[Lead Lawyer: Wang Tengfeng] 1. Case Recap

On August 19, 1993, Shenzhen Haituo Import and Export Trading Company (original plaintiff) and Shenzhen Anhui Industrial Corporation (original defendant) signed a "Contract for Contracted Operation." The contract stipulated that the plaintiff would lease to the defendant the 4th to 6th floors of the Yali Hotel and the hotel lobby, totaling 2,235 square meters of business premises, with the operation period from September 1, 1993, to August 31, 1998. Article 20 of the "Contract for Contracted Operation" explicitly stated that the relevant expenses for water, electricity, heating, telephone, and building management fees would be covered by a supplementary agreement to be signed separately by both parties. After the contract was signed, no supplementary agreement was reached on the allocation of these expenses. In the early stages of the contract, the plaintiff and defendant cooperated well, seeking common ground while reserving differences. However, from August 1994, disputes arose between the two parties over hotel management and cost allocation, and the defendant stopped paying the plaintiff the contracted fees and other expenses from that month onward. After multiple negotiations 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 session was held on March 10, 1995, where both parties agreed to terminate the contract but still had significant differences over the contracted fees and cost allocation. On March 12, both parties reached an agreement on the evacuation and resettlement of the defendant's personnel after the contract termination. On May 31 of the same year, at the request of both the plaintiff and defendant, the Luohu Court mediated again, and both parties agreed to start inventorying property and transferring the premises on June 1, with the defendant formally handing over the contracted premises to the plaintiff. Due to the parties' differing views on the allocation of contracted fees and other expenses during the contract period, the Luohu Court commissioned Shenzhen Fair Accounting Firm to conduct a special audit. The audit results confirmed that the defendant should bear other expenses of RMB 445,316.04 and HKD 48,582.72. On September 27, 1995, the Luohu Court issued a judgment in this case, as recorded in the judgment document [(1994) Shen Luo Fa Jing Zi No. 523]:

"The court holds that the 'Contract for Contracted Operation' signed by the plaintiff and defendant on the basis of equality and mutual benefit is a valid contract and is protected by law. During the performance of the contract, the defendant failed to adhere to the contract's terms, leading to disputes and ceasing to pay the plaintiff the contracted fees, constituting a breach of contract first. According to Article 8 of the contract, the plaintiff has the right to terminate the contract. The defendant shall bear full liability for the breach. — Accordingly, in accordance with Articles 111 and 112 of the 'General Principles of the Civil Law of the People's Republic of China,' and Articles 26, Paragraph 1, Item 3, Paragraph 2, and Article 29, Paragraph 1 of the 'Economic Contract Law of the People's Republic of China,' the judgment is as follows:

First, the 'Contract for Contracted Operation' signed by the plaintiff and defendant is hereby terminated.

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

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

The defendant, dissatisfied, filed an appeal.

II. Case Outcome

After trial, 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 first item of the judgment in Civil Judgment (1994) Shen Luo Fa Jing Zi No. 523 of the Shenzhen Luohu District People's Court.

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

late payment penalties of RMB 82,946, as well as water, electricity, heating, and building management fees totaling RMB 333,987.03 and HKD 36,437.04.

Third, revoke the third item of the judgment in Civil Judgment (1994) Shen Luo Fa Jing Zi No. 523 of the Shenzhen Luohu District People's Court.

The total litigation costs 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 cause and focus of this case revolve around how the parties should share expenses for water, electricity, heating, telephone charges, and building management fees. Since the original "Contract for Management and Operation" did not specify these details and no agreement could be reached after the contract was signed, the defendant refused to pay the contract fees, leading to litigation. After the case was accepted, the parties still could not reach a consensus. The Luohu District Court directly rendered a judgment based on the special audit conclusions of an accounting firm. Chief Attorney Wang Tengfeng, relying on legal facts and his expertise in law and financial accounting, strongly refuted the unreasonable cost-sharing in the first-instance judgment. In the appeal opinion, he stated: "The plaintiff breached the contract first and in multiple ways, causing severe economic losses to our client. Article 20 of the contract clearly stipulates that a supplementary agreement should be signed 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 tenants in the building, so it’s not appropriate for just the two of us to sign.' This led to unclear responsibilities, and our client was forced to bear the shared costs for water, telephone, and other expenses incurred by multiple tenants, while the contract fees from all tenants were exclusively enjoyed by the plaintiff. Due to the plaintiff’s chaotic management, our client suffered significant economic losses during the operation period, incurring additional expenses including 57,000 yuan for power generation, 54,900 yuan for water, 111,800 yuan for telephone, 155,000 yuan for repairs and equipment, and 12,800 yuan for sewage fees, totaling 391,000 yuan." The appeal opinion also pointed out that the calculation of liquidated damages in the first-instance judgment was unreasonable.

Chief Attorney Wang Tengfeng’s arguments were supported by the second-instance judgment, which rejected the special audit conclusions of the accounting firm and proposed that "expenses should be shared in proportion to the floor area actually occupied by each party." The second-instance judgment stated: "Article 20 of the Contract for Management and Operation clearly stipulates that the parties shall sign a supplementary agreement regarding expenses for water, electricity, heating, telephone charges, and building management fees. After the contract was signed, no supplementary agreement was reached on the allocation of these expenses, for which both parties bear responsibility. Therefore, the expenses incurred shall be shared in proportion to the floor area actually occupied by each party. The first-instance judgment was clear on the main facts, but some figures in the outcome were improperly calculated and should be corrected." As a result, 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 liquidated damages for the contract were reduced from RMB 138,066.66 to RMB 82,946. The second-instance judgment reduced the client’s expenses by RMB 166,449 and HKD 55,120. The second-instance litigation costs of RMB 13,010 were ordered to be borne by the appellee in the amount of RMB 7,806, indicating that the original defendant’s appeal was largely supported.

Chief Attorney Wang Tengfeng represented the original defendant, Shenzhen Anhui Industrial Corporation, a window company of the Anhui Provincial Government in Shenzhen and a large state-owned enterprise, while the opposing party was a state-owned enterprise under the Shenzhen Municipal Government. Both parties had government backgrounds and strong economic strength. The dispute escalated outside the courtroom, with tensions running high and neither side willing to yield, ultimately leading to litigation. The final judgment clarified the responsibilities of both parties, providing a fair resolution for the original defendant and imposing a reasonable burden, finally bringing the intense dispute to a rational conclusion.

(Compiled and commented by Guo Tianxi)

Zhiming Office

April 19, 1996