Cassation judgment no. 08/HDTP-KT dated March 30, 2005 on dispute over processing contract

THE SUPREME PEOPLE’S COURT

CASSATION JUDGMENT NO. 08/HDTP-KT DATED MARCH 30, 2005 ON DISPUTE OVER PROCESSING CONTRACT

On March 30, 2005, at the headquarters of the Supreme People’s Court, the cassation trial is opened to hear the dispute over processing contract with foreign trader between:

Plaintiff:  Thanh Phat sole proprietorship specialized in high-class glass (hereinafter referred to as Thanh Phat company); company’s head office: Kieu Ky, Gia Lam District, Hanoi City. Mrs. Nguyen Mai Huong, company owner, permanently residing at: 57 To Hien Thanh, Hai Ba Trung District, Hanoi City.

Defendant: Glass tech International Inc (hereinafter referred to as GTI); headquartered at America. Representative: Mr. Kim Jung Chul, Korean nationality, temporarily residing at Kieu Ky, Gia Lam District, Hanoi City.

NOTES THAT

In 1996 and 1997, Thanh Phat company entered into two processing contracts with GTI to cut interior glass below:

- Processing contract No. 01/TP-IN96 dated September 12, 1996. GTI supplied materials for processing but failed to make payments. The contract expired on December 31, 1997 without finalization and dispute or claim.

- Processing contract No. 02/TP-IN97 dated October 25, 1997:

Quantity of products:

- Glass for straight cut: 19,500,000 products

- Glass for curve cut: 1,000,000 sets

- Copper-coated glass: 200,000 plates

Processing prices are mentioned in the purchase order; GIT supplied materials and machinery and equipment without payments (see manifest of 38 machinery/equipment and 950 processed copper products and L/C at sight or wire transfer. The contract period is 5 years (November 15, 1997 – November 15, 2002). The contract was made in Vietnamese and English, obtaining approval of the Ministry of Trade to execute the contract and temporarily import equipment for processing purpose.

Thanh Phat company and GTI subsequently entered into 9 Appendices and Appendix to contract No. 02/TP-IN9 registered with the customs authority.

In March 1998, Thanh Phat Company temporarily imported 39 machines transferred by GIT (including 38 machines listed in the contract No. 02 and 1 machine listed in Appendix No. 02 dated February 16, 1998). Before that, in September 1996, Mrs. Nguyen Mai Huong imported 8 machines for personal use and non-commercial purpose. These machines were given to Mrs. Huong by Mr. Kim as a gift, when Thanh Phat company had not been incorporated.

On January 2, 2001, two parties signed a final account regarding Appendix No. 06 and 07 of contract No. 02. The final account specifies that total value of two Appendices is USD 112,935 and GTI still owed Thanh Phat company USD 3,365.30 until December 31, 2000.   On January 2, 2001, there was Appendix No. 09 on quantity of products to be processed of estimated USD 412,600 which was paid by wire transfer or irrevocable L/C 30 days before all the products were delivered.

While two contracts were being executed:  Thanh Phat company exported 22 shipments with processing fees of USD 462,670.95 to GIT. Products sold on credit were delivered not equivalent to contract addendum. The last shipment was delivered on May 8, 2001 worth USD 29,500, GTI made payment in cash of VND 272,156,357 (≈USD 18,762.2). On May 8, 2001, the two parties signed an addendum to Appendix No. 09 on products and unit prices determined by Inch and payment by prepaid wire transfer or irrevocable L/C 30 days before all the products are delivered. The addendum to Appendix 09 also specifies actions against machines transferred under the contract and chooses Hanoi economic court for dispute settlement. The addendum was made in 4 English copies, no Vietnamese version and valid from the signing date (May 8, 2001) to November 15, 2002 (Thanh Phat company registered receiving customs authority on March 20, 2002).

On May 26, 2001, Thanh Phat company gave a notice of business suspension for indefinite duration because of financial problems since Mr. Kim breached Appendix 09 by not making payment under L/C before delivery of products.

On June 6, 2001, two parties reached an agreement as follows: While Mr. Kim kept running business and born all the costs incurred, Mrs. Huong followed legal procedures for maintaining the business and brought documents related to cooperation between contracting parties back to the company, and Mrs. Huong was paid for her working days. Then, Mrs. no longer came to the company.

On August 3, 2001, two parties reached an agreement to terminate the contract and have Thanh Phat company dissolved. On December 1, 2001, GTI issued decision No. 01/QD on termination of the contract No. 02/TP-IN97 for the ground that Thanh Phat company failed to deliver products on schedule, committed labor violations and burned documentary evidence (on September 29, 2001). Thanh Phat company subsequently required GTI to receive products and make payments. GTI required Thanh Phat company to deliver products before October 15, 2002.

On October 10, 2002, Thanh Phat company filed a lawsuit to People’s Court of Hanoi, requiring GTI to pay off debts arising from processing contract No. 02/TP-IN97, in specific:

- Request the court to settle the finalization of contract No. 02/TP-IN 97.

- Recognize ownership of Thanh Phat company to the machines imported under the contract.

- Entitle Thanh Phat company to liquidate 3 remaining shipments to pay off the debt.

- Compel GTI to compensate the following:

+ 6 months’ rent: VND 59,653,000

+ 1 month’s pay for 170 workers x VND 500,000 = VND 85,000,000

Total: VND 114,653,000

At the first-instance trial, Thanh Phat company made some changes to their request:

- Finalize the contract No. 02/TP-IN97. GTI must pay off outstanding processing fees: USD 98,353, examined by the court on January 24, 2003 (determined by Inch, unit prices mentioned in addendum to Appendix 09 dated May, 8, 2001) deducted from the overpaid amount of USD 1,886.90 mentioned in statement of Appendix 06 and 07. GTI must pay the remaining amount of USD 96,446.10 together with bank interests from May 26, 2001 to May 31, 2003, which is VND 407,130,396.

- Thanh Phat company owns the machines imported under contract No. 02/TP-IN97 according to the addendum to Appendix 09.

- GTI must compensate the following due to its termination of contract:

+ 1 year’s buildings rent: VND 119,306,000

+ Worker training: VND 85,000,000

Total: VND 204,306,000

GTI also requests the court to solely settle the dispute over contract No. 02/TP-IN97.

At the first-instance economic judgment No. 19/KTST dated June 3, 2003, People’s Court of Hanoi decided:

- The contract No. 02/TP-IN97 dated October 25, 1997 and Appendix 09 of contract No. 02 dated January 2, 2001 signed between Thanh Phat company and Glass Tech International Includes: (GTI) was legal and valid. - The addendum to Appendix 09 of contract No. 02/TP-IN97 dated May 8, 2001 was declared wholly null and void.

- Thanh Phat company and GTI terminated the contract No 02/TP-IN97 from September 30, 2001.

- GTI was compelled to open an L/C or TTR (Telegraphic Transfer Reimbursement) to pay the outstanding processing fees of USD 58,191.90 (≈ VND 849,834,507 with exchange rate of VND 14,406/1 USD on September 30, 2001) to Thanh Phat company. When GTI makes payment, Mrs. Nguyen Mai Huong – owner of Thanh Phat company must re-export GTI all finished glass products according to the stocktaking record dated January 24, 2003. GTI must pay Thanh Phat company interest amount of VND 133,848,935.

- Dismiss compensation claim of Mrs. Nguyen Mai Huong.

- Dismiss request to recognize machines under contract No. 02 of Thanh Phat company made by Mrs. Nguyen Mai Huong.

- Two parties must finalize the contract No. 02/TP-IN97 and appendices and addenda thereto at the competent customs authority as per the law etc.

The first-instance judgment also decided the court fee etc.

After first-instance trial, Thanh Phat company and GTI both filed an appeal. Thanh Phat company required GTI to pay off the principal debt of USD 98,353 and overdue interests as per the law; make compensation and recognize the ownership of machines under contract No. 02 of Thanh Phat company. Conversely, GTI required non-recognition of statements of Appendix 06 and 07, Appendix 09 dated January 2, 2001, and the addendum to Appendix 09 dated May 8, 2001 shall be declared falsified, and have GTI expenses deducted from the payable processing fees from June 6, 2001 to the contract termination date.

At the appellate economic judgment No. 139/KTPT dated April 13, 2003, People’s Court of Hanoi decided: rectify the first-instance economic judgment No. 19/KTST dated June 3, 2003, People’s Court of Hanoi decided:

1. processing contract No. 02/TP-IN97 dated October 25, 1997; statements of Appendix 06, 07 dated January 2, 2001; Appendix No. 09 dated January 2, 2001 and addendum No. 09 dated May 8, 2001 of contract 02/TP-IN/97 dated October 25, 1997 between Thanh Phat company and GTI are legal and valid. Contract No. 02 and abovementioned Appendices were terminated from December 1, 2001.

2. GTI was forced to open an irrevocable L/C or TTR to pay the outstanding processing fees of USD 95,797.69 and interest amount of USD 14.069.03 to Thanh Phat company. Total: USD 95,707.69 + 14,069.03 = USD 109,776.72.

3. GTI was forced to compensate Thanh Phat company the 1 year’s building rent of VND 119,306,000.

4. After GTI made full payment (including USD 109,776.72 and VND 119,306,000), Mrs. Nguyen Mai Huong – owner of Thanh Phat company must re-export GTI all finished glass products stock taken on January 24, 2003 by People’s Court of Hanoi.

5. Thanh Phat company must finalize the contract No. 02/TP-IN97 and appendices and addenda thereto at the competent customs authority as per the law etc.

a. 09 machines given by Mr. Kim as gift on April 10, 1996, Thanh Phat company imported these machines, under their ownership, for non-commercial purpose under the customs declaration No. 316 dated July 26, 1996 and No. 398 dated September 13, 1996 of customs authority of Hai Phong city.

b. 39 machines temporarily imported under the customs declaration No. 2841 dated January 26, 1998 and No. 1624 dated March 31, 1998 of customs authority of Ha Noi city and Thanh Phat company must re-export remaining imported materials to GTI as per the law etc.  GTI shall bear all the re-export costs incurred.

The judgment also decided the court fee etc.

On May 20, 2004, Mr. Kim – representative of GTI filed a claim for cassation trial against appellate judgment under the following grounds:

- Statements of Appendix 06, 07, Appendix 09 were signed on January 2, 2001 and addendum to Appendix 09 dated May 8, 2001 was falsified because they born false signature and old seal which had been replaced from April 2000 and their contents were not conformable to manufacture codes.  Request re-assessment.

- The court did not deduct GTI expenses from June 6, 2001 related to products stock taken on January 24, 2003.

- The compulsion on GTI to give 9 machines was not legal because Mr. Kim had no right to give them as a gift.

- The decision on L/C payment method was inconsistently with reality because GTI had not made it.

- The court did not deduct the building rent of VND 59,630,000 which GTI paid on behalf of Thanh Phat company.

- Request to engage auditors or financial inspectors in the lawsuit settlement.

At the appeal No. 20/KN-AKT dated December 31, 2004, the Chief Procurator of the Supreme People’s Procuracy considered:

1. The processing contract No. 02/TP-IN97 entered into by contracting parties is legal because the Ministry of Trade approved the execution of contract and temporary import of machines enclosed for processing purpose.

2. The addendum to Appendix 09 dated May 8, 2001 registered with the receiving customs authority on March 20, 2002 was no longer valid legally and in reality.  Because before August 3, 2001, the two contracting parties reached an agreement to terminate the contract and dissolve Thanh Phat company, and on December 1, 2001, GTI notified Thanh Phat company of termination of processing contract No. 02. Moreover, the judgment of first-instance court that this addendum was declared null and void was valid.

3. According to the gift agreement dated April 10, 1996, Mr. Kim, as personal status not in the name of GTI, gave 8 machines to Mrs. Huong as a gift while Thanh Phat company had not been incorporated and signed the processing contract no. 02. In the lawsuit claim, Mrs. was silent on these machines. The appellate court decided that Thanh Phat company had ownership of 9 machines, while the first-instance court disregarded this matter, was invalid and ultra vires.

4. Parties reached an arrangement on August 3, 2001 on termination of contract, so, GTI had no fault to notify the termination of the processing contract.

5. The first-instance and appellate courts had not specified costs and finished products manufactured under administration of Mr. Kim according to the record dated June 6, 2001 to determine the processing fees payable, which failed to protect involved parties’ interests.

Based on above consideration, the Chief Procurator of the Supreme People’s Procuracy filed an appeal against the appellate economic judgment No. 39/KTPT dated April 13, 2004 of appellate court of People’s Court of Hanoi and requested the Judges' Council of the Supreme People’s Court to hear the case under cassation procedure so as to annul the appellate economic judgment No. 39/KTPT dated April 13, 2004 for re-trial as per the law to protect involved parties’ interests.

CONSIDERS THAT

The processing contract No. 02/TP-IN/97 signed on October 25, 1997 between Thanh Phat company and GTI which was registered lawfully, approved by the Ministry of Trade (document No. 6288/TMDT dated December 29, 1997). This contract and 9 appendices thereof were also registered with the receiving customs authority. Therefore, the contract No. 02/TP-IN/97 is legally effective. In consideration of the addendum to Appendix No. 09 dated May 8, 2001, it bears signatures of authorized representatives; the GTI’s representative admits his/her signature at the English document; Thanh Phat company also made a Vietnamese translation and had it sealed and provided the translation for the customs authority in accordance with Circular of the General Department of Customs No. 07/2000/TT-TCHQ dated November 2, 2000, therefore, the judgment of appellate court that the addendum to Appendix No. 09 was legal was valid. Alternatively, this addendum was valid to November 15, 2002 instead of processing contract No. 02/TP-IN/97. On December 1, 2001, GTI gave a notice of contract termination, but after that, contracting parties still be involved in the undertakings of contract No. 02/TP-IN/97. The registration with customs authority is a necessary and compulsory requirement for export and import management purpose, not a condition for determining validity of the contract appendix.

Thanh Phat company and the party ordering processed products reached an arrangement that the production after June 6, 2001 would be maintained by the latter party and bear all the production costs incurred. GTI requested to deduct GTI expenses from the processing fees for products processed during this period. While the first-instance and appellate court should have determined specific quantity and value of products made by GTI during this period to settle the dispute, they determined that expenses incurred by GTI were beyond the processing contract and split it to another case. It is not irrational and does not protect involved parties’ interests.

According to the processing contract No. 02/TP-IN/97, GTI provided Thanh Phat company with 38 machines for processing purpose without payment; these machines were approved by the Ministry of Trade and imported under temporary import mechanism. Regarding 8 machines that Mrs. Huong declared that she was given by Mr. Kim as a gift on April 10, 1996, before incorporation of Thanh Phat company (April 19, 1996) and before Thanh Phat company and GTI entered into the processing contract No. 02/TP-IN/97, any dispute arising from such giving should be considered as civil dispute; the appellate court decided to grant Thanh Phat company ownership of these 9 machines while the first-instance court did not give a decision on these machines, the appellate court's decision is deemed ultra vires.

The GTI’s notice of contract termination dated December 1, 2001 was made according to agreement between contracting parties dated August 3, 2001. However, previously GTI failed to make payments to Thanh Phat company 30 days before delivery of products; it is considered a breach of addendum to Appendix No. 09. This also made Thanh Phat company face financial problems and business suspension; therefore, GTI must bear liability. The first-instance court must investigate whether Thanh Phat company breached the contract so as to determine the degree of fault of GTI.

The appellate court was wrong when it compelled GTI to open an L/C or wire transfer to pay off the outstanding debt because in this case, the court should decide that one party must make payments and one party must deliver processed products, and payment is not necessary to be specific to open an L/C or wire transfer.

For those reasons, pursuant to Clause 3 Article 291, Clause 3 Article 297, Article 299 of the Civil Procedure Code;

HEREBY DECIDES

Partially accept the appeal No. 20/KN-AKT dated December 31, 2004 by the Chief Procurator of the People’s Supreme Procuracy; annul the first-instance economic judgment No. 19/KTST dated June 3, 2003 of People’s Court of Hanoi and appellate economic judgment No. 39/KTPT dated April 13, 2004 of appellate court of the Supreme People’s Court in Hanoi. Give case files to People’s Court of Hanoi City to re-hold a first-instance trial against the case as per the law.

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- Grounds for annulling first-instance and appellate judgments:

1. The appellate court granting ownership right of assets which were not considered by the first-instance court deemed is ultra vires;

2. Thanh Phat company must be investigated whether it breached the contract so as to determine the degree of fault of GTI;

3. The appellate court deciding the payment in form of L/C is wrong.

- Reasons resulting in annulment of first-instance and appellate judgments:

1. Inadequacies when taking of evidence;

2. Inadequacies related to splitting of case in accordance with the Civil Procedure Code