Contractual energy management project dispute series · Loss of available benefits under new judicial interpretation

By Jie Hou and Xudong Jiang

Preface

Under the background of "carbon peak and carbon neutral", contract energy management projects play a win-win effect of energy conservation, emission reduction and capital saving, and are favored by more and more energy saving units and investors. However, at the same time, due to the large initial investment and long operation cycle of contract energy management projects, relevant disputes have emerged in recent years. Based on this background, the law team of Hou Jie of Shanghai Dehe Hantong Law Firm has written a series of articles to help relevant enterprises and public institutions prevent risks and resolve disputes.

A Preface

Contract energy management refers to the energy saving service mechanism in which the energy saving service company and the energy using unit agree on the energy saving target of the energy saving project in the form of contract, the energy saving service company provides the necessary services to the energy using unit to achieve the energy saving target, and the energy using unit pays the input of the energy saving service company and its reasonable profit with the energy saving benefit, energy saving service fee or energy custodian fee. In the contract energy management project, the sharing of future energy saving benefits becomes an important goal for the contracting parties to conclude the contract. When one party breaches the contract and causes loss, the other party will claim the loss of available interest while claiming the direct loss, which has produced many cases in judicial practice. On December 4, 2023, the Supreme People's Court issued Interpretation No. 13 (2023) Interpretation on Several Issues concerning the Application of the General Provisions of the Civil Code of the People's Republic of China on Contracts (hereinafter referred to as the Judicial Interpretation of the General Provisions of the Civil Code of the People's Republic of China), in which Articles 60 to 62 detailed the rules for determining the loss of available interests. For the contract energy management projects with long performance cycle and large investment, it is of great significance and deserves great attention. According to the relevant provisions of the judicial interpretation and combined with relevant cases in recent years, the author introduces the key points of the determination of available benefits and losses in contract energy management projects, and shares and exchanges with readers and friends.

01

The loss of available benefits is limited to a foreseeable range

Article 584 of the Civil Code of China reads: "If one party fails to perform its contractual obligations or performs its contractual obligations in a non-conforming manner, thus causing losses to the other party, the amount of compensation for losses shall be equal to the losses caused by the breach, including the benefits that can be obtained after the performance of the contract. However, it shall not exceed the possible loss caused by the breach foreseen or should have been foreseen by the breaching party when the contract was concluded." This provision not only provides a legal basis for the non-breaching party to claim compensation for the loss of available interests, but also determines the marginal scope of the loss of available interests through the "predictability rule". It can be said that whether the claim of loss of available interests can pass the "predictability rule" test is crucial for the parties to the contract.

The first paragraph of Article 63 of the Judicial Interpretation of the General Rules for the Preparation of Contracts further elaborates the "predictability rule", which stipulates that the people's court shall comprehensively consider the contract subject, contract content, transaction type, transaction habit, negotiation process and other factors according to the purpose of the parties to conclude the contract. It shall be determined according to the losses foreseen or should have been foreseen by the civil subject in the same or similar situation as the breaching party at the time of concluding the contract. Accordingly, the author believes that the loss of available interests suffered by one party to a contractual energy management project due to the breach of contract by the other party is generally highly predictable, and the main reasons are as follows:

1. From the perspective of the contract subject, the contract parties are energy saving units and energy using units respectively;

2.From the perspective of the contract content, the parties have agreed on the relevant provisions of benefit sharing or service fee payment in the contract;

3. From the perspective of transaction type, contract energy management projects need to be performed in a long-term, stable and sustainable manner, paying more attention to long-term benefits;

4.From the perspective of transaction habits, the contract energy management project mode has developed for a long time. The Energy Conservation Law of the People's Republic of China has confirmed "contract energy management" as a way of energy conservation. A certain trading habit has been formed in practice;

5.From the perspective of the negotiation process, the parties to the contract generally determine the energy benchmark, energy-saving measures, quantified energy-saving targets and energy-saving benefit sharing methods when signing the contract, and complete the energy saving measurement and verification, so as to strengthen the expectations of both parties on the future benefits.

In the current public cases supporting compensation for loss of available benefits, contract energy management projects have usually completed design, construction and entered the operation stage, achieving stable energy saving benefits. However, the dispute lies in whether the non-breaching party can claim the loss of available interests against the breaching party in the project that has not yet been actually operated.

The author believes that this issue cannot be generalized and needs to be combined with the negotiation and performance of both parties when the contract is concluded, especially whether both parties have completed the work of "energy benchmark determination, energy saving measures, quantified energy saving targets, energy saving benefit sharing methods, energy saving measurement and verification". If the contract energy management project is not substantially completed, the author tends to believe that due to the long performance period of the contract energy management project, there are many uncertain factors in engineering conditions, technical difficulties, national policies and other aspects, and the "attainable benefits" claimed by the non-defaulting party are not certain and difficult to be supported.

In the case of power supply contract dispute between Jiangxi De Xin Textile Co., Ltd. and the appellee Jiujiang Leye New Energy Co., LTD., Guangdong Longji New Energy Co., LTD., and Xi 'an Longji New Energy Co., LTD. (Case No. : (2019) Gan 04 Min Zhong No. 1484),

The Court held that: "After investigation, the appellant Dexin Company and the appellee Leye Company have not agreed on the calculation standard and basis for the expected loss of interests, and the contract involved has not been actually performed, so the expected loss of interests claimed by the appellant is uncertain. Therefore, the appellant demands that the possible income be used as the basis for determining the loss and determining the liability for breach of contract based on it, which has no legal basis and is not supported by the court."

02

To determine the loss of available benefits within a reasonable period of time to find alternative transactions

In contract energy management projects, the performance period is long, ranging from a few years to 20 years. If, after the termination of the contract, the non-breaching party determines and calculates the loss of available interests according to the energy saving benefits corresponding to the remaining performance period of the contract, can it be supported?" Article 61 of the Judicial Interpretation of the General Rules for Contract Compilation stipulates:

"In a time contract with continuously performed debts, if one party fails to perform the payment of price, rent and other monetary debts, and the other party requests to terminate the contract, and the people's court considers that the contract should be terminated according to law after trial, it may, on the basis of the party's claim, The reasonable period for the non-breaching party to find an alternative transaction shall be determined by referring to the contract subject, transaction type, market price change, remaining performance period and other factors, and the benefits that can be obtained after the performance of the contract shall be determined according to the price and rent corresponding to the period after deducting the corresponding performance cost that the non-breaching party should pay.

The people's court shall not support the non-breaching party's claim to determine the benefits that can be obtained after the performance of the contract according to the price and rent corresponding to the remaining performance period after the termination of the contract after deducting the performance cost. However, unless the remaining performance period is less than a reasonable period to find a substitute transaction."

The above judicial interpretation reflects the spirit of the derogation rule, that is, after one party breaches the contract, the non-breaching party should actively seek alternative transactions to prevent the expansion of the loss of available interests. In the previous judicial practice, there have been related cases involving contract energy management to reflect the spirit. In the case of lease contract dispute between Shanghai Tongqi New Energy Co., Ltd. and Shanghai Huxiang Communication Information Technology Co., LTD. (Case No. : (2021) Shanghai 0115 Minchu 27468),

In the opinion of the Court: "Although the two parties signed an agreement in December 2018 that the lease term was 20 years, and the plaintiff also took 20 years as the period for calculating the expected benefits, the plaintiff only started to prepare for construction in September 2019, which was blocked by the defendant. By April 2021, the house involved in the case had been included in the scope of demolition. Since it is impossible for both parties to continue to perform the agreement in fact, the period of time for the plaintiff to calculate the benefits should not be limited to 20 years. Taking into account the time required for construction, the court determines that the period of time for the plaintiff to calculate the benefits is 1.50 years."

In the above cases, although there may be disputes on how to determine the "reasonable period", the basic idea can be used for reference. Especially in photovoltaic power generation projects, the contract performance period is as long as 20-25 years, and there are large uncertainties in the performance. If the corresponding loss of available interests is determined completely according to the remaining performance period, the imbalance of interests will be caused, resulting in excessive responsibility of the breaching party.

As for how to determine the reasonable period for the non-breaching party to find an alternative transaction, this judicial interpretation has given a method, that is, to determine the reasonable period for the non-breaching party to find an alternative transaction by referring to factors such as the contract subject, transaction type, market price change, and remaining performance period.

Combined with the characteristics of the energy management project under contract, the author believes that it is difficult for the parties to the contract to find alternative transactions, and the following factors directly or indirectly affect the reasonable period for the non-breaching party (especially the energy-saving party) to find alternative transactions: 1. Whether the equipment is customized products; 2. Conditions required for selecting partners in the industry; 3. Required working conditions. In case of a claim, the non-breaching party may prove it to the people's court from the aforementioned aspects in order to determine a reasonable time limit.

03

Liquidated damages can be adjusted if they are obviously too high

In the contract energy management project, the parties agree that one party shall pay a certain amount of liquidated damages to the other party according to the breach of contract. For example, "The breaching party shall pay liquidated damages to the other party according to 30% of the total investment of the project". There are also the parties agree on the calculation method of compensation for the loss of available interests. One-time termination fee needs to be paid: termination fee = total investment price × (total amount of heat during the contract period - actual amount of heat performed) ÷ total amount of heat during the contract period ×2 ". The author thinks that both of them belong to liquidated damages in Civil Code of our country. Therefore, if the agreed liquidated damages are lower than or excessively higher than the loss caused, the breaching party may request the people's court for adjustment. It should be noted that according to the provisions of paragraph 3 of Article 65 of this judicial interpretation, the people's court generally will not support the request of a party who breaches the contract in bad will to reduce the liquidated damages.

In the contract dispute case between Baosi Energy Sales (Changsha) Co., Ltd. and Ningxiang Kangda Bottle Industry Co., LTD. (Case No. (2020) Xiang 0103 Minchu 8333). Article 10 of the contract stipulates that the energy saving project is designed and invested by the plaintiff. If the defendant cancles or reneges and fails to perform the contract, the defendant shall pay the plaintiff liquidated damages equal to 20% of the total income of the project stipulated in the contract, and the plaintiff claims liquidated damages accordingly.

In this regard, the court held that: "As for the liquidated damages claimed by Bauss Sales Company, although the court has not determined that the government's proposed expropriation of the defendant's factory site constitutes force majeure, the government's proposed expropriation decision is bound to affect the performance and income of the contract. The defendant Kangda Company is not maliciously in breach of contract, and it has borne the loss of the plaintiff's purchase of equipment due to the failure to perform the contract. In the trial, the defendant defended the payment of liquidated damages on the grounds that it did not constitute a breach of contract. After the trial, the court also indicated in its "interview transcript" that if the court found that it constituted a breach of contract, it requested to reduce the liquidated damages. Therefore, based on the actual loss, the court takes into account the performance of the contract, the degree of fault of both parties, expected benefits and other comprehensive factors, measures it according to the principle of fairness and good faith, and determines that Kangda Company shall pay liquidated damages of 20,000 yuan to Baos Sales Company at its discretion."

When determining the loss of available benefits, both parties may refer to the relevant data determined in the Feasibility Study Report, and if there is further verification, it can be determined according to the data verified by both parties. If the foregoing method still cannot be determined, if necessary, a professional institution may be applied for appraisal of the loss of available interests. It should be noted that judicial appraisal is not the optimal choice, and there are many uncertainties in the initiation and development of judicial appraisal. If the project involved cannot meet the relevant materials and conditions required by judicial appraisal, judicial appraisal cannot be carried out, and the relevant adverse consequences shall be borne by the party bearing the burden of proof.

04

When determining the amount of loss compensation, the corresponding loss caused by the fault of the non-breaching party shall be deducted first

Article 592 of Civil Code of our country stipulates that if the parties both violate the contract, they shall bear corresponding liabilities respectively, which is called "fault offset rule". The judicial interpretation further clarifies that when determining the amount of compensation for the loss of breach of contract, the breaching party can claim to deduct the corresponding loss caused by the fault of the non-breaching party. For the contract energy management project, both parties are responsible for each other's obligations, and many disputes have mutual breach of contract. At this time, when determining the loss of available interests, it is necessary to apply the fault offset rule at the same time to reasonably balance the interests of both parties.

In the heat supply contract dispute between Zhejiang Vignes Decoration Materials Co., Ltd. and Suzhou Disen Energy Technology Co., LTD. (Case No. : (2017) Su 0585 Min Chu No. 5029), although the boiler provided by Disen Company met the national standards applicable at the time of signing the contract, after the implementation of the new national standard in 2014, three of the four test contents of exhaust gas of the boiler met the emission standards, and one did not meet the emission standards. The court found that Disen Company had a general breach of contract. However, at the same time, Vignes Company also had the breach of contract of overdue payment. When determining the loss of available interests, the court held that:

"Considering that the counterclaim defendant Vignes Company provides evidence that the counterclaim plaintiff Disson Company also has the aforementioned general breach of contract during the performance of the contract, and the counterclaim plaintiff Disson Company is also at fault for the occurrence of this loss, according to the principle of negligence offset, 50% deduction is calculated as the total amount of the corresponding loss".

05

The performance cost shall be deducted first when determining the amount of compensation for losses

According to the judicial interpretation, the performance cost that should be paid by the non-breaching party shall be deducted when determining the loss of available interests. For contract energy management projects, the difficulty lies in how to determine the performance cost. In this regard, the author believes that first of all, we should check whether the two parties have agreed on the performance cost. If so, it shall be implemented as agreed by both parties.

In the appeal case of contract dispute between CGN Energy Saving Industry Development Co., Ltd. and Yunnan Yongbao Special Cement Co., LTD. (Case No. 263). Both parties agreed in the contract the calculation method of compensation after the termination of the contract, that is, the compensation amount C= (total energy saving income of the project ×90%- energy saving income received by Party B) ×N. Yongbao Company appealed that the policy influence, later investment and other factors were not considered when determining the loss, so that the compensation amount far exceeded the expected benefits.

In this regard, the Supreme People's Court held that: "According to the calculation formula of the compensation amount agreed in the contract, the compensation paid by Yongbao Company has been the energy saving income receivable from the normal operation of the project multiplied by a certain coefficient, that is, the parties have taken into account the possible reduction of subsequent maintenance costs and other factors when entering into the contract. The court does not support Yongbao's grounds of appeal that the calculation of compensation violates the consistency of rights and obligations, the principle of fairness, risk sharing, consideration of expected benefits, and the total amount cannot exceed 30% of the outstanding amount."

However, if there is no similar agreement between the parties, the performance cost shall first be proved by the non-breaching party claiming the loss of available interests, and the other party may provide evidence to refute it. In the operation stage of contract energy management, if the party employs a third party to provide operation and maintenance services, it can provide relevant contracts, payment vouchers and other evidence as proof. If it cannot be proved, it shall be determined at the discretion of the people's court and the arbitration institution, or the party bearing the burden of proof shall bear the consequences of failure to prove.

Conclusion

The contract energy management project has a long cycle and large investment. Once a dispute occurs, the scope of claim includes not only direct loss, but also the loss of available interests of one party. The claim amount far exceeds the project investment amount, and the dispute is often very fierce. In order to avoid unnecessary disputes, it is suggested that energy saving units and energy using units take relevant measures to reduce risks and losses in time when feasibility studies, negotiations and disputes occur in the early stage of the project.

For energy users, it is necessary to carefully determine the project plan, especially the energy benchmark, energy saving measures, quantitative energy saving targets, energy saving benefit sharing methods and energy saving measurement and verification data, and do not sign relevant acceptance and confirmation documents at will to declare government subsidies. At the same time, it is necessary to focus on the review of the loss compensation provisions, determine the compensation calculation method and relevant basis, and put forward suggestions for modification or rejection of the obviously unreasonable calculation method.

For energy-using units, in addition to doing a good job in the preliminary investigation and risk assessment of the project, try to agree on the calculation method of the available benefit loss in the contract. In case of disputes, the loss of available interests shall be correctly assessed and timely measures shall be taken to reduce the loss.

Notes

 I Please refer to the General Rules of Contract Energy Management Technology (GB/T 24915-2020) for details