Keywords: Contract takes effect   Conditional   Performance deadline

Counseling Attorney: Jin Lu

Basic Facts of the Case:

In 2023, Party A and Party B entered into a Share Transfer Agreement, under which Party A agreed to transfer to Party B 20% of the equity interest in Company X, held by Party A, at a price of RMB XX million. The payment terms stipulated that, after Party B signed a share transfer agreement with a third party, Party B would pay the full transfer consideration in one lump sum no later than September 15, 2023. If Party B failed to make the payment by the due date, it would be required to pay a default penalty equal to one-thousandth of the total transfer consideration per day for each day of delay. On August 17, 2023, Party A cooperated with Party B to complete the registration procedures for the equity transfer and withdrew from the company. However, Party B refused to pay the transfer consideration on the ground that it had not yet signed a share transfer agreement with any third party.

Key points of contention: Whether the Equity Transfer Agreement has taken effect; and whether the agreement on payment of the equity transfer consideration is conditional or time-limited.

Judgment Rationale: The court of first instance held that the agreement explicitly stipulates: “The equity transfer agreement shall be entered into against the backdrop of a 100% equity transfer to a third party.” With regard to the payment of the transfer consideration, the agreement provides: “The transfer consideration shall be paid by Party B to Party A no later than September 15, 2023, after Party B and the third party have signed the equity transfer agreement. If the equity transfer agreement signed between Party B and the third party involves any changes to the provisions of this contract, Party B shall promptly notify Party A and engage in thorough consultations on the relevant matters.” Both of these provisions clearly indicate that, following the transfer of the company to a third party, Party B will pay the equity transfer consideration to Party A within a specified period. Therefore, the condition for the effectiveness of this contract is the actual transfer of the company to the third party. Currently, it has been verified that Party B remains the controlling shareholder of the company, and the company has not yet been effectively transferred. Although the equity transfer agreement has been established, its condition for effectiveness—the transfer of equity to a third party—has not yet been fulfilled. Consequently, the court of first instance dismissed Party A’s claim.

The second-instance court held that, under the equity transfer agreement, payment of the consideration is the transferee’s primary contractual obligation. While the performance of this obligation may be subject to a time limit, it cannot be made conditional. After A fulfilled its obligation to transfer the shares as agreed, B’s obligation to pay the equity transfer consideration became a debt that must be performed without delay. If the timing of B’s payment of the equity transfer consideration were tied to an agreement B had entered into with a third party, this would amount to setting an uncertain deadline for a debt that had already become due and enforceable. The uncertain fact that the third party might or might not acquire the company could either materialize or remain hypothetical; if such uncertainty were made a condition for B’s payment of the equity transfer consideration, it would seriously conflict with B’s original obligation. The second-instance judgment reversed the first-instance judgment and ruled in favor of all of A’s claims.

Case Highlights: The Equity Transfer Agreement has been signed and sealed by both parties, and the agreement contains no provision stipulating that its effectiveness is conditional. In accordance with Articles 136 and 143 of the Civil Code, the equity transfer agreement in this case has been duly established and has taken effect. Therefore, A is entitled to demand that B pay the equity transfer consideration and assume liability for breach of contract. As the seller of the equity, A has already cooperated to complete the registration of the equity transfer as agreed upon in the contract and has withdrawn from the company. As the transferee of the equity, B is obligated to pay the consideration for the equity, and this obligation should not be subject to any conditions.

Typical significance: Where the parties agree that an existing debt, which is indeed enforceable, shall be performed upon the occurrence of a certain uncertain future event, such an agreement appears on the surface to be a stipulation concerning performance conditions. However, in essence, it is an agreement on the time limit for performance—albeit an uncertain one. How to determine this uncertain time limit in litigation is an inevitable requirement of the judiciary’s function of dispute resolution. If the ancillary payment method involved were treated as conditional performance, it would to some extent lower the threshold for fulfilling the obligation, thereby clearly upsetting the balance of rights and obligations between the parties. In accordance with the principle of good faith and fair dealing, the reasonable time limit may be determined by taking as a benchmark the reasonable expectations of a prudent business person; this reasonable time limit shall then serve as the performance deadline. Once the reasonable time limit has elapsed and the debtor still fails to perform the obligation, the creditor may request performance. Given that an uncertain performance deadline is, in terms of its uncertainty, akin to a condition, the relevant provisions governing the deemed fulfillment of conditions may be applied by analogy: if a party, acting in its own interest, improperly prevents the uncertain event from occurring or ensures that the uncertain event does not occur, the performance deadline shall be deemed to have expired, and the creditor may directly demand that the debtor fulfill its obligation.