Judgment assesses nature of PPP agreements

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Judgment assesses nature of PPP agreements

On 1 January 2020, Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Administrative Agreement Cases came into force. This article examines how the definition of administrative agreements and the denial of their arbitrability will affect the arbitration clause in a public-private partnership (PPP) agreement. Of particular interest is the ruling on the arbitrability of a PPP agreement decided by the Beijing No. 4 Intermediate People’s Court in 2020.

FACTS OF THE CASE

The people’s government of a county (Party A) and an industrial limited company (Party B) signed a project agreement for an international tourist resort, agreeing to adopt a PPP model. Party A would be mainly responsible for supervising the project and securing external conditions such as land use rights, while Party B would register and establish a project company responsible for the financing, construction and operation of the project.

In 2019, in accordance with article 20.2 of the PPP agreement, Party A sought arbitration on the grounds that Party B had failed to restore the original state and compensate for losses after the cancellation of the agreement. Party B applied to the court to invalidate the arbitration clause under the agreement.

Party B argued that according to article 1 of the judicial interpretation, an agreement entered into by an administrative authority with any citizen, legal person or other organisation through negotiation, containing rights and obligations under the administrative laws, to achieve the purposes of administration or public service, would be an administrative agreement under the Administrative Procedure Law. The PPP agreement therefore was an administrative agreement for the following reasons:

First, it said that the obligations of Party A included: completion of government approval procedures for the establishment, planning and design of the project; land requisition, relocation and compensation within the scope of the project; arranging the construction index of the project to ensure its smooth development; and allocating the land in a timely and lawful manner based on the progress and location of the project, all of which fall within the functions and powers of the administrative authority granted by the law.

Second, the PPP agreement concerned the development of a large-scale eco-environmental tourism and leisure time project, making it a “government concession project” with the nature of public service. Thus, the PPP agreement was an administrative agreement, and according to article 26 of the judicial interpretation, if an administrative agreement stipulates an arbitration clause, it should be deemed invalid.

Party A, on the other hand, argued that the PPP agreement was a civil contract. An agreement in which one party is an administrative authority is not necessarily an administrative agreement, and in the case of market transactions, a government would have the same status as any natural or legal person; the agreement had the purpose of realising not administrative management, but economic value, and its essence was to establish an equally-weighted legal relationship focusing on property rights; in terms of content, the agreement did not relate to the parties’ rights and obligations under the administrative laws, and their relationship was not one of administrative management. Their contract, an act under the market transaction framework and the principle of compensation of equal value, ought to be viewed as a civil contract; and the content of the PPP agreement was to return the cash paid, providing the dispute with evident civil characteristics.

JUDGMENT OF THE COURT

Focal points of the dispute included: whether the PPP agreement was an administrative agreement, and the validity of its arbitration clause. In the end, the court determined that the agreement should be a civil contract with arbitrability. Therefore, the arbitration clause shall also be valid. The main reasons were as follows:

First, the question of whether the PPP agreement was an administrative one and whether the dispute was administrative should be judged according to the specific contents of the agreement, the disputed matters between the parties, and the arbitration claims.

Second, in terms of the content of the PPP agreement, Party B enjoyed full autonomy of will when concluding the agreement and negotiating its clauses. The agreement was executed following the principles of equality, voluntariness, and compensation of equal value. Clauses on the rights and obligations of the parties and compensation for breach of contract demonstrated a consensus reached by the parties through negotiation. Their rights and obligations were of a civil, not administrative nature. Therefore, the PPP agreement was deemed a civil and commercial agreement by and between parties with equal status in nature, rather than an administrative agreement.

Third, in terms of the arbitration claims made by Party A to the arbitration institution and the disputed matters between the parties, the application did not target any administrative act of the administrative authority. Regarding the dispute, both parties had equal legal status and may apply for arbitration. Therefore, the dispute was arbitrable and was not a dispute that should be dealt with by the administrative authority in accordance with the law.

OBSERVATIONS

In this case, the court identified the PPP agreement as a civil and commercial agreement. Therefore, PPP agreements are not necessarily administrative, and only those that conform to the provisions of article 1 of the judicial interpretation shall be deemed as such.

The case also revealed the reasoning of the court in determining whether a PPP agreement is administrative. Courts usually make a judgment from two aspects: the specific content of the PPP agreement, and the dispute matters and arbitration claims of the parties. With respect to the former, courts mainly consider whether the administrative authority and its counterparty have an equal status, and whether the rights and obligations established by the agreement fall under the administrative laws.

As to the latter, it is crucial to determine whether the disputed matter and arbitration claims target any specific administrative act of the administrative authority.


Elvis Zhou is an arbitrator at Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC)