EXCLUSIVE DISTRIBUTION AGREEMENT

PARTY A: ZHEJIANG XINCHAI HOLDING GROUP CO., LTD.
 
CHINESE NAME: ZHEJIANG XINCHAI KONGGU JITUAN YOUXIAN GONGSI
 
ADDRESS: XINXIN INDUSTRIAL PARK, XINCHANG, ZHEJIANG, CHINA
POSTCODE: 312500
 
TELEPHONE: 0575-623-6603
 
REPRESENTATIVE: ZHU XIANWEI CONTACT TELEPHONE: 0575-623-6603
 
MOBILE PHONE: 135-6751-1288

PARTY B: ZHEJIANG ZHONGCHAI MACHINERY CO., LTD
 
CHINESE NAME: ZHEJIANG ZHONGCHAI JIQI YOUXIAN GONGSI
 
ADDRESS: JINXING CHUN, HIGH-TECH PARK, XINCHANG, ZHEJIANG, CHINA
 
POSTCODE: 312500
 
TELEPHONE: 0575-629-5699
 
REPRESENTATIVE: SHI RONG CONTACT TELEPHONE: 0575-629-5699
 
MOBILE PHONE: 139-6758-1220

RECITALS

WHEREAS, the parties have thoroughly discussed and negotiated the terms and
conditions of the exclusive distribution agreement herein contained; and

WHEREAS, Party A is a corporation with limited liability organized under the
laws of the People’s Republic of China and is engaged in the business of
manufacturing diesel engines and related parts and accessories; and

WHEREAS, for the purposes of this distribution agreement Party A shall be deemed
to include all of its upstream parent corporations or entities, all of its
direct and indirect, wholly and partially owned subsidiaries or entities,
interlocking companies or entities, joint ventures and partnerships of which
Party A is a direct or indirect and partial or whole owner in whatever capacity,
and other affiliates of any nature, each as may exist from time to time, and Zhu
Xianwei (an individual); and
 
 
 

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WHEREAS, Party B is a foreign joint-venture company organized by Party A and
Usunco Automotive Limited (“Usunco”) under the laws of the Peoples Republic of
China; and

WHEREAS, Party A desires that Party B become the exclusive worldwide distributor
of Party A’s existing and future products and services; and

WHEREAS, Party A and Party B desire to enter into this distribution agreement,
which will govern the aforementioned distribution arrangement and will operate
for the mutual business interests and benefits of the parties hereto and protect
the business interests and benefits of both parties in connection with the
distribution arrangement contemplated hereby.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual promises and agreements contained
herein, the parties agree and under take the following agreements:

1. Party B is hereby appointed by Party A to be exclusively in charge of the
worldwide distribution of all the current and future diesel engine and diesel
engine related products of Party A (the “Products”). In furtherance, and not in
limitation, of the foregoing appointment, Party A hereby grants to Party B the
exclusive right and authority to sell and distribute the Products anywhere in
the world. Party B hereby accepts such appointment. Party A will not appoint any
third party as a distributor, sales or other agent or representative for the
distribution, marketing, sale, commercialization or other disposition of any of
the Products, regardless of whether any such other appointment is on a limited
product basis or limited territory basis, and Party A and shall not, directly or
indirectly, sell, transfer or license, commercialize or otherwise make available
the Products anywhere in the world to any person other than Party B.
 
 
 

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2. Party A shall not take any action designed to develop an internal sales team
with respect to the Products, other than for the sole benefit of, and at the
direction of, Party B and it sales efforts for the Products. Party A shall
immediately refer all sales inquires and requests about the Products to Party B.
 
3. Party B shall use commercially reasonable efforts to sell, distribute and
export the Products. Notwithstanding the foregoing, Usunco, the controlling
stockholder of Party B, and its affiliates, including, without limitation, any
direct or indirect subsidiaries that Usunco forms to operate within the People’s
Republic of China, is not restricted in any way from selling, distributing or
otherwise commercializing products manufactured, assembled or otherwise produced
by parties other than Party A, whether or not such products compete in any way
with the Products.
 
4. This agreement and the exclusive distribution rights set forth herein will
apply to all current and future products (including parts) created, developed,
modified, enhanced and licensed for manufacture, fabrication, assembly and
production by Party A during the term of this distribution agreement as it may
be amended or modified from time to time and all such products fall within the
definition of “Product” as used herein. In addition, Party B will have the right
of first refusal to act as the exclusive, worldwide distributor of any other
product that may be conceived, developed, licensed to, manufactured, assembled
or produced by Party A (“collectively “Future Products”), which other products
will be governed by this distribution agreement. In the event that Party A has a
Future Product, it shall notify Party B of such Future Product, and provide to
Party B any and all information about the Future Product as shall be reasonably
requested by Party B to evaluate the Future Product and its marketability by
Party B. Party B shall have not less than 90 days to elect to undertake the
distribution of the Future Product hereunder by the giving of written notice to
Party A of its acceptance of the distribution of such Future Product. If Party B
does not give notice of its undertaking to distribute such Future Product, then
Party A will be free to market or commercialize such Future Product in any way
it determines. For the purposes of clarity, the right of first refusal apply to
each and every Future Product individually and the procedure of notification,
evaluation and acceptance must be done for each such product.
 
 
 

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5. Party A will sell the Products to Party B at a competitive price designed to
allow Party A to make a reasonable profit consistent with industry margins for
similar distribution companies in similar industries. Party A has delivered to
Party B the initial price list for the Products on the date hereof. Without
limiting the generality of the foregoing, Party A may change the prices for its
Products, from time to time in its discretion on 120 days’ prior written notice
to Party B; provided, however, that Party A shall not increase the price of any
Product by more than 5% in any one year as compared to the prior year.
Notwithstanding the foregoing, Party A and Party B may mutually agree to adjust
the pricing from time to time.
 
6. Party B shall have the right to use sub-distributors, sales agents or other
companies, persons or organizations for the sale and/or distribution of the
Products and Party A hereby approves the use of such sub-distributors, sales
agents and other companies, persons or organizations.
 
7. If Party A desires to discontinue the manufacture, assembly or production of
any of the Products, Party A shall provide to Party B at least six months’ prior
notice of such discontinuance. In the event of such discontinuance, Party A
shall reimburse Party B for any extraordinary costs associated with the
termination of such item hereunder and repurchase any inventory held by Party B
at the time of termination. Party B may give at least six months’ prior notice
of its intention not to sell and distribute any of the Products, which will
include the discontinuance of any marketing and sales support of such Products
commencing the date of notice. In the event that Party B terminates this
agreement in respect to an item included in the Products, Party A agrees that it
will not sell such item itself after the termination at a price that is less
than the last list price of Party B for the item.
 
8. Party A shall, during the term hereof, render such technical assistance to
Party B as shall reasonably be required to assist Party B in distributing the
Products and shall provide product support, including but not limited to: (i)
complete maintenance and service instructions, and an operator’s manual for each
of the Products; (ii) installation kits with installation instructions; and
(iii) any other information as may reasonably be requested by Party B for the
Products. Party A shall provide the foregoing free of cost to Party B.
 
 
 

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9. Party A shall provide Party B with technical personnel with the training
necessary to: (a) inform customers properly concerning the features and
capabilities of the Products; (b) support the Products; and (c) otherwise carry
out the obligations and responsibilities of Party B under this distribution
agreement. Party A shall provide any and all such training free of cost to Party
B.
 
10. Party A and Party B shall each comply with all applicable local and
international laws and regulations in performing their respective duties
hereunder and in any of their respective dealings with respect to the Products.
 
11. Party A hereby represents and warrants to Party B as follows:
 
(a) Party A is the exclusive owner of the Intellectual Property (as defined
below) and the Products and that its entry into this distribution agreement does
not violate any agreement between Party A and any third party.
 
(b) All Products are and shall remain free from defects in workmanship or
material for a period of least one year from the date of purchase of such
Product by an end-user.
 
12. Party B represents and warrants to Party A that Party B’s entry into this
distribution agreement does not violate any agreement between Party B and any
third party.
 
13. To protect the exclusivity of the distribution arrangement, Party A shall
cause all of its high-level managers and employees, members of its board of
directors or similar governing body, shareholders and such other parties as
Party B may reasonably request (“Party A Executives”), to enter into
non-competition agreements and intellectual property protection agreements in
form and substance satisfactory to Party B. Part A shall use its best efforts to
ensure that (a) no Party A Executive competes with Party A or Party B and that
no Party A Executive invests in, is employed by, acts as a consultant, advisor
or board member to, or otherwise provides services or advice to, any entity that
competes with Party A or Party B anywhere in the world, and (b) no Party A
Executive solicits employees or customers from Party A anywhere in the world. In
the event of breach this distribution agreement, Party B or Usunco shall have
the right to take legal action to protect their legal rights against Party A and
the Party A Executives.
 
 
 

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14. Party A hereby grants to Party B the the right to use its copyrights,
trademarks and similar and related intellectual property in the marketing and
distribution of the Products as contemplated by this distribution agreement and
in connection with its obligations and rights under this distribution agreement
in any manner as long as such use complies with all applicable laws.
 
15. Party A shall not, without prior written consent of Party B, take any action
whether from an operational, contractual, investment or other perspective, that
would negatively affect the exclusive distribution agreement contemplated
hereunder.
 
16. Once each calendar year during the term of this distribution agreement,
within 60 days after the close of the fiscal year of Party A, there will be
provided to Party B, at no cost to Party B, the financial statements of Party A,
prepared in accordance with generally accepted accounting principals of the PRC,
consistently applied.
 
17. As soon as practicable after Party B commences its marketing and
distribution, upon notice to Party A, Party A will notify its current and past
customers of the Products of this distribution agreement and the grant of the
distribution rights to Party B, such notice to be as mutually determined by
Party A and Party B. In addition, Party A will secure from each of its past and
current customers an acknowledgement that all future inquiries and purchases of
the Products are to be made to and through Party B.
 
18. If in the event of a breach of the exclusive distribution arrangement by any
party, then the breaching party will be responsible to the non-breaching party
for all the monetary losses and damages and other legal remedies to which it may
be entitled under the law or any provision of this distribution agreement.
 
19. In addition to the foregoing provision, Party A acknowledges and agrees that
Party B will be incurring significant expense in order to fulfill its
obligations hereunder. Party a further acknowledges that its breach of this
distribution agreement would cause Part B and its stockholders significant
damage and perhaps the complete cessation of its business. Since the exact
amount of such damages would be extremely difficult, if not impossible to
calculate, Party A agrees that in the event of the termination of this
distribution agreement as a result of Party A materially breaching it, which
breach has not been cured within a reasonable time not to exceed 30 calendar
days, then Party B shall have the right to liquidated damages from Party A in an
amount equal to the higher of (a) five times the annualized net income derived
from the sale of the Products (as determined in accordance with United States
GAAP, consistently applied) of Party B for the last four completed fiscal
quarters, or (b) $50,000,000.
 
 
 

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20. This distribution agreement shall remain in effect for a period of
twenty-five (25) years commencing on the date that both parties have signed this
distribution agreement. This distribution agreement shall be effective
immediately after the execution thereof for fifteen years.
 
21. Upon the occurrence of any one of the following events, the party not
responsible for the event of termination specified below shall, upon giving the
other party written notice and without further obligation other than as
expressly specified herein, have the right to terminate this distribution
agreement: (a) material breach by either party in fulfilling any one or more of
the obligations undertaken by it pursuant to this distribution agreement, which
breach is not cured within 120 days after notice advising of such breach; (b)
either party is declared insolvent or bankrupt, or makes an assignment of a
substantial portion of its assets for the benefit of creditors; or a trustee,
receiver or other officer of court is appointed to control a substantial portion
of the assets of the other party, or if bankruptcy, liquidation or
reorganization proceedings are instituted by or against the other party; or (c)
either party is prevented from fulfilling its obligations hereunder for a period
in excess of 180 consecutive days as a result of the occurrence of an event of
Force Majeure (as defined below).
 
22. Upon termination of this distribution agreement for any reason whatsoever:
Party A shall: (a) be responsible for the support or maintenance of the Products
owned by end-users and shall bear all expenses related thereto; and (b) purchase
from Party B all Products in Party B's possession, which have not been sold to
an end-user, including all charges for return of the same to Party A. Party B
shall ship such Products to Party A in accordance with the instructions supplied
by Party A at no cost to Party B.
 
23. Each party to this distribution agreement (the “Indemnitor”) agrees to
indemnify and hold the other party (the “Indemnitee”), its partners,
shareholders, directors, officers, employees, agents, and assignees harmless
against any liability for any claims arising out of any breach by the Indemnitor
of its duties under this distribution agreement or any other agreement between
the parties. For purposes of this clause, “claims” includes any and all claimed
liabilities or obligations, incurred or claimed to have been incurred in
connection with business conducted by the Indemnitee. This indemnity shall
continue in effect after the termination of this distribution agreement.
 
 
 

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24. Any notice or consent required by this distribution agreement shall be in
writing, and the notice will be either personally delivered or mailed by prepaid
registered or certified mail, return receipt requested, or conveyed by other
then legally acceptable means, to such party at its address as specified on the
signature page hereto. Such notices shall be deemed delivered on the date of
receipt, or upon attempted delivery if acceptance of delivery is refused.
 
25. No waiver of any breach of any of the provisions of this distribution
agreement shall be deemed a waiver of any preceding or succeeding breach of the
same or any other provisions hereof. No such waiver shall be effective unless in
writing and then only to the extent expressly set forth in writing. This
distribution agreement may not be modified, altered or amended except by written
instrument duly executed by both parties.
 
26. This distribution agreement and performance hereunder shall be construed and
governed by the laws of People’s Republic of China without giving effect to
conflict of law principles thereof. All disputes arising out of or in connection
with this distribution agreement or the performance of its provisions by either
party hereto shall be referred to binding arbitration before three arbitrators
and the arbitration will be conduced in accordance with the UNCITRAL Arbitration
Rules at a venue before the Hong Kong International Arbitration Center. Each
party will select one arbitrator in accordance with the UNCITRAL Arbitration
Rules and then the two arbitrators so selected will select the remaining
arbitrator in accordance with the UNCITRAL Arbitration Rules. The decision of
the arbitrators will be final and binding upon the parties and will be
enforceable in any court of competent jurisdiction. Each party will be
responsible for its won costs of the arbitration, including the costs of legal
counsel. The parties will share equally in the cost of the arbitration,
including the fees and expenses of the arbitrator, venue and enforcement, unless
the arbitration award provides to the contrary.
 
 
 

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27. This distribution agreement is being executed in both English and Chinese
versions. If there is any ambiguity or inconsistency between the two versions,
the Chinese version of this distribution agreement shall prevail and be
instructive of the parties obligations hereunder.
 
28. In case any one or more of the provisions contained herein shall, for any
reason, be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provisions
of this distribution agreement, and this distribution agreement shall be
construed as if such provision(s) had never been contained herein, provided that
such provision(s) shall be curtailed, limited or eliminated only to the extent
necessary to remove the invalidity, illegality or unenforceability.
 
29. Any delay or failure in the performance of any part or the whole of this
distribution agreement by either party hereto shall be excused, subject to the
other provisions hereof, if and to the extent caused by earthquake, typhoon, or
other natural disaster, war, warlike condition, revolution, terrorist attack,
blockade, embargo or governmental order, rule or restriction (“Force Majeure”),
and the affected part of this distribution agreement shall be suspended until
such Force Majeure has ended.
 
30. The parties agree that this distribution agreement is the complete and
exclusive statement of the agreement between the parties, which supersedes and
merges all prior proposals, understandings and other agreements, oral or
written, between the parties relating to this distribution agreement, including
any letter of intent, memorandum of understanding or similar agreement or
instrument previously existing between the parties.
 
31. This distribution agreement shall be effective after signed by
representatives of both parties and there shall be two original copies, each
party shall have one copy.
 
[Signature Page Follows]
 
 
 

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The parties to this distribution agreement are evidencing their intention to be
legally bound by this distribution agreement by signing in the space provided
below as of January ___, 2007. Each such signing party hereby represents and
warrants to the other parties that it is authorized to execute and deliver this
distribution agreement.
 

Party A: 
Zhejiang Xinchai Holding Group Co., Ltd.
   
Representative Signature:
/S/ Zhu, Xianwei 

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Print Name:
Zhu Xianwei
Print Title:
Chairman 
Print Address for Notices:
 

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Party B:
Zhejiang Zhongchai Machinery Co., Ltd.
   
Representative Signature:
/S/ Shi Rong

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Print Name:
Shi Rong
Print Title:
General Manager
Print Address for Notices:
 

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