The resource investment and mining companies Lingang and Jinhe engaged in a joint venture, in which Jinhe would transfer mining rights to Lingang under an agreement which certified, among other guarantees, that the mining rights were valid and that the site was not located in a nature reserve. The agreement provided for dissolution and compensation if one party materially breached the agreement, affecting the ability of the other party to achieve its goals. More than two years into the venture, at which point Lingang had already invested into developing and surveying the site, Lingang discovered that the site was in a nature reserve, and notified Jinhe that it wished to dissolve the agreement. Jinhe sued to prevent the dissolution of the agreement, while Lingang counter-sued to affirm the dissolution and compensation owed by Jihne. The court of first instance held that because the location of the site within a nature reserve was public information, because Lingang had not raised this issue until over two years into the venture, and because Lingang had not provided evidence of operations being affected by the site’s location within the reserve, no serious breach had occurred, the agreement remained in force, and no compensation was owed. Lingang appealed to the Supreme People’s Court, which held that since mining activities within reserves are prohibited, the agreement was void from its inception, and therefore cannot be dissolved or affirmed. As a result, Jinhe was obligated to return the compensation it received for the transfer of mining rights, as well as to compensate Lingang for certain road construction expenses. All other losses were to be borne by each individual company, or settled upon liquidation of the joint project company.
Environmental Legal Questions:
- Did Jinhe’s failure to notify Lingang of the mining site’s location within a nature reserve materially breach the agreement, justifying dissolution: This question did not need to be answered. The agreement itself was void from its inception, as the object of the agreement was in violation of laws against mining activities in nature reserves, regardless of whether either party was aware of this fact.
- What compensation is owed due to the invalidity of the agreement: Under the Contract Law of the PRC, property acquired from a void contract shall be returned. Jinhe shall thus return the compensation for the transfer of mining rights, as well as compensate certain expenses incurred in road construction. Because Lingang did not carry out a full investigation of the site before entering into the joint venture, it bears fault for making a void agreement, and thus bears the loss of interest incurred by its own conduct. Each party bears its own attorney fees.