30 days agreed in the 'Memorandum,' including not submitting the 'all relevant original contracts' as agreed in the 'Memorandum,' this constitutes a clear breach of contract and has harmed the applicant's economic interests. The arbitral tribunal supports the applicant's request in the first arbitration claim for a ruling that the respondent return the investment of HKD 1.5 million." The arbitral tribunal also ruled on the applicant's claims for attorney fees and arbitration costs in accordance with the law.

(2) The applicant suffers losses without an arbitration agreement.

The arbitration tribunal has clear legal provisions for accepting cases:

"Arbitration Law of the People's Republic of China": "Article 4 The parties adopting arbitration to resolve disputes shall do so voluntarily and reach an arbitration agreement. If there is no arbitration agreement and one party applies for arbitration, the arbitration commission shall not accept the case."

"China International Economic and Trade Arbitration Commission Arbitration Rules": "Article 5 Arbitration Agreement:

(1) The Arbitration Commission accepts cases based on an arbitration agreement reached by the parties before or after the dispute arises, agreeing to submit the dispute to the Arbitration Commission for arbitration, and a written application from one party.

(2) An arbitration agreement refers to an arbitration clause stipulated in the contract by the parties, or a written agreement reached in other forms to submit to arbitration."

The legal documents submitted by the applicant in this case include three agreements and one memorandum. Only the memorandum contains an arbitration agreement; the three agreements do not. Therefore, disputes arising from the three agreements fall outside the scope of the arbitration agreement in this case. The investment amount of RMB 387,500 involved in the applicant’s first request will not be considered by the arbitral tribunal and can only be resolved through other legal channels. This is a consequence of the applicant’s lack of legal knowledge, and no lawyer can provide assistance.

(Compiled and commented by Guo Tianxi)

Zhiming Office

March 19, 2001