How courts in China handle cases involving struggling real estate developers will affect not only the future of the country’s real estate sector but also foreign investors’ confidence in the entire Chinese market.  The Supreme People’s Court recently highlighted the enforcement of a series of cases involving a real estate developer in Shandong Province.  These cases provide indications illuminating how courts in China are expected to follow suit to achieve “good political, social, and legal effects”.

Nearly 500 Cases Arising from One Failed Housing Project

“An illuminating series of nearly 500 related cases, all rooted in a housing project […], should be noted for its implications as explained below.”

An illuminating series of nearly 500 related cases, all rooted in a housing project between Dongying Penghao Real Estate Development Co., Ltd. (“Penghao Company”) and Shengli Oilfield Shengli Pump Industry Co., Ltd. (“Shengli Company”), has attracted little attention outside China but should be noted for its implications as explained below.

Formerly affiliated with a local petroleum administration bureau, Shengli Company became a private enterprise in 2004, specializing in producing electric submersible pumps, special cables, and other products used in deep well oilfields.  Shengli Company’s products accounted for 40% of the oilfield-related market in China.  With this market share and its solid technical skills, Shengli Company was perceived as having “great significance” to “the safeguarding of [China’s] national energy security”.

The housing project began in 2014, when Penghao Company agreed to construct both housing for Shengli Company’s employees and housing for sale in the old factory area of Shengli Company.  Subsequently, due to misappropriation of funds, the project was suspended, triggering dozens of petitions brought by employees waiting for their housing and migrant workers seeking their wages.  All of these became “a major social instability factor”.  In addition, because of crimes committed by multiple parties involved in the housing project, Shengli Company experienced a sharp decline in its production and Penghao Company was almost shut down.

The suspended housing project led to various disputes over, for example, corporate loans, labor issues, and housing contracts.  Judgments in nearly 500 cases were finally rendered.  However, this merely marked the beginning of a real challenge: how to enforce these judgments, as almost 900 parties were seeking compensation amounting to more than RMB 800 million.

Enforcement to Satisfy Almost 900 Parties

The Intermediate People’s Court of Dongying City, Shandong Province, (“Dongying Intermediate Court”) was in charge of enforcing the judgments.  A straight-forward approach that the Dongying Intermediate Court could have taken would have been to simply order the auction of the remaining assets of Penghao Company and Shengli Company, followed by the distribution of the proceeds to compensate the affected parties.

As reported by the Supreme People’s Court, the Dongying Intermediate Court did not take this approach for two primary reasons.  First, at the time, the two companies hardly had enough assets to fully satisfy all the affected parties.  Second, letting the housing project continue to fail meant that “the housing problem facing [Shengli Company’s] employees would remain unresolved”.

The Dongying Intermediate Court took a different and more proactive approach.  With support from local leaders, the court was able to bring in another contractor with the required funds to resume the construction of the housing project.  In addition, the court coordinated with government agencies to help Penghao Company and Shengli Company restore their corporate credibility.  As a result, the two companies became eligible again to get access to their relevant markets as well as to participate in certain financing and bidding processes.

The Dongying Intermediate Court’s proactive approach produced impressive results.  At present, Penghao Company and Shengli Company are reportedly thriving.  To commend this enforcement approach, the Supreme People’s Court wrote:

The series of conflicts involved in these cases lasted for nine years.  A large amount of money and many parties were involved.  In addition, there were not only internal corruption problems in a private enterprise, but also livelihood issues such as the housing of more than a thousand employees and the wages of hundreds of migrant workers.  The social impact was quite large.

Under the strong leadership of the local party committee, with the active support of the local government and relevant departments, and through the unremitting efforts and active coordination of the People’s Court, all enforcement cases involving the two companies were concluded by the end of 2022, with 1,472 housing units completed and the wages of migrant workers were paid in full.  Good political, social, and legal effects were achieved.

[emphasis added]

“Political, Social, and Legal Effects”

“The outcome of this series of cases is incredibly impressive. However, foreign investors will likely find the above enforcement approach difficult to comprehend.”

The outcome of this series of cases is incredibly impressive.  However, foreign investors will likely find the above enforcement approach difficult to comprehend.

What is worth noting is that this approach is not meant to be used in a single, rare situation only.  Rather, these cases are now identified as “Typical Cases”¹ and courts in China are, therefore, expected to pursue such “good faith and civilized enforcement” in similar cases to “systematically resolve complex conflicts and disputes involving private enterprises and safeguard the maximization of the asset value of private enterprises”.

Many uncertainties emerge from this enforcement approach.  For example, does this mean that a real estate project involving a certain “social instability factor” and an enterprise that is of “great significance” to safeguarding China’s national security (whether or not energy-related) will have a better chance of survival?  Is the process of getting a substitute contractor to resume the construction of a failed real estate project open to any contractor that has the required funds to complete the project?  What could happen if a certain affected party prefers to get less compensation, instead of waiting for years to see the completion of the project and be fully compensated?

The “good faith and civilized enforcement” may help achieve “good political, social, and legal effects” in select cases.  The accompanying uncertainties, however, could cause foreign investors to lose immeasurable confidence—a bad effect that has the potential to outweigh all the positive political, social, and legal effects Chinese courts strive to achieve.

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^† The citation of this article is: Dr. Mei Gechlik, The Future of China’s Real Estate Sector: Indications from a Series of Enforcement Cases, SINOTALKS.COM^®, In Brief No. 36, Sept. 27, 2023, https://sinotalks.com/inbrief/202309-english-real-estate-china.

The original, English version of this article was edited by Nathan Harpainter.  The information and views set out in this article are the responsibility of the author and do not necessarily reflect the work or views of SINOTALKS^®.

¹ For more discussion of the nature of Typical Cases and how they are different from Guiding Cases, see Dr. Mei Gechlik, Anti-Monopoly Law and Intellectual Property: More Guidance for Chinese Courts, SINOTALKS.COM^®, In Brief No. 4, Jan. 26, 2022, https://sinotalks.com/inbrief/week03-2022-english.

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