Zhenghan Law Firm represented a Shanghai-registered foreign-invested sports club and its offshore parent company registered in the British Virgin Islands (BVI) in a litigation against a town-level People’s Government. The dispute, spanning over twenty years and involving more than 2,000 mu of land, concerned a lease agreement with a total value exceeding 500 million RMB. Despite an unfavorable first-instance judgment where only partial claims were supported, the team successfully moved the Supreme People’s Court to remand the case for retrial. Following the retrial, the compensation amount was increased to approximately 150 million RMB (including principal and interest) and was recovered in full, effectively safeguarding the legitimate rights and reliance interests of the foreign-invested enterprise.
Case Overview
The roots of this dispute trace back to the beginning of this century. In 2001, an international sports industry group registered in the BVI and its wholly-owned subsidiary in Shanghai were invited through government investment attraction to sign a land lease agreement with the town. The agreement covered over 2,000 mu of agricultural land for developing sightseeing and leisure agriculture projects, such as flowers, trees, and turf. With government approval, a standard 18-hole golf course was constructed and put into operation, while the Phase II land was consistently used for ecological agricultural operations.
Following the State Council’s 2004 notice suspending the construction of new golf courses, relevant departments held a special coordination meeting and agreed to complete the formalities for the client’s project “under the framework of resolving historical issues.” In March 2006, both parties signed a “Master Land Use Agreement,” stipulating that the town government would be responsible for completing all land grant and expropriation procedures, ensuring that the lease term corresponded with the expropriation term, while the client would pay the land expropriation fees. Over the following decade, the client paid the expropriation fees and grant fees in full as agreed, paid millions of RMB in annual rent, obtained real estate title certificates for the granted portion of the land, and maintained normal operations.
In March 2016, the town government suddenly informed the client that the leased land in question was still classified as “basic farmland” and subsequently closed the golf course. Consequently, the client suffered massive losses, including replacement costs for ground structures and losses from membership card refunds.
Key Issues and Challenges
The core challenges of this case were: first, the dispute over contract validity—whether the land lease portion of the “Master Land Use Agreement” was void for violating mandatory provisions of the Land Administration Law, which directly determined whether the client could claim damages for breach of contract; second, innovation in legal theory—the need to argue, under the premise that the contract might be deemed void, that “clauses promoting contract effectiveness” should remain independently valid and that defects in validity should be rectified applying Article 16 of the Interpretation of the Contract Volume of the Civil Code; third, the allocation of fault liability—how to argue that the government should bear all or the vast majority of the fault in the event the contract was found void, rather than the usual practice of splitting it equally; fourth, the determination of the scope of losses—the legal characterization of membership refund losses (reliance interest vs. expectation interest) and the burden of proof for ground structure losses on Phase II land. Additionally, the case involved foreign elements (a BVI company), specific Taiwan-related issues, and a complex timeline spanning over twenty years, resulting in highly intertwined legal relationships.
Highlights of Representation
The team demonstrated exceptional legal expertise and strategic litigation planning. First, regarding the argument for contract validity, the team built a three-tiered system: the first tier argued that the contract was valid (land use was open-ended, the golf course was only one of the uses and not the sole purpose, and leasing agricultural land is not inherently illegal); the second tier argued that even if validity defects existed, they should be rectified (citing Article 16 of the Interpretation of the Contract Volume of the Civil Code to argue the government’s liability for failing to rectify in breach of the principle of good faith); the third tier argued that even if the contract was partially void, the “clauses promoting contract effectiveness” should remain independently valid.
Second, regarding litigation strategy, following the unfavorable first-instance judgment, the team appealed to the Supreme People’s Court. They precisely identified issues where basic facts were unclear, such as the failure to ascertain the value of ground structures on Phase II land and the failure to examine the validity of the “Master Land Use Agreement.” This successfully led the Supreme Court to vacate the original judgment and remand the case for retrial—a significant achievement for a case involving a provincial-level court’s first instance and a Supreme Court’s second instance. During the retrial phase, the team further uncovered evidence, using investigation orders to obtain key documents such as appraisal work papers for Phase II ground structures, thereby expanding the factual basis for damages. Furthermore, the team skillfully utilized audio recordings and meeting minutes where the government had repeatedly promised full compensation over the years, effectively debunking the defense that “statements made during mediation do not count.”
Key Points of the Judgment
Following the remand by the Supreme People’s Court, the Shanghai High People’s Court ruled that although the land lease portion of the “Master Land Use Agreement” was void for violating mandatory provisions of the Land Administration Law (due to the use of collective land for non-agricultural construction), the Xiaokunshan Town Government, as the lessor who had collected expropriation fees, should have played a leading role in processing land conversion procedures. Since the procedures for the leased land were never completed, the government was held primarily liable. After considering the actual performance of the case, the appraisal conclusions, and the degree of fault, the court determined that the government should bear the land investment losses and corresponding interest.
Case Insights
This case offers profound warnings for land cooperation models in the field of investment attraction. First, when participating in domestic land cooperation projects, foreign-invested enterprises should independently verify the actual status of land nature and use approval procedures, rather than relying solely on government promises or approval documents. Second, for cooperation arrangements involving the conversion of collective land, specific obligations, timelines, and consequences for breach regarding land procedures should be explicitly stipulated in the agreement to mitigate risks of contract invalidity. Third, although the argument for the independent validity of “clauses promoting contract effectiveness” was not directly adopted by the court, this legal theory holds significant value for future cases where a party fails to fulfill its procedural obligations in bad faith, leading to contract invalidity. Fourth, before and after major events such as government expropriation or demolition, emphasis should be placed on preserving key evidence such as recordings of negotiations and written promises; these materials are irreplaceable in restoring the truth and securing a favorable judgment during litigation.
