Hans Energy scores initial victory over Sinopec in arbitration case

March 24:


David An says Hans will seek an order from the Guangzhou court to enforce the arbitration commission's decision. Photo: Thomas Yau

Hans Energy has won the opening round in a legal battle that sets up a David versus Goliath confrontation with China Petroleum & Chemical (Sinopec) in a Guangzhou court.

This month, Hans secured a rare victory for a small private firm against a state-backed giant in an arbitration case on the mainland. The Hong Kong-listed firm has been embroiled in a rental agreement dispute with Sinopec, which was ordered by an arbitration centre to pay Hans compensation. Sinopec's failure to do so prompted Hans to take the energy major to court.

Joseph Ko, a senior adviser at Hans, alleged that Sinopec used its dominant position to disadvantage its former partner and ignored its legal obligations despite the arbitrator ruling in favour of Hans.

Hans is a fuel storage facilities operator majority owned by businessman David An.

"It is a typical case of a state firm flouting its legal obligations," he told theSouth China Morning Post. "Some state enterprises have no intention to follow through on their obligations when they sign a contract, believing that their private enterprise partners cannot do much about it."

Hans and Sinopec Guangdong Oil Products signed a lease agreement for oil storage tanks in late 2004, under which Sinopec Guangdong agreed to rent 240,000 cubic metres of oil storage tanks in Panyu, Guangzhou, from Hans for 20 years.

In 2011, Sinopec Guangdong requested unilaterally to terminate the deal from July 1 that year, citing changes in its business operating conditions, Hans said in filings to the stock exchange.

Hans applied to the Guangzhou Arbitration Commission in mid-2012 for a ruling, seeking payment of outstanding rentals and penalty for late payment totalling 156 million yuan (HK$196.5 million). It also requested that the agreement be terminated and sought a default payment of 607 million yuan.

Hans booked an impairment loss of HK$109.5 million on rental income receivable in 2011 and stopped booking income from the agreement since July that year, causing it to post losses since then. The deal had been its main revenue source.

An, who is Hans' chairman, said the firm had tried many times to negotiate for a settlement with Sinopec, but each time the latter agreed to a compensation sum, it failed to follow through. "The compensation they agreed to became smaller and smaller, and each time they failed to pay up," he said, adding that the annual rental involved amounted to 86 million yuan.

According to the lease agreement seen by the Post, if either party substantially breaches the terms or asks for an early termination, it has to pay the other party an amount equal to half the total rental payments of the outstanding agreement period.

Hans and Sinopec also agreed to go to the Guangzhou Arbitration Commission to resolve any dispute that could not be settled through bilateral negotiations.

Hans said in an exchange filing on March 6 that the commission had ordered Sinopec to pay a 607.3 million yuan one-off default payment to Hans, while an additional 156 million yuan sought by Hans and counterclaims by Sinopec were dismissed.

An said Sinopec had not paid the default payment within 10 days of the ruling as required, adding that Hans would seek in one to two weeks an order from the Guangzhou Intermediate People's Court to enforce the commission's decision.

A Sinopec spokesman said it had applied to the Guangzhou court for an order to overrule the commission's decision.

The escalation in the legal battle comes at a time when state firms in monopolistic industries have been ordered by the central government since late last year to enter into more co-investments with private firms as part of reforms to enhance efficiency.

Source: