* Evergrande says has been sued by Faraday for failure to pay
* Evergrande says Faraday looking to scrap deal to sell stake
* Faraday refutes Evergrande's claims
* Evergrande shares crater as much as 36 percent (Adds Faraday Future's comment, update share prices)
By Clare Jim
HONG KONG, Oct 8 (Reuters) - China's Evergrande Health Industry Group Ltd shares slumped on Monday, on news it was being sued by electric vehicle (EV) start-up Faraday Future for failing to make a payment and that Faraday was looking to scrap a deal to sell a stake.
Evergrande Health, a 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.
It did not detail the conditions.
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.
Faraday Future, in a statement posted on its official Weibo account on Monday, refuted Evergrande's claims.
The EV firm said Evergrande had initiated an agreement to make an additional payment to Faraday by the end of 2018.
Faraday said the Chinese investment holdings company did not keep its promise even though both the start-up and Jia had fulfilled all payment conditions.
"Rather, Evergrande tried to acquire the control and ownership of all FF's IP (Faraday Future's intellectual property)," it said in the statement.
Evergrande also stopped Faraday from getting any financing from other channels, it added.
Faraday Future, which has ambitions of overtaking Tesla , said it will soon ensure mass production of its first high-end vehicle, FF91, and that it welcomes "investors with the same value as FF (Faraday Future) to pursue the dream together".
Faraday did not make any reference to a lawsuit against Evergrande in its statement.
According to Evergrande's statement filed with the Hong Kong Stock Exchange, Jia has started arbitration at the Hong Kong International Arbitration Centre against Evergrande.
Evergrande said it would take all necessary steps to protect its rights.
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.
Leshi Internet Information & Technology, which is the main listed unit of Jia's debt-laden conglomerate LeEco, declined to comment. Leshi shares closed down 7.9 percent.
Evergrande Health shares tumbled as much as 36.6 percent in the morning session on Monday and recovered only slightly to close down 16.5 percent.
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. (Reporting by Clare Jim; Additional reporting by Sijia Jiang; Editing by Sayantani Ghosh and Himani Sarkar)