Facts
Dalian Maritime Court
High Court of Liaoning Province
Comment
Protection and reasonable exploitation of marine resources is an important topic in China, which may influence Chinese courts' decisions in cases involving such exploitation. A case heard by the Dalian Maritime Court and affirmed by the High Court of Liaoning Province demonstrated such influence.
In 2018, Q and L signed an aquatic farm transfer contract, which stipulated the following:
- Q would transfer the aquatic farm to L for exploitation from May 2018.
- L would pay Q a transfer fee of 190,000 yuan in total, over three years as follows:
- 80,000 yuan in 2018;
- 70,000 yuan in 2019; and
- 40,000 yuan in 2020.
- If L defaulted on the payments, Q had the right to terminate the transfer contract and retrieve the aquatic farm.
After signing the contract, L paid Q 80,000 yuan in 2018 and 32,000 yuan in 2019. In May 2020, L requested to pay the remaining transfer fee to Q, but Q refused L's payment.
Q then filed a lawsuit against L with the Dalian Maritime Court in July 2020, claiming his right to terminate the transfer contract and requesting L to pay a transfer fee of 10,000 yuan and relevant interests based on the fact that L had breached the contract by not paying the transfer fee as agreed.
Dalian Maritime Court did not recognise Q's right to terminate the agreement.
Interpretation on payment agreement in transfer contract
Considering the plain meaning of the payment agreement, the Court held that it had been understood that L would pay a transfer fee of 190,000 yuan in total within three years before 31 December 2020. Specifically, L would pay Q a transfer fee of 80,000 yuan before 31 December 2018, 70,000 yuan before 31 December 2019 and 40,000 before 31 December 2020.
L breached contract by not paying transfer fee as agreed
In 2019, L merely paid Q a transfer fee of 32,000 yuan, even though L should have paid Q 70,000 yuan before 31 December 2019. Therefore, the Court found that L had breached the contract and affirmed Q's request for L to pay Q the transfer fee of 10,000 yuan and relevant interests. Also, the Court held that Q could sue L for the remaining 28,000 yuan due in 2019, which had not been claimed by Q in this case.
The Court also held that a transfer fee of 40,000 yuan had not been due when Q had filed the suit, since such transfer fee would be due on 31 December 2020. Therefore, the Court did not consider Q's assertion with regard to such transfer fee to be relevant.
Q had no rights to terminate transfer contract
L's overdue payment of transfer fee was not a material breach. Continued performance of the transfer contract was more conducive for Q to realise the purpose of the contract. For Q, the purpose of signing the contract with L was to obtain the transfer fee by transferring the rights to exploit the aquatic farm to L. L had paid most of the transfer fee to Q and had thereby substantially performed its main obligation under the contract. Based on the fact that L had requested to pay the remaining transfer fee to Q in May 2020, it could be reasonably inferred that L had been willing to pay the unpaid transfer fee.
Q had breached his implied duty of good faith under the contract. When L had failed to pay the transfer fee in full in 2019, Q had failed to urge L to pay within a reasonable time. Moreover, when L had requested to pay the unpaid transfer fee in May 2020, Q had refused L's payment; instead, Q had requested to terminate the transfer contract based on L's default. Q had not actively facilitated the continuous performance of the contract.
Based on the principle of encouraging transactions and balancing interests – and considering the principle of reasonable exploitation of marine resources – it would be not appropriate to recognise Q's right to terminate the contract. After Q and L had signed the transfer contract, sea cucumber seedlings had been put into the aquatic farm. Given that L had substantially performed his payment obligation under the contract and had been willing to pay the unpaid transfer fee, recognising Q's right to terminate the transfer contract would cause a great waste of marine resources and significantly hurt L's economic interests.
High Court of Liaoning Province
In March 2021, the High Court of Liaoning Province affirmed the Dalian Maritime Court's judgement and provided the following additional reasoning.
L had asked to pay the transfer fee to Q in May 2020, but Q had refused to accept it on the grounds that it was overdue. Therefore, due to Q's refusal, L had failed to pay all the transfer money within three years after signing the transfer contract as agreed. Q had no right to terminate the transfer contract on the basis that the failure had been created by his own refusal.
Appropriate exploitation of marine resources played an important role in this case. When Q had asked to terminate the aquatic farm transfer contract on the basis of a failure to pay that he had created, both the trial and appellate courts could not easily confirm the termination of the contract. Instead, considering the appropriate exploitation of marine resources, development of mariculture and protection of the aquatic farm user's legitimate interests, both courts found that continued performance of the contract was more appropriate.
For further information on this topic please contact Jin Yu-Lai at KaiRong Law Firm by telephone (+86 21 5396 1065) or email ([email protected]). The KaiRong Law Firm website can be accessed at www.skrlf.com.