Liaoning XX Teaching Company (defendant in the counterclaim) v. Shenyang XX University (plaintiff in the counterclaim) – Dispute over the Cooperation Contract

Keywords: Disputes over cooperation contracts / Management fees / Enrollment quota targets / Funds for commissioned training / Liability for breach of contract

Counseling Attorneys: Yang Xingquan, Liu Ying

Basic Facts of the Case: On May 19, 2004, Liaoning XX Teaching Company and Shenyang XX University (the委托人) signed a “Cooperative Education Agreement.” The agreement stipulates the following: 1. The cooperative project involves Shenyang XX University (Party A) and Liaoning XX Teaching Company (Party B), which will jointly establish XX Technical College, a college with independent legal status. The development goal is to reach an enrollment capacity of 9,000 students within five years of construction. 2. Party A’s obligations include assisting XX Technical College in implementing its annual enrollment plan, recommending qualified management personnel, and dispatching teachers who meet the requirements to teach at XX College. 3. Party B’s obligations include providing land for the college’s operation as well as other basic facilities necessary for teaching and student life. 4. The funding sources for XX Technical College are as follows: From September 1, 2004, to September 1, 2007, the college’s funds will consist of tuition fees and capital contributions from Party B; thereafter, tuition fees will be the primary source of funding. 5. For students enrolled under the national admission plan, Party B shall remit to Shenyang XX University annually 18% of the tuition fees paid by these students. 6. In the event of breach of contract, the breaching party shall pay a penalty equal to the total tuition fees for one year of study by the affected students.

From 2005 to 2012, the tuition fees for the 20,212 higher vocational students admitted by Shenyang XX University were charged according to national government standards, fluctuating around 4,000 to 4,500 yuan per student per year.

On October 9, 2012, the plaintiff and the defendant signed a “Strategic Cooperation Agreement,” under which they planned to restructure XX Technical College into a private, general-purpose higher education institution—the Shenyang XX College. It was agreed that all 63 staff members originally assigned by the plaintiff would remain employed at the new institution. Starting in 2014, Shenyang XX University began withdrawing some of its personnel and terminated contracts with those who requested to continue working at the university.

The plaintiff, Liaoning XX Teaching Company, alleges the following: 1. The defendant, Shenyang XX University, is requested to refund the overpaid management fees totaling RMB 2,399,769.2; 2. The defendant is requested to pay a breach-of-contract penalty of RMB 61,046,000 for violating the “Agreement on Joint Establishment of XX Technical College” (hereinafter referred to as the “Joint Education Agreement”); 3. The defendant is requested to return the training funds allocated by the state for the higher vocational students trained at the plaintiff’s institution, amounting to RMB 83,064,000; 4. The defendant is requested to compensate for various losses incurred due to the violation of the “Strategic Cooperation Agreement,” totaling RMB 2,000,000; 5. The total amount claimed in the above requests sums up to RMB 148,509,769.2.

The counter-plaintiff, Shenyang XX University, alleges: 1. Requests the court to order the counter-defendant to pay management fees in the amount of 23,815,711.00 yuan, plus a penalty for breach of contract totaling 15,518,623.44 yuan (the penalty is calculated as of the date of the counterclaim); 2. Requests the court to order the counter-defendant to pay the outstanding loan amount of 2.5 million yuan; 3. Requests the court to order the counter-defendant to pay the equipment transfer fee of 324,640.8 yuan, plus a penalty for breach of contract amounting to 118,234.18 yuan; 4. Requests the court to order the defendant to bear all litigation costs.

During the trial, Liaoning XX Teaching Company admitted that it owed Shenyang XX University a loan of 2.5 million yuan as well as equipment payments totaling 324,640.8 yuan, and agreed to pay these amounts.

The Shenyang Intermediate People's Court of Liaoning Province has issued the following first-instance judgment:

1. The defendant, Shenyang XX University, shall pay the plaintiff, Liaoning XX Teaching Company, the surrogate training expenses of RMB 23,041,680 within 20 days from the date this judgment becomes legally effective.

2. The defendant in the counterclaim, Liaoning XX Teaching Company, shall pay the plaintiff in the counterclaim, Shenyang XX University, management fees in the amount of 20,200,358.67 yuan within 20 days from the date this judgment becomes legally effective.

3. The defendant in the counterclaim, Liaoning XX Teaching Company, shall pay the plaintiff in the counterclaim, Shenyang XX University, the loan amount of 2,500,000 yuan and the equipment payment of 324,640.8 yuan within 20 days from the date this judgment becomes legally effective.

4. Dismiss the plaintiff Liaoning XX Teaching Company’s other claims.

V. Dismiss the other claims of the counterplaintiff, Shenyang XX University.

The court fee for the first-instance plaintiff’s claim was 784,395 yuan, of which 79,200 yuan was borne by Shenyang XX University and 705,195 yuan was borne by Liaoning XX Teaching Company. The court fee for the first-instance counterclaim was 147,493 yuan, of which 78,900 yuan was borne by Liaoning XX Teaching Company and 68,593 yuan was borne by Shenyang XX University.

Both parties appealed, and the second-instance court upheld the original verdict.

Case Highlights:

The agent identified a breakthrough in the case, and most of the defense arguments and counterclaims submitted were accepted by the court. In this case, during the performance of the “Cooperative Education Agreement,” the defendant, Shenyang XX University, did not commit any breach of contract and therefore should not be held liable for breach of contract nor required to pay liquidated damages.

1. Shenyang XX University has not engaged in any breach of contract regarding the failure to meet the agreed-upon enrollment targets.

First, the contractual obligation of Shenyang XX University is to “assist” the plaintiff in implementing the enrollment plan, rather than to “guarantee” it. In light of the provision in Article 1, Paragraph 4 of the Cooperative Education Agreement, the only cooperative development goal envisioned by both parties is to reach an enrollment scale of 9,000 students. This goal is merely an expectation held by both parties and does not entail any substantive obligation; moreover, achieving this goal requires joint efforts from both sides. The implementation and execution of the enrollment plan are carried out strictly in accordance with the “Notice on Enrollment Plans and Sources of Enrollment for Ordinary Higher Education Institutions in Liaoning Province,” issued annually by the Liaoning Provincial Department of Education and the Provincial Development and Reform Commission. Shenyang XX University has no authority to interfere with the rights vested in the national education authorities, nor does it have the right to incorporate into the Cooperative Education Agreement provisions that fall outside its own jurisdiction.

II. Shenyang XX University did not engage in any breach of contract by “unilaterally reducing the enrollment quota for higher vocational students.”

First, although the College of Applied Technology engages in both state-run and privately-run education as well as higher vocational education, the enrollment targets for higher vocational education have consistently been allocated to Shenyang XX University. Shenyang XX University has not fulfilled its contractual obligation to ensure that the enrollment quota for higher vocational students reaches 1,000 students annually, and Liaoning XX Teaching Company is likewise not entitled to claim breach of contract liability based on whether the scale of enrollment for higher vocational students meets certain standards. Second, Shenyang XX University strictly adheres to the enrollment targets set by the state and is prohibited from exceeding or conducting unapproved enrollments. Any reduction in the enrollment quota for higher vocational students is mandated by national policies and determined by the competent state educational authorities; such actions do not constitute a breach of contract on the part of Shenyang XX University.

3. Shenyang XX University, in accordance with national policies and the employment intentions of its faculty and staff, withdrew certain faculty and staff members. Since these faculty and staff members were not subjectively at fault and their withdrawal was in compliance with legal provisions, such action does not constitute a breach of contract.

The “Strategic Cooperation Agreement” signed by the plaintiff and the defendant stipulates that, following the reorganization into a new school, the 63 tenured staff members originally dispatched by Shenyang XX University would remain at the new school to continue teaching. The background behind this agreement is that enrollment at XX Technical College had already been completed in 2012, and students would not be eligible to graduate from the college until 2016. Even though, starting in 2014, the state gradually introduced policies requiring the elimination of tenured staff who were neither on duty nor actively working, most of these staff members requested to return to work at Shenyang XX University and also submitted petitions through the Minxin Network to the Education Department, reporting their situation. Therefore, after fully soliciting the individual wishes of each staff member, Shenyang XX University withdrew some of its staff members; thus, such withdrawal does not constitute a breach of contract.

IV. Liaoning XX Teaching Company still owes management fees to Shenyang XX University.

On April 28, 2017, Liaoning Tiantuo Certified Public Accountants LLP issued the “Analysis Report on Financial Matters of Shenyang XX College for the Period 2004–2013,” which calculated that, based on the book value of tuition revenue, the supplementary management fees payable from 2004 to 2016 amounted to RMB 47,805,280.67. According to calculations by Shenyang XX University, even taking into account any agreed-upon reductions or exemptions, the total amount of unpaid management fees owed by Liaoning XX Teaching Company over the years totaled RMB 23,815,711.00. The two parties have consistently failed to reach an agreement on the issue of management fees.

Typical significance:

By gathering evidence and investigating the facts, the agent developed a litigation strategy that was most favorable to the client, actively filing a counterclaim and successfully recovering losses totaling 148.5 million RMB for the client. Contracts are the most common legal acts in civil legal relationships; however, during actual performance, contract disputes frequently arise for various reasons. The determination and assumption of liability for breach of contract thus become critical issues. The judgment in this case serves as a valuable guide, encouraging market participants to exercise their rights and fulfill their obligations in accordance with the law and guided by the principle of good faith, and it holds positive significance for maintaining order in market transactions.