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A notice of a breach of contract

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Chillphord Machinery Co. Ltd
Att: Martyn Chillphord
Beijing Industrial Zone
Beijing
China

20 April 2011

Dear Mr Chillford

Contracts between Nivostein Inc. and Chillphord Machinery Co. Ltd (“Chillphord”)

We are writing to you in our capacity as counsel for Nivostein Inc (hereinafter referred to as “Nivostein”).

In 2007, the above-mentioned contracts relating to the construction of brewing facilities, etc. in Kazakhstan (hereinafter referred to as the “Contracts”) were concluded between Nivostein and Chillphord. The brewing facilities are today operated by Nivostein subsidiary, Nivorock Inc. (hereinafter referred to as “Nivorock”).

The Contracts stipulated that the brewing facilities had to be ready for entry into production no later than April 2009. However, in breach of the stipulation, the facilities were not ready to enter into production until June 2009, i.e. full performance of the contract was significantly delayed.

When the brewing facilities provided by Chillphord under the Contracts at last entered into production, it became clear that the facilities fell short of the contracted undertakings and were defective in several respects.

Nivostein notified Chillphord of the defects without undue delay and requested that Chillphord remedy all defects in the facilities that had a negative impact on production capacity and/or quality. Furthermore, several meetings were arranged between representatives of Chillphord, Nivostein and Nivorock in order to address Chillphord’s failure to successfully remedy the aforementioned defects. Extensive correspondence has also been exchanged between the parties on the subject of the proper remedying of the defects by Chillphord.

At a meeting between the concerned parties held on 28 February 2010, Chillphord and Nivostein agreed that Nivostein would be entitled to engage a third party to remedy the defects should Chillphord fail to do so. Chillphord also agreed to reimburse Nivostein for all pertinent and relevant costs related to the engagement of such third party. The minutes of the meeting were signed by duly authorized representatives of the parties, i.e. Chillphord’s general manager, Mr Derek Schiestl, and Nivostein/Nivorock’s project manager, Mr Rawdon Axeford.

The exact scope of the defects to be remedied by Chillphord was modified somewhat during subsequent meetings between the parties, but the scope of the defects has never been in dispute.

Nivostein repeatedly requested that Chillphord remedy the defects, but time after time Chillphord failed to comply with the reasonable deadlines that were set for remedying the defects. Hence, one cannot escape the conclusion that not only has Chillphord failed to timely comply with its original contractual delivery obligations, but also failed to meet its subsequent obligation to remedy the defects.

At the latest meeting between the parties on 9 March 2011, it was once again agreed that Nivostein was entitled to engage a third party to remedy the defects. However, at that meeting Chillphord claimed that it would be able to remedy some of the defects itself. However, since then Chillphord has failed to notify Nivostein/Nivorock regarding any action plan for the remedying the defects, and yet again Chillphord has failed to remedy defects, as agreed.

As a consequence of Chillphord’s repeated failure to remedy the defects, Nivostein is now left with no option other than to engage a third party to remedy all the defects. As agreed on 28 February 2010, Nivostein is entitled to reimbursement by Chillphord of costs associated with the engagement of such a third party.

Nivostein has received estimates from third party contractors indicating the cost for remedying the defects at approximately EUR 5 million. Nivostein thus demands that Chillphord pay Nivostein an amount of EUR 5 million no later than 4 May 2011. Payment is be made to IBAN: CH82 WEST 1234 5698 7654 32. Alternatively, Nivostein is prepared to accept a bank guarantee for the same amount, provided it is issued on terms accepted by Nivostein in advance.

Should the final cost for a third party contractor be less than EUR 5 million, Chillphord shall be entitled to a refund of the difference. Correspondingly, Chillphord shall be obliged to pay Nivostein the difference between EUR 5 million and any final cost in excess of such amount.

In conclusion, notwithstanding Chillphord’s repeated failures to fulfil its obligations as stated above, our client is prepared to hold a final meeting to try to reach an amicable settlement of this protracted matter, in a final attempt to avert legal proceedings. Your reply to this proposal must, however, be received within one week. In the event of failure to reply within the aforesaid time, or should Chillphord fail to honour any agreement reached, Nivostein will not hesitate to initiate immediate legal proceedings against Chillphord in accordance with the provisions of the Contracts.

Yours sincerely

Copy to:
Alisdair Faulkner, Nivostein

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