Landmark Supreme Court ruling: “guanxi” enters New Zealand’s justice system

It is widely recognised that Chinese New Zealanders have made a major contribution to property development and the wider construction industry, playing a pivotal role throughout the process, from land development and housebuilding to sales. Recently, an ordinary commercial dispute between Chinese parties also sparked extensive discussion in New Zealand’s legal community about Chinese culture and business practices. Drawing on the dispute and the arguments presented in court, the Supreme Court incorporated Chinese culture, the concept of “guanxi” and Chinese business practices into its judgment—a milestone for Chinese New Zealand culture within the justice system.

Background to the case

Mr Zheng and Mr Deng are two leading figures in New Zealand’s construction industry. Mr Zheng is a property developer, while Mr Deng’s professional background is in project management and land development. Their working relationship dates back to the 90s

of the last century.

In 2004, Mr Deng acquired proprietary interests in several developments in which Mr Zheng was involved. These projects had originally involved other individuals rather than Mr Deng and Mr Zheng; we will refer to those individuals as the “original group”.

One of the original group’s projects involved purchasing and developing 11 sections on Bella Vista Drive. At the time, the original group was splitting up and dissolving. After becoming involved, Mr Zheng and Mr Deng brought in a Mr Jiang to work with them. This arrangement was collectively known as the “Bella Vista agreement”, drafted in Chinese and signed in April 2008. The parties fell into two categories: (a) a new company linked to Mr Deng’s and Mr Zheng’s companies, whose name translates literally as “Eastern Construction Group”, holding a 60% share; and (b) Mr Jiang, holding a 40% share. A set of internal accounting records became another central feature of the case. These began with a document dated 31 March 2010 recording the original group’s financial position when it dissolved. Thereafter, internal accounts recorded Mr Zheng’s and Mr Deng’s joint business dealings twice a month. In 2015, their business relationship began to encounter difficulties. In May, they agreed to separate. Their negotiations and discussions about dissolution were recorded in a “principles of dissolution” agreement.

The central legal question was the nature of Mr Zheng’s and Mr Deng’s business relationship between 2010 and 2015. Mr Zheng maintained that, from March 2010, they were partners engaged in property development and construction, conducting those activities through companies. As parties to the Bella Vista agreement, they worked jointly with Mr Jiang. Mr Deng argued that there was no “overarching partnership” between them. Instead, they worked together through the relevant companies, their respective shareholdings in those companies and intercompany accounts.

The judgments

New Zealand’s court system has four tiers: the Supreme Court, Court of Appeal, High Court and District Court. Generally, the High Court or District Court has jurisdiction at first instance. The Court of Appeal hears appeals and is usually the final court, while the Supreme Court hears final appeals in selected cases of major significance. Higher court decisions bind lower courts, and Supreme Court decisions bind all

courts.

The High Court ruled in Mr Deng’s favour, finding that no partnership existed. The Court of Appeal overturned that decision, finding that they were partners. Mr Deng appealed to the Supreme Court. An appeal from the Court of Appeal requires prior leave from the Supreme Court, the first hurdle Mr Deng had to clear. His legal team had to submit an application and supporting evidence, after which the Supreme Court would decide whether to grant leave and give its reasons.

The Supreme Court granted Mr Deng leave to appeal. Its leave judgment identified several important questions to be resolved, foremost among them: “Was the Court of Appeal correct to find that Mr Deng and Mr Zheng were partners?” The five Supreme Court justices unanimously dismissed Mr Deng’s appeal, confirming that a partnership existed between them.

Reasons for the judgment

The Supreme Court’s judgment can be understood through the following key points:

The evidence showed that, in the Bella Vista project, Mr Deng and Mr Zheng participated as partners in their personal capacities, while the relevant companies effectively acted as their nominees. The document dated 31 March 2010 recorded the transition from the original group’s dissolution to the establishment of the partnership, which began on 1 April 2010.
The twice-monthly financial reports were based on the relevant companies’ trading activities and a shared understanding that the profits would be divided equally between the two men.
The “principles of dissolution” agreement also recorded a conversation between them, from which it could be inferred that their business relationship was not determined or explained by the relevant companies.
From April 2008, they were partners in the Bella Vista project, together holding a 60% interest in the overall project. From 1 April 2010, their partnership extended to all projects on which they worked together.

The “guanxi” element

The Supreme Court’s judgment also examined the Chinese cultural concept of “guanxi”. A complex concept with multiple meanings, it can encompass interpersonal relationships, social resources and an individual’s networks across different levels of society. These relationships are widely used in business dealings and social life.

Regarding Chinese business practices and behaviour, “Chinese people are less likely to conduct business using a formal contract”, preferring expressions of agreement such as a handshake to conclude a deal, “…because written contracts are perceived as evidence for transactions and appear ‘distrusting’”. Another major feature of this case was therefore the absence of a complete set of written agreements, alongside numerous oral agreements and text message and WeChat exchanges. The court decided to use these informal records as a source of evidence, reaching its conclusions through analysis and inference.

Guidance

Following its judgment, the Supreme Court also offered the following guidance:

Cases in which the parties’ cultural backgrounds differ from that of the presiding judge will become increasingly common in New Zealand, and judges must approach them carefully.
When dealing with different cultural backgrounds and individual cases, judges’ familiar, usual methods of gathering and analysing evidence may not work. Business behaviour considered normal in one cultural context may appear unusual in another.
In such cases, it is for the parties and their expert witnesses to explain the relevant behaviour in its sociocultural context. The relationships between them, whether commercial or otherwise, must be interpreted in light of their respective social and business cultures.
The provisions of the Evidence Act 2006 governing expert testimony and other matters remain applicable. These provisions allow judges to consider the accuracy and sources of information under section 128, and to admit reliable, authoritative publications, papers and professional opinions as evidence.
People from the same ethnic and cultural background must not be treated as a homogeneous group, to avoid generalisation and stereotyping.

Conclusion

According to the 2018 Census, New Zealand is home to more than 160 ethnic groups, most of them living in Auckland. Auckland’s ethnic and cultural communities could be described as even more complex and diverse than those of New York, London and San Francisco. Chinese people have appeared at different times and in different capacities throughout New Zealand’s judicial history of more than a century. But this is the first time the Supreme Court has used Chinese culture, distinctive Chinese business practices and interpersonal relationships as a basis for a judgment! Mr Deng and Mr Zheng each spent substantial sums on legal fees. In their different ways, both have contributed to New Zealand’s case law—and perhaps to the wider common law system.