2021.12.10 ZHOU, Xianfeng (Elvis)、WANG, Shuningi、YANG, Tianbolun
PART 3. CASE STUDIES
3.1 Case 1: Dispute over a Major EPC Project
Purpose agreed upon in an EPC contract and allocation mechanism of quality liability, as well as claim procedure for employer
Facts
On 9 September 2013, the Contractor, as the lead party, formed a general contracting consor-tium with the Engineering Institute and signed an EPC Contract with the Employer. The EPC Con-tract adopted the general contract terms of the 2012 Standard Design and Construction General Contracting Tender Document (“2012 Standard Tender Document”), agreeing to adopt the gen-eral conditions of contract of Engineering Pro-curement Construction (EPC) for the construction of a rooftop photovoltaic power generation pro-ject consisting of Sub-Projects A–F (“the Project”) by the consortium. The EPC Contract stipulated that 5% of the price of the completion settlement shall be taken as retainage, which shall be re-leased after 36 months from the date of inspec-tion on completion of the Project. The special terms of the EPC Contract also stipulated that “if there is no deduction, all retainage shall be re-leased”.
As agreed in the Consortium Agreement between the Contractor and the Engineering Institute (the Engineering Institute was not involved in this case), the Contractor shall be responsible for receiving all payments made by the Employer.
The Project in this case passed the inspection on completion conducted by the Employer on 31 December 2014. The price for the completion settlement was RMB 150 million, of which RMB 7.5 million in retainage remained unpaid by the Employer. The Contractor believed that the de-fects liability period of the Project in this case had expired on 31 December 2017, and therefore the Employer should pay the retainage. The Em-ployer asserted that during the defects liability period, it had repeatedly notified the Contractor to rectify the quality defects in the Project, but the Contractor refused to bear liability for defects, causing a series of economic losses to the Em-ployer. Therefore, the amount of losses suffered by the Employer shall be deducted from the re-tainage. The Employer claimed that the Con-tractor should take responsibility for the quality problems in each Sub-Project. On 11 September 2019, the Contractor filed an arbitration applica-tion to the Beijing Arbitration Commission/Beijing International Center, requesting for an order that the Employer shall pay the overdue retainage and that the Contractor shall have the preemptive right to construction payments in this case within the scope of the overdue retainage.
Subsequently, the Employer filed a counterclaim for arbitration to request for an order that the Contractor shall compensate the loss and rem-edy the defects in the roof Sub-Project.
In its defense, the Employer also argued that, in accordance with the Distributed Photovoltaic Plant Inspection Report issued by a third party, as the power generation efficiency of about 4,000 solar photovoltaic panels need to be replaced due to low power generation efficiency and failing to meet the design requirements. However, the Contractor refused to bear the defects liability. Therefore, the corresponding equipment re-placement costs shall be deducted from the re-tainage (the Employer has not yet filed a coun-terclaim for arbitration for retainage).
In addition, the Employer also raised an objection to the Contractor’s failure to initiate arbitration jointly with the members of the consortium, claiming that:
First, according to the current provisions of the Consortium Agreement, it was impossible to reasonably distinguish the interest shares of several consortium members in the construction project price under the EPC Contract in this case.
Second, in the case that the consortium members share the interests of construction project price and their respective interest shares cannot be ascertain, if one party to the consortium applied unilaterally for arbitration on the total interests of construction project price, it would inevitably lead to the interest share of the other party to the consortium being included in the application for arbitration, and if one party to the consortium did not authorize the other party to apply for arbitration, the jurisdiction of the arbitral tribunal would be flawed.
Third, although the Consortium Agreement stipulated that the Contractor “shall be responsible for receiving, coordinating and arranging all payments agreed by the Employer under the EPC Contract”, since the arbitration involved the disposal of the interests of the construction project price, the above agreement was not sufficient to explain that the Contractor also had the authority to unilaterally dispose of the interests of the construction project price shared by all parties to the consortium.
Issues
First, as one party to the general contracting consortium, whether the Contractor had the right to initiate the arbitration application independently.
Second, whether the Contractor had the right to not assume quality responsibility on the grounds that its design complied with the relevant specifications.
Third, whether the Contractor had the right to not assume quality compensation responsibility on the grounds of the expiration of the defects liability period, and whether the Employer had the right to require the Contractor to continue to bear the defects liability after the defects liability period had expired.
Fourth, whether the Employer had the right to directly deduct the claimed damages from the retainage if it did not make a counterclaim and did not follow the claim procedure agreed in the EPC Contract.
Fifth, whether the Contractor had the right to claim the preemptive right to construction payments.
Judgment
(1) As one party to the general contracting consortium, whether the Contractor had the right to initiate the arbitration application independently.
The arbitral tribunal found that the Consortium Agreement stipulated that the Contractor “shall be responsible for receiving, coordinating and arranging all payments agreed by the Employer under the EPC Contract”, and that there was no evidence proving that during the performance of the agreement the Contractor had communi-cated with the Engineering Institute (i.e., the member of the consortium) to confirm the pay-ment. However, based on the above agreement and the performance of the Consortium Agree-ment, the arbitral tribunal held that all parties to the consortium should have reached an agree-ment on the relevant payment claimed by the Contractor against the Employer, and therefore, the Contractor shall have the right to unilaterally apply for arbitration against the Employer.
(2) Whether the Contractor had the right to not assume quality responsibility on the grounds that its design complied with the relevant specifications.
In this case, the Contractor provided the Inspec-tion Report issued by a third-party testing institu-tion and the Calculation Report and Statement on Building Bearing Capacity Compliance issued by the Engineering Institute (i.e., the member of the consortium) to prove that the engineering of the rooftop photovoltaic power generation project in this case complied with the specifications and met the bearing capacity requirements as as-sessed by the professional institution.
On this, the arbitral tribunal held that the contract under this case is an EPC contract. According to Articles 4.1.3 and 4.1.4 of Section I “General Contract Terms” of the EPC Contract, the Con-tractor was obligated to not only “fit for the pur-poses agreed upon in the EPC Contract” but also “be responsible for all the engineering, construc-tion operations and methods, as well as the completeness, safety and reliability of the whole project”. In other words, compared with the re-sponsibility allocation mechanism under a normal construction contract, the Contractor was re-quired to assume more comprehensive and stricter obligations and responsibilities under the EPC Contract, including responsibility for all the designs, responsibility for the safety and reliability of the whole project, and responsibility for fit for the purposes agreed upon in the EPC Contract. Under this responsibility allocation mechanism, even if the Contractor’s design and construction met the requirements of the relevant standards and codes, and there were no faults, the Con-tractor shall bear the liability for breach of con-tract in accordance with the EPC Contract as long as the Project is unsafe, unreliable or could not fit for the contractual purposes, provided that it was not due to any fault of the Employer.
With respect to the purposes agreed upon in the EPC Contract in this case, according to the rel-evant provisions of the particular contract terms in Section II of the EPC Contract, the arbitral tribunal held that the purposes agreed upon in the EPC Contract in this case should be that the power curve determined by the performance test reached the power curve determined by the main equipment, the electric power output reached the agreed value, and the annual power generation during the defects liability period reached the promised value under the engineering condi-tions.
Based on the above responsibility allocation mechanism, the arbitral tribunal held that even if the two pieces of evidence submitted by the Contractor could prove that its initial design was free of defects, the Contractor shall still be liable for breach of contract to the Employer in ac-cordance with Articles 4.1.3 and 4.1.4 of the general terms of the EPC Contract in the occur-rence of roof collapse accident, that is, a major defect in safety and reliability which led to the failure to fit for the purposes agreed upon in the EPC Contract.
(3) Whether the Contractor had the right to not assume quality compensation responsi-bility on the grounds of the expiration of the defects liability period, and whether the Em-ployer had the right to require the Contractor to continue to bear the defects liability after the defects liability period had expired.
First, with respect to whether the Contractor had the right to not assume quality compensation responsibility on the grounds of the expiration of the defects liability period, the arbitral tribunal held that although the defects liability period had expired when the quality accident occurred and the Contractor bore no defects liability therefrom, the quality accident was attributable to the Con-tractor’s failure to conduct engineering design and construction in accordance with the Speci-fications for the Design of the Photovoltaic Power Station. According to Article 282 of the Contract Law which provides that “the contractor shall be liable for personal injury and property damage caused by the construction project in its rea-sonable period of use due to the contractor’s reasons”, the Contractor shall still be liable for compensation for property losses caused by the quality accident within the reasonable period of use of the Project in this case. Therefore, the arbitral tribunal supported the costs requested by the Employer for the maintenance of the colored steel tiles of the roof.
Second, as to whether the Employer had the right to require the Contractor to continue to rectify the defects after the defects liability period had ended, the arbitral tribunal held that, in accord-ance with the relevant provisions of the defects liability system of construction projects in China, during the defects liability period, the employer and the contractor form a specific relationship of rights and obligations in which, for quality defects attributable to the contractor, the contractor has the obligation (and right) to rectify and bear the cost of repair of the defect work; accordingly, the employer has the right (and obligation) to notify the contractor in advance to rectify the defects — it is only when the contractor refuses to rectify that the employer has the right to entrust a third party to rectify the defects and to require the contractor to compensate for the corresponding losses. These special rights and obligations be-tween the employer and the contractor during the defects liability period of the construction project come to end at the expiry of the defects liability period, that is, for quality defects attributable to the contractor, the contractor no longer has the obligation (or right) to undertake quality respon-sibility by the way of rectification; accordingly, the employer no longer has the right (or obligation) to notify the contractor in advance to carry out rec-tification; rather, the employer has the right to claim against the contractor for the compensa-tory damages arising from its breach of contract within the statutory statute of limitations, eg., the employer may request the contractor to com-pensate for the expenses incurred by entrusting a third party to make rectification. In this case, the arbitral tribunal found that the defects liability period of the Project expired on 31 December 2017. Therefore, since the Contractor’s liability for defects had ended, the employer had no right to request the Contractor to assume quality re-sponsibility by continuing to rectify the defects. However, for the defects that the Employer had evidence to prove that were caused by the Con-tractor’s failure to perform the contract obliga-tions in accordance with the agreement, the Employer shall still have the right to claim com-pensatory damages from the Contractor.
(4) Whether the Employer had the right to directly deduct the claimed damages from the retainage if it did not make a counterclaim and did not follow the claim procedure agreed in the EPC Contract.
After the hearing, the arbitral tribunal held that the particular conditions of the EPC Contract provided that “if there is no deduction, all re-tainage shall be released”, which can be taken as the contractual basis for the Employer to directly deduct the compensatory damages from the retainage without the need to make a counter-claim. Nevertheless, the arbitral tribunal noted that Article 23.4 of the general terms of the EPC Contract in this case explicitly agreed on a pro-cedure for the Employer to put forward its claim. Article 23.4.2 specifically provides that “the Em-ployer agrees or determines the compensatory damages paid by the Contractor and/or the ex-tension of the defect liability period in accordance with Article 3.5”.
Article 3.5 “To agree or determine” in the general conditions of the EPC Contract was as follows:
“Article 3.5.1 Where the Contract stipulates that the chief supervision engineer shall agree or determine any matter in accordance with this article, the chief supervision engineer shall ne-gotiate with the parties hereto and try to reach an agreement. If no agreement can be reached, the chief supervision engineer shall make a fair de-termination after careful study.
Article 3.5.2 The chief supervision engineer shall notify the parties hereto of the matters agreed or determined with an attachment of the detailed basis. In case of any objection to the determina-tion of the chief supervision engineer, the dispute shall be handled in accordance with Article 24. Prior to the resolution of the dispute, both parties shall implement the chief supervision engineer’s determination temporarily. If the determination of the chief supervision engineer is modified in accordance with Article 24, it shall be imple-mented pursuant to the modified results.”
Thus, according to Articles 3.5 and 23.4.2 of the general conditions of the EPC Contract, the ar-bitral tribunal held that one of the procedures for the Employer to directly deduct the compensa-tory damages from the retainage was to obtain a determination made by the chief supervision engineer according to Article 3.5, or else the Employer shall have no right to make such a deduction. In this case, as the Employer failed to provide proof that the above procedure was fol-lowed, the arbitral tribunal did not support its defense of directly deducting the compensatory damages from the retainage.
(5) Whether the Contractor had the right to claim the preemptive right to construction payments.
The arbitral tribunal found that Article 22 of the Original Judicial Interpretation II on Construction Contracts provided that “the time limit for the Contractor to exercise the preemptive right to construction payments is six months, com-mencing from the date on which the Employer should pay the construction project price.”
In this case, the payment date for the retainage was 31 December 2017. However, the Contractor did not claim the preemptive right to project price payments until 11 September 2019 when it submitted to arbitration, obviously exceeding the above-mentioned six-month time limit. Therefore, the arbitral tribunal did not support the Contrac-tor’s claim for the preemptive right to construction payments.
Observations
This is a typical EPC contract dispute case which involve several major disputes with repre-sentative features.
First, the question of whether the contractor, as a member of the general contracting consortium, can unilaterally initiate an arbitration application, is a very important issue that is easily overlooked in practice. In this case, the arbitral tribunal ruled in favor of the Contractor’s unilateral application for arbitration pursuant to the Consortium Agreement which provided that the Contractor “shall be responsible for receiving, coordinating and arranging all payments agreed by the Em-ployer under the EPC Contract”, that is, con-firmed that the Contractor had obtained the au-thorization of the consortium members. Never-theless, if the share of interests between the members of the consortium could not be deter-mined, and one party did not authorize the other to apply for arbitration, there may be defect of right when a consortium member unilaterally applies for arbitration. In this regard, it is nec-essary for the consortium members to specify such matters that may easily give rise to a “deadlock”, at the time of entering into the Con-sortium Agreement. For example, it shall be clearly agreed in advance that the leader of the consortium is authorized by the other members and shall have the right to initiate litigation or arbitration on behalf of the consortium in its own name.
Second, the purposes agreed upon in the EPC Contract and the allocation mechanism of quality responsibility are also key issues of this case. Although the Contractor provided preliminary evidence to prove that its engineering complied with the relevant specifications, since the deliv-ered Project could not fit for the purposes agreed upon in the EPC Contract, the Contractor should still bear quality responsibility to the Employer. In a normal engineering or construction contract, the quality liability assumed by the designer and the constructor usually is a fault-based liability mainly arising from incompliance with the rele-vant standards and specifications for the design and construction. However, in an EPC contract, if it is agreed that the contractor has an obligation to fit for the contractual purposes, then the con-tractor’s quality responsibility is transformed into a strict liability. Even if all the links of engineering and construction conform to the relevant stand-ards and specifications, the contractor shall still bear quality responsibility as long as it fails to fit for the contractual purposes. The responsibility distribution mechanism of the EPC Contract with “fitness for purpose” as its essential feature re-quires the close attention of all parties.
Third, as to the Contractor’s liability for defects during the defects liability period and quality lia-bility after the expiration of the defects liability period, although this is not a new question, there are still many disputes and misunderstandings in the practice of dispute resolution in construction projects. In this case, the arbitral tribunal sorted out and analyzed the applicable legal basis for handling these two types of common disputes as well as the principle of unifying the rights and obligations related to defects liability, which will have positive significance for the correct handling of this type of disputes in the future.
Fourth, as to the employer’s claim procedure, by referring to the mechanism and principle of “Employer’s Claims” in Article 2.5 of FIDIC’s Conditions of Contract for Construction (1999 Version), and through the 2012 Standard Tender Document, China has introduced the employer’s claim procedure mechanism for the first time to its contract model text system of construction projects, in order to reasonably restrict the em-ployer’s abuse of the right to claim deductions. In this case, in accordance with the relevant provi-sions on the employer’s claim procedure in the 2012 Standard Tender Document, the arbitral tribunal did not support the Employer’s request for directly deducting the compensatory dam-ages from the retainage.
3.2 Case 2: Dispute over an Overseas Con-struction Project
Determination of fraud of independent letter of counter guarantee
Facts
On 2 November 2010, Korea Hyundai Engi-neering Construction Co., Ltd. (“the Beneficiary”) and Qatar Hongjiong Industry Co., Ltd. (“the Supplier”) entered into a supply agreement under which the Supplier shall supply raw materials such as steel pipe piles and provide assembly services for the Beneficiary. Later, Luoyang Avi-ation Engineering (Qatar) Co., Ltd. (“the Sub-contractor”) entered into a subcontracting agreement (“the Subcontract”) with the Supplier in respect of this Project, and on 8 December 2010, entered into an assignment agreement for the Subcontract with Luoyang Aviation Construc-tion Co., Ltd. (“Luoyang ACC”), under which Luoyang ACC or its affiliate shall be responsible for the performance of the Subcontract, and Luoyang ACC or its affiliate shall apply to the bank for the issuance of an independent guar-antee and shall provide a counter-guarantee to the bank that issued the guarantee.
On 25 December 2010, Kaimai (Luoyang) Avia-tion Protection Equipment Co., Ltd., an affiliate of the Subcontractor, applied to the Henan Branch of the Bank of China Limited (“the Coun-ter-guarantor”) for the issuance of an inde-pendent guarantee in favor of the Beneficiary.
On 31 December 2010, the Counter-guarantor issued a counter-guarantee for the advance payment guarantee (“the Counter-guarantee”) in favor of the Arab and United Bank of France (Hong Kong) Limited (“the Guarantor”), which stipulated that “the Counter-guarantee of the bank shall take effect from the date on which the Supplier receives the advance payment pro-ceeds from the Beneficiary and remits them to the Subcontractor”. On the same day, the Guarantor issued to the Beneficiary an advance payment guarantee (“the Guarantee”).
On 27 January 2011, the Beneficiary paid the advance payment to the Supplier; on 7, 8 and 10 February 2011, the Supplier remitted the ad-vance payment to the accounts of the Subcon-tractor in three installments.
On 11 February 2011, the Guarantor sent an electronic message to the Counter-guarantor stating that since the Subcontractor’s account opening bank informed the Supplier that the advance payment had been transferred to the Subcontractor, the Counter-guarantee issued by the Counter-guarantor on 31 December 2010 shall take effect on the date on which the ad-vance payment was transferred to the Subcon-tractor’s account.
On 6 December 2011, the Beneficiary issued a written claim to the Guarantor according to the Guarantee requiring the Guarantor to pay the amount under the Guarantee. On the same day, the Counter-guarantor informed the Guarantor that it had received a stop payment order from the Luoyang Intermediate People’s Court, and that the Subcontractor informed the Coun-ter-guarantor that it had not received the ad-vance payment and required the Guarantor to confirm whether the advance payment had been actually made.
On 9 December 2011, the Guarantor sent a written claim to the Counter-guarantor stating that the Guarantor had received the written claim submitted by the Beneficiary and requiring the Counter-guarantor to pay the amount under the Counter-guarantee.
On 14 December 2011, the Guarantor informed the Beneficiary via bank message that as the Beneficiary’s claim had non-conformance and there was evidence that the claim constituted fraud, the Guarantor refused to pay the amount claimed.
On 15 December 2011, the Counter-guarantor sent a message to the Guarantor to refuse to pay the amount claimed on the grounds that there was non-conformance and the Luoyang Inter-mediate People’s Court had issued a stop pay-ment order. On the same day, the Guarantor sent a letter to the Counter-guarantor stating that the Guarantor believed that its claim issued on 9 December 2011 was not a non-conforming claim, and that the Guarantor had received a con-forming claim submitted by the Beneficiary, and accordingly again required the Coun-ter-guarantor to make the payment under the Counter-guarantee.
On 19 December 2011, the Beneficiary resub-mitted the documents to the Guarantor to apply for the amount under the Guarantee. According to the facts subsequently identified by the court, the claim was a conforming claim.
Issues
First, the validity and effective time of the Coun-ter-guarantee.
Second, whether the Guarantor’s request for recourse for the Counter-guarantee constituted fraud under an independent guarantee.
Judgment
(1) Validity and effective time of the Coun-ter-guarantee
The court held that the disputed Coun-ter-guarantee stipulated that “the Coun-ter-guarantee shall become effective immedi-ately when the Supplier transfers the advance payment to the Subcontractor.” According to the Uniform Rules for Demand Guarantees of the International Chamber of Commerce (“URDG 758”) and the Provisions of the Supreme Peo-ple’s Court on Certain Issues of Independent Guarantee (“Judicial Interpretation of Inde-pendent Guarantee”), the parties shall be deemed to have imposed conditions for the Guarantee to take effect. Independence is one of the core characteristics of an independent guarantee, and is manifested through instru-ments. While agreeing on the requirements in the Guarantee for it to take effect, both parties shall also specify the instruments that meet these requirements. Due to the fact that the account for receiving the advance payment was not open with the Counter-guarantor or any other affiliated enterprise of the Counter-guarantor, the Coun-ter-guarantor was unable to determine whether the Subcontractor had received the advance payment based on its own records; also, the requirements for the Counter-guarantee agreed upon by both parties to take effect did not specify the instruments required. Therefore, the Coun-ter-guarantee shall become effective as soon as it is issued.
(2) Whether the Guarantor’s request for re-course for the Counter-guarantee consti-tuted fraud under an independent guarantee.
The court held that the Guarantor filed its first claim against the Counter-guarantor upon receipt of the Beneficiary’s first submission of instru-ments under the Guarantee. After the Guarantor pointed out the non-conformance in its claim to the Beneficiary and before it had received the conforming claim from the Beneficiary, the Guarantor still asserted to the Counter-guarantor that it had received a conforming claim, and demanded recourse of the amount under the Counter-guarantee. Therefore, the instruments submitted by the Guarantor at the time of claiming against the Counter-guarantor were inconsistent with the truth, and the Guarantor was aware of such inconsistency. Furthermore, when the Guarantor had not yet received the Beneficiary’s conforming instruments and re-fused to pay the amount under the Guarantee claimed by the Beneficiary, it clearly knew that it did not have the right to claim payment, yet still concealed the facts and claimed to the Coun-ter-guarantor that it had received a conforming claim, inducing the Counter-guarantor to make the payment. Its act is an abuse of the rights to claim payment and constitutes fraud. Although the Beneficiary had filed a conforming claim against the Guarantor during the trial of this case and the Guarantor had also made payment, however since the Guarantor’s act constituted fraud when making the claim against the Coun-ter-guarantor, the Guarantor’s payment to the Beneficiary shall not be deemed as “payment in good faith” as stipulated in the Judicial Interpre-tation of Independent Guarantee.
Observations
This case involves the requirement for the in-dependent Counter-guarantee to take effect, and fraud claims. Through this case, SPC set the following precedent:
First, the instrument requirements for the Guarantee to take effect: for a conditional guarantee that do not set forth the instrument requirements, it takes effect when the independent guarantee is issued.
Second, in the event that the Guarantor per se committed fraud when claiming for the Counter-guarantee, even if the Guarantor had made the payment to the Beneficiary, the provision that “where the guarantor has made payment in good faith, the court shall not rule to stop the payment of the counter-guarantee” as stipulated in Item 3, Article 14 of the Judicial Interpretation of Independent Guarantee is not applicable. Therefore, it cannot be deemed that the Guarantor had made a good faith payment to the Beneficiary.
In addition, in its final judgment in the case in-volving a dispute over letter of credit fraud, Ecentepe Corporate Banking Center Branch of Construction Credit Bank Co., Ltd. v. Shenyang Yuanda Aluminum Engineering Co., Ltd., SPC further clarified that the purpose of the rule of “payment in good faith by the issuer of the guarantee” is to protect “the legitimate rights and interests of the issuer of the guarantee who makes payment in good faith, and to balance the interests of the applicant, the beneficiary, the issuer of the guarantee and the issuer of the counter-guarantee”. However, in this case here, as the Guarantor itself committed fraud and did not make the payment in good faith, it does not meet the conditions for the application of the rule of payment in good faith, nor does it meet the purpose of this rule.
3.3 Case 3: Dispute over a Major PPP Case
Relationship between PPP contracts and ad-ministrative agreements, and arbitrability of PPP contracts
Facts
In order to construct an international tourist resort scenic spot project (“the Project”), the people’s government of a county (“Party A”) and an in-dustrial limited company (“Party B”) signed the PPP Project Agreement for the International Tourist Resort Scenic Spot (“PPP Agreement”) in 2016, agreeing that the Pub-lic-Private-Partnership (PPP) model would be adopted. The specific model of the Project was “TOT+BOT”, that is, the TOT (Trans-fer-Operate-Transfer) model shall be adopted for the stock assets, and the BOT (Build-Operate-Transfer) model shall be adopted for the incremental assets. Party A shall be mainly responsible for the supervision of the Project and providing external guarantees such as land use rights, etc. for Party B, while Party B shall register and establish a project company to be responsible for the financing, construction, operation, etc. of the Project.
In 2017, Party A, Party B and a fund management limited company (“Party C”) entered into the In-vestment Cooperation Framework Agreement for International Tourist Resort Scenic Spot Project (“Investment Cooperation Contract”), pursuant to which the three parties shall jointly establish a platform company responsible for the investment development, operation and management of the Project, and the parties agreed on the estab-lishment of the platform company, registered capital, liabilities of each party for breach of contract, etc.
In 2019, in accordance with Article 20.2 of the Investment Cooperation Contract, Party A ap-plied to the arbitration commission for arbitration on the grounds that Party B and Party C had failed to restore the original state and compen-sate losses after the rescission of the Investment Cooperation Contract. Thereafter, Party B ap-plied to the Beijing No. 4 Intermediate People’s Court to invalidate the arbitration clause of the Investment Cooperation Contract.
In the legal proceedings, the claimant Party B held that, according to Article 1 of the Judicial Interpretation on Administrative Agreements promulgated by SPC, an agreement entered into by an administrative organ with any citizen, legal person or other organization through negotiation, which contains rights and obligations under the administrative laws, to achieve the goals of ad-ministration or public service shall be an admin-istrative agreement under the Administrative Procedure Law of the People’s Republic of China (“Administrative Procedure Law”). Pursuant to the above provisions, the Investment Coopera-tion Contract in this case shall be an administra-tive agreement, because:
First, it is agreed in the Investment Cooperation Contract that the obligations of Party A shall include: (1) completion of government approval procedures for the establishment, planning and design of the Project; (2) being responsible for the land requisition, relocation and compensation within the scope of implementation of the Project; (3) arranging the construction index of the Project prior to the old city area to ensure the normal development of the Project; and (4) allocating the land legally and in a timely manner according to the progress and location of the Project, all of which fall within the administrative functions and powers of the administrative organ granted by the law.
Second, the development project involved in the Investment Cooperation Contract is a large-scale project of eco-environmental protection, tourism and vacation, etc., and is a “government concession project” of the nature of public service. To sum up, the Investment Cooperation Contract is a PPP agreement with rights and obligations under administrative laws to achieve the goals of administration or public service, and it is a typical administrative agreement on “government concession”. Any dispute arising from the said agreement shall fall within the scope of administrative litigation. According to Article 26 of the Judicial Interpretation on Administrative Agreements, "If an administrative agreement stipulates an arbitration clause, the people’s court shall affirm that such arbitration clause is invalid”. Thus, the Investment Cooperation Contract in this case is an administrative agreement, and if an administrative agreement stipulates an arbitration clause, such clause shall be invalid.
The respondent Party A argued that:
First, the Investment Cooperation Contract shall be a civil contract. An agreement in which one party is an administrative organ is not necessarily an administrative agreement. In the case of market transactions, the government shall have the qualification of equal transaction entity with natural persons and legal persons.
Second, the purpose agreed upon in the Investment Cooperation Contract was to realize economic value, not to realize administrative management. The essence of the Investment Cooperation Contract was to build a legal relationship with sufficient consideration, with property rights as the core content.
Third, the content of the Investment Cooperation Contract was not the rights and obligations of the two parties under the administrative laws, and there was no administrative management relationship between the two parties. The contract between the two parties was based on an act with sufficient consideration under the market transaction framework, and shall be a civil contract.
Fourth, the content of the Investment Cooperation Contract was to return the paid cash, giving the dispute obvious characteristics of a civil dispute.
Issues
First, whether the Investment Cooperation Con-tract shall be an administrative agreement.
Second, whether the arbitration clause agreed in the Investment Cooperation Contract shall be valid.
Judgment
The court determined that the Investment Co-operation Contract shall be a civil contract with arbitrability. Therefore, the arbitration clause agreed therein shall be valid. The main reasons were as follows:
•First, the question of whether the Investment Cooperation Contract was an administrative agreement and whether the dispute involved in the case was an administrative dispute shall be judged according to the specific contents of the agreement, the disputed matters of the parties, and the arbitration claims.
•Second, in terms of the content of the Investment Cooperation Contract, the applicant (i.e., Party B) enjoyed full autonomy of will in concluding the agreement and determining the content of the agreement. The conclusion of the agreement followed the principles of equality, voluntariness, and sufficient consideration. The agreement on the rights and obligations of the parties and compensation for breach of contract manifested the consensus of the parties through negotiation, and created civil rights and obligations for the parties, not the rights in the administrative law. Therefore, the Investment Cooperation Contract shall be a civil and commercial agreement by and between parties with equal status in nature, rather than an administrative agreement.
•Third, in terms of the arbitration claims made by Party A to the arbitration institution and the disputed matters between the parties, the application did not target the specific administrative act of the administrative organ. With respect to the dispute involved in the case, the parties have equal legal status and may apply for arbitration. Therefore, the dispute involved in the case was arbitrable and was not an administrative dispute that should be dealt with by the administrative organ in accordance with the law.
Observations
With respect to the duality of PPP agreements, the authors of this chapter have conducted a systematic analysis and demonstration in Annual Review of Construction Dispute Resolution in China (2020) in light of a series of typical cases heard before the promulgation of the Judicial Interpretation on Administrative Agreements by SPC, and envisaged at the end of that chapter that “in view of the promulgation of the Judicial Interpretation on Administrative Agreements, the authors believe that the good practice imple-mented by courts at all levels based on the ‘du-ality’ of PPP agreements still needs to be de-veloped continuously and deeply.” The result of the trial of this case fully confirms the above opinions.
In this case, the court first identified the Invest-ment Cooperation Contract as a civil or com-mercial agreement, that is, not all PPP agree-ments are administrative agreements, and only PPP agreements that conform to the provisions of Article 1 of the Judicial Interpretation on Ad-ministrative Agreements shall be administrative agreements.
Second, this case also reveals the logical thinking of the court in judging whether a PPP agreement is an administrative agreement, that is, the court mainly judged from the two aspects: the specific content of the PPP agreement, and the dispute matters and arbitration claims of the parties. With respect to the specific content of a PPP agree-ment, the court mainly consider whether the counterparty of the administrative organ is a subject that has an equal status with that ad-ministrative organ, and whether the rights and obligations established by the agreement belong to rights and obligations under the administrative laws. The disputed matters and arbitration claims of the parties mainly depend on whether they target the specific administrative act of the ad-ministrative organ.
1. This case is derived from an arbitration case concluded in February 2021 by the Beijing Arbitration Commission/Beijing International Arbitration Center concerning a series of rooftop photovoltaic power generation EPC contract disputes. For the purpose of this annual review, the details of this case have been processed and sorted.
2. The Contract Law still applies to this case. It should be noted that the last sentence of Article 282 of the Contract Law, “the contractor shall be liable for damages”, was revised in Article 802 of the Civil Code to “the contractor shall be liable for compensation”, that is, the word “damages” was deleted.
3. Dispute over credit fraud letter in Kaimai (Luoyang) Aviation Protection Equipment Co., Ltd. v. Luoyang Aviation Engineering Construction Co., Ltd., ([2018] Zui Gao Fa Min Zhong No. 1216). Accessed on 6 May 2021.
4. Paragraph 3, Article 14 of the Judicial Interpretation of Independent Guarantee provides that: “where the issuer has made payment in good faith under the Independent Guarantee issued upon instruction, the people’s court shall not rule cessation of payment for the Independent Guarantee which guarantees the issuer's right of recourse.”
5. Dispute over credit fraud letter in Ecentepe Corporate Banking Center Branch of Construction Credit Bank Co., Ltd. v. Shenyang Yuanda Aluminum Engineering Co., Ltd., Civil Judgment ([2020] Zui Gao Fa Min Zai No. 265), 26 August 2020.
