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under the Agreement during the trusteeship and the failure to report to plaintiff on the assert management and to pay plaintiff the principal of the fund and the interest after the trusteeship came to an end constitute a breach of contract.

In addition, pursuant to Article 75 of the Supreme People’s Court “Several Rules of Evidence Concerning Civil Litigation”, if a party who holds evidence refuses to submit it without reasonable grounds and the other party asserts that the contents of such evidence are something disadvantageous to the holding party, the assertion may be assumed to be true. In this case, since, defendant is able to but does not provide the assert management report, which renders no evidence that the fund in trust experienced any loss or did not reach the level of profit as agreed by the parties, plaintiff’s demand shall therefore be granted.

With regard to the fund in trust, the agreed amount by the parties was RMB 50 million of which a receipt of acknowledgement was issued by defendant to plaintiff. However, since the amount of the fund actually remitted to defendant was RMB48.20 million, and the prepaid interest of RMB 1.8 million was nothing more than a promise defendant made to plaintiff and no transfer of such interest money took place, we conclude that the amount of the fund in trust is RMB 48.20 million.

Accordingly, it is ordered as follows:

1.Defendant shall, within 10 days after this judgment takes effect, pay plaintiff the principal of the fund in trust and accrued interest in the amount of RMB 50.369 million Yuan, and shall also pay belated performance fine for the period from August 4, 2003 to the date of this judgment at the rate of .004% of RMB 50.369 million per day.

2.Plaintiff’s other claims are denied.

Further, defendant shall bear the litigation fee of RMB 274,310 Yuan and the attachment fee of RMB 275,000 Yuan. If refusing to accept this judgment, either of the parties may, within 10 days after this judgment is served, appeal to the Supreme People’s Court by submitting to this Court three copies of the appellate petition and paying appellate fee of RMB 274,310 Yuan.

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4. Disclaimers

In contracts, a disclaimer is the term whereby the parties agree to exempt a party from liability in certain situations, and on this ground, it is also called exemption clause. The disclaimer is often seen in the sales contracts as the device to limit sellers’ liability by reducing number of situations in which seller can be found in breach of contract terms. Obviously the disclaimer is a useful tool for a contractual party who wants to be cleared off from certain liability. Once agreed by the parties the disclaimer becomes part of the contract and has binding effect upon the parties unless its effect is invalidated by the operation of law.

The disclaimers are recognized in the Contract Law to the extent that they do not fall within the categories where disclaimers are prohibited. Under

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Article 53 of the Contract Law, an exemption clause shall be null and void if it exempts the liability for (1) personal injury caused to the other party and

(2) property damages caused to the other party as a result of deliberate intent or gross negligence.49 As far as the validity of disclaimers is concerned, it has also been argued that in addition to those provided in Article 53, the liability for the breach of contract due to failure to perform may also not be disclaimed by agreement of the parties.50 In addition, Article 53 applies to the standard terms as well.

Moreover, for a disclaimer to be valid, the other two criteria are also considered decisive. One criterion is that the disclaimer must be made expressly by the parties and may not be inferred or implied because, as noted, a valid disclaimer will bind the parties to the contract. The other criterion concerns the contents of a disclaimer. It is generally held in China that the disclaimer contents as such shall at least contain the matter of disclaimer and the scope of disclaimer. The former refers to the situations to which the disclaimer will apply, and the latter indicates the type and degree of the disclaimer (i.e. partial exemption or complete exemption).

49See the Contract Law, art. 53.

50The “substantial breach disclaimer” refers to the disclaimer that is aimed at releasing the liability of the party in breach in case where there is a substantial breach of the contract.

Chapter VI

Defenses to Formation of Contracts – Validity Issues

A contract, once concluded by the parties, may not be enforced if there exist some defects affecting its validity. As we have previously discussed, the validity of contracts has received great attention in China and the issues of the validity are separated from those of conclusion of contract. With regard to the Contract Law, the validity of a contract determines whether the contract will be effective and legally binding to the contractual parties. In practice, the validity is perhaps the most obvious target the lawyers would focus on in order to more meaningfully challenge the contract. To begin with, let’s take a look at Shen Yang International, the case that exemplifies a battle over the validity of a contract after the contract is concluded.

Shen Yang International Technology and Industry Park Company, Ltd.

v.

Shen Yang Electronic Company, Inc.

High People’s Court of Liao Ning Province1

Appellant (plaintiff at trial court) appeals to this Court from the Civil Judgment “(2002) Shen Min (3) Chu Zhi No. 559” entered by the Intermediate People’s Court of ShenYang City for a dispute over a contract of transfer of equity shares.

1 See, Civil Judgment Document, (2003) Liao Min 2 He Zhong Zhi No. 314.

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The facts as pleaded at the trail court are as follows. Appellant and respondent reached a contract for transfer of equity shares on September 24, 2000. Under the contract, appellant would transfer to respondent all 30% of the equity shares of Shen Yang New World Industry Company, Ltd. and the subscribed capital in the amount of RMB 4.2 million that appellant held. It was agreed that the payment of RMB 4.2 million Yuan should be made within 10 days after the transfer of the equity shares was approved by the original approval authority and registered with commerce and industry authority, as well as the legal process of the transfer was complete. The contract would take effect after the said approval and the registration.

After the contract was concluded, on October 30, 2000, the Development Bureau of Shen Yang Economic and Technology Development Zone issued a document of “An Official Reply to the Request for Transfer of Equity Shares of Shen Yang New World Industry Company, Ltd.”, approving the transfer of 30% shares and the subscribed capital of RMB 4.2 million Yuan. The Reply required that a registration of change of the shareholder for the transfer be made with relevant registration authority within 30 days after the transfer.

On December 12, 2000, Shen Yang New World Industry Company Ltd. registered the change with local commerce and industry authority. Later on, appellant launched this litigation in the Intermediate People’s Court of ShenYang City asking the court to declare the transfer contract invalid on the grounds that the contract for the transfer of equity shares violated Company Law and other provisions of law concerning the transfer of the State owned assets.

The trial court held that the contract for the transfer of shares was valid and should be observed because the intention of the parties as manifested in the contract was true and the contract was made voluntarily with a full compliance with the law. The trial court dismissed appellant’s arguments that the contract was void because it violated the law, and it not only infringed the lawful interest of the appellant but also caused a significant amount of State assets to run off. The court reasoned that although the “Methods of Administration of State Owned Assets Appraisal” issued by the State Council on November 16, 1991 required a asset appraisal for the transfer of the asserts possessed by the enterprise on behalf of the State, under Article 45 of the Detailed Rules for Implementation of the Methods of Administration of State Owned Assets Appraisal, promulgated by the State Owned Assets Administration Office of the State Council on July 18, 1992, such appraisal applies to the situation where the Chinese investor has 50% or more shares in an equity joint venture or contractual joint venture.

In this case, according to the trial court, the equity shares to be transferred amounted to only 30% of the total shares of Shen Yang New World Industry Company, Ltd. and did not fall within the scope of required appraisal. And since the appellant had accepted the payment for part of the transferred shares, and the transfer had both been approved by relevant state authority and been registered with local commerce and industry authority, the contract for the transfer had become effective, by which the parties shall be bound. On this ground, the trial court, according to Articles 44 and 52 of the Contract Law, dismissed appellant’s complaint by rendering a judgment that (1) the contract for the transfer of the shares entered by the parties is valid and effective, (2) other claims of appellant and respondent are denied. In addition, appellant was ordered to pay the litigation fee in the amount of RMB 31,010 Yuan.

Appellant disagreed and appealed. In its petition for appeal, appellant argued that the share transfer contract was void because it was not a manifestation of the true intention of the parties and without appraisal, and that the contents of the contact violated law because articles 6,7, and 8 of the contract were contrary to the provisions of Company

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Law of China that requires creditors’ approval for the bearing of the existing debts of the respondent.

In rebuttal, respondent asserted that the transfer was valid because it was agreed by the parties on a voluntary basis and approved by relevant government authority. Respondent further argued that the debts did not exceed the amount of subscribed capital of the shareholders because the worth of transferred shares was RMB 12 million and the debts to be born by shareholders was RMB 6 million Yuan, and due to the uncooperative conduct of appellant, some of the debts failed to obtain creditors’ approval, but it shall not affect the effectiveness of the share transfer agreement.

The finding of this Court tells that the share transfer contract was concluded on September 24, 2000 and according to article 6 of the contract, Party B (respondent) accepts the rights and obligations after the transfer. It is found that (a) as of the date of transfer, the total debts of Shen Yang New World Industry Company, Ltd. (New World Industry) were RMB 20 million Yuan, and as a consequence of the transfer, such debts would be born by new shareholders and beginning on the day of transfer respondent was to be responsible for RMB 6 million Yuan debts proportioning to respondent’s prescribed capital. In addition, article 7 of the contract states a promise of Party A (appellant) to guarantee the payment for the debts of the New World Industry, which provides that after completion of the registration of the transferred shares, if appellant fails to manage the transfer and then causes damages to the New World Industry, appellant shall be responsible for the payment of debts or damages. Moreover, under article 8 which provides the methods and time limit of the guarantee, the New World Industry shall be a guarantor jointly and severally responsible for ensuring that appellant will keep its promise, and the time of the guarantee of New World Industry has a two-year limit from the date when creditors make claims to the New World Industry after the transfer is complete.

In light of the facts that the share transfer contract on September 24, 2004 was reached on consensus of the parties and approved by the Development Bureau of Shen Yang Economic and Technology Development Zone, and the change of the shares was registered with the commerce and industry authority, we hold that except for its articles 6 (1)(a), 7 and 8, the contract of the share transfer is valid and has no violation of law, and accordingly, the appellant’s argument about loss of state owned assets and avoidance of the contract shall be denied for lack of factual and legal grounds.

Under the Company Law of China, after making capital or property contribution to a company, the shareholders only enjoy the ownership of the shares of the company but do not have the right to own the credit rights or control the debt liabilities that belong to the company. However, the shareholders as the contributor of capital have such the owners’ rights as being benefited from assets of the company, making major decisions and choosing managerial personnel for the company. On the other hand, the company has the property right of the legal person that is formed entirely by the shareholders’ capital contributions, and possess civil rights and bear civil obligations according to law. In a limited liability company, shareholders assume liability towards the company to the extent of their respective capital contribution, and the company is liable for its debts to the extent of its all asserts.

Applying the above rules to this case, we conclude that in the share transfer contract, articles 6 (1), 7 and 8 concerning the agreement on the liabilities to be assumed by the New World Industry violate the provisions of the Company Law for want of the creditors approval, and therefore must be held void, for which both parties are liable, and the appellant’s request for the voidance of the contract is granted with regard to these articles. The trial court was right on the finding of facts but erred in part in the application of law, which