Stalled automotive joint venture creates complex dispute

The Hong Kong International Arbitration Centre (HKIAC) recently handled an arbitration between a US car distributor (claimant) and a Chinese automobile manufacturer, the manufacturer’s chief executive officer, and the manufacturer’s subsidiary (respondents). The dispute focused on a failed proposal to create a joint venture (JV) that was to manufacture cars in China and sell and distribute those vehicles in North America. Due to foreseeable complications in the operation of the arbitration clause contained in the underlying contracts, the parties agreed to submit to arbitration under the HKIAC administered arbitration rules after the commencement of the arbitration. The facts of the case are elaborate and the damages claimed amounted to over US$1.2 billion.

The background

The dispute centred on two main contractual documents: a letter of intent (LOI) and a distribution agreement. The LOI was signed between the distributor and manufacturer, with both agreeing to establish a JV within China for the purpose of manufacturing and selling vehicles. The bulk of provisions in the LOI were not intended to be binding on the distributor or the manufacturer.

The distribution agreement was signed between the distributor and the manufacturer’s subsidiary, under which the distributor was granted the exclusive right to distribute the vehicles produced by the proposed JV to the North American market. The manufacturer’s subsidiary was to transfer its rights and obligations under the agreement to the JV, once the JV was set up.