Determining an ‘official act’

With the prosperity that has followed the development of the market economy, employees in many companies may conduct a broad range of activities. It would be neither reasonable nor legally acceptable for companies to bear responsibility for all of the illegal acts of their staff. Thus, when an illegal act occurs, it is very important for both the companies and individuals involved to determine whether an act is an official act or a personal act, as well as whether enterprise legal persons or employees will be liable for its consequences.

Case study

PRC enterprise A and foreign enterprise B execute an equity joint venture contract providing that the parties will jointly establish and invest in an equity joint venture. A is to make its capital contribution in kind, in return for a 70% equity stake in the JV, and B is to make its capital contribution in cash in return for a 30% stake. Pursuant to the contract, natural person C, who is nominated by B and approved by A, is to serve as general manager of the JV.

In establishing the JV, certain reasonable start-up costs will necessarily be incurred, including rent and the cost of fitting out office premises and purchasing office supplies. However, A does not agree to advance any money to cover these expenses, asserting that they should be borne by B. B, however, is unable to pay due to foreign exchange control restrictions. Through consultation, A and B decide that the general manager of the JV, C, should approach affiliate D – an affiliate of A – for a loan to cover the expenses. C signs a loan note, clearly indicating that C is borrowing RMB300,000 (US$44,000) from D in his capacity as general manager of the JV, and warranting that the entire sum will be used to lease and fit out the JV’s office premises and purchase office supplies, and that the loan will be repaid by the JV once it is established.

A member of the JV’s financial staff then goes to D to collect the loan money and uses it for the lease and fitting out of the premises and the purchase of office supplies, without any involvement of C. Subsequently, a dispute arises between A and B over the performance of the joint venture contract, and D commences legal action demanding that C repay the loan.

The focal point of the dispute between the parties is whether C’s actions were personal or official.

Criteria to be considered

The term “official act”, when broadly interpreted, means acts carried out by: the personnel of state agencies; professionals that have a certain capacity to constrain, control or influence society or others; and employees in the course of performing their duties.

The determination of an official act should in the first instance be judged based on the law. PRC laws and statutes do not provide for official acts in great detail. Relevant provisions include Article 43 of the PRC General Provisions of the Civil Code, which specifies that “an enterprise legal person shall be civilly liable for the business activities of its legal representative and other working personnel,” and Article 58 of the Supreme People’s Court Opinions on Several Issues Concerning Implementation of the General Provisions of the PRC Civil Code, which specifies that “If business activities engaged in the name of an enterprise legal person by its legal representative or other working personnel cause another to incur an economic loss, the enterprise legal person shall be civilly liable.” Thus the capacity of the actor and whether the actor is engaging in a business activity are the criteria used to judge whether an act is an official act.

In determining what constitutes an official act, the criteria include capacity, function and power, time and space and an element of objectivity. The capacity criterion refers to whether the actor acted in their capacity as a member of staff of the enterprise; the function and power criterion refers to whether the actor acted within the scope of his duties and authority; the space and time criterion refers to whether the actor acted within the time and the territory in which they exercise their functions and powers in the performance of their duties; and the objectivity criterion refers to whether the actor carried out the act for the purpose of performing their statutory or contractual duties and obligations. If the act satisfies the foregoing criteria, it can be determined to be an official act. Furthermore, in trial practice, the determination of an official act also relies on the support of evidence to establish whether or not the above criteria have been met.

Legal analysis

To summarize the case, even though the JV had not been established at the time of the loan, there were no legal or procedural defects in the appointment of C as general manager of the JV. The act of borrowing by C fell within the scope of his duties, and was carried out for the purpose of facilitating the establishment of the JV. C used the entire amount to pay the start-up costs of the JV, which clearly shows that such act was related to the business of the JV and the beneficiary of the loan was the JV. Accordingly, both in terms of his work and the objective of his actions, C was performing his duties and obligations as general manager. C’s act, therefore, satisfies the legal criteria to be judged as a business act, and should therefore be determined to be an official act.

In the course of the court hearing, D admitted that C used the entire amount of loan to meet the start-up and operational costs of the JV. The court therefore judged that the debt was that of the JV, and C’s act was an official act rather than a personal act. The court therefore rejected the lawsuit brought by D.

Furthermore, pursuant to Article 42 of the Supreme People’s Court Opinions on Several Issues Concerning the Implementation of the PRC Civil Procedure Law, “If a legal action arises in connection with an official or authorized act by a member of staff of a legal person or other organization, such legal person or other organization shall be a party to the action.”

In this case, C has the right to apply to the court requesting that the JV be added as a defendant the legal action. From D’s perspective, when D institutes the legal action, at a time when it is unclear which party has an obligation to repay the loan, D should name both C and the JV as defendants so as to help ensure the ultimate realization of its rights.

Wang Xin, a senior associate at Dacheng Law Offices, specializes in real estate and construction, litigation and arbitration, and enforcement