administrative agreement

Case 6

Reasonably compensate private enterprises for their loss of trust and interests in accordance with the law and create a legalized business environment——A construction company sued a certain district people’s governmentadministrative agreementcase

【Key words】

Some clauses are invalid Reliance on interests, keeping promises, and reasonable compensation in accordance with the law

【Case summary】

The benefit distribution clause set in the "Cooperation Agreement" signed by a local government and an enterprise was deemed invalid according to law, but other clauses of the cooperation agreement did not violate legal provisions and have been actually performed. After the cooperation project was terminated due to policy reasons, the two parties did not reach an agreement on the compensation for the reliance interests arising from the company's signing and performance of the "Cooperation Agreement". The government also failed to make compensation or compensation decisions to the company as required by the effective judgment of the first instance court. The company resorted to court for this. In accordance with the spirit of Articles 18 and 70 of the Private Economy Promotion Law of the People's Republic of China, and based on the specific circumstances of the case, the court determined that the government should reasonably compensate the enterprise for the loss of trust interests in accordance with the law, protect the legitimate rights and interests of the enterprise, and encourage the government to keep its promises.

【Details】

In April 2007, a district government and a construction company signed a "Cooperation Agreement" on the cooperative development and construction of a certain project. It was stipulated that the two parties should follow the cooperation principles of "government leadership, business operation, market operation, benefit sharing, and win-win". The government would entrust the preliminary land development work of the development and construction project to a construction company to be responsible for investment and construction; after completing the preliminary development work, the government would provide rewards from the land transfer income in accordance with the profit distribution method agreed upon by both parties. After the "Cooperation Agreement" was signed, a construction company carried out preliminary land development work in accordance with the agreement.

In 2016, due to policy changes and other factors, the parties agreed to liquidate and settle the cooperation project in advance, set up a project development cost settlement review team to conduct review, issued a "Construction Project Development Cost Review and Verification Report", and signed a "Letter of Agreement" to review and confirm the comprehensive development cost. At the same time, the "Agreement" stipulates that except for the benefit distribution clauses in the "Cooperation Agreement" which shall be judged by the court in accordance with the law, other contents of the "Cooperation Agreement" will be automatically terminated. In January 2021, a construction company filed a lawsuit over the distribution of benefits involved in the Agreement.

The Intermediate People's Court of Longyan City, Fujian Province held in the first instance that the benefit distribution clause in the "Cooperation Agreement" was confirmed to be invalid because it violated legal provisions and the national financial system, harmed national interests and social public interests, and a construction company had no performance benefits calculated based on this clause. There is no legal basis for a construction company to claim that its losses should be calculated and compensated with reference to this clause. However, except for the invalid benefit distribution clause in the Cooperation Agreement signed by the two parties in April 2007, the rest of the contents do not violate laws, administrative regulations, and mandatory provisions, and have been actually performed. The reasonable interest expectations of private enterprises when signing and performing the contract should be protected. The "Agreement" and the "Construction Project Development Cost Review and Verification Report" signed in June 2016 did not involve compensation for the plaintiff's interests. Therefore, the court of first instance considered the content of the Cooperation Agreement, the main work carried out by the plaintiff, and the actual operating conditions of the construction company when the cooperation agreement was terminated, and decided that a certain district government should pay a compensation of more than RMB 43 million to a certain construction company, and rejected other claims of a certain construction company.

The Fujian Provincial Higher People's Court held in the second instance that a certain district government was mainly at fault for invalidating some terms of the cooperation agreement and should bear corresponding compensation or reasonable liability for compensation in accordance with the law. According to the spirit of Articles 18 and 70 of the Private Economy Promotion Law of the People's Republic of China, government integrity is the cornerstone of the social credit system, and government commitment is the hardest "soft power" in a legalized business environment. Administrative agencies should have higher legal awareness and prudential obligations than ordinary business entities. The benefit distribution clause of the cooperation agreement involved in the case was found to be invalid due to harming national interests and social public interests. A construction company bears certain responsibilities. However, a certain district government, as an administrative subject, signed the above clause despite knowing that it was prohibited by law, and was primarily responsible for the invalidity of the benefit distribution clause. Subsequently, it failed to properly handle matters related to the invalidation of the cooperation agreement in accordance with the requirements of the effective administrative judgment. According to the law, it should reasonably compensate a construction company for the loss of trust interests arising from the performance of the cooperation agreement. The court of first instance comprehensively considered the actual circumstances of the case and determined that the amount of compensation determined was not inappropriate, so it upheld the first-instance judgment in accordance with the law.

【Typical meaning】

This case is a dispute arising from the invalidity of some provisions of the administrative agreement. The People's Court did not simply stop at the legality review, but based on the spirit of the Private Economy Promotion Law, it deeply considered the trust interests of enterprises based on the government's integrity and the performance of agreements. On the premise that the government is primarily at fault for invalidating some of the provisions of the administrative agreement, and based on the signing and actual performance of the government-private capital cooperation project, the company shall be reasonably compensated for the loss of trust interests in accordance with the law. This case makes it clear to the society that local governments must abide by honesty and credibility in exercising administrative power, must not damage the reasonable trust interests of business entities based on government commitments, and should actively create a legal business environment.