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The Case of XX v. XX on Disputes over the Contract of Jointly Developing the High-rise Commercial Building of A Mansion
Jurisdiction: Arbitration; CIETAC Shenzhen
1.Case Brief
On May 6, 1992, the claimant and the first respondent concluded the Contract on Developing the High-rise Commercial Building of A Mansion, which prescribes:
(1) Party A (i.e. the first respondent, hereinafter referred to as Party A) consents to jointly develop the high-rise commercial building of A Mansion with Party B (i.e. the claimant, hereinafter referred to as Party B) which should contract the construction of the building.
(2) The location is the land for the High-rise Commercial Building provided by Party A with the area of 7,849 square meters, the use right of which is possessed by it;
(3) Obligations of Party A: being liable for all the procedures for this construction project, such as the approval for the use of land; being liable for both "three connections and one leveling" and layout design of this project; being liable for signing commission sales contracts with companies which are entitled to engage in the real estate business.
(4) Obligations of Party B: to fund the whole construction and to organize construction teams to construct the building; to finish the whole project within 2 years as of the date 10 days after the issue of the construction permit.
(5) The constructed building would be distributed to the two parties by the proportion of fifty-fifty; each party would sell its own part of the building at the price decided by it.
(6) Party B should pay RMB 12,000,000 on behalf of Party A as the pre-development fund within 15 days as of the date when the contract is concluded. Party A should pay back RMB 12,000,000 to Party B within a period (1 year tentatively) as of the date when Party B makes the payment and should distribute part of the development profit, RMB 1,748,000, to Party B. In case Party A could not pay back the money, the building belonging to Party A should be mortgaged to Party B at value of 85.6% of the sales price. And in case the payback period is made longer, the profit distributed to Party B should be increased in proportion thereof.
(7) The two parties should conclude a supplementary contract, which should have the same legal force as this contract. Both of them should be performed. This contract should come into effect on the day of being signed by both parties.
This contract was signed and sealed by the claimant and the first respondent. So did the second respondent at the space for Party A at the end of the contract.
On May 23, 1992, the two parties to the aforesaid contract entered into a Supplementary Contract, which stipulates: when Party A receives RMB 12,000,000, which is the pre-development fund paid by Party B on behalf of Party A, the contract and the power of attorney signed by Party A and the owner of the land (the content is that the owner of the land consents and confirms that the two parties could jointly construct A Mansion), and the original receipt should be handed to Party B to preserve as a countersecurity. The pre-development fund should be handed to the owner of the land directly by Party A together with Party B. Party B has the right to supervise the fund to be used for the construction project of A Mansion only . Only when Party B signs, can the fund be used before the commencement of construction. If Party B finds a company, which is entitled to engage in real estate business, to sign the commission sales contract with it, Party A should pay RMB 200,000 for the labor charge of Party B. This Supplementary Contract was signed and sealed by the claimant and the first respondent. So did the second respondent at the space for Party A at the end of the contract.
On the same day, the third respondent issued a Confirmation, reading: (1) Upon study, the villagers' committee consents to the joint construction of A Mansion by the first respondent and the claimant. (2) The villagers' committee consents to the claimant's paying the pre-development fund of RMB 12,000,000 for the first respondent, after which, the contract between the first respondent and the villagers' committee and the receipt issued by the villagers' committee should be handed to the claimant as countersecurity for safeguarding the performance of the contract by the first respondent. (3) "A Mansion" referred to both in the Contract on Developing the High-rise Commercial Building of A Mansion and the Supplementary Contract thereof is exactly the Business-and-Residence Building of Hedong Village referred to in the Contract on Jointly Developing the Business-and-Residence Building of Hedong Village.
The Contract on Jointly Developing the Business-and-Residence Building of Hedong Village was concluded by HeDong Village and the first respondent on March 11, 1992. The assurance provider thereof is the third respondent. This contract mainly prescribes that one party provides land, one party provides fund, and they should jointly construct the building and share the total value estimated.
The claimant paid RMB 12,000,000 totally for twice respectively on May 6, 1992 and on June 12, 1992. Among which, the first respondent issued a receipt for the payment of RMB 2,000,000, and Hedong Village issued a voucher, reading that the claimant paid the joint-development expenditure for the respondent, for the payment of RMB 10,000,000 on June 12, 1992.
On August 22, 1992, the third respondent and XX Property Development Company (hereinafter referred to as the Property Company) entered into the Agreement on Jointly Developing the Merchandise Residence Building stipulating matters about the two parties' cooperation on developing A Mansion, which specified that the Property Company should derive a fixed profit of RMB 90 for every square meter, and all investment cost, operating benefit and tax should be assumed by the third respondent who should take full responsibility for the profits and losses. The people's government of the town signed and sealed on this agreement to approve it on October 15, 1992.
On the same day, the second respondent and the Property Company concluded the Agreement on Jointly Developing the Merchandise Residence Building which had almost the same format and content as the aforesaid agreement and merely changed the rights and obligations of the third respondent to those of the second respondent.
On August 28, 1992, the Property Company obtained the building permit and the land use permit of PRC for the planed construction projects from the Urban Planning Section of the County Construction Bureau. On December 8, 1992, the county land and resources bureau issued the approval to the application about the third respondent's transferring the land use right to the Property Company. On December 15 of the same year, the Property Company obtained the utilization permit of state-owned land from the county land and resources bureau. On December 18, the County Construction Bureau issued the construction permit.
On August 18, 1993, the claimant entrusted an attorney to send a letter to the first respondent reading "upon investigation and study, we believe that it is illegal that you and the claimant jointly develop the high-rise commercial building of A Mansion and the commercial building XX Garden. And you have breached the contract seriously. Therefore, please return all the investment paid by the claimant and the interest thereof to the claimant in one week as of the day when you receive this letter. Any objections can be raised to me within 3 days as of the receipt of this letter." When receiving the letter, the first respondent claimed that it would reply in detail in half a month. However, until now, it has neither given a clear reply nor returned the payment and interest. Therefore, the claimant filed arbitration with CIETAC Shenzhen on September 30, 1993.
The claimant required in the arbitration application:
(1) To terminate the Contract on Developing the High-rise Commercial Building of A Mansion and the Supplementary Contract signed between the claimant and the first and the second respondents, and the confirmation issued by the third respondent.
(2) According to the principle to handle the contract which is null and void, all respondents should jointly return the claimant RMB 12,000,000 in total and the interest calculated at the bank interest rate from June 12, 1992 to the actual date of payment.
(3) According to the liability for fault of the respondents, the respondents should compensate the claimant RMB 1,000,000 for its losses.
(4) The arbitration fee of this case should be undertaken by the respondents.
As claimed in the application of the claimant, after the claimant and the first respondent as well as the second respondent concluded the Contract on Developing the high-rise Commercial Building of A Mansion and the Supplementary Contract, the third respondent, according to the contract, issued a confirmation to consent to the claimant's joint construction of A Mansion together with the first respondent and the second respondent, and to consent to hand both the contracts and the receipt to the claimant as the countersecurity for the first respondent and the second respondent performing the contract.
Afterwards, the claimant repeatedly urged the respondents for the essential procedures such as the building permit for the planned construction projects, the application for construction project and the land use permit, whereas none was finished. Upon inquiry, it was known that the third respondent and the Property Company, concerning A Mansion, concluded the Agreement on Jointly Developing the Merchandise Residence Building, and the relevant authorities of the county had officially approved the third respondent's transferring the land use right of A Mansion to the Property Company.
Thus, the validity of the Contract on Jointly Developing the Business-and-Residence Building of Hedong Village, which was provided by the third respondent to the claimant as one of the security documents, was denied. Meanwhile it was impossible for the third respondent and the first respondent to jointly develop A Mansion for this cooperation was the content of the aforesaid contract. Since the first and second respondents were not the ones who held the land use right of A Mansion, they did not have the legal subject qualification to sign the contract, as a result of which, they had no rights to sign the Agreement on Jointly Developing A Mansion with the claimant. Therefore, the Contract on Jointly Developing A Mansion between the claimant and the first & second respondent should be null and void, and the security in the confirmation issued by the third respondent should be invalid. According to the principle to handle the invalid civil act and the invalid economic contract prescribed in the General Principle of Civil Law of PRC, the respondents should repay the RMB 12,000,000 got from the claimant and the interest thereof to the claimant. In addition, the respondents took the main responsibility for the invalidity of the contracts, so they should compensate the claimant for its economic losses arising thereof.
The respondents argued in the defense:
(1) The subject qualification of the respondent
In March of 1992, Hedong Village and the respondent entered into the Contract on Jointly Developing the Business-and-Residence Building of Hedong Village, as a result of which, the respondent acquired the land use right thereon and the ownership of the buildings on the land. Given the huge number and the large volume of the projects invested by the respondents, as well as the temporary squeeze of the fund turnover, the respondent decided to cooperate with the claimant, contracting the project of A Mansion out to it. As stipulated in the contract between the respondents and the claimant, the respondent should find an enterprise entitled to engage in real estate business, which should appear personally to go through all the formalities for the development of the building, in order to convert the original self-use apartments therein to commodity housing. Therefore, on August 22, 1992, the respondent and the Property Company entered into the Agreement on Jointly Developing the Merchandise Residence Building. Only the land use right therein was transferred to the Property Company, could the building on the land become commodity to be sold. As a result, the Property Company and the third respondent entered into the Agreement on Jointly Developing the Merchandise Residence Building to transfer the land use right. Thereafter the Property Company obtained the building permit for planned construction projects, the land use permit for planned construction, the utilization permit of state-owned land and the construction permit.
As showed by the facts above, after several changes of the cooperators of the project, the respondent was the legal cooperator of the Property Company to manage the real estate, while the claimant was the legal cooperator of the respondent. According to Article 3 of the Special Economic Zone of Shenzhen Property Management Regulations promulgated by Guangdong People's Government on January 23, 1984, "Shenzhen Municipal People's Government encourages the foreign customers to engage in real estate management including construction, purchase, sale and rent of house in the form of sole proprietorship or joint & cooperative ventures with the state-owned enterprises entitled to engage in real estate business by Shenzhen Municipal People's Government", the respondent had the subject qualification to sign building-construction contracts with the claimant, for it, as a foreign customer, had cooperated with the Property Company to get the right to manage the real estate.
(2) The validity of the contracts between the respondent and the claimant
The respondent had not yet cooperated with the Property Company when the respondent and the claimant entered into the contract on the construction of A Mansion. But Clause 3 of this contract stipulated that the respondent was liable for signing commission sales contracts with companies which are entitled to engage in the real estate business. Moreover, Clause 4 of the Supplementary Contract stipulated that if the claimant found a company, which was entitled to engage in real estate business, to sign the commission sales contract with it, the respondent should pay RMB 200,000 for the labor charge of the claimant. These clauses all manifestly illustrated the intent of the two parties as follows: (a) neither parties had the right to manage real estate at that time; (b) it was the obligation of the respondent to contact with a company entitled to engage in real estate business, or it was the obligation of the claimant on the condition that the respondent should pay RMB 200,000 for the labor charge of the claimant; (c) the company, which was entitled to engage in real estate business, was liable for converting the apartment therein to commodity housing; (d) the respondent could obtain the right of sale of the building through cooperating with the company which was entitled to engage in real estate business; (e) it should be the respondent who would appear personally to have legal relations with the company running real estate; (f) to sign the commission contract on the building with a company which was entitled to engage in real estate business was the key that the contact could come into effect and be executed.
Therefore the contract on jointly constructing A Mansion between the respondent and the claimant was a contract whose effectiveness was subject to certain conditions. If the building therein failed to be converted to commodity housing, the contract could not be performed, i.e. it failed to go into force. As prescribed in the General Principle of Civil Law of PRC, a contract whose effectiveness was subject to certain conditions should become effective when such conditions were accomplished. The respondent had acquired the right to run real estate through the effort to collaborate with the Property Company, so the condition of the contract therein had been satisfied, as a result of which, the contract should be effective. The claimant no longer performed the contract, which had been a breach of contract. Its intent to terminate the contract was because the real estate market turned depressed form boom and the price thereof dropped sharply. It was an immoral business practice that the claimant made excuses for shirking the responsibilities. Therefore the respondent requested CIETAC Shenzhen to overrule the claims of the claimant.
On July 25, 1994, the attorney of the claimant further emphasized in his statement of attorneys that, the third respondent was liable for the repayment of the pre-development fund and interest thereof, which could not be shifted.
2.Award
(1)
The first respondent and the second respondent shall repay RMB 12,000,000 and the interest of RMB 2,705,023 to the claimant within 30 days as of the day when this award is made. If overdue, interest shall be added at an annual rate of 15%.
(2)
The claim requiring the respondent to compensate the claimant RMB 1,000,000 for its losses shall be overruled.
(3)
The arbitration fees and the counsel fees of this case shall be undertaken by the claimant, the first respondent and the second respondent in the proportion of 1/3, 1/3 and 1/3.
3.Comment
The legal matters in relation to this case are mainly as follows:
(1)
The confirmation of the responsibilities
The arbitral tribunal finds: at the initial part of both the Contract of Jointly Developing the High-rise Commercial Building of A Mansion and the Supplementary Contract, "Party A" was the first respondent, whereas at the end of both contracts, the space for the signature and seal of "Representative of Party A", there were the signature and seal of the second respondent in addition to those of the first respondent, which indicated that the first respondent and the second respondent were jointly Party A of the aforesaid contracts. Therefore, they should jointly bear all responsibilities arising from concluding the aforesaid contracts.
(2)
Whether the third respondent should be one party of the contracts
The third respondent merely issued a confirmation, which consented to the joint construction of A Mansion by the claimant and the first respondent and the first respondent's pledging the relevant contracts and the receipt to the claimant for occupation. But it did not enter into both the contracts as one party. Although the claimant paid the third respondent the pre-development fund of RMB 10,000,000, the Supplementary Contract and the receipt issued by the third respondent read that the claimant paid the money for the first respondent and the second respondent. Therefore the arbitral tribunal believes that the third respondent is not one party of the aforesaid contracts, as a result of which, it should not be under the jurisdiction of the arbitration clause in this case.
(3)
Whether the first respondent and the second respondent should repay the payment, which had been paid by the claimant for the performance of the contracts, with interest
The Contract on Developing the high-rise Commercial Building of A Mansion between the claimant, the first respondent and the second respondent is actually a contract on cooperative building construction, which mainly stipulates that the first and the second respondent should provide land, the claimant should provide fund, and they should jointly run real estate and share the property right. According to relevant state laws and provisions and regulations of Shenzhen Municipal People's Government, in cooperative house building, the party providing land should have the land use right and the real estate licence, the party providing fund should be a real estate development company registered in Shenzhen National Land Planning Bureau, and the contract on cooperative building construction should be approved by Shenzhen National Land Planning Bureau. It is found that, the first and second respondents did not have the land use right and the business scope of the claimant did not include the development and management of real estate when the Contract on Developing the high-rise Commercial Building of A Mansion and the Supplementary Contract were concluded, and these two contracts were never submitted to Shenzhen National Land Planning Bureau for approval. Therefore the arbitral tribunal holds that, according to Article 9 of the Foreign-related Economic Contract Law of PRC (which has been repealed by the Contract Law of PRC and has been no longer in force since October 1, 1999), the aforesaid two contracts are null and void. According to Article 61 of the General Principle of Civil Law of PRC, "After a civil act has been determined to be null and void or has been rescinded, the party who acquired property as a result of the act should return it to the party who suffered a loss", the first and the second respondents should return the RMB 12,000,000 which had been paid by the claimant for the performance of the aforesaid two invalid contracts and the interest of RMB 2,705,023 thereof calculated at the annual rate of 10% from the day when the claimant paid to the day when this award is made.
(4)
The claim that the claimant required the respondents to compensate for its losses
The claimant required the respondents to compensate RMB 1,000,000 for its losses in the third request of the arbitration application. However, it failed to provide the ground for losses and the reasonable calculation method. So the arbitral tribunal should not support this claim of the claimant.
(5)
The arbitration fees
Since the claimant, the first respondent and the second respondent all have fault on the conclusion of the contracts which are null and void, the arbitration fees of this case should be averagely undertaken by the three parties.
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