Wahaha v. Danone: My Arbitration is Better Than Yours

Ok, this is getting really interesting!

Remember that Danone submitted the whole dispute to the Stockholm Institute of Arbitration on May 9, 2007? The arbitration is pending there in Sweden.

Remember that Wahaha also applied to have the Wahaha trademark transfer portion of the dispute with Danone arbitrated in the Hangzhou Arbitration Commission (“HAC”) on June 13, 2007?

In my last post, I was not sure whether HAC would take the case since the matter, on a bigger scale, is pending in Sweden.

But, surprise!! HAC accepted the petition for arbitration the very next day on June 14, 2007.

According to a report, Wahaha wants the HAC to determine whether the trademark transfer agreement, as a matter of law, is void since the Chinese Trademark Law requires such transfer to be approved by the China Trademark Office at the time of transfer (1996).

My hunch is that this might be Wahaha’s strongest argument. Wahaha Group in fact competed against Wahaha-Danone joint ventures; Wahaha Group actually used the trademark without the approval of the joint venture pursuant to the joint venture agreement. Therefore, without attacking the legality of the contract, Wahaha will have a very tough job in convincing the tribunals or a jury.

The next question that I anticipate to be raised after the “verdict” on the transfer issue is whether the contract in its entirety will be held as void. In my previous post, I discussed that Chinese Contract Law allows per se illegal clauses to be stricken in an otherwise enforceable contract. Assuming that the trademark transfer agreement is held as void by the HAC, will the original joint venture agreement (“Original Agreement”) survive the ordeal?

From a legal perspective, the rest of the Original Agreement should stand and continue to be effective given Article 56 of the Chinese Contract Law. But the really issue is what good is there for Danone if the Trademark transfer portion of the contract is void. Without the right to the Wahaha trademark, Danone’s joint ventures in China would only be a shell without its core value with which the Chinese consumers identify. Of course, Danone can rely on its own trademarks acquired elsewhere, but that is the topic of another day.

Wahaha v. Danone: Partnership at Grace’s End

When Danone Asia Pte Ltd. (“Danon Asia”) and other Danone subsidiaries located in Asia submitted the dispute to arbitration in Sweden, things between the two partners have turned from the good, to the bad, then to the ugly. And Danone has hired the British law firm Freshfields to represent it in the Swedish arbitration deal. As a side note, Article 26 of the Joint Venture Agreement stipulates that disputes between the contracting parties, if unresolved, are to be arbitrated in the Arbitration Institute of the Stockholm Chamber of Commerce.

My research reveals some of the details of Danone’s contentions and complaints in the arbitration. The plaintiffs/petitioners are: Danon Asia, Jinjia Investments Ltd., Myen Ltd., Novalc Ltd. The defendants/respondents are: Wahaha Group Ltd., Wahaha Shiye Ltd., Hangzhou Food Ltd., Hangzhou Wahaha Investments Ltd.

The pith of Danone’s complaints is that Wahaha Group and its non-joint venture companies violated the original Joint Venture Agreement (“Original Agreement”) between Danone and Wahaha Group, and that such violation consequently resulted in the infringement of the trademark transfer clauses of the Original Agreement. Danone alleged that the defendants, without approval from the joint venture companies, manufactured products that are same as those of the joint venture companies. These products competed against the joint venture companies’ products, injuring the interests of the joint venture companies.

In addition to the corporate defendants, Danone also joined Mr. Zong, the former chairman of the board of directors of the joint venture companies and the man behind all the non-joint venture companies, as a defendant in the arbitration. Danone, expectedly, complained of Zong’s violation of the non-compete agreement (“NCA”) and non-disclosure agreement (“NDA”). And it also alleged that Zong created conflict of interests, violating his duty to the joint venture company as a board member.

In an attempted strategic move, Zong submitted the same case to the Hangzhou Arbitration Commission on Wednesday (June 13, 2007), hoping to capture a little bit of the home-court advantage. He avers that the trademark transfer clause in the Original Agreement is void for violation of the Chinese law at the time of contract in 1996, and that Danone fraudulently induced Wahaha into the contract.

From a legal stand point, Zong is caught in a tight spot. First, his choice of venue for arbitration is against the express provisions of the Original Agreement, notwithstanding his “need” of a friendly forum. Second, the disputes have already been accepted by the Stockholm Arbitration Institute, where Zong and the other four non-joint venture companies are defendants. So, whether the Hangzhou Arbitration Commission will dismiss the petition remains a very curious legal and possibly political riddle.

And then, to make thing a little more uncomfortable for Mr. Zong, Danone lit a fire in his back yard where he could not even get to. Danone’s lawsuit in Los Angeles against Ever Maple Trading Ltd., Hangzhou Hongsheng Beverage Co Ltd., and Zong’s daughter & wife really added “insult to injury.” Zong’s immediate response to this suit is to resign his position on the Danon-Wahaha Joint Venture board, which demonstrates how enraged he might have been. Aside from making him comfortable, Danone’ choice of forum in California could not have been better since here Danone is immune from the heat of nationalism manipulated by Zong, local politics in Hangzhou (the city is a shareholder of Wahaha Group, remember?), and unpredictable courts.

Good move, Danone! Smile…

[Tomorrow, I will talk about what I think Danone did wrong. Don’t laugh yet.]

Wahaha v. Danone: Who Will Have the Last Laugh?

The Wahaha and Danone dispute appears to have been kicked into high gear.

Following Danone’s lawsuit in California state court against a subsidiary company of Wahaha, the former board director of the Danon-Wahaha Joint Venture, Zong Qinghou, announced on June 13, 2007 in a press conference that he would submit the dispute between Wahaha and Danone to arbitration in China. Specifically, the dispute involves a trademark transfer agreement Wahaha and Danone. The venue of arbitration is the Hangzhou Arbitration Commission.

In order to follow the development of dispute, which has gone global literally, it is better grasp the chronology of the relationship between Wahaha and Danone.

First, the occasion warrants a brief intro of the players. Danone is currently one of the world’s leading global corporations in fresh dairy products and bottled water, and its production and sales spans around the world. Wahaha is a bit more complicated. Wahaha Group consists of three large blocks of corporate entities. The first is the original Wahaha Group Ltd., and the City of Hangzhou owns 46% of the stock, and the rest of stocks of the company are unevenly distributed among Mr. Zong, the management, and employees (before 2000, Wahaha Group was a solely state-owned enterprise). The second one is the Wahaha-Danone Joint Equity Venture Group. Wahaha Group Ltd. Controls 49% of the shares, and Danone holds 51%. The third bunch is a host of non-joint venture companies established and operated in essence by Wahaha Group Ltd. and Hangzhou Wahaha Food Products Ltd.

Second, the following is the chronology of the relationship between Danone and Wahaha.

1. 02/29/1996-----Joint Venture Agreement between Wahaha Group Ltd. and Danone, including trademark transfer agreement, non-compete agreement, and confidentiality agreement

2. 03/28/1996-----Wahaha Group Ltd., Danone, and a Hong Kong enterprise agreed to form five joint ventures in China.

3. 04/1996-----Mr. Zong became the chairman of board of directors of the said five joint ventures.

4. From 1996—2007, the original five joint ventures evolved into 39 joint ventures, and everybody made a ton of money.

5. Problems began to surface in 2000 after the reorganization of Wahaha Group Ltd., which became a private entity with the Hangzhou government holding 46% of its stocks. The reorganized Wahaha Group Ltd. began to establish its own joint ventures and separate subsidiary entities, which totaled 17 entities in a span of six years. Apparently, Wahaha Group Ltd. used the Wahaha-related trademark in violation of the Wahaha-Danone Joint Venture Agreement.

6. Danone kept quiet with respect to Wahaha Group’s use of the trademark and apparent breach of the non-compete agreement inherent in the Joint Venture Agreement.

7. In late 2006, Danone initiated an offer to buy all of Wahaha Group Ltd.’s companies which are developed outside of the Joint Venture Agreement, and Wahaha Group Ltd. rejected the offer. The dispute went public in early 2007, escalating into a full blown fight over the ownership and usage of the Wahaha trademark.

8. 05/09/2007, Danone Asia submitted the disputes with Wahaha Group Ltd. with respect to the Joint Venture Agreement to the Stockholm Arbitration Institute.

9. 06/04/2007, Danone sued, in the Superior Court of Los Angeles County, Ever Maple Trading, a company based in the British Virgin Islands, and Hangzhou Hongsheng Beverage, as well as two individuals related to these companies. The two companies are believed to have ties with Wahaha Group Ltd. and Mr. Zong.

10. 06/05/2007, Mr. Zong tendered his resignation as the chairman of the board of directors of the Wahaha-Daone Joint Venture.

11. 06/13/2007, Mr. Zong announced his plan to submit the trademark dispute arising out of the Joint Venture Agreement to the Hangzhou Arbitration Commission.

As can be seen, the facts of this dispute are complicated and convoluted, and both parties are engaging in interesting tactics to gain procedural advantages. I am trying to get my hands on the Joint Venture Agreement to see exactly what they agreed to in 1996. Tomorrow, I will blog about the thrust of both parties’ contentions in their respective arbitration, trial proceedings.

Choice of Law and Contracts in China

Disputes happen. It certainly happens to foreign companies doing business in China. The multinational company Danone is in a huge one now.

I think it is safe to say that conflicts and disputes are unavoidable in doing business in a foreign country, but one can control the risks involved and minimize the damages thereunder. Choice of law in contracts with foreign parties can be of strategic importance if and when disputes arise in commercial activities.

Article 126 of the Contract Law of China governs foreign-related contracts. It provides that “parties to a foreign related contract may choose the applicable law for the resolution of their disputes, unless the law provides otherwise.” As it is clear from the contract code itself, the contracting parties' express provision on choice of law will be enforceable in case of a dispute later. Whether to choose Chinese law, the law of your own residing jurisdiction, or a neutral third jurisdiction is a difficult decision. The best thing to do is to get competent counsel who understands, comprehensively, the laws and regulations of all the three possible jurisdictions. Only upon a careful examination of all the applicable laws of the various possibilities can one make an educated choice.

The Contract Law of China also contemplates that if the parties fail to expressly state in the contract the choice of law, the disputes between the parties shall be governed by law of the country with the closest connection (nexus) to the contract. Simple it might seem, but the two words “closest connection” have generated voluminous commentaries among contract law and international law scholars. Some suggest that the connection is one that should be assessed in terms of both the quantity and quality of the connections, while other suggest that the presiding judge over the case should have wide discretion to determine by weighing the interest of the parties involved. Still others argue that the contracting parties’ intent warrants some consideration in determining what law governs. My two cents worth on this is that if the scholars cannot figure it out over years of research, the contracting parties REALLY need to expressly provide the choice of law clause for their own good.

Not all contracts in China can be governed by laws selected by the parties. According to the Contract Law, the following three types of contracts shall be governed by the law of P. R. China:

Chinese-foreign joint equity venture contracts to be performed in China
Chinese-foreign cooperative joint venture contracts to be performed in China
Chinese-foreign contracts for joint exploration and development of natural resources in China

If you really do not want a piece of the Chinese law over your contract, consider structuring your business deals around the contract law by avoiding forming a joint venture in China. But a deal, as I understand, is often more complicated than that.

For more on Chinese Contract Law, check out my earlier posts.

Freedom of Contract in China: Not So Fast Yet

Freedom of Contract in China: Not So Fast Yet (II)

Freedom of Contract in China: Not So Fast Yet (III)

Freedom of Contract in China (IV): The Role of the People's Court

Freedom of Contract in China (IV): The Role of the People's Court

Don’t get me wrong. Freedom of contract is one of the fundamental principles of the Chinese contract law promulgated in 1999. However, as Professor Hsu states in his article Contract Law of the People’s Republic of China, the freedom of contract “is not absolute.” The freedom is restricted to contracting within the metes and bounds of the law, societal values, and basic public policy. Provided that such freedom veers off course in the eyes of the Contract Law, the people’s courts (tribunals, alternatively) have jurisdiction and authority to invalidate the contract or illegal clauses therein.

One conspicuous question here is what standard a people’s court or tribunal applies in determining whether a contract or its clauses are per se void for violating other laws or regulations. This question, very naturally, turns on the issue of conflict of laws. Where the law of a locale comports with the law of the land on a particular issue, no concerns arises in terms of the conflict of laws; where the law of a locale conflicts with the law of the land, the concern for inconsistent judicial decisions is well-founded.

In response to the above question, the Supreme People’s Court opined and ordered that when invalidating a contract or clause, the courts must consider the laws and/or administrative regulations adopted by the National People’s Congress, its Standing Committee, State Council, and various underlying ministries, commissions of the State Council. No local regulations or rules should be applied by the courts while invalidating contracts. This Supreme Court rule symbolizes a bold step toward unifying judicial standards across the country. But I’d caution contracting parties about relying exclusively on this Supreme Court opinion.

Assuming that Chinese law is the law of choice in a contract, here is what I suggest in this regard:

1. Get local counsel and know the local law governing all aspect of the contractual relationship;

2. Make sure that your contract and its clauses comply with the laws and regulations of the Republic;

3. Harmonize the contract and the relevant form contracts drafted by local Industry and Commerce Administration.

Freedom of Contract in China: Not So Fast Yet (III)

To continue my musing on the topic of governmental, executive intrusion to the freedom of contract in China, I intend to discuss the origin of such power to regulate contract formation, and to shed a little on how the power has been exercised in some locales in China.

Legislative Designation of Executive Power to Regulate Contracts

Article 127 of the Contract Law of the P. R. China designates contract enforcement authorities to departments of the Industry and Commerce Administration and other relevant administrative agencies. However, such authority and power is restricted to “monitoring and handling illegal acts that harm the State or public interests through the conclusion of a contract, in accordance with the relevant laws and regulations.” See 16 Minn. J. Int’l L. 115, 142.


工商行政管理部门和其他有关行政主管部门在各自的职权范围内，依照法律、行政法规的规定，对利用合同危害国家利益、社会公共利益的违法行为，负责监督处理；构成犯罪的，依法追究刑事责任。

In other words, these administrative institutions and agencies are granted a restrictive authority to monitor and handle illegal activities associated with contracts. By inference, they do not have the power to invalidate either contracts or contract clauses unless a crime or illegal acts are involved which injure the State or public interests.

The Exercise of Executive Power in Regulating Contracts

In practice, however, local Industry and Commerce Administration departments enjoy greater power and authority than what is defined in Article 127 of the Contract Law. “Monitor” and “handle” were the two key words that define powers designated, but the power and authority exercised by the Beijing Municipal Department of Industry and Commerce, to my mind, far exceed powers granted by the Contract Law.

For instance, the Circular Regarding Intensifying the Supervision of Contract Terms and Provisions (“Beijing Order”) mandates the usage of form contracts drafted by Department of Industry and Commerce alone or along with other administrative agencies. Such form contracts cover a wide range of commercial agreements:
1. landlord-tenant contracts;
2. home renovation contracts;
3. utilities contracts;
4. business operations training contracts;
5. TV, communications services contracts;
6. Consumer loans, life and property insurance contracts;
7. Travel, transportation contracts;
8. Automobile purchase, lease, and repairs contracts;
9. franchise contracts;
10. Supermarkets transactions contracts.

These contracts, according to the Beijing Order, are under scrutiny. And the governmental scrutiny manifests in two ways. First, contracting parties are encouraged to adopt the form contracts already drafted and circulated for use. Second, parties engaged in the above-list commercial activities can expect to be targeted in inspection. Violations of local enforcement regulations can result in heavy penalties.

Conclusion

The People’s Congress through the Contract Law grants Industry and Commerce Administration and other agencies the power to monitor and handle illegal acts associated with contracts. In reality, however, the power has been expanded beyond its designated sphere of law enforcement. It morphed into the power to draft form contracts for use in a wide range of commercial transactions. Although the use of such draft contracts is not yet mandatory, it surely would not surprise a business person in China when they do some day.

Freedom of Contract in China: Not So Fast Yet (II)

In yesterday’s post, I examined local rules affecting the freedom of contract, especially the Beijing and Shanghai Orders that declare certain contractual terms and provisions per se illegal and void. The local municipal governments' power to interfere with parties’ contract in this fashion led me to conclude that the basic spirit of freedom of contract has been violated by the Orders. Today, I want to continue the discussion by observing the stipulations on the topic of contract validity in the Contract Law of the P. R. China. [note: my comments are largely based on the article written by Professor Steven Hsu published in the Minnesota Journal of International Law. See 16 Minn. J. Int’l L. 115]

Per Se Void Contracts

Contracts, pursuant to Chapter Three of the Contract Law of P. R. China, can be invalid and void in the following five circumstances:

1). Contract executed through fraud or under duress, thereby harming the interest of the State;

2). Contract between parties who have colluded in bad faith, thereby harming the interest of the State, the collective, or an innocent 3rd party;

3). The contracting parties have hidden an illegal purpose under the disguise of a legitimate contract;

4). The contract harms public interests; or

5). The contract violates a mandatory provision of laws or administrative regulations.

Per Se Void Contract Clauses/Terms

Individual contract clauses, likewise, can also be per se invalid if they violate public policy or interests. Even though the rest of the contract can remain enforceable, clauses that meet the following description are per se invalid according to Article 53 of the Contract Law of P. R. China:

1). Clauses that exclude a party’s liability for personal injury sustained by the other party; and

2). Clauses that exclude a party’s liability for damages sustained by the other party through the other party’s intentional misconduct or gross negligence.

Voidable Contracts

Some contract, in contract with per se invalid contract, may be invalidated or voided by the injured parties through either judicial action or arbitration. Void contracts are, pursuant to Article 54, the following type of contracts:

1). The ones that are entered into with material mistake;

2). The ones that are clearly unfair upon execution.

3). The ones entered into when one party was under duress or was defrauded by the other.

The aggrieved party may petition a people’s court to either reform or cancel the contract. Alternatively, the same party may pursue redress through arbitration. But, the petitioned court or tribunal cannot cancel the contract if the remedy sought is a reformation.

Who Has the Authority to Invalidate Contracts?

Obviously, tribunals and courts with proper jurisdiction have the authority to invalid contracts or contract clauses. But the sticky question is—What legal standard shall the adjudicating institution apply where the local statutes/regulations differ from those of the central government?

To be continued…

Freedom of Contract in China: Not So Fast Yet

Freedom of contract plays a crucial rule in most commercial activities, and the basic idea is that both parties get the benefit of their bargain in exchange for the imposed contractual duties. Simply put, you “pay” for what you bargained for in the contract. In order for this basic form of commercial tool to work effectively and efficiently, the parties to the contract must have the freedom to decide what is good and bad for itself, free of other interferences and influences.

However, things do not work 100% well in reality. In the United States, courts sometime step in to declare certain terms and provisions null and void because the enforcement of which violates equity, fairness, or public policy in general. A detailed discussion of this topic is beyond the scope of this post.

In the same vein, contracts can be under scrutiny in China, thus being subject to governmental, administrative interference under the umbrella of consumer rights protection.

For example, the City of Shanghai enacted a municipal statute on July 13, 2000. (ordinance)—Regulations on the Supervision of Contract Terms and Provisions. (上海市合同格式条款监督条例) Similarly in Beijing, the Municipal Administration of Industry and Commerce issued an administrative order, which was blessed by the city government. Titled Circular Regarding Intensifying the Supervision of Contract Terms and Provisions, the order resembles the Shanghai statute. (关于加强北京市合同监督管理若干意见的通知) Hereafter, I refer to the above-mentioned municipal rules as “orders.”

According to the Orders, the following terms and provisions are per se illegal:

A. Terms and provisions that shield the drafting party from the following liability:

1. Liability arising out of personal injury to consumers;
2. Liability arising out of damages to consumer’s property due to intentional tort or gross negligence;
3. Warranty liability provided to consumers along with sale of products or services;
4. Liability due to the drafting party’s breach of contract;
5. Other liabilities under the law due to the drafting party’s breach of contract

B. Terms and provisions that increase consumers’ liability:

1. Unreasonable amount of liquidated damages or contractual damages;
2. Responsibility of operational risks that rightfully belong to the drafting party;
3. Other terms or provisions that unlawfully increase consumers’ liability

C. Terms and provisions that extinguish the following consumers’ rights:

1. The right to lawfully amend or rescind the contract;
2. The right to demand liquidated damages or actual damages;
3. To exercise the right of contract interpretation;
4. The right to litigate in the event of a dispute.
5. Any other consumers’ rights guaranteed under the law.

As a consumer, I am not against the protection of consumer rights. But the pervasive hand-on, in-you-face type of governmental interference in the contractual process, in my humble opinion, is an affront to the basic idea of freedom of contract. Even if there are instances of fraud, unfair contractual practices, governmental interference, like the Orders, is arguably not the most efficient means of correction, and I’d argue that the market itself is in the long term, which includes the consumers at large in a burgeoning market economy.

As a lawyer friend always says:"A litigation lawyer would die for a good argument." However true that might be, the reality of doing deals in China, especially in two of China's largest and important cities Beijing & Shanghai, demands foreign and domestic companies alike to draft contracts carefully so as to avoid the contracts being deemed void.