The case in this article centres on a state-owned coal enterprise (company Y) and its equity increase agreement with company Z and other partners. Industry policy constraints led to oversimplified contractual provisions on compensation payments and termination, triggering disputes that culminated in a seven-year legal battle and ended with a 2023 final judgment in company Y’s favour, handed down by the Supreme People’s Court (SPC).
The protracted litigation saw multiple reversals: first instance, where the court ordered continued contract performance; the SPC remand, with the case returned for retrial; and retrial rulings that ultimately upheld Y’s claims for contract termination, capital repayment and compensation.
Diverging views
Executive Director, Senior Partner
Kangda Law Firm
Tel: +86 133 1925 3709
E-mail: gaobo.lian@kangdalawyers.com
Company Z and other partners asserted that: (1) the exploration rights had been or could be transferred, as government correspondence had confirmed the intent to transfer such rights; (2) the exploration rights holder’s demand for payment of exploration rights fees had triggered the conditions for the second-phase compensation payment; (3) the agreement should continue to be performed, as policy adjustments did not constitute force majeure; and (4) state-owned enterprises (SOEs) cannot exit easily, as returning capital contributions would amount to illegal withdrawal of capital and equity withdrawal requires shareholder resolutions.
On the other hand, company Y argued: (1) the transfer of exploration rights must be subject to registration changes, which were not completed in this case; (2) payment required the signing of an exploration rights transfer agreement, which was not finalised here, meaning the payment conditions had not been met; (3) production capacity restrictions rendered the contractual objectives unachievable, making continued performance of the agreement impossible; and (4) the SOE exit here was lawful, as the agreement explicitly stipulated a mechanism for returning capital contributions on withdrawal and internal state-owned asset approval procedures had been fulfilled.
Company Z sought to broadly interpret the contract, asserting that “government intent to approve could substitute for an exploration rights transfer agreement”, while company Y maintained its stance on “registration” and “policy obstruction”.
Defence strategies
Associate
Kangda Law Firm
Tel: +86 133 7926 5623
E-mail: hai.xia@kangdalawyers.com
Notwithstanding its initial defeat at first instance, company Y and its legal counsel reversed the unfavourable outset and secured a final victory by developing and rigorously implementing a defence strategy anchored in contractual interpretation, evidence fortification, and argument substantiation.
Counter opposing claims through precise contractual interpretation. Regarding the transfer of exploration rights, company Y’s legal team invoked statutory provisions governing exploration rights transfers, emphasising that “no transfer occurs without registration changes”. This nullified the counterparty’s reliance on government correspondence as proof of transfer feasibility, reasserting the criteria of executed transfer agreements and completed registration as decisive factors.
Additionally, company Y submitted policy documents to the court evidencing the state’s progressive tightening of coal production capacity restrictions. By cross-referencing these policies with the agreement’s simplistic termination clauses, it established that “policy-induced impossibility of performance” satisfied the contractually agreed termination conditions. This approach precluded company Z’s efforts to characterise Y’s actions as a breach of contract.
Fortified evidence to solidify the “impossibility of performance”. Company Y collected official correspondence and documents from provincial and municipal governments and departments in the exploration rights’ jurisdiction, proving local authorities explicitly rejected the transfer. It also submitted national coal industry policy documents demonstrating progressively tightened production capacity restrictions that cannot be circumvented. Critically, the partnered coal mine’s maximum planned capacity no longer met minimum regulatory requirements.
Company Y prompted both tiers of courts to investigate the feasibility of exploration rights transfers with relevant government authorities and rights holders, confirming the factual impossibility of performance. The legal team mapped out the 2013 decision-making timeline for suspending the disputed coal mine project, demonstrating that the inability of continued performance predated the suspension, so establishing the suspension as loss mitigation rather than a breach of contract.
Argument substantiation. Company Y comprehensively demonstrated that withdrawal from the partnership complied with contractual stipulations, did not violate the capital maintenance principle and would not prejudice creditor interests. Furthermore, by submitting resolutions and authorisation documents from its superior state-owned asset regulatory authority, it proved compliance with state-owned asset supervision requirements.
Takeaways for risk control
Mining collaborations are quintessentially high-investment, long-cycle commercial transactions, where precision in contractual risk identification and mitigation proves critical. Drawing lessons from the contractual management lapses and successes evident in this dispute, risk control measures for such commercial agreements should be augmented as follows.
Clause design. (1) In material transactions, rigorously define clauses governing conditions precedent to fulfilling major obligations and exercising major rights, replacing ambiguous language with clearly quantifiable criteria; (2) incorporate policy adjustments as grounds for contract modification, rescission or termination. For long-term transactions, policy shifts must be factored into clause design considerations, but avoid making them the sole triggering condition; and (3) for breach liabilities, expressly stipulate liquidated damages plus quantifiable compensatory losses, seeking to establish a “liquidated plus compensatory damages” liability framework from the onset.
Performance management. In long-term commercial transactions, personnel handling the contracts often change. Both parties should therefore designate dedicated personnel and departments to oversee end-to-end contract management – from execution through to termination – ensuring maintenance of litigation-grade evidentiary records of contractual performance and seamless handover during staff transitions.
Parties should establish a performance evidence checklist from contract execution, specifying evidence for each obligation milestone (e.g. government approvals, property deeds and payment receipts). During performance, documents should be regularly filed to monitor progress.
Lian Gaobo is an executive director, senior partner at Kangda Law Firm. He can be contacted by phone at +86 133 1925 3709 and by email at gaobo.lian@kangdalawyers.com
Xia Hai is a partner at Kangda Law Firm. He can be contacted by phone at +86 133 7926 5623 and by email at hai.xia@kangdalawyers.com
