Evergrande Health, an investment holding unit of property developer China Evergrande Group, had in June agreed to buy Season Smart, owner of 45 percent of Faraday Future, as part of plans to diversify into new technology.

The Hong Kong-listed firm agreed to pay Faraday $1.2 billion in two equal instalments, due in 2019 and 2020, completing Season Smart's obligations to Faraday Future - which was founded by entrepreneur Jia Yueting.

Evergrande said it had also agreed in July to make an advance $700 million payment, subject to some conditions, following a request from Faraday that was short on cash.

Faraday is now using the $700 million payment agreement as an excuse to seek arbitration, despite the payment obligations not being fulfilled, Evergrande said in a statement on Sunday.

Jia has started arbitration at the Hong Kong International Arbitration Centre against Evergrande, the statement said. It did not detail the conditions.

Jia is manipulating Faraday Future's board through his majority seats and is seeking to deprive Evergrande of its right as a shareholder to approve plans by Faraday to raise financing in the future, Evergrande said.

Evergrande said it would take all necessary steps to protect its rights under the relevant agreements.

Faraday Future did not respond to an email and a phone call from Reuters requesting comment.

Leshi Internet Information & Technology, which is the main listed unit of Jia's debt-laden conglomerate LeEco, declined to comment. Leshi shares were down 6 percent.

Evergrande Health's stock was down about 15 percent by midday on Monday, after plunging as much as 36 percent earlier.

The stock had rallied after Evergrande first announced news of the deal in June, jumping more than three-fold over July and August on Faraday Future's prospects.

Faraday, which has ambitions of overtaking Tesla, said in August that full vehicle assembly of its first high-end vehicle, the FF91, had started at its U.S. base. It also said it aimed to reach an annual production capacity of 5 million vehicles after 10 years.

(Reporting by Clare Jim; Additional reporting by Sijia Jiang; Editing by Sayantani Ghosh and Himani Sarkar)

By Clare Jim