[1] Representing Shenzhen Anhui Industrial Corporation in a contract dispute over contracted operations

[Lead Attorney: Zhiming Law Firm]

I. Case Recap

On August 19, 1993, Shenzhen Haituo Import and Export Trading Company (the plaintiff in the original trial) and Shenzhen Anhui Industrial Corporation (the defendant in the original trial) signed a "Contract Management Agreement." The contract stipulated that the plaintiff would contract out to the defendant its business premises, comprising the 4th through 6th floors of Yali Grand Hotel and the hotel lobby, totaling 2,235 square meters, with the business period running from September 1, 1993 to August 31, 1998. Article 20 of the "Contract Management Agreement" expressly stipulated that the agreed fees for water, electricity, heat, telephone charges, and building management fees, among others, would be separately agreed upon by both parties through a supplementary agreement. After the contract was signed, the two parties did not sign a supplementary agreement regarding the apportionment of the aforesaid fees. In the early stage of the contracting period, the plaintiff and defendant cooperated well, seeking common ground while reserving differences. However, starting from August 1994, disputes arose between the two parties over hotel management and fee apportionment, and from that month onward, the defendant ceased paying contract fees and other charges to the plaintiff. After multiple negotiations between the two parties failed to reach a consensus, the plaintiff filed a lawsuit with the Shenzhen Luohu District People's Court at the end of that year. The first court hearing was held on March 10, 1995, during which both parties reached a consensus on terminating the contract management agreement, but still had significant differences regarding contract fees and fee apportionment. On March 12, arrangements were made by both parties for the evacuation and placement of the defendant's personnel after termination of the contract. On May 31 of the same year, at the request of both the plaintiff and defendant, the Luohu District Court presided over another mediation, during which both parties agreed to begin inventorying property and handing over the premises starting June 1, with the defendant formally transferring the contracted premises to the plaintiff. Due to the parties' divergent views and significant differences over contract fees and the apportionment of various other fees during the contracting period, the Luohu District Court commissioned Shenzhen Fair Accounting Firm to conduct a special audit. The audit results confirmed that the defendant should apportion other fees in the amount of RMB 445,316.04 and HKD 48,582.72. On September 27, 1995, the Luohu District Court rendered its judgment on this case, and the judgment document [(1994) Shen Luo Fa Jing Zi No. 523] states:

“本院认为：原、被告双方 在平等互利的基础上签订的《承包经营合同》，为有效合同，受法律保护。在合同履行期间，由于被告不恪守合同的约定，致双方发生纠纷而停止向原告缴纳承包 金，已违约在先，根据合同第八条的约定，原告有权终止合同。被告应负全部违约责任。——据此，本院依照《中华人民共和国民法通则》第一百一十一 条、第一百一十二条，《中华人民共和国经济合同法》第二十六条第一款第三项，第二款，第二十九条第一款的规定，判决如下：

First, the Contract for Undertaking Operations signed by the plaintiff and the defendant is hereby rescinded.

Second, the defendant owed the plaintiff contracted fees of RMB 908,333.3 and liquidated damages of RMB 138,066.66 from August 1, 1994 to May 31, 1995; and owed various fees of RMB 445,316.04 and HKD 48,582.72.

Third, the litigation costs of this case, RMB 13,010, shall be borne by the defendant.

The defendant, dissatisfied with the judgment, filed an appeal.

II. Case Outcome

After holding a hearing, the Shenzhen Intermediate People's Court rendered a final judgment [Civil Judgment (1996) Shen Zhong Fa Jing Yi Zhong Zi No. 360]:

First, uphold the judgment in Item 1 of the Civil Judgment (1994) Shen Luo Fa Jing Zi No. 523 of the People's Court of Luohu District, Shenzhen.

Second, amend the judgment of Item 2 of the Civil Judgment (1994) Shen Luo Fa Jing Zi No. 523 of the Luohu District People's Court of Shenzhen City to: the appellant shall pay the contract fees for the period from August 1, 1994 to May 31, 1995 in the amount of RMB 908,333.36, and

Late payment fee of RMB 82,946.00; water, electricity, heating expenses, and building management fees totaling RMB 333,987.03 and HKD 36,437.04.

Third, set aside Item 3 of the civil judgment (1994) Shen Luo Fa Jing Zi No. 523 rendered by the People's Court of Luohu District, Shenzhen.

The total litigation fees for the first and second instance in this case amount to RMB 26,020, with the appellant bearing RMB 18,214 and the appellee bearing RMB 7,806.

III. Case Analysis

The origin and focus of this case lie in how the parties should share the costs of water, electricity, heating, telephone charges, and building management fees for the building. Because the original Contract for Contracted Management contained no specific provisions on this matter, and no agreement could be reached after the contract was entered into, the defendant refused to pay the contract fees, giving rise to this lawsuit. After the case was accepted, the parties remained unable to reach an agreement. The Luohu District Court rendered a direct judgment based on the special audit conclusions of an accounting firm. Relying on the legal facts and drawing on his knowledge of both law and financial accounting, Attorney Zhiming mounted a forceful rebuttal against the unreasonable allocation of costs in the judgment of first instance. The appellate representation opinion pointed out: "The plaintiff breached the contract first and breached it in multiple respects, causing severe economic losses to our client. Article 20 of the contract expressly provides that a supplementary agreement should be concluded to address the allocation of various expenses. However, when our client drafted the agreement and asked the plaintiff, Haituo, to sign it, the plaintiff said: 'The expenses involve other occupants of the building, so it would not be appropriate for just the two of us to sign separately.' It was precisely because of this that responsibility became unclear, and although multiple households used water, telephones, and other shared facilities, our client alone was forced to bear the deductions and collections for those public apportioned expenses, while the contract fees from the various households were enjoyed exclusively by the plaintiff. Due to the plaintiff's artificially created management chaos, our client suffered considerable economic losses during its period of operation, and the additional expenses it bore were: power generation fees of RMB 57,000, water fees of RMB 54,900, telephone charges of RMB 111,800, repair and equipment costs of RMB 155,000, and sewage discharge fees of RMB 12,800, totaling RMB 391,000." The representation opinion further pointed out that the calculation of liquidated damages in the judgment of first instance was unreasonable.

Lawyer Zhiming's opinion was supported by the second-instance judgment, which did not adopt the accounting firm's special audit conclusion and ruled that "expenses shall be borne proportionally according to the floor area actually occupied by each party." The second-instance judgment states: "Article 20 of the contracted operation contract clearly stipulates that the related expenses for water, electricity, heating, telephone, and building management fees shall be governed by a supplementary agreement to be separately signed by both parties. After the contract was signed, the parties did not enter into a supplementary agreement on the allocation of the aforesaid expenses, for which both parties bear responsibility, and the expenses arising therefrom shall be borne proportionally according to the floor area actually occupied by each party. The facts found in the original judgment were generally clear, but some figures in the disposition were incorrectly calculated and should be corrected." As a result of the second-instance judgment, the defendant's liability for water, electricity, heating, and building management fees was reduced from RMB 445,316.04 and HKD 48,582.72 to RMB 333,987.03 and HKD 36,437.04, and the contractual default penalty was reduced from RMB 138,066.66 to RMB 82,946. The second-instance judgment reduced the client's expenditure by RMB 166,449 and HKD 55,120. The second-instance litigation fee of RMB 13,010 was apportioned with the appellee bearing RMB 7,806, which demonstrates that the original defendant's appeal was largely sustained.

Zhiming lawyers represented the original defendant, Shenzhen Anhui Industrial Corporation, which was Anhui Provincial Government's window company in Shenzhen and a large state-owned enterprise under the government. The opposing party was a subsidiary of the Shenzhen Municipal Government, and both sides had government backgrounds and considerable economic strength. The dispute between the two parties escalated outside the courtroom with intense antagonism, each locked in a fierce contest with no clear advantage, until it finally reached the courtroom. The final judgment in this case clarified the responsibilities of both parties, provided a fair resolution for the original defendant, imposed a reasonable burden, and ultimately brought the intense dispute back to a rational conclusion.

(Compiled and commented by Guo Tianxi)

Zhiming Office

April 19, 1996