Selected Cases from the Supreme People’s Court of the People’s Republic of China: Volume 3 (Library of Selected Cases from the Chinese Court) 981168409X, 9789811684098

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Library of Selected Cases from the Chinese Court

China Applied Jurisprudence Institute Editor

Selected Cases from the Supreme People’s Court of the People’s Republic of China Volume 3

Library of Selected Cases from the Chinese Court

This series focuses on telling Chinese legal stories in Chinese voices, vividly and intuitively demonstrating the concept, achievements and real-world experience of socialist rule of law with Chinese characteristics. In addition, it is intended to further comparative research on Chinese and foreign cases, promote international legal exchanges, and contribute Chinese judicial wisdom and judicial experiences to global governance. The cases presented in the series are strictly selected by the trial departments of the Supreme People’s Court from their concluded cases, which include guiding cases of the Supreme People’s Court; cases deliberated on by the Adjudication Committee of the Supreme People’s Court; and cases discussed at the Joint Meetings of Presiding Judges from the various tribunals. These cases are of great significance in terms of revealing or clarifying the application of legal rules, establishing new methods of adjudication, and filling in legal loopholes or gaps. The writers are the presiding judges for the respective cases, and possess substantial experience in making judicial decisions. Their familiarity with the facts of the cases, legal thinking and reasoning, the decisional methodology and the application of the law makes them ideally suited to conveying to readers the legal processes, legal methodology and ideology in an intuitive, clear, and accurate manner. This series aims to: a) improve the guiding case system and promote consistency regarding the applicable standards of law; b) contribute to a harmonious society by employing judicial rationality; and c) share China’s judicial wisdom with the rest of the world and foster international legal exchanges.

More information about this series at https://link.springer.com/bookseries/16437

China Applied Jurisprudence Institute Editor

Selected Cases from the Supreme People’s Court of the People’s Republic of China Volume 3

Editor See next page

ISSN 2662-5261 ISSN 2662-527X (electronic) Library of Selected Cases from the Chinese Court ISBN 978-981-16-8409-8 ISBN 978-981-16-8410-4 (eBook) https://doi.org/10.1007/978-981-16-8410-4 Jointly published with Law Press China The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Law Press China. Translation from the Chinese language edition:《中华人民共和国最高人民法院案例选》(第三辑) by et al., © Law Press China 2020. Published by Law Press China. All Rights Reserved. © Law Press China 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Editor China Applied Jurisprudence Institute Beijing, China With Contribution by Feng Zhu Legal Translation & Publication Center Law Press·China Beijing, China

Hongyu Han Legal Translation & Publication Center Law Press·China Beijing, China

Qiujing Ma Legal Translation & Publication Center Law Press·China Beijing, China Translated by Daxuan Zheng School of Foreign Languages Southwest University of Political Science & Law Chongqing, China

Zhijian Cao School of Foreign Languages Southwest University of Political Science & Law Chongqing, China

Lin Sun School of Foreign Languages Southwest University of Political Science & Law Chongqing, China

Xiaohua Zhu School of Foreign Languages Southwest University of Political Science & Law Chongqing, China

Benlin Niu School of Foreign Languages Southwest University of Political Science & Law Chongqing, China

Jing Duan School of Foreign Languages Southwest University of Political Science & Law Chongqing, China

Jialiu Xiao Postgraduate School Southwest University of Political Science & Law Chongqing, China

Yi Zheng Postgraduate School Southwest University of Political Science & Law Chongqing, China

Acknowledgments

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2.

The contents of this volume are intended for study and research only and shall not be used as evidence or proof. Any judgment opinions herein shall be subject to their original Chinese versions issued by the Supreme People’s Court of the People’s Republic of China. In this translation, third-person singular male pronouns should be construed to include the corresponding female and neuter pronouns except where the context clearly requires otherwise.

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Panel of Senior Editors

Director of the Panel Wanming Yang Members of the Panel (In Order by Stroke Numbers of Chinese Characters) Housen Yu Yan Ma Baosen Wang Xiaodong Wang Shumei Wang Ling Kong Biao Wu Zheng Liu Zhumei Liu Jingxiang Liu Jianfeng Xu Zhihua Sun Xiaoyong Sun Yong Li Guangyu Li Yuping Li Chengyu Li Li He Ming Zhang Yili Zhang Yifang Chen Guanghai Lin Wenxue Lin Zhonglin He Xuelin Zheng

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Xiang Zhao Jinshan Zhao Yinzhong Hao Shihao Hu Qibo Jiang Erjun Zhu Xiaochen Qian Xiaoli Gao Jingkun Guo Wenjun Huang Wenpu Dong Weizhong Han Xiangyang Liao Wei Teng

Panel of Senior Editors

Panel of Editors

Editor-in-Chief Qibo Jiang Associate Editors Yuping Li Xuechun Zhang Managing Editor Wenyan Ding Editors Xianrong Bao (criminal cases) Ming Li Yi Yang (civil and commercial cases, performance cases) Wenyan Ding (intellectual property cases) Zaiyu Guo (admiralty cases) Deqiang Han (administrative cases, state compensation cases) Assistant Editor Leilei Zhang

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Foreword

Sitting atop the judiciaries in this country, the Supreme People’s Court of the People’s Republic of China has annually adjudicated a great number of vital and hard cases, which have exerted enormous influence on rule of law in China and have contributed Chinese judicial wisdom to the world. To give full play to the legal value and social function of the cases from the Supreme People’s Court, to achieve the goal of serving trial practice, serving economic and social development, serving legal education and legal scholarship, serving international legal exchanges among Chinese and foreign legal communities, and serving rule of law in China, the China Applied Jurisprudence Institute, on approval of the Supreme People’s Court, has decided to organize the compilation of Selected Cases from the Supreme People’s Court of the People’s Republic of China in both Chinese and English languages since 2018 for domestic and overseas distribution. The cases in the series are strictly selected by the trial departments of the Supreme People’s Court from their adjudicated cases. These cases are of significance in revealing or clarifying the application of legal rules, establishing new methods of adjudication, and filling in legal loopholes or gaps. Moreover, the writers are the presiding judges of those selected cases, who are experts in the trials at the Supreme People’s Court. They have possessed profound legal attainments and rich experience in making judicial decisions. Their familiarity with the facts of those cases, legal thinking and reasoning, the decisional methodology, and the application of law has enabled them to convey to the readers legal processes, legal methodology and ideology in an intuitive, clearest, and most accurate manner. This volume is divided into three sections: (a) Cases by Justices, which have exerted profound influence throughout the country and the world; (b) Cases at the Adjudication Committee, which are focal, edge-cutting, and hard cases that have been deliberated at the Adjudication Committee of the Supreme People’s Court and have affected the judicial process and development in China so as to play the role of cases in unifying the application of law and functioning a role of early warning or predicting the legal issues; and (c) Typical Cases, which involve civil law, criminal law, commercial law, intellectual property law, maritime law, administrative law and

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Foreword

enforcement, to reflect the latest endeavor and adjudication of the Supreme People’s Court in various fields. By modeling upon the layout and design of case systems at home and abroad, the editors, for the convenience of the readers, take into account the reading habits of readers in different legal systems and use subtitles to accurately identify core legal issues and highlights of the cases, as well as rules to precisely clarify adjudication ideas and methods. The case layout includes such elements as Title, Subtitle, Rule, Case Information, Essential Facts, Issue(s), Holding, and Comment on Rule for reading or retrieval. Through the publication of a series of Selected Cases from the Supreme People’s Court of the People’s Republic of China, we hope to achieve the following objectives: (a) to improve the guiding case system and promote the uniformity of the applicable standards of law. Through systematically editing and publishing classic cases adjudicated by the Supreme People’s Court every year, we hope to guide the trial practices of people’s courts at all levels to unify judicial standards, to restrain the judicial discretion, to treat like cases alike, to promote justice, to maintain legal unity, to establish the authority of and confidence in the people’s courts among the public and to effectively prevent various legal risks; (b) to promote a harmonious society by imparting the judicial rationality. By way of these cases, people can be informed of adjudicative methods and ideology as well as authoritative positions held by the Supreme People’s Court toward the newer, challenging, and complex issues in the current economic, cultural, scientific, and social life so as to promote rule of law, display fairer concept of justice, and show due respect toward law; and (c) to contribute to the world China’s judicial wisdom and help promote the international legal exchanges. The series is to be published in Chinese and English languages, orienting toward telling Chinese legal stories in Chinese voice, vividly and intuitively demonstrating the ideas, achievements and experiences of socialist rule of law with Chinese characteristics, furthering comparative research on Chinese and foreign cases, and promoting international legal exchanges. More importantly, in the pivotal point of comprehensively deepening the reform and opening-up, as well as building the community of shared future for humanity, this series could exert farreaching influence on the “going global” of Chinese legal culture, promotion of judicial cooperation and development under the Belt and Road Initiative, demonstration of advantages of socialist judicial system with Chinese characteristics, contribution of Chinese judicial wisdom and experiences to global governance, and dissemination of Chinese judicial culture around the world. April 2020

Editorial Board

Cited Laws, Regulations, Judicial Interpretations and Other Normative Documents

I. Administrative Enactments 1. The Law of the People’s Republic of China on Prevention and Control of Water Pollution (Rev. 2017) Referred to as Law on Prevention and Control of Water Pollution; adopted at the 5th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China on May 11,1984; amended for the first time on May 15, 1996, at the 19th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Prevention and Control of Water Pollution; revised at the 32nd Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on February 28, 2008; amended for the second time on June 27, 2017, at the 28th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Prevention and Control of Water Pollution. 2. The Forestry Law of the People’s Republic of China (Rev. 2019) Referred to as Forestry Law; adopted at the 7th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China on September 20, 1984; amended for the first time on April 29,1998, at the 2nd Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Forestry Law of the People’s Republic of China; amended for the second time on August 27, 2009, at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China; revised on December 28, 2019, at the 15th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China.

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3. The Grassland Law of the People’s Republic of China (Rev. 2013) Referred to as Grassland Law; adopted at the 11th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China on June 18, 1985; revised at the 31st Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China on December 28, 2002; amended for the first time on August 27, 2009, at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China; amended for the second time on June 29, 2013, at the 3rd Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Protecting the Cultural Relics and Other Eleven Laws. 4. The Law of the People’s Republic of China on Mineral Resources (Rev. 2009) Referred to as Mineral Resources Law; adopted at the 15th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China on March 19, 1986, and publicized by No. 36 Order of the President of the People’s Republic of China on March 19,1986; amended for the first time on August 29, 1996, at the 21st Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Mineral Resources Law of the People’s Republic of China; and amended for the second time on August 27, 2009, at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China. 5. The Land Administration Law of the People’s Republic of China (Rev. 2019) Referred to as Land Administration Law; adopted at the 16th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China on June 25, 1986; amended for the first time on December 29, 1988, at the 5th Session of the Standing Committee of the Seventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Land Administration Law of the People’s Republic of China; revised at the 4th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China on August 29, 1998; amended for the second time on August 28, 2004, at the 11th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Land Administration Law of the People’s Republic of China; amended for the third time on August 26, 2019, at the 12th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Land Administration Law of the People’s Republic of China and the Urban Real Estate Administration Law of the People’s Republic of China.

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6. The Customs Law of the People’s Republic of China (Rev. 2017) Referred to as Customs Law; adopted on January 22, 1987, at the 19th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China; amended for the first time on July 8, 2000, at the 16th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Customs Law of the People’s Republic of China; amended for the second time on June 29, 2013, at the 3rd Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Protecting the Cultural Relics and Other Eleven Laws; amended for the third time on December 28, 2013, at the 6th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Marine Environmental Protection Law of the People’s Republic of China and Other Six Laws; amended for the fourth time on November 7, 2016, at the 24th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Foreign Trade Law of the People’s Republic of China and Other Eleven Laws; amended for the fifth time on November 4, 2017, at the 30th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Accounting Law of the People’s Republic of China and Other Ten Laws. 7. The State Compensation Law of the People’s Republic of China (Rev. 2012) Referred to as State Compensation Law; adopted on May 12, 1994, at the 7th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China; amended for the first time on April 29, 2010, at the 14th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the State Compensation Law of the People’s Republic of China; amended for the second time on October 26, 2012 at the 29th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the State Compensation Law of the People’s Republic of China. 8. The Electric Power Law of the People’s Republic of China (Rev. 2018) Referred to as Electric Power Law; adopted on December 28, 1995, at the 17th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China; amended for the first time on August 27, 2009, at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China; amended for the second time on April 24, 2015, at the 14th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with

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Cited Laws, Regulations, Judicial Interpretations and Other Normative …

the Decision on Revising the Electric Power Law of the People’s Republic of China and Other Five Laws; and amended for the third time on December 29, 2018, at the 7th Session of Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Electric Power Law of the People’s Republic of China and Other Three Laws. 9. The Administrative Penalty Law of the People’s Republic of China (Rev. 2017) Referred to as Administrative Penalty Law; adopted on March 17, 1996, at the 4th Session of the Eighth National People’s Congress of the People’s Republic of China; amended for the first time on August 27, 2009, at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China; amended for the second time on September 1, 2017, at the 29th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Judges and Other Seven Laws. 10. The Law of the People’s Republic of China on Urban and Rural Planning (Rev. 2019) Referred to as Law on Urban and Rural Planning; adopted at the 30th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on October 28, 2007; amended for the first time on April 24, 2015, at the 14th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Port Law of the People’s Republic of China and Other Six Laws; amended for the second time on April 23, 2019, at the 10th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Construction Law of the People’s Republic of China and Other Seven Laws. 11. The Administrative Coercion Law of the People’s Republic of China (2011) Referred to as Administrative Coercion Law; adopted at the 21 Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China on June 30, 2011; publicized by No. 49 Order of the President of the People’s Republic of China on June 30, 2011, and implemented as of January 1, 2012.

II. Criminal Enactments 12. The Criminal Law of the People’s Republic of China (Rev. 2017) Referred to as Criminal Law; adopted at the 2nd Session of the Fifth National People’s Congress of the People’s Republic of China on July 1, 1979; publicized by the No. 5 Chairman Decree of the Standing Committee of the National People’s Congress

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of the People’s Republic of China on July 6, 1979, and implemented as of January 1, 1980; revised at the 5th Session of the Eighth National People’s Congress of the People’s Republic of China on March 14, 1997; and revised by Amendment to the Criminal Law of the People’s Republic of China on December 25, 1999 (“Criminal Law Amendment I”), Amendment to the Criminal Law of the People’s Republic of China on August 31, 2001(“Criminal Law Amendment II”), Amendment to the Criminal Law of the People’s Republic of China on December 29, 2001(“Criminal Law Amendment III”), Amendment to the Criminal Law of the People’s Republic of China on December 28, 2002 (“Criminal Law Amendment IV”), Amendment to the Criminal Law of the People’s Republic of China on February 28, 2005 (“Criminal Law Amendment V”), Amendment to the Criminal Law of the People’s Republic of China on June 29, 2006 (“Criminal Law Amendment VI”), Amendment to the Criminal Law of the People’s Republic of China on February 28, 2009 (“Criminal Law Amendment VII”); Amendment to the Criminal Law of the People’s Republic of China on February 25, 2011 (“Criminal Law Amendment VIII”), Amendment to the Criminal Law of the People’s Republic of China on August 29, 2015 (“Criminal Law Amendment IX”), and Amendment to the Criminal Law of the People’s Republic of China on November 4, 2017 (“Criminal Law Amendment X”).

III. Civil and Commercial Enactments 13. General Principles of Civil Law of the People’s Republic of China (Repealed) Referred to as General Principles of Civil Law; adopted at the 4th Session of the Sixth National People’s Congress of the People’s Republic of China on April 12, 1986; publicized by No. 37 Order of the President of the People’s Republic of China, and implemented as of January 1, 1987; amended on August 27, 2009, at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China; repealed as of January 1, 2021, for the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28, 2020. 14. The Trademark Law of the People’s Republic of China (Rev. 2019) Referred to as Trademark Law; adopted at the 24th Session of the Standing Committee of the Fifth National People’s Congress of the People’s Republic of China on August 23, 1982; publicized by No. 10 Order of the Standing Committee of the Fifth National People’s Congress of the People’s Republic of China, and implemented as of March 1, 1983; amended for the first time on February 22, 1993, at the 30th Session of the Standing Committee of the Seventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China; amended for the second time on October 27,

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2001, at the 24th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China; amended for the third time on August 30, 2013, at the 4th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China; amended for the fourth time on April 23, 2019, at the 10th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Construction Law of the People’s Republic of China and Other Seven Laws. 15. The Maritime Law of the People’s Republic of China (1992) Referred to as Maritime Law; adopted at the 28th Session of the Standing Committee of the Seventh National People’s Congress of the People’s Republic of China on November 7, 1992; publicized on November 7, 1992, and implemented as of July 1, 1993. 16. The Company Law of the People’s Republic of China (Rev. 2018) Referred to as Company Law; adopted at the 5th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China on December 29, 1993; publicized by No. 16 Order of the President of the People’s Republic of China, and implemented as of July 1, 1994; amended for the first time on December 25, 1999, at the 13th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Company Law of the People’s Republic of China; amended for the second time on August 28, 2004, at the 11th Session of the Standing Committee of the Tenth National People’s Congress in accordance with the Decision on Revising the Company Law of the People’s Republic of China; revised at the 18th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on October 27, 2005; amended for the third time on December 28, 2013, at the 6th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Protecting the Marine Environment and Other Six Laws; amended for the fourth time on October 26, 2018, at the 6th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Company Law of the People’s Republic of China. 17. The Guaranty Law of the People’s Republic of China (Repealed) Referred to as Guaranty Law; adopted at the 14th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China on June 30, 1995; publicized by No. 50 Order of the President of the People’s Republic of China on June 30, 1995, and implemented as of October 1, 1995; repealed as of January 1, 2021, for the adoption of the Civil Code of the People’s Republic of China

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at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28, 2020. 18. The Auction Law of the People’s Republic of China (Rev. 2015) Referred to as Auction Law; adopted at the 20th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China on July 5, 1996; publicized by No. 70 Order of the President of the People’s Republic of China on July 5, 1996, and implemented as of January 1, 1997; amended for the first time on August 28, 2004, at the 11th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Auction Law of the People’s Republic of China; and amended for the second time on April 24, 2015, at the 14th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Electric Power Law of the People’s Republic of China and Other Five Laws. 19. The Contract Law of the People’s Republic of China (Repealed) Referred to as Contract Law; adopted at the 2nd Session of the Ninth National People’s Congress of the People’s Republic of China on March 15, 1999; publicized by No. 15 Order of the President of the People’s Republic of China on March 15, 1999, and implemented as of October 1, 1999; repealed as of January 1, 2021, for the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28, 2020. 20. The Law of the People’s Republic of China on Enterprise Bankruptcy (2007) Referred to as Enterprise Bankruptcy Law; adopted at the 23rd Session of the Standing Committee of the Tenth National People’s Congress on August 27, 2006; publicized by No. 54 Order of the President of the People’s Republic of China, and implemented as of June 1, 2007. 21. The Property Law of the People’s Republic of China (Repealed) Referred to as Property Law; adopted at the 5th Session of the Tenth National People’s Congress of the People’s Republic of China on March 16, 2007; publicized by No. 62 Order of the President of the People’s Republic of China on March 16, 2007, and implemented as of October 1, 2007; repealed as of January 1, 2021, for the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28, 2020. 22. The Tort Law of the People’s Republic of China (Repealed) Referred to as Tort Law; adopted at the 12th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China on December 26, 2009; publicized by No. 21 Order of the President of the People’s Republic of China on December 26, 2009, and implemented as of July 1, 2010;

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repealed as of January 1, 2021, for the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28, 2020. 23. General Rules of the Civil Law of the People’s Republic of China (Repealed) Referred to as General Rules of the Civil Law; adopted at the 5th Session of the Twelfth National People’s Congress of the People’s Republic of China on March 15, 2017; publicized by No. 66 Order of the President of the People’s Republic of China on March 15, 2017, and implemented as of October 1, 2017; repealed as of January 1, 2021, for the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28, 2020.

IV. Economic Enactments 24. The Law of the People’s Republic of China on Protecting Consumer Rights and Interests (Rev. 2013) Referred to as Law on Protecting Consumer Rights and Interests; adopted at the 4th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China on October 31, 1993 and publicized by No. 11 Order of the President of the People’s Republic of China on October 31, 1993; amended for the first time on August 27, 2009, at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China; amended for the second time on October 25, 2013, at the 5th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Protecting Consumer Rights and Interests.

V. Procedural Enactments 25. The Criminal Procedure Law of the People’s Republic of China (Rev. 2018) Referred to as Criminal Procedure Law; adopted at the 2nd Session of the Fifth National People’s Congress on July 1, 1979, publicized by No. 10 Order of the President of the People’s Republic of China; amended for the first time on March 17, 1996, at the 4th Session of the Eighth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Criminal Procedure Law of the People’s Republic of China; amended for the second time on March 14, 2012, at the 5th Session of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Criminal Procedure Law of the People’s Republic of China; and amended for the third time on October 26, 2018,

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at the 6th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Criminal Procedure Law of the People’s Republic of China. 26. The Administrative Procedure Law of the People’s Republic of China (Rev. 2017) Referred to as Administrative Procedure Law; adopted at the 2nd Session of the Seventh National People’s Congress of the People’s Republic of China on April 4,1989, publicized by No. 16 Order of the President of the People’s Republic of China, and implemented as of October 1, 1990; amended for the first time on November 1, 2014, at the 11th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Administrative Procedure Law of the People’s Republic of China; and amended for the second time on June 27, 2017, at the 28th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Civil Procedure Law of the People’s Republic of China and the Administrative Procedure Law of the People’s Republic of China. 27. The Civil Procedure Law of the People’s Republic of China (Rev. 2017) Referred to as Civil Procedure Law; adopted at the 4th Session of the Seventh National People’s Congress of the People’s Republic of China on April 9, 1991, publicized by No. 44 Order of the President of the People’s Republic of China; amended for the first time on October 28, 2007, at the 30th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Civil Procedure Law of the People’s Republic of China; amended for the second time on August 31, 2012, at the 28th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Civil Procedure Law of the People’s Republic of China; and amended for the third time on June 27, 2017, at the 28th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Civil Procedure Law of the People’s Republic of China and the Administrative Procedure Law of the People’s Republic of China. 28. The Arbitration Law of the People’s Republic of China (Rev. 2017) Referred to as Arbitration Law; adopted at the 9th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China on August 31, 1994; amended for the first time on August 27, 2009, at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China; and amended for the second time on September 1, 2017, at the 29th Session of the Standing Committee of the Twelfth National People’s

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Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Judges and Other Seven Laws. 29. The Special Maritime Procedure Law of the People’s Republic of China (2000) Referred to as Special Maritime Procedure Law; adopted at the 13th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China on December 25, 1999; publicized by No. 28 Order of the President of the People’s Republic of China on December 25, 1999, and implemented as of July 1, 2000. 30. The Law of the People’s Republic of China on Notarization (Rev. 2017) Referred to as Notarization Law; adopted at the 17th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on August 28, 2005, publicized by No. 76 Order of the President of the People’s Republic of China; amended for the first time on April 24, 2015, at the 14th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Compulsory Education Law of the People’s Republic of China and Other Four Laws; and amended for the second time on September 1, 2017, at the 29th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Judges and Other Seven Laws. 31. The Law of the People’s Republic of China on the Application of Laws to Foreign-Related Civil Relations (2011) Referred to as Law on the Application of Laws to Foreign-Related Civil Relations; adopted at the 17th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China on October 28, 2010, publicized by No. 36 Order of the President of the People’s Republic of China, and implemented as of April 1, 2011.

VI. Administrative Regulations 32. Regulations for Administering the Registration of Exploring and Mining the Mineral Resources (Rev. 2014) Publicized by No. 241 Executive Order of the State Council of the People’s Republic of China on February 12, 1998; revised on July 29, 2014, by the State Council in accordance with the Decision of the State Council of the People’s Republic of China on Revising Certain Administrative Regulations.

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33. Regulations for Transferring Exploration Rights and Mining Rights (Rev. 2014) Publicized by No. 242 Executive Order of the State Council of the People’s Republic of China on February 12, 1998; revised on July 29, 2014, by the State Council in accordance with the Decision of the State Council of the People’s Republic of China on Revising Certain Administrative Regulations. 34. Regulations for Implementing the Administrative Penalties by the Customs of the People’s Republic of China (2004) Referred to as Regulations for Implementing the Administrative Penalties by the Customs; adopted at the 62nd Executive Meeting of the State Council of the People’s Republic of China on September 1, 2004, publicized by No. 420 Executive Order of the State Council, and implemented as of November 1, 2004. 35. Measures for the Payment of Court Fees (2007) Adopted at the 159th Executive Meeting of the State Council of the People’s Republic of China on December 8, 2006, publicized by No. 481 Executive Order of the State Council on December 19, 2006, and implemented as of April 1, 2007. 36. Regulations of the People’s Republic of China on the Disclosure of Government Information (Rev. 2019) Referred to as Regulations on the Disclosure of Government Information, adopted at the 165th Executive Meeting of the State Council of the People’s Republic of China on January 17, 2007, publicized by No. 492 Executive Order of the State Council, and revised under No. 711 Executive Order of the State Council of the People’s Republic of China on April 13, 2019. 37. Regulations of the People’s Republic of China on the Customs Protection of Intellectual Property Rights (Rev. 2018) Referred to as Regulations on the Customs Protection of Intellectual Property Rights, publicized by No. 395 Executive Order of the State Council of the People’s Republic of China on December 2, 2003; revised for the first time on March 24, 2010, by the State Council in accordance with the Decision of the State Council of the People’s Republic of China on Revising the Regulations on the Customs Protection of Intellectual Property Rights and revised for the second time on March 19, 2018, by the State Council in accordance with the Decision of the State Council of the People’s Republic of China on Revising and Repealing Certain Administrative Regulations.

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VII. Judicial Interpretations and Other Normative Documents Administrative Issues 38. Rules of the Supreme People’s Court on Trying Administrative Cases Involving Government Information Disclosure (SPC JI No. 17 [2011]) Referred to as Rules on Trying Administrative Cases Involving Government Information Disclosure; adopted at the 1505th Meeting of the Adjudication Committee of the Supreme People’s Court on December 13, 2010, publicized on July 29, 2011, and implemented as of August 13, 2011. 39. Judicial Interpretation of the Supreme People’s Court on Certain Issues about the Application of the State Compensation Law of the People’s Republic of China (I) (SPC JI NO. 4 [2011]) Referred to as Judicial Interpretation on Certain Issues about the Application of the State Compensation Law (I); adopted at the 1511th Meeting of the Adjudication Committee of the Supreme People’s Court on February 14, 2011, publicized on February 28, 2011, and implemented as of March 18, 2011. 40. Rules of the Supreme People’s Court on Certain Issues about the Trial of Administrative Cases Involving Authorization and Determination of Trademark Rights (SPC JI No. 2 [2017]) Referred to as Rules on Certain Issues about the Administrative Cases Involving Authorization and Determination of Trademark Rights; adopted at the 1703rd Meeting of the Adjudication Committee of the Supreme People’s Court on December 12, 2016, publicized on January 10, 2017, and implemented as of March 1, 2017. Criminal Issues 41. Judicial Interpretation of the Supreme People’s Court on Certain Issues Concerning Specific Application of Laws in Trying Cases Involving Misappropriation of Public Funds (SPC JI No. 9 [1998]) Referred to as Judicial Interpretation on Certain Issues Concerning the Specific Application of Laws in Trying Cases Involving Misappropriation of Public Funds; adopted at the 972nd Meeting of the Adjudication Committee of the Supreme People’s Court on April 6, 1998, publicized on April 29, 1998, and implemented as of May 9, 1998. 42. Specific Rules of the Supreme People’s Court on the Trial Procedures for Reopening a Criminal Case (for Trial Implementation) (SPC JI No. 31 [2001]) Referred to as Specific Rules on the Trial Procedures for Reopening a Criminal Case; adopted at the 1196th Meeting of the Adjudication Committee of the

Cited Laws, Regulations, Judicial Interpretations and Other Normative …

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Supreme People’s Court on October 18, 2001, publicized on December 26, 2001 and implemented as of January 1, 2002. 43. Supplementary Rules of the Supreme People’s Court and the Supreme People’s Procuratorate on Determining the Count of Criminal Accusations in Implementing the Criminal Law of the People’s Republic of China (III) (SPC JI No. 16 [2007]) Referred to as Supplementary Rules on Determining the Count of Criminal Accusations in Implementing the Criminal Law (III); adopted at the 1436th Meeting of the Adjudication Committee of the Supreme People’s Court on August 27, 2007 and at the 82nd Meeting of the Tenth Procuratorial Committee of the Supreme People’s Procuratorate on September 7, 2007, publicized on October 25, 2007, and implemented as of November 6, 2007. 44. Opinions of the Supreme People’s Court on Implementing the Criminal Policy of Tempering Justice with Mercy (SPC Doc. No. 9 [2010]) Referred to as Opinions on Implementing the Criminal Policy of Tempering Justice with Mercy, and implemented as of February 8, 2010. 45. Opinions of the Supreme People’s Court, the Supreme People’s Procuratorate, Ministry of Public Security and Ministry of Justice on Punishing Sexual Crimes against the Infants in Accordance with Law (SPC Doc. No. 12 [2013]) Referred to as Opinions on Punishing Sexual Crimes against the Infants in Accordance with Law, and publicized on October 23, 2013 by the Supreme People’s Court, the Supreme People’s Procuratorate, Ministry of Public Security and Ministry of Justice. 46. Judicial Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Certain Issues Regarding Application of Laws in Criminal Cases Involving Organizing Cult Group and Making Use of Cults to Sabotage Law Enforcement (SPC JI No. 3 [2017]) Referred to as Judicial Interpretation on Certain Issues Regarding Application of Laws in Criminal Cases Involving Organizing Cult Group and Making Use of Cults to Sabotage Law Enforcement; adopted at the 1706th Meeting of the Adjudication Committee of the Supreme People’s Court on January 4, 2017, and at the 58th Meeting of the Twelfth Procuratorial Committee of the Supreme People’s Procuratorate on December 8, 2016, publicized on January 25, 2017, and implemented as of February 1, 2017. 47. Judicial Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Certain Issues Regarding the Application of Laws in Handling Criminal Cases Involving Malicious Litigation (SPC JI No. 17 [2018]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Laws in Handling Criminal Cases Involving Malicious Litigation; adopted at the

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1732nd Meeting of the Adjudication Committee of the Supreme People’s Court on January 25, 2018, and at the 2nd Meeting of the 13th Procuratorial Committee of the Supreme People’s Procuratorate on June 13, 2018, and implemented as of October 1, 2018. Civil and Commercial Issues 48. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of the Contract Law of the People’s Republic of China (I) (SPC JI No. 19 [1999]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of the Contract Law (I); adopted at the 1090th Meeting of the Adjudication Committee of the Supreme People’s Court on December 1, 1999, publicized on December 19, 1999 and implemented as of December 29, 1999. 49. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of the Guaranty Law of the People’s Republic of China (SPC JI No. 44 [2000]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of the Guaranty Law; adopted at the 1133rd Meeting of the Adjudication Committee of the Supreme People’s Court on September 29, 2000, publicized on December 8, 2000, and implemented as of December 13, 2000. 50. Judicial Interpretation of Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Civil Cases Involving Trademark Disputes (SPC JI No. 32 [2002]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Civil Cases Involving Trademark Disputes; adopted at the 1246th Meeting of the Adjudication Committee of the Supreme People’s Court on October 12, 2002, publicized on October 12, 2002, and implemented as of October 16, 2002 51. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of the Marriage Law of the People’s Republic of China (I) (SPC JI No. 30 [2001]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of the Marriage Law (I); adopted at the 1202nd Meeting of the Adjudication Committee of the Supreme People’s Court on December 24, 2001, publicized on December 25, 2001, and implemented as of December 27, 2001. 52. Reply by the Supreme People’s Court to the Issue of Priority of Payment for Construction Project (SPC JI No. 16 [2002]) Referred to as Reply to the Issue of Priority of Payment for Construction Project; adopted at the 1225th Meeting of the Adjudication Committee of the Supreme People’s Court on June 11, 2002, publicized on June 20, 2002, and implemented as of June 27, 2002.

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53. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in the Trial of Contract Disputes for the Building of Construction Projects (SPC JI No. 14 [2004]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Laws in the Trial of Contract Disputes for the Building of Construction Projects; adopted at the 1327th Meeting of the Adjudication Committee of the Supreme People’s Court on September 29, 2004, publicized on October 25, 2004, and implemented as of January 1, 2005. 54. Rules of the Supreme People’s Court on Certain Issues in Hearing Cases Involving Letter of Credit Disputes (SPC JI No. 13 [2005]) Referred to as Rules on Certain Issues in Hearing Cases Involving Letter of Credit Disputes; adopted at the 1368th Meeting of the Adjudication Committee of the Supreme People’s Court on October 24, 2005, publicized on November 14, 2005, and implemented as of January 1, 2006. 55. Rules of the Supreme People’s Court on Enforcing the Mortgaged Houses by the People’s Courts (SPC JI No. 14 [2005]) Referred to as Rules on Enforcing the Mortgaged Houses by the People’s Courts; adopted at the 1371st Meeting of the Adjudication Committee of the Supreme People’s Court on November 14, 2005, publicized on December 14, 2005, and implemented as of December 21, 2005. 56. Rules of the Supreme People’s Court on Certain Issues Regarding the Application of the Company Law of the People’s Republic of China (I) (SPC JI No. 3 [2006]) Referred to as Rules on Certain Issues Regarding the Application of the Company Law (I); adopted at the 1382nd Meeting of the Adjudication Committee of the Supreme People’s Court on March 27, 2006, and revised on February 17, 2014, at the 1607th Meeting of the Adjudication Committee of the Supreme People’s Court in accordance with the Decision on Revising the Rules on Certain Issues Regarding the Application of the Company Law of the People’s Republic of China. 57. Rules of the Supreme People’s Court on Certain Issues Regarding the Application of the Company Law of the People’s Republic of China (II) (SPC JI No. 6 [2008]) Referred to as Rules on Certain Issues Regarding the Application of the Company Law (II); adopted at the 1447th Meeting of the Adjudication Committee of the Supreme People’s Court on May 5, 2008, and revised on February 17, 2014, at the 1607th Meeting of the Adjudication Committee of the Supreme People’s Court in accordance with the Decision on Revising the Rules on Certain Issues Regarding the Application of the Company Law of the People’s Republic of China.

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58. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of the Contract Law of the People’s Republic of China (II) (SPC JI No. 5 [2009]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of the Contract Law (II); adopted at the 1462nd Meeting of the Adjudication Committee of the Supreme People’s Court on February 9, 2009, publicized on April 24, 2009, and implemented as of May 13, 2009. 59. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding Specific Application of Laws in Hearing Cases Involving Disputes over Contracts for Lease of Urban Houses (SPC JI No. 11 [2009]) Referred to as Judicial Interpretation on Certain Issues Regarding Specific Application of Laws in Hearing Cases Involving Disputes over Contracts for Lease of Urban Houses; adopted at the 1469th Meeting of the Adjudication Committee of the Supreme People’s Court on June 22, 2009, publicized on July 30, 2009, and implemented as of September 1, 2009. 60. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws for Hearing Cases Involving Environmental Tort Disputes (SPC JI No. 12 [2015]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Laws for Hearing Cases Involving Environmental Tort Disputes; adopted at the 1644th Meeting of the Adjudication Committee of the Supreme People’s Court on February 9, 2015, publicized on June 1, 2015, and implemented as of June 3, 2015. 61. Rules of the Supreme People’s Court on Certain Issues about the Application of Laws in Hearing Private Lending Cases (SPC JI No. 18 [2015]) Referred to as Rules on Certain Issues about the Application of Laws in Hearing Private Lending Cases; adopted at the 1655th Meeting of the Adjudication Committee of the Supreme People’s Court on June 23, 2015, publicized on August 6, 2015, and implemented as of September 1, 2015. 62. Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee (SPC JI No. 24 [2016]) Referred to as Rules on Certain Issues in Hearing Disputes over Independent Letter of Guarantee; adopted at the 1688th Meeting of the Adjudication Committee of the Supreme People’s Court on July 11, 2016, publicized on November 18, 2016, and implemented as of December 1, 2016. 63. Rules of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Cases about Mining Rights Disputes (SPC JI No. 12 [2017]) Referred to as Rules on Certain Issues Regarding the Application of Laws in Hearing Cases about Mining Rights Disputes; adopted at the 1710th Meeting of the Adjudication Committee of the Supreme People’s Court on February 20, 2017, publicized on June 24, 2017, and implemented as of July 27, 2017.

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Procedural Issues 64. Rules of the Supreme People’s Court on Certain Issues Regarding Enforcement by the People’s Courts (for Trial Implementation) (SPC JI No. 15 [1998]) Referred to as Rules on Certain Issues Regarding Enforcement by the People’s Courts; adopted at the 992nd Meeting of the Adjudication Committee of the Supreme People’s Court on June 11, 1998, publicized on July 8, 1998, and implemented as of July 8, 1998; readjusted on December 16, 2008 in accordance with the Decision of the Supreme People’s Court on Adjusting the Citation Sequence Number of the Civil Procedure Law of the People’s Republic of China in the Judicial Interpretation and Other Documents. 65. Rules of the Supreme People’s Court on Evidence in Civil Actions (SPC JI No. 33 [2001]) Referred to as Rules on Evidence in Civil Actions; adopted at the 1201st Meeting of the Adjudication Committee of the Supreme People’s Court on December 6, 2001, and revised at the 1777th Meeting of the Adjudication Committee of the Supreme People’s Court on October 14, 2019 in accordance with the Decision of the Supreme People’s Court on Revising the Rules of Evidence in Civil Actions. 66. Judicial Interpretation of the Supreme People’s Court on Certain Issues in Applying the Special Maritime Procedure Law of the People’s Republic of China (SPC JI No. 3 [2003]) Referred to as Judicial Interpretation on Certain Issues in Applying the Special Maritime Procedure Law; adopted at the 1259th Meeting of the Adjudication Committee of the Supreme People’s Court on December 3, 2002, publicized on January 6, 2003, and implemented as of February 1, 2003. 67. Rules of the Supreme People’s Court for Sealing up, Distraining and Freezing Property in the Enforcement of Civil Cases by the People’s Courts (SPC JI No.15 [2004]) Referred to as Rules for Sealing up, Distraining and Freezing Property in the Enforcement of Civil Cases by the People’s Courts; adopted at the 1330th Meeting of the Adjudication Committee of the Supreme People’s Court on October 26, 2004, publicized on November 4, 2004, and implemented as of January 1, 2005. 68. Rules of the Supreme People’s Court for Auction or Sale of Property by the People’s Courts in the Enforcement of Civil Cases (SPC JI No. 16 [2004]) Referred to as Rules for Auction or Sale of Property by the People’s Courts in the Enforcement of Civil Cases; adopted at the 1330th Meeting of the Adjudication Committee of the Supreme People’s Court on October 26, 2004, publicized on November 15, 2004, and implemented as of January 1, 2005.

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69. Rules of the Supreme People’s Court on Certain Issues Regarding Change and Addition of the Parties during Enforcement of Civil Cases (SPC JI No. 21 [2016]) Referred to as Rules on Certain Issues Regarding Change and Addition of the Parties during Enforcement of Civil Cases; adopted at the 1691st Meeting of the Adjudication Committee of the Supreme People’s Court on August 29, 2016, publicized on November 7, 2016, and implemented as of December 1, 2016. 70. Judicial Interpretation of the Supreme People’s Court on Certain Issues in Applying the Arbitration Law of the People’s Republic of China (SPC JI No. 7 [2016]) Referred to as Judicial Interpretation on Certain Issues in Applying the Arbitration Law; adopted at the 1375th Meeting of the Adjudication Committee of the Supreme People’s Court on December 26, 2005, publicized on August 23, 2006, and implemented as of September 8, 2006. 71. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding Enforcement Procedures in Applying the Civil Procedure Law of the People’s Republic of China (SPC JI No. 13 [2008]) Referred to as Judicial Interpretation on Certain Issues Regarding Enforcement Procedures in Applying the Civil Procedure Law; adopted at the 1452nd Meeting of the Adjudication Committee of the Supreme People’s Court on September 8, 2008, publicized on November 3, 2008, and implemented as of January 1, 2009. 72. Judicial Interpretation of the Supreme People’s Court in Applying the Criminal Procedure Law of the People’s Republic of China (SPC JI No. 21 [2012]) Referred to as Judicial Interpretation in Applying the Criminal Procedure Law; adopted at the 1559th Meeting of the Adjudication Committee of the Supreme People’s Court on November 5, 2012, publicized on December 20, 2012, and implemented as of January 1, 2013. 73. Judicial Interpretation of the Supreme People’s Court in Applying the Civil Procedure Law of the People’s Republic of China (SPC JI No. 5 [2015]) Referred to as Judicial Interpretation in Applying the Civil Procedure Law; adopted at the 1636th Meeting of the Adjudication Committee of the Supreme People’s Court on December 18, 2014, publicized on January 30, 2015, and implemented as of February 4, 2015. 74. Rules of the Supreme People’s Court for the People’s Courts to Handle Certain Issues Regarding Enforcement Objection and Reconsideration Cases (SPC JI No. 10 [2015]) Referred to as Rules for the People’s Courts to Handle Certain Issues Concerning Enforcement Objection and Reconsideration Cases; adopted at the 1638th Meeting

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of the Adjudication Committee of the Supreme People’s Court on December 29, 2014, publicized on May 5, 2015, and implemented as of May 5, 2015. 75. Judicial Interpretation of the Supreme People’s Court in Applying the Administrative Procedure Law of the People’s Republic of China (SPC JI No. 1 [2018]) Referred to as Judicial Interpretation in Applying the Administrative Procedure Law; adopted at the 1726th Meeting of the Adjudication Committee of the Supreme People’s Court on November 13, 2017, publicized on February 6, 2018, and implemented as of February 8, 2018. 76. Rules of the Supreme People’s Court on Handling Certain Issues Regarding the Reconciliation in Enforcement (SPC JI No. 3 [2018]) Referred to as Rules on Handling Certain Issues Regarding the Reconciliation in Enforcement; adopted at the 1725th Meeting of the Adjudication Committee of the Supreme People’s Court on November 6, 2017, publicized on February 22, 2018, and implemented as of March 1, 2018. 77. Rules of the Supreme People’s Court on Handling Certain Issues about the Enforcement of the Notarized Debt Instruments (SPC JI No. 18 [2018]) Referred to as Rules on Handling Certain Issues about the Enforcement of the Notarized Debt Instruments; adopted at the 1743rd Meeting of the Adjudication Committee of the Supreme People’s Court on June 25, 2018, publicized on September 30, 2018, and implemented as of October 1, 2018. 78. Opinions of the Supreme People’s Court on the Coordination of Case Filing, Trial, and Enforcement by the People’s Courts (SPC Doc. No. 9 [2018]) Referred to as Opinions on the Coordination of Case Filing, Trial, and Enforcement by the People’s Courts, publicized and implemented as of May 28, 2018.

VIII. Other Documents 79. Measures for Handling the Maritime Compensation Limits as to Vessels of Less than 300 Gross Tonnage and Vessels Engaging in Coastal Transport and Coastal Operations (1994) Publicized by No. 5 Ministerial Order of the Ministry of Communications of the People’s Republic of China on November 15, 1993, and implemented as of January 1, 1994. 80. Interim Measures for Governing Grant and Assignment of Mining Rights (Rev. 2014) Publicized by the Ministry of Land and Resources of the People’s Republic of China on October 31, 2000, implemented as of October 31, 2000, and revised in accordance

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with Article 55 of the Notice issued by the Ministry of Land and Resources on Suspending the Implementation of the Notice on the Issuance of the Interim Measures for Governing Grant and Assignment of Mining Rights on July 16, 2014. 81. Administrative Measures for Handling Certain Issues in the Valuation of State-Owned Assets (2002) Adopted at the Ministerial Meeting of the Ministry of Finance, publicized on December 31, 2001, and implemented as of January 1, 2002. 82. Measures for Investigating and Handling the Land Ownership Disputes (Rev. 2010) Publicized by No. 17 Ministerial Order of the Ministry of Land and Resources of the People’s Republic of China on January 3, 2003, and revised in accordance with the Decision by the Ministry of Land and Resources on Revising Certain Regulations on November 30, 2010. 83. Interim Measures for Administering the Evaluation of State-Owned Assets of State-Owned Enterprises (2005) Adopted at the 31st Directors’ General Meeting of the State-owned Assets Supervision and Administration Commission of the State Council, publicized on August 25, 2005, and implemented as of September 1, 2005. 84. Summary Minutes of the Supreme People’s Court Symposium on Hearing Cases Involving Compulsory Liquidation of Companies (SPC Doc. No. 52 [2009]) Referred to as Summary Minutes on Hearing Cases Involving Compulsory Liquidation of Companies, and implemented as of November 4, 2009. 85. Measures of the Customs of the People’s Republic of China for Implementing the Regulations of the People’s Republic of China on Customs Protection of Intellectual Property Rights (2009) Referred to as Measures for Implementing the Regulations on Customs Protection of Intellectual Property Rights; adopted at the Executive Meeting of General Administration of the Customs of the People’s Republic of China on February 17, 2009, publicized on March 3, 2009, and implemented as of July 1, 2009. Simultaneously, Measures of the Customs of the People’s Republic of China for Implementing the Regulations of the People’s Republic of China on Customs Protection of Intellectual Property Rights publicized by No. 114 Executive Order of the General Administration of the Customs of the People’s Republic of China on May 25, 2005 was repealed.

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86. Decision of the Standing Committee of the National People’s Congress on Questions Regarding Regulation of Expert Evaluation in the Judiciary (Rev. 2015) Referred to as Decision on Questions Regarding Regulation of Expert Evaluation in the Judiciary; adopted at the 14th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on February 28, 2005, and implemented as of October 1, 2005; revised in accordance with the Decision on Revising the Law of the People’s Republic of China on Compulsory Education and Other Four Laws adopted at the 14th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China on April 24, 2015.

Contents

Cases by Justices Shanghai Oubao Biological Technology Co., Ltd. v. Liaoning Telaiwei Property Development Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yunteng Hu and Guoxian Wang

3

Cases at the Adjudication Committee The People v. Liu X and Wang X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Haiying Xing

23

The People v. Qin X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Haiying Xing

31

The People v. Rou X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aniwar Simayi and Xu Liu

43

Yang X v. Guizhou Xinguixing Automobile Sales & Service Co., Ltd. and Volkswagen Group Import (China) Co., Ltd. . . . . . . . . . . . . . . . . Yan Shang Chongqing Zhongji Logistics Co., Ltd. v. Chongqing Sanxia Guarantee Group Co., Ltd., Chongqing Import and Export Credit Guarantee Co., Ltd. et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xingye Yang Wu’ai Building Materials Factory of Lintao County v. Lintao Electric Power Company of Gansu Electric Power Company of the State Grid Corporation of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ming Chen Chongqing Aosi Lidu Entertainment Co., Ltd. v. The Fifth Intermediate People’s Court of Chongqing Municipality . . . . . . . . . . . . . . Li Jia

51

63

73

85

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Contents

Typical Cases Lin X v. Tianjin Jiuding Industrial Development Co., Ltd., Jiali Jingsheng (Tai’an) Real Estate Co., Ltd., et al. . . . . . . . . . . . . . . . . . . . . . . . Xuemei Zhang

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Beijing Datang Fuel Co., Ltd. v. Shandong Baifu Logistics Co., Ltd . . . . 109 Yuying Wang Yaodong Mining Co., Ltd., Zhashui County, Yang X v. Beijing Datang Fuel Co., Ltd., Tianjin Kaize International Trade Co., Ltd. . . . . . 117 Huihui Liu Jiangxi Lanhai International Trade Co., Ltd. v. China Arts & Crafts Import & Export Co., Ltd., Shanghai Kangcan Materials Co., Ltd., et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Qian Zhang Shanghai Fengrui Investment Consulting Co., Ltd. v. Shanghai Automotive Industry Sales Co., Ltd., Yangzhou Electromechanical Equipment Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Xuemei Zhang Gansu Jianxin Industrial Group, Co. Ltd. v. Minmetals International Trust Co., Ltd., Inner Mongolia Zhongxi Mining Co., Ltd., et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Guangyu Ding, Xin’er Chen, and Liang Zhang China Huarong Asset Management Co., Ltd., Henan Branch, Ma X v. Qingdao Free Trade Zone Huale International Trade Company, Henan Tianhui Energy Development Co., Ltd., et al. . . . . . . . . 163 Fang Mei and Yiqian Fan Gansu Huayuan Industrial Co., Ltd., et al. v. Bank of Lanzhou Co., Ltd., Qingyang Branch, et al. Gansu Longdong Auto Transport Co., Ltd. (Third Party in the First Instance), et al. . . . . . . . . . . . . . . . . . . . . 175 Xiaofei Liu and Junhong Zou Anhui Qiangzheng Chinese Medicine Co., Ltd. v. Dongfang Zhongxin Microfinance LLC., Linchuan District, Fuzhou City . . . . . . . . . 185 Runzhi Qin Han X v. PetroChina Jilin Oilfield Company . . . . . . . . . . . . . . . . . . . . . . . . . 191 Wenchao Wei and Kaimin Wu China Cinda Asset Management Co., Ltd., Liaoning Branch, Jia X (A) v. Dalian Qianyi Heavy Industry Co., Ltd., and Dalian Qianyi Heavy Equipment Co., Ltd., Jiang X (Defendants in the First Instance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Weiming Ji

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PowerChina Harbor Co., Ltd. v. Land Reserve Center of Pingtan Comprehensive Pilot Zone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 Jun He and Lidan Zhong Hainan Lingshui Baoyu Co., Ltd., Li X (A), et al. v. Sanya Zhicheng Color Printing Co., Ltd., Xu X, et al. . . . . . . . . . . . . . . . . . . . . . . . 221 Xianhe Jiang and Fei Luo Gansu August First State-Owned Farm v. Jinchang Cement (Group) Co., Ltd., State-Owned Assets Supervision and Administration Commission of the People’s Government of Jinchang City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Jinqi Hao Liu X v. Henan Jinbo Land Development Co., Ltd., Henan Yuanheng Construction Group Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 Jing Yan Chen X v. Liang X, Sanya Huihong Tourism Development Co., Ltd. . . . . 249 Yanzhu Gao and Jingjing Wang Northeast Electric Development Co., Ltd. v. China Development Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 Chun Yang Zhuzhou Haichuan Industrial Co., Ltd. v. Changsha Cai’e Subbranch of Bank of China Limited, Hunan Deyihong Metal Materials Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Shaoyang Liu Qinghai Jintai Financing Guarantee Co., Ltd. v. Shanghai Jinqiao Engineering Construction Development Co., Ltd., Qinghai Haixi Jiahe Hotel Management Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Changmao Shao Chen X v. Liu X, Guangdong Shantou Fishery Products Import and Export Corporation, et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 Huifeng Wan Yu X v. Xilin Gol League Longxing Mining Co., Ltd. . . . . . . . . . . . . . . . . . . 289 Jinlong Huang China Institute of Defense Science and Technology v. United Resources Education Development (Yanjiao) Co., Ltd. . . . . . . . . . . . . . . . . 299 Yan Zhu Lianyungang Zhenxing Industrial Group Co., Ltd. v. Jiangsu Huanyu Traffic Engineering Group Co., Ltd., Jiangsu Haitong Construction Project Group Co., Ltd., et al. . . . . . . . . . . . . . . . . . . . . . . . . . . 311 Guohui Xiang and Lijuan Huang

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Yu X v. Inner Mongolia Runpu Iron and Steel Co., Ltd., Ningcheng Xinma Foundry Co., Ltd., et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 Guohui Xiang and Dan Wei Laiwu Mining Co., Ltd. of Laiwu Steel Group Limited v. Shanxi Jinghai Industrial Co., Ltd., Fengzhen Xinxin Powdered Iron Co., Ltd., et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 Qinglin Jia and Di Yang Wuliangye Yibin Co., Ltd. v. Gansu Binhe Food Industrial (Group) Co., Ltd., Beijing Tan’s Ruifeng Commercial and Trading Co., Ltd. . . . . 341 Jiayin Cao ANDIS Company v. Trademark Review and Adjudication Board of the State Administration for Industry and Commerce, Ningbo Brofa Hairdressing Appliance Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 Lihua Mao DBS Bank Singapore v. Wuxi Humei Thermal Power Engineering Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 Bona Zhang Zhoushan Enji Shipping Development Co., Ltd., Yisheng Dahua Petrochemical Co., Ltd. v. Han X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 Ke Zhao Changjiang Geotechnical Engineering Corporation (Wuhan) v. Wenling Subbranch of China Construction Bank Co., Ltd., Zhongbo Construction Engineering Group Co., Ltd. . . . . . . . . . . . . . . . . . . 371 Ke Zhao Sinohydro Engineering Bureau No. 4 Co., Ltd. v. China CAMC Engineering Co., Ltd., Xining Railway Subbranch of China Construction Bank Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 Yinglin Xu Tang X, et al. v. The People’s Government of Jin’an District, Fuzhou City, Fujian Province, Jin’an Branch of Fuzhou Land and Resources Bureau . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 Yan Wang and Jing Lu Jiangguan Agricultural Economic Cooperative of Minqiang Village Committee, Xinzhou Town, Longlin Multiethnic Autonomous County, Guangxi Zhuang Autonomous Region v. The People’s Government of Longlin Multiethnic Autonomous County, the People’s Government of Baise City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 Xiujiang Guo and Qiaoyun Zhang

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Liu X v. The People’s Government of Yingzhou District, Fuyang City, Anhui Province, The Urban and Rural Management and Law Enforcement Bureau of Yingzhou District, Fuyang City, Anhui Province, et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 Lei Tong and Xiaoyu Xu Ouyang X v. The People’s Government of Panyu District, Guangzhou City, Guangdong Province . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 Chuxiao Song and Ninghui Huang Zhejiang Fangjue Import and Export Co., Ltd. v. Zhenjiang Customs of the People’s Republic of China, Anhui CONCH Group Ltd. (Third Party in the First Instance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 Qiang Wei and Qingxing Lin

Cases by Justices

Shanghai Oubao Biological Technology Co., Ltd. v. Liaoning Telaiwei Property Development Co. Ltd. (Dispute over Corporate Lending): Determination of Malicious Litigation in Civil Trials Yunteng Hu and Guoxian Wang

Rule The people’s courts are to protect the legitimate private lending relationships, whereas malicious collusion to initiate a malicious litigation intended to harm the legitimate rights and interests of other party or parties shall be sanctioned by law. If a people’s court finds in the course of reviewing the case that both parties in the loan situation may have probably launched a malicious litigation, the court should ex officio have access to relevant evidence, strictly examine the formation of mutual consent of both parties hereto, and carefully evaluate such details as the amount of the loan, the purpose of the loan, cash flow in both parties’ money transactions, borrowing or lending dealings, and specific conduct of the parties before and after the commencement of litigation, and other details. After a detailed questioning of the parties concerned, a comprehensive judgment about whether there is a malicious litigation is to be made.

Collegial Bench for the Second Instance: Yunteng Hu, Xiangyang Fan and Guoxian Wang Edited by Wenyan Ding; translated by Daxuan Zheng Y. Hu (B) Former Standing Member of the Adjudication Committee of the Supreme People’s Court of the People’s Republic of China, Beijing, China G. Wang The Fifth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Chongqing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_1

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Case Information 1. Parties Appellant (Plaintiff in the First Instance): Shanghai Oubao Biological Technology Co., Ltd. (hereinafter referred to as Oubao Biotech Company) Appellee (Defendant in the First Instance): Liaoning Telaiwei Property Development Co. Ltd. (hereinafter referred to as Liaoning Telaiwei Property Development Company) Complainant in the First Instance: Xie X 2. Procedural History First Instance: No. 15 [2010] Trial, Civ. Division, the Higher People’s Court of Liaoning Province (dated Mar. 21 of 2011) Retrial of First Instance: No. 13 [2012] Retrial, Civ. Division, the Higher People’s Court of Liaoning Province (dated May 20 of 2015) Second Instance: No. 324 [2015] Final, Civ. Division, the Supreme People’s Court (dated Oct. 27 of 2015) 3. Cause of Action Dispute over corporate lending

Essential Facts From July 2007 to March 2009, Oubao Biotech Company and Liaoning Telaiwei Property Development Company entered into nine loan contracts, under which Liaoning Telaiwei Property Development Company was to borrow a total of CNY 86.5 million from Oubao Biotech Company, with agreed interest rate being four times of the loan interest rate for the same year. The agreed purpose of the loan was that the loan can only be used for the real estate development project of Telaiwei International Garden. It was also agreed that, “the borrower will place the entire property of the company, including the land of Telaiwei International Garden with an area of 33,158.26 m2 (subject to the land certificate) (Liaoning Telaiwei Property Development Company undertakes that the land and the property are currently unencumbered) and the ground property as the mortgage; if the borrower cannot repay on time the principal of the loan, a default fee will be charged at 5% per day from the date of borrowing, in addition to the return of the principal and interest as agreed. The lender reserves the right to pursue other assets of the borrower if the assets listed above are insufficient to repay the principal”. After signing the loan contract, Oubao Biotech Company made a total of ten remittances, totaling CNY 86.5 million, while Liaoning Telaiwei Property Development Company transferred six remittances thereof on the same day or a few days after receiving the remittances, totaling CNY 70.5 million, five of which

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were transferred to Hanhuang Company, totaling CNY 64 million. In addition, in the signing and performance of the abovementioned contract, the two parties did not go through the mortgage registration process. In addition, during the period of the first instance lawsuit for repayment from Liaoning Telaiwei Property Development Company, Oubao Biotech Company still transferred three remittances to Liaoning Telaiwei Property Development Company, totaling CNY 3.6 million. Oubao Biotech Company was incorporated and established on September 13, 2005, with two shareholders, Li X and Qu X (A), and with Li X being the legal representative. On May 28, 2008, after an equity transfer and an increase in registered capital, the number of shareholders on the list increased to eight, of which Qu X (B) invested CNY 8.85 million, holding 73.75% of the shares; Jiang X invested CNY 240,000, holding 2% of the shares; Zong X invested CNY 240,000, holding 2% of the shares. At the same time, the legal representative was changed to Zong X. Liaoning Telaiwei Property Development Company was incorporated on January 12, 2006, the legal representative being Wang X (A). Hanhuang Company invested CNY 18 million, accounting for 90% of the registered capital; Wang X (A) contributed CNY 2 million, accounting for 10% of the registered capital. On August 16, 2010, the legal representative was changed to Jiang X. As recorded in the industrial and commercial administration files, when the company changed its registration, the signature of the licensee was made by Liu X, the appointed sole agent of Oubao Biotech Company during the first instance litigation, who is an employee of Oubao Biotech Company. The predecessor of Hanhuang Company is Shanghai Telaiwei Cosmetics Co., Ltd., which was established on March 26, 2002, with Wang X (A) contributing CNY 2 million, accounting for 67%; Qu X (B) contributing CNY one million, accounting for 33%, and Wang X (A) being the legal representative. On October 28 of the same year, the company information was changed, with Wang X (A)’s capital contribution of CNY 2 million, accounting for 67%, and Wang A’s capital contribution of CNY one million, accounting for 33%. On October 10, 2004, the company was renamed Hanhuang Company, and the company registration procedures were entrusted with Zong X. On July 5, 2011, the company was written off. During the first instance trial of the case, Oubao Biotech Company filed an application for property preservation with the Higher People’s Court of Liaoning Province on June 22, 2010, requesting seizure, attachment and freezing of the property of Liaoning Telaiwei Property Development Company worth CNY 58.5 million. Wang A placed two plots of his properties (F32-1 and F32-2 of No. X, located in X X Road, Heping District, Shenyang City, Liaoning Province, with a floor area of 236.4 m2 ). Wang X (B) also placed his own property (located in No. X, XX District, Shenyang City, with a total floor area of 671.76 m2 ) and Shaqi Cosmetics Co. Ltd. [hereinafter referred to as Shaqi Cosmetics Company, the shareholders being Wang X (C) and Xiu X] has also placed two factory buildings (located in XX village of Shenyang City, with a floor area of 212 and 946 m2 respectively) and a tract of land (totaling 4000 m2 ) as suretyship and guarantee for Oubao Biotech Company. On September 3, 2010, Oubao Biotech Company issued a reply letter to the Higher People’s Court of Liaoning Province, saying that it agreed to provide the Higher

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People’s Court of Liaoning Province with a property of land (totaling 12,026.91 m2 , worth RMB 200 million) located at No. X of XX Highway, Qingpu District, Shanghai Municipality as security or guarantee for property preservation, and the Higher People’s Court of Liaoning Province may at any time seize the abovementioned property as security for property preservation. Oubao Biotech Company admitted in the court trial that the aforementioned real estate belongs to Shanghai Telaiwei Cosmetics Co., Ltd. (hereinafter referred to as Shanghai Telaiwei Cosmetics Company). Shanghai Telaiwei Cosmetics Company was incorporated on December 9, 2002, with Wang X (A) being its legal representative. The shareholders are Wang X (A), Wang A and Zou X of Hanhuang Company, Zong X, Jiang X, Wang X (B) and Han X of Oubao Biotech Company. In addition, Wang A is also a board member of Shanghai Telaiwei Cosmetics Company, Zong X is the vice president and deputy general manager, Wang X(B) is the deputy general manager, and Huo X is a board member. On April 20, 2011, Oubao Biotech Company applied to the Higher People’s Court of Liaoning Province for the execution of civil judgment (No. 15 [2010] Trial, Civ. Division, the Higher People’s Court of Liaoning Province), and the said court filed the case for execution of the judgment on the same day. On July 12 of the same year, Oubao Biotech Company submitted a written application to the Higher People’s Court of Liaoning Province, saying that “in order to recover the capital as soon as possible and reduce the loss of our company, we agreed with the enforcee that we would allow the enforcee to sell the remaining properties of the project, but we must assign our financial personnel to collect the money, and the money of the sold properties must be deposited into the designated account of our company.” On September 6, 2011, the Higher People’s Court of Liaoning Province issued a notice of assistance to the Donggang Real Estate Administration Office, requesting the said office to transfer the aforementioned property directly to the name of the purchaser outside the said case on the ground that the seized property had been paid to the appellant for enforcement to offset the debt. After Oubao Biotech Company applied for execution of judgment, in addition to Xie X, other creditors of Liaoning Telaiwei Property Development Company, Shi’an Company, Linchuan Construction and Installation Engineering General Corporation (Jiangxi Province), Qianyang Construction and Installation Engineering General Corporation (Donggang City) have stated in the form of submitting objections to the court or via complaints through the deputies of Local People’s Congress to the Higher People’s Court of Liaoning Province that Oubao Biotech Company and Liaoning Telaiwei Property Development Company are engaged in malicious litigation, which has greatly jeopardized the equity and rights of the contractors. During the first instance of retrying the case, Xie X provided to the Higher People’s Court of Liaoning Province a copy of civil judgment made by the First Intermediate People’s Court of Shanghai Municipality (No. 426 [2008] Final, Civ. Division, the First Intermediate People’s Court of Shanghai Municipality), concerning a dispute over a franchise contract in which Zhang X and Jia X launched a legal action against

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Hanhuang Company and Oubao Biotech Company. The judgment by the First Intermediate People’s Court of Shanghai Municipality ascertained that the legal representative of Hanhuang Company is Wang X (A), and the appointed agent for Oubao Biotech Company and Hanhuang Company is Zong X, an employee of Hanhuang Company. During the second instance of retrying the case, it is additionally ascertained that the addresses stated in the application forms for opening bank settlement accounts on behalf of Oubao Biotech Company and Liaoning Telaiwei Property Development Company are both at No. X, XX Road, Donggang City, and Cui X is entrusted with handling the formalities. In May 2010, Wei X was authorized by Liaoning Telaiwei Property Development Company to open bank accounts, and in September 2011, he opened bank accounts on behalf of Oubao Biotech Company. The contact person for both accounts is Wei X, and the contact telephone number is 150 ×××××××××, which is the same as the contact telephone number of Liaoning Telaiwei Property Development Company in the civil complaint submitted to the Higher People’s Court of Liaoning Province by Oubao Biotech Company on June 10, 2010. Wang X (A) and Qu X (B) are husband and wife. The shareholders of Shaqi Cosmetics Company, Wang X (C) and Xiu X are the father and the mother of Wang X (A) respectively. Wang X (C), the shareholder of Oubao Biotech Company, is the daughter of Wang X (A)’s brother, Wang X (B), and Wang X (A) is related to Wang A as brother and sister. The Higher People’s Court of Liaoning Province held in the first instance that the loan contract signed between Oubao Biotech Company and Liaoning Telaiwei Property Development Company manifested the genuine mutual intention of both parties and should be confirmed. After Oubao Biotech Company made appropriate payments to Liaoning Telaiwei Property Development Company according to the contract, Liaoning Telaiwei Property Development Company had not repaid the money within the purported period, as agreed upon in the contract. Therefore, the request from Oubao Biotech Company to get the arrears repaid immediately by Liaoning Telaiwei Property Development Company is reasonable and should be supported by the people’s court. However, as the case involves a corporate loan contract between enterprises (businesses), the request by Oubao Biotech Company of Liaoning Telaiwei Property Development Company to bear four times the interest rate of the loan and liquidated damages is not supported by the court. The court modified the interest rate payable by Liaoning Telaiwei Development Company into the loan interest rate stipulated by the People’s Bank of China during the same period. Accordingly, on March 21, 2011, the court issued a civil judgment (No. 15 [2010] Trial, Civ. Division, the Higher People’s Court of Liaoning Province), ordering that Liaoning Telaiwei Property Development Company repay the loan principal of CNY 86.5 million together with the interest calculated at a rate published by the People’s Bank of China for the same period from the actual date of the loan to the date when the payment date is determined in the judgment. After the judgment (No. 15 [2010] Trial, Civ. Division, the Higher People’s Court of Liaoning Province) took legal effect, Xie X, an outsider, complained to the court

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of first instance that Liaoning Telaiwei Property Development Company and Oubao Biotech Company had maliciously colluded to infringe upon the legitimate rights and interests of Xie X, an investor of Telaiwei International Garden real estate project, by means of fabricating fictitious equity and debts, and requested the court of first instance to retry the case. The court of first instance made a civil ruling on January 4, 2012 (No. 8 [2012] Ruling, Filing and Registration Division, the Higher People’s Court of Liaoning Province) to retry the case. In the course of retrial, the Higher People’s Court of Liaoning Province holds, pursuant to Xie X’s claim, the disputant point in the case is whether there is a genuine loan relationship between Oubao Biotech Company and Liaoning Telaiwei Property Development Company. It was found by the court that from July 2007 to March 2009, Liaoning Telaiwei Property Development Company and Oubao Biotech Company had consecutively signed nine loan contracts, in which Liaoning Telaiwei Property Development Company borrowed a total of CNY 86.5 million from Oubao Biotech Company, and both parties agreed that the loan could only be used for financing Telaiwei International Garden real estate project. After signing the loan contracts, Oubao Biotech Company made a total of 10 remittances, remitting the contracted CNY 86.5 million to Liaoning Telaiwei Property Development Company, while Liaoning Telaiwei Property Development Company immediately transferred 6 of the remittances on the same day or a few days after receiving the remittances, transferring a total of CNY 70.5 million. Five of them were transferred to Hanhuang Company, totaling CNY 64 million. The above verified facts are sufficient to prove that Liaoning Telaiwei Property Development Company has not used the loan for Telaiwei International Garden real estate project, and the immediate transference of the loan for other purposes runs contrary to the purported use of the loan and does not conform to common sense. Even in the first instance trial process, when Oubao Biotech Company requested Liaoning Telaiwei Property Development Company to repay the loan, Oubao Biotech Company persisted in transferring CNY 3.6 million to Liaoning Telaiwei Property Development Company. As the plaintiff suing for repayment of money, the said company still transferred money to Liaoning Telaiwei Property Development Company, which runs counter to the common sense. While Oubao Biotech Company filed an application for property preservation, requesting the seizure, attachment and freezing of the property of Liaoning Telaiwei Property Development Company worth CNY 58.5 million, Wang A, a shareholder of Liaoning Telaiwei Property Development Company, provided guarantee for Oubao Biotech Company with his own property, which is also not in line with common sense. In addition, Jiang X, the shareholder of Oubao Biotech Company, is the legal representative of Liaoning Telaiwei Property Development Company, and Zong X, the legal representative of Oubao Biotech Company, is a staff member of Hanhuang Company, the major shareholder of Liaoning Telaiwei Property Development Company. The addresses and the person in charge of handling the formalities recorded in the application forms for opening bank settlement accounts for Oubao Biotech Company and for Liaoning Telaiwei Property Development Company are the same person. During the first instance proceedings, Liu X, an employee of Liaoning Telaiwei Property Development Company, acted as the appointed agent for Oubao

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Biotech Company, whose identity is an employee of Oubao Biotech Company. It can be found by the court that the existence of mixed personnel and the identical office location between Oubao Biotech Company and Liaoning Telaiwei Property Development Company is justified. Through checking the files or the records deposited in the Industrial and Commercial Administration Office, it can be seen that the shareholders of Liaoning Telaiwei Property Development Company are Hanhuang Company and Wang X (A), with Hanhuang Company accounting for 90% of the shares, while the shareholders of Hanhuang Company are Wang X (A) and Wang A, with Wang X (A) accounting for 67% of the shares, according to which it can be adjudged that Wang X (A) possesses absolute control over Liaoning Telaiwei Property Development Company. Qu X, the wife of Wang X (A), holds 73.75% of the shares of Oubao Biotech Company and exercises absolute control over Oubao Biotech Company. The abovementioned facts have been found to justify that Wang X (A) and his wife have full control over Liaoning Telaiwei Property Development Company, Oubao Biotech Company and Hanhuang Company. In all, in consideration of the loan process between Oubao Biotech Company and Liaoning Telaiwei Property Development Company, together with other circumstances occurring in the lawsuit and the fact that Wang X (A) and his wife exercise full control over Liaoning Telaiwei Property Development Company, Oubao Biotech Company and Hanhuang Company, as well as the fact that Liaoning Telaiwei Property Development Company transferred most of the monetary remittances, it is not sufficient for the people’s court to make a determination of the genuine loan relationship between the two parties. The claims raised by Oubao Biotech Company to collect the repayment of the arrears together with interest by Liaoning Telaiwei Property Development Company are not supported by the court due to insufficient evidence. After deliberation and decision by the Judicial Committee of the Higher People’s Court of Liaoning Province, the Higher People’s Court of Liaoning Province holds, in accordance with Article 2 of Rules of the Supreme People’s Court on Evidence in Civil Actions and Article 207 of the Civil Procedure Law of the People’s Republic of China, that: (1) the civil judgment (No. 15 [2010] Trial, Civ. Division, the Higher People’s Court of Liaoning Province) be set aside; (2) the claims raised by Oubao Biotech Company be rejected. After the judgment was pronounced, Oubao Biotech Company was dissatisfied and appealed to the Supreme People’s Court.

Issues 1. Whether there is an affiliated relationship between Oubao Biotech Company and Liaoning Telaiwei Property Development Company; 2. Whether there is a real borrowing relationship between Oubao Biotech Company Liaoning Telaiwei Property Development Company regarding the disputed CNY 86.5 million.

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Holding The Supreme People’s Court holds in the second instance with regard to: 1. Whether there is an affiliated relationship between Oubao Biotech Company and Liaoning Telaiwei Property Development Company The Company Law of the People’s Republic of China provides that affiliated relationship is the business relationship between the controlling shareholder(s), the actual controller(s), directors, supervisors, senior management and enterprises under their direct or indirect control, and other relationships that may lead to a transfer of corporate interests. It can be observed that the “affiliated company” mentioned in the Company Law includes not only the company with mutual intersection of company shareholders, but also the company directly or indirectly controlled by a third party, or the company where the shareholders and the actual controller(s) of the company may have direct blood relatives, in-laws relations, joint investment, or any other relationships that may lead to the transfer of corporate interests. In the case at hand, Qu X(B) is the controlling shareholder of Oubao Biotech Company, Wang X (A) is the former legal representative of Liaoning Telaiwei Property Development Company and the controlling shareholder and legal representative of Hanhuang Company, the controlling shareholder of Liaoning Telaiwei Property Development Company at the time the contract in question was signed, and Wang X (A) and Qu X(B) are husband and wife, indicating that Oubao Biotech Company and Liaoning Telaiwei Property Development Company are actually controlled by the husband and the wife. Although Oubao Biotech Company claims that two of them have been divorced, no divorce registration issued by the Civil Affairs Department or any other effective legal documents issued by the people’s court have been produced. Although the legal representative of Liaoning Telaiwei Property Development Company has changed from Wang X (A) to Jiang X after the Higher People’s Court of Liaoning Province took up the case, the written application submitted by Jiang X to the court of second instance and verified in the court trial indicates that Wang X (A) was still the actual controller of Liaoning Telaiwei Property Development Company. At the same time, Zong X, the shareholder and legal representatives of Oubao Biotech Company, and Wang B of Oubao Biotech Company, Wang X (A), the de facto controller of Liaoning Telaiwei Property Development Company, and Jiang X, the legal representative of Liaoning Telaiwei Property Development Company, and Wang A, the current controlling shareholder, have jointly invested in the incorporation of Shanghai Telaiwei Cosmetics Company, which indicates that the shareholders of Oubao Biotech Company have been engaged in other common interests with the controlling shareholders and de facto controller of Liaoning Telaiwei Property Development Company. In addition, Shenyang Telaiwei Company is a company controlled by Oubao Biotech Company, and the shareholders of Shaqi Cosmetics Company are the father and the mother of Wang X(A). It can be ascertained that an affiliated relationship between Oubao Biotech Company and Liaoning Telaiwei Property Development Company, and between the two aforementioned

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companies and Shaqi Cosmetics Company, Shanghai Telaiwei Cosmetics Company and Shenyang Telaiwei Company are to be recognized. Another problem can be detected in the personnel mixing between Oubao Biotech Company and Liaoning Telaiwei Property Development Company and other affiliated companies. First, senior officers are mixed. Jiang X is not only a shareholder and director of Oubao Biotech Company, but also the legal representative of Liaoning Telaiwei Property Development Company; at the same time, he also participated in the corporate liquidation of Hanhuang Company. Zong X is not only the legal representative of Oubao Biotech Company, but also a staff member of Hanhuang Company. Although Oubao Biotech Company claimed that Zong X resigned from Hanhuang Company in May 2008, the facts contained in the civil judgment (No. 426 [2008] Final, Civ. Division, the First Intermediate People’s Court of Shanghai Municipality) that during litigation from August to December 2008, Zong X still participated in litigation as a staff member of Hanhuang Company. Wang B was both a supervisor of Oubao Biotech Company and a director of Shanghai Telaiwei Cosmetics Company, and he also represented himself in relevant administrative litigation in the capacity of a staff member of Shanghai Telaiwei Cosmetics Company. Wang A is both a supervisor of Liaoning Telaiwei Property Development Company and a director of Shanghai Telaiwei Cosmetics Company. Wang X (A) originally is the legal representative and actual controller of Liaoning Telaiwei Property Development Company, but he has also entered into a chain franchise contract with third parties outside the case at hand on behalf of Oubao Biotech Company and Hanhuang Company. Second, there is also a mix of ordinary employees. Huo X is a staff member of Oubao Biotech Company, but in the case at hand, he served as the appointed agent of Oubao Biotech Company in the first instance litigation, and signed the construction contract with Shi’an Company on behalf of Liaoning Telaiwei Property Development Company on February 23, 2007. He also served as a director of Shanghai Trelaiwei Cosmetics Company. Cui X was an accountant of Liaoning Telaiwei Property Development Company and opened a bank account on behalf of Liaoning Telaiwei Property Development Company on January 7, 2010, but when the case at hand was brought into court on August 20, 2010, he opened a bank account on behalf of Oubao Biotech Company. Furthermore, Oubao Biotech Company admitted in the course of the trial that Wei X, an employee of Liaoning Telaiwei Property Development Company, was authorized by the same company in May 2010 to open bank accounts. Then, in September 2011, when the case was launched, he was authorized by Oubao Biotech Company to open bank accounts in the Maluwan Office of China Construction Bank Shenyang Branch, and the contact person of the bank account was recorded as Wei X. Liu X is also a staff member of Oubao Biotech Company and acted as the agent of Oubao Biotech Company in the first instance and execution procedures of this case, but he handled the enterprise registration and other related matters on behalf of Liaoning Telaiwei Property Development Company on March 17, 2009. In addition, Liu Yang represented this case in the name of Liaoning Telaiwei Property Development Company but was assigned by Wang X (A) to represent Shanghai Telaiwei Cosmetics Company in the related litigation.

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The facts listed in the preceding paragraph have demonstrated that there is no strict distinction between the personnel of Oubao Biotech Company, Liaoning Telaiwei Property Development Company and other affiliated companies, all the personnel have followed the deployment of the co-controller, Mr. and Mrs. Wang X(A) and according to the admissions made by Oubao Biotech Company that Qu X(B) has been living in Hong Kong for a long time and subject to the evidence on file, the above personnel actually obey the command of Wang X(A), they are assigned different jobs at any time as tasks require. Furthermore, in the appellant brief, Oubao Biotech Company claimed that it had sent relevant personnel to Liaoning Telaiwei Property Development Company when corporate loan relationship commenced in 2007 to supervise the company’s use of funds and assist the company when needed, but as early as five months before the first loan was transferred by Oubao Biotech Company to Liaoning Telaiwei Property Development Company, Huo X was involved in the making and signing of contract. Moreover, from the role played by these dispatched personnel to Liaoning Telaiwei Property Development Company, the abovementioned personnel participated in such work as contract signing, financial management to litigation representation, rather than supervision. Thus, the defense raised by Oubao Biotech Company is credulous and incredible. The finding made by the Higher People’s Court of Liaoning Province that Oubao Biotech Company and Liaoning Telaiwei Property Development Company are affiliated companies controlled by Wang X (A) and Qu X (B) is factually and sufficiently justified. 2. Whether there is a real borrowing relationship between Oubao Biotech Company and Liaoning Telaiwei Property Development Company regarding the disputed CNY 86.5 million Article 90 of the Judicial Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China provides, “(p)arties to a legal action shall be responsible for producing evidence to prove the facts on which their own claims are based or the facts on which the allegations by the other party or parties are refuted. Where any party cannot produce evidence or the evidence produced cannot justify the facts on which the allegations are based, the party concerned that bears the burden of proof shall undertake adverse or unfavorable consequences.” Article 108 hereof also provides, “(t)he people’s court shall make an examination of the evidence produced by the party who is obligated with burden of proof, together with relevant facts, make an ascertainment of the submitted facts if there is a high degree of probability; if higher probability can be made sure, the facts can be admitted into the court as evidence; the facts submitted by the other party to refute the facts raised by the party with burden of proof, if the people’s court, after examination and together with relevant facts, finds that these facts are untrue or unknown, can be found nonexistent.” In the case of affiliation between the parties, in order to prevent malicious collusion between the parties to bring a malicious litigation to the detriment of the legitimate rights and interests of others, the people’s court must strictly examine whether there is a real legal relationship of borrowing between them.

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Oubao Biotech Company filed a lawsuit and demanded that Liaoning Telaiwei Property Development Company repay the loan of CNY 86.5 million together with the interest. Although it provided the loan contract and the remittance vouchers or certificates, there were irretrievable contradictions between admissions made by the company in the trial process and the submitted evidence and other evidence; furthermore, the behaviors of the two parties before and after the lawsuit run counter to the common sense, which can be manifested from the following seven aspects: First, from the perspective of the formation of the loan contract, there is a possibility that the loan contract is forged. The details of offer and acceptance in the statements and descriptions made in the court by Oubao Biotech Company and Liaoning Telaiwei Property Development Company are unclear. Specifically, as the legal representative of the creditor Oubao Biotech Company, Zong X, who claims to be the person in charge of handling the contract, is not sure of the details of the time and the place when all the loan contracts are executed, members of his own party as well as members of other parties to the contract. In addition, each of the loans in question is a large sum, and the persons in charge of the loans are unclear about the details of all the contract formation and signing, even the general circumstances, which is not reasonable. Second, from the time of borrowing, the evidence submitted by the parties is inconsistent. The admissions and statements made by Oubao Biotech Company and the loan contract submitted to the court by the said company indicate that Oubao Biotech Company started to have engaged in loan relationship with Liaoning Telaiwei Property Development Company since July 2007; but after filing an appeal to the court of second instance, the audit report commissioned by Oubao Biotech Company itself states that the said company started to lend money to Liaoning Telaiwei Property Development Company since December 2006. However, from the transaction details of the bank accounts of Liaoning Telaiwei Property Development Company and Oubao Biotech Company, before December 2006, in Oubao Biotech Company’s 8115 bank account, two transfers of up to CNY 11 million yuan occurred, of which CNY 3 million was transferred to the account of Liaoning Telaiwei Property Development Company on March 8, 2006 in the name of “loan”, and CNY 8.01 million was transferred into the account of Liaoning Telaiwei Property Development Company on June 12, 2006. Third, from the amount of the loan, the parties’ claims and statements are inconsistent and contradictory. After Oubao Biotech Company filed the lawsuit, it first claimed that the cumulative amount of loans since July 2007 was CNY 58.5 million, and then changed to CNY 86.5 million yuan during the litigation, but the total amount of loans reached CNY 108.5 million in the appeal to the court of second instance; although the amount of loans changed many times, Oubao Biotech Company could only provide loan contracts worth CNY 86.5 million. The bank transfer certificates or vouchers submitted by Xie X proved that beyond CNY 108.5 million loans claimed by Oubao Biotech Company, another CNY 44 million had been credited to the account of Liaoning Telaiwei Property Development Company in the name of “loan”. In this regard, Oubao Biotech Company admitted willingly that these extra payments were requested by Wang X (A) to help transfer money, not the loan in a real sense.

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This self-admission indicates that in the relevant bank vouchers, the item “money purpose” was filled in extremely arbitrarily by Oubao Biotech Company. From the amount contained in the details of bank account transactions obtained by the court of second instance, the amount transferred to the account of Liaoning Telaiwei Property Development Company by Oubao Biotech Company in the name of loan far exceeded CNY 58.5 million, CNY 86.5 million or CNY108.5 million as claimed successively by Oubao Biotech Company. In addition to the transaction amount provided by Xie X, many other large sums of money transferred to the account of Liaoning Telaiwei Property Development Company in the name of “loan” are not included or listed in the scope of loan claimed by Oubao Biotech Company. Fourth, from the perspective of financial dealings, Oubao Biotech Company ran into a problem of making a one-way calculation of the outflow funds instead of inflow funds. Whether it was during the loan period specified in the loan contract or before that time, or even after the initiation of the lawsuit, the fund exchanges or financial dealings between the accounts of Oubao Biotech Company and Liaoning Telaiwei Property Development Company witnessed either the fund flow from Oubao Biotech Company to Liaoning Telaiwei Property Development or fund flow from Liaoning Telaiwei Property Development to Oubao Biotech Company, but Oubao Biotech Company only calculated the debit amount transferred from its own account, and there was no mention of any transfers from the account of Liaoning Telaiwei Development Company to the account of Oubao Biotech Company. Fifth, from the perspective of money transfers among all affiliated companies, there is a problem of circular transfer of money between two or more accounts. After cross-checking the accounts between Oubao Biotech Company, Liaoning Telaiwei Property Development Company, Hanhuang Company and Shaqi Cosmetics Company, the court of second instance determines that Liaoning Telaiwei Property Development Company transferred its own money into Hanhuang Company’s account by way of the bank accounts of Oubao Biotech Company, and then transferred it back to the account of Liaoning Telaiwei Property Development Company, resulting in an inflated loan. For example, on September 5, 2008, CNY 17.35 million was transferred from the account number ending with 5555 of Liaoning Telaiwei Property Development Company to the account number ending with 4917 of Hanhuang Company; on October 30, CNY 19 million was transferred from the account number ending with 4917 of Hanhuang Company to the account number ending with 8115 of Oubao Biotech Company, and on the same day, CNY 19 million was transferred from the account number ending with 8815 of Oubao Biotech Company to the account number ending with 5555 of Liaoning Telaiwei Property Development Company. On November 6, CNY 18 million was transferred from the account number ending with 5555 of Liaoning Telaiwei Property Development Company to the account number ending with 4917 of Hanhuang Company, and on December 9, CNY 18 million was transferred from the account number ending with 4917 of Hanhuang Company to the account of 8115 of Oubao Biotech Company, and on the same day, CNY 19 million was transferred from the account number ending with 81,115 of Oubao Biotech Company to the account number ending with 5555 of Liaoning Telaiwei Property Development Company. For another

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example, on December 24, 2008, CNY 7,167,300 was transferred from the account number ending with 5555 of Liaoning Telaiwei Property Development Company to the account number ending with 4917 of Hanhuang Company, and on the same day, Hanhuang Company transferred CNY 6 million to the account number ending with 8115 of Oubao Biotech Company, and then on the same day, the said amount CNY 6 million was transferred back to Liaoning Telaiwei Property Development Company from Oubao Biotech Company. Every time these amounts were transferred from the account of Oubao Biotech Company to the account of Liaoning Telaiwei Property Development Company, they were counted as the amount of loan owed by Liaoning Telaiwei Property Development Company to Oubao Biotech Company. This is the case for the financial transactions between Liaoning Telaiwei Property Development Company and other affiliated companies. Sixth, from the perspective of the purpose of the loan, the use of the loan is contrary to what has been agreed upon in the contract. Article 2 of the loan contract states that the loan is limited to the Telaiwei International Garden real estate project, but after the money is transferred to the account of the Liaoning Telaiwei Property Development Company, the said company has immediately transferred most of the money by way of “loan” or “repayment” to Hanhuang Company and Shaqi Cosmetics Company respectively, and finally the money flows to Oubao Biotech Company and Shenyang Telaiwei Company controlled by Oubao Biotech Company. For Oubao Biotech Company’s argument that the amount of loans transmitted from Liaoning Telaiwei Property Development Company to Hanhuang Company was repayment made by Hanhuang Company, the contradiction in the actual amount of bank account transactions between Hanhuang Company and Liaoning Telaiwei Property Development Company and flow of money back to Oubao Biotech Company or its holding companies has indicated that this argument cannot be justified. Seventh, the conduct of Oubao Biotech Company, Liaoning Telaiwei Property Development Company and their affiliated companies runs contrary to daily life experience either during litigation or in the enforcement phase. After Oubao Biotech Company filed the lawsuit, both Oubao Biotech Company and Liaoning Telaiwei Property Development Company continually transferred money to each other; although Liaoning Telaiwei Property Development Company Liaoning kept transferring huge amount of money to the account of Oubao Biotech Company, it did not raise any defense against Oubao Biotech Company for the request of repayment during the lawsuit and in enforcement phase; when Oubao Biotech Company applied to the Higher People’s Court of Liaoning Province for property preservation, Wang A, the shareholder of Liaoning Telaiwei Property Development Company, provided guarantees to the contestant Oubao Biotech Company with all his own real property; the ownership of the real property located in Qingpu District, Shanghai Municipality, with which Oubao Biotech Company additionally provided as a guarantee in the first instance litigation, turned out to belong to the Shanghai Telaiwei Cosmetics Company, where Wang X(A) was the legal representative; Oubao Biotech Company and Liaoning Telaiwei Property Development Company also admitted in the statements made during the trial that the bank accounts opened on behalf of Oubao Biotech Company in China Construction Bank Donggang Branch and China

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Construction Bank Shenyang Branch (Maluwan Office) were all controlled by Wang X(A). Regarding the above contradictions and despoliations of common sense, both Oubao Biotech Company and Liaoning Telaiwei Property Development Company have offered no reasonable explanations. Thus, it can be seen that Oubao Biotech Company has not provided sufficient evidence to prove the existence of a real loan relationship between Oubao Biotech Company and Liaoning Telaiwei Property Development Company in relation to the disputed loan. Moreover, from the transaction details of the bank accounts of Oubao Biotech Company, Liaoning Telaiwei Property Development Company and their affiliated companies, it is found that Oubao Biotech Company, Liaoning Telaiwei Property Development Company and other affiliated companies transferred money freely among themselves and between different accounts of the same company, and the purpose of the money was filled at their free will. Combined with other evidence at hand, the court of second instance was convinced that the claims of Oubao Biotech Company were fictitiously made by intercepting the transacted money transference between Oubao Biotech Company and Liaoning Telaiwei Property Development Company, and its request to return the loan and interest of CNY 86.5 million from Liaoning Telaiwei Property Development Company based on the fictitious claims should not be supported. Accordingly, there is nothing inappropriate in the retrial decision made by the Higher People’s Court of Liaoning Province to dismiss the request. 3. Whether there is malicious collusion to jeopardize the legitimate rights and interests of others in the lawsuit filed by Oubao Biotech Company against Liaoning Telaiwei Property Development Company First, both Oubao Biotech Company and Liaoning Telaiwei Property Development Company were fully aware of the creditor-debtor relationship between Liaoning Telaiwei Property Development Company and the first instance complainant Xie X and other creditors. From the process of judgment enforcement on, after the application for enforcement is submitted, Oubao Biotech Company did not agree to the auction of the seized properties but continued to allow Liaoning Telaiwei Property Development Company to sell them, and for every set of sales by Liaoning Telaiwei Property Development Company, Oubao Biotech Company applied to the court to unseal one set. When questioned by the court of second instance, Oubao Biotech Company was unclear about how many seized properties were sold and how much loan was repaid by Liaoning Telaiwei Property Development Company, which indicates that the said company did not initiate the lawsuit to realize its claims, but to carry out protective seizure through judicial procedures to prevent other creditors from obtaining the repayment from the property of Liaoning Telaiwei Property Development Company. As the lawsuit was initiated with fictitious claims and fabricated facts, the malicious intent becomes apparent. Second, judging from the fact that the personnel of Oubao Biotech Company and Liaoning Telaiwei Property Development Company are mixed and their bank accounts are controlled by Wang X (A), it is clear that Oubao Biotech Company and Liaoning Telaiwei Property Development Company have lost their independent

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corporate personality as legal persons, as the two companies belong to the same person. The same person also served as two parties to the lawsuit; thus, malicious collusion is self-evident. Article 112 of the Civil Procedure Law of the People’s Republic of China provides, “(w)here the parties, maliciously acting in collusion, attempt to infringe upon the lawful rights and interests of other persons by way of litigation, mediation or any other means, a people’s court is to dismiss their claims and impose a fine or detention on the parties according to the severity of the circumstances; and if suspected of any crime, the party or parties shall be subject to criminal liability in accordance with law.” The opinion put forward by the complainant Xie X in the first instance that Oubao Biotech Company and Liaoning Telaiwei Property Development Company collusively filed a lawsuit to damage his legitimate rights and interests, as well as the request for sanctions against the parties concerned and those who are responsible, is justified by law and should be supported. The court of second instance is to punish the malicious litigation initiated by Oubao Biotech Company and Liaoning Telaiwei Property Development Company. In summary, the court of second instance held that civil judgment (No. 13 [2012] Trial, Civ. Division, the Higher People’s Court of Liaoning Province) has clearly ascertained the facts and correctly applied the law and should be affirmed. The grounds for appeal raised by Oubao Biotech Company cannot be established, and its appeal request is not supported. Thus, it is hereby held by the Supreme People’s Court that the appeal is dismissed and judgment made is affirmed. Meanwhile, the court of second instance holds that the corporate lending controversy between Oubao Biotech Company and Liaoning Telaiwei Property Development Company constitutes malicious litigation; therefore, each company is to be fined CNY 500,000 in accordance with law.

Comment on Rule At present, frequent malicious litigation in the field of civil and commercial trials has not only seriously impinged on the legitimate rights and interests of the parties and outsiders, disrupted the normal order of civil litigation, and caused a great waste of judicial resources, but has also seriously posed serious threats to the judicial authority and judicial credibility, undermined social integrity, affected social stability, and attracted great concern by people at large. As malicious litigation permeates various fields of civil and commercial trials with various types of cases and covert means of perpetrators, the people’s courts have run into difficulties in the process of screening these malicious lawsuits. In judicial practice, people’s courts will usually dismiss the plaintiff’s claim of failing to meet the corresponding standard of proof, and it is extremely rare to identify a malicious lawsuit directly; thus, illegal practices are rarely properly punished. To some extent, the occurrence of malicious litigation or false lawsuits is left undisciplined.

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The case at hand is the first case of malicious litigation directly identified by the Supreme People’s Court in civil and commercial proceedings. By imposing severe sanctions on both parties to the malicious litigation, the determination and confidence of the Supreme People’s Court to combat the malicious litigation lawsuits have been highlighted, and this can further prompt local courts at all levels to enhance their awareness of malicious litigation and their ability to identify them. At the same time, the judgment can also serve as a reference model for guiding the public to raise their awareness of the illegality of malicious litigation as well as their consciousness to resist false lawsuits or malicious litigation. 1. The Elements of Malicious Civil Litigation Malicious litigation in civil cases refers to a civil action in which one party or parties to a civil action, for the purpose of seeking illegitimate benefits, alone or in collusion with others, falsify evidence, fabricate fictitious facts or conceal the truth to launch a civil litigation to deceive the people’s court into making effective civil judgment to the detriment of the lawful rights and interests of the state, the collective or others. Generally, malicious civil litigation may include the following elements: (1) The complexity of the actor(s). The actor of malicious litigation may be one or both parties and may also be an agent ad litem, a witness, or a forensic appraiser or anyone else; the actor may also be a natural person or an institution or organization. Litigation is a complicated process; in the same vein, the completion of malicious litigation often requires the help of others. In practice, malicious litigation is often carried out in collusion between the plaintiff and the defendant in the first instance trial; infrequently, it is also determined that a party to the litigation forms a clique with agent ad litem, a forensic appraiser, witnesses, or rarely even a trial judge, to carry on the litigation. (2) The subjective intentionality of a perpetrator. First, as deliberate intentionality is a critical element for malicious litigation, negligence cannot be said to constitute malicious litigation. “Intention” or “intentionality” or “deliberately intentional” means that the perpetrator knows or should have known that his commission or omission will infringe on the lawful rights and interests of others, obstruct civil litigation, and undermine judicial credibility, but he still falsifies evidence, files a lawsuit or participates in civil litigation to defraud the people’s court into making a civil judgment. Second, the intent of one party to legal action or both parties can constitute a false civil lawsuit. In practice, both parties’ mutual intention is a frequent occurrence in malicious litigation, but unilateral intention on behalf of one party to the action can also constitute a false civil lawsuit. Third, malicious litigation should be oriented at seeking illegal benefits. In practice, the illegal benefits that perpetrators attempt to obtain mainly include evasion of debts imposed by law; evasion of legal obligations recognized in legal documents; exclusive or multiple shares of inheritance; exclusive or multiple control or possession of community property at the time of divorce; fraudulent insurance claims; evasion of laws and regulations or government policy; provision of false testimony or evidence for the criminal, etc. (3) Objectively, malicious litigation in civil cases is launched to achieve the purpose of illegally obtaining legal documents issued by the people’s courts. The “trilogy” involved in the malicious litigation is that parties to the litigation are to falsify evidence, conceal the truth, and fabricate the facts of the case; then launch the legal action, and finally defraud the people’s court into making a judgment document. However, whether the parties have actually obtained effective judgment documents does not denigrate malicious civil litigation.

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2. Main Features of Malicious Litigation in the Civil Cases In trial practice, malicious civil litigation is generally characterized by the following features: (1) the actors in malicious litigation are usually enterprises with affiliated relationships, friends or those with close family relations, or those with alumni relationships; (2) the amount requested by the plaintiff in the lawsuit may not be consistent with its own economic situation, and the amount is either large or unreasonable; in addition, the defendant is under an unfavorable economic situation or involved in other economic disputes; (3) the defendant often makes no defense or defends immaterially, and they often make admissions; (4) the evidence provided by the plaintiff can often only prove the material facts of the case, short of other relevant subsidiary facts to be admitted into evidence or the testimony is usually vague, or the facts of the case are unclear, even contradictory during the court trial processes; and (5) the malicious litigation is often settled through mediation, and the mediation agreement is usually reached smoothly. 3. The Focus of the Trial of Malicious Civil Litigation The case at hand is a typical case of malicious litigation concerning private corporate lending. After taking the appeal from Oubao Biotech Company, the Supreme People’s Court found that the commonly required element of litigant confrontation between the appellant and the appellee was nonexistent, which is very abnormal. The complainant Xie X and other creditors of Liaoning Telaiwei Property Development Company have consistently reported that the case was a malicious litigation launched with fictitious equity claims by affiliated companies. Therefore, whether the case falls within the scope of malicious litigation has become the focus of the second instance review. The collegial bench in the second instance trial firstly checked the files and the records deposited in the Industrial and Commercial Administration Offices submitted by Oubao Biotech Company and Liaoning Telaiwei Property Development Company and found that two companies were actually controlled by a couple named Wang X(A) and Qu X(B), so an affiliated relationship between the two companies could be established. However, this affiliated relationship cannot necessarily indicate that both parties have maliciously colluded to harm the legitimate rights and interests of others; thus, the authenticity of the lending relationship between the parties requires further investigation. To this end, the collegial bench decided to ascertain the authenticity of the lending relationship between two sides parties from the following aspects: first, two parties were questioned as to the time and the place of signing the loan contract, the person in charge, the payment of money and other details, respectively, to review whether the statements thus made are consistent; second, the court took the initiative ex officio to have obtained evidence to examine whether their opinion about the facts of the loan submitted by the prosecution agency and the defense was consistent with the facts ascertained by the people’s court; third, the court, based on such evidence as the details of bank account transactions, has checked the flow of the money in question to see whether it is consistent with the contractual agreement or the purpose of the loan as claimed by the parties; fourth, the court has reviewed inconsistencies

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and any violations of common sense in the conduct of both sides of the borrower and the lender in the process of litigation and enforcement. In the process of handling the case, the court of second instance has ex officio retrieved the details of bank account transactions between the appellant Oubao Biotech Company, the appellee Liaoning Telaiwei Property Development Company and other affiliated companies, has checked and analyzed the financial transactions of the bank accounts, and determined that Oubao Biotech Company and Liaoning Telaiwei Property Development Company have acted contradictorily and contrary to common sense before and after the lawsuit commenced. For example, the appellant Oubao Biotech Company has changed the amount of the loan it claimed several times during the lawsuit; the shareholders of the appellee Liaoning Telaiwei Property Development Company provided guarantee for the property preservation application of the appellant Oubao Biotech Company with their private properties; the appellant still transferred money to the account of the appellee after the lawsuit was filed; in the presence of other creditors, the appellant applied for the execution of the seized property of Liaoning Telaiwei Property Development Company, but the appellant continued to allow the appellee to sell and cooperate with the appellant in unsealing the property of Liaoning Telaiwei Property Development Company, instead of auction. The parties have provided no reasonable explanations for these contradictions and violations of common sense, nor have they provided relevant evidence to explain them, but on the contrary, they tried their best to deny the relationship between them in the course of the litigation, much to the suspicion that they were trying to cover up the truth. After having made a great many out-of-court investigations and meticulous factual investigations during the hearing, the court of second instance has decided that the claims about the corporate equity raised by the plaintiff, Oubao Biotech Company, were found to be untrue, and claims were fictitiously made by both parties, and the purpose of filing a lawsuit was not to realize the creditor’s rights, but to conduct a protective seizure through judicial procedures to prevent other creditors from making payment to the appellee, Liaoning Telaiwei Property Development Company, which has seriously infringed on the legitimate rights and interests of other creditors. Therefore, the Supreme People’s Court holds in the second instance that this case at hand constitutes a typical malicious civil litigation.

Cases at the Adjudication Committee

The People v. Liu X and Wang X (Death Penalty Review of Cases Involving Intentional Homicide, Robbery, and Contract Fraud): Handling the Applicability of Death Penalty in Cases of Joint Crimes Resulting in the Death of One Person Haiying Xing

Rule In judicial practice, when a joint crime results in the death of one person, the death penalty with immediate execution is generally not imposed on more than two persons, but for cases where the crime is extremely pernicious and social harmfulness is extremely serious, severe punishment in accordance with law can truly reflect the criminal policy of tempering justice with mercy or leniency. In the crime of robbery and intentional homicide, the accused Liu X led and plotted the crime, the accused Wang X actively implemented specific criminal acts, the two has assisted each other and offered mutual help to each other in the process of committing the crime. Both have played a major and equal role and thus shall be deemed principal offenders. The two jointly participated in the robbery, and in the process, they attempted to kill the victim twice for the sake of silencing the matter; the circumstances were extremely pernicious. In addition, prior records indicate that the two have separately committed the crime of robbery or intentional homicide before committing the present crime. As they have repeatedly committed the same kind of pernicious crimes, subjective viciousness can be said to be rooted, and the threat to the human being and social Collegial Bench for the First Instance: Hui Liu, Mingqiang Wang and Peng Ye Collegial Bench for the Second Instance: Ye Li, Xiaofeng Tian and Yuefeng Jiang Death Penalty Review Collegial Bench: Su Qi, Qing Zhou and Haiying Xing Edited by Xianrong Bao; translated by Daxuan Zheng H. Xing (B) Judicial Supervision Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_2

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harmfulness to society at large are deemed great and grave; thus, the two should be severely punished in accordance with law. The death penalty with immediate execution for the accused should be approved in the process of death penalty review.

Case Information 1. Public Prosecution Authority and Parties Public Prosecution Authority: The People’s Procuratorate of Xinyang City, Henan Province The accused: Liu X The accused: Wang X 2. Procedural History First Instance: No. 44 [2013] Trial, Crim. Division, the Intermediate People’s Court of Xinyang City, Henan Province (dated Apr. 28 of 2014) Second Instance: No. 150 [2014] Final, Crim. Division, the Higher People’s Court of Henan Province (dated Nov. 17 of 2014) Death Penalty Review: No. 32409354 [2015] Ruling, Crim. Supervision & Death Review Division, the Supreme People’s Court (dated Jan. 19 of 2018) 3. Cause of Action Intentional homicide, robbery and contract fraud

Essential Facts The accused Liu X became acquainted with Wang X because they had served their sentences in the same prison in Shandong Province. In September 2012, Liu X, who had been granted temporary release from prison, invited Wang X, who had been released from prison for having fully served the sentence, to Xinyang City, Henan Province. Two of them have plotted for many times to rob others of their money and have the victim(s) killed, so they bought in advance shovels, white gloves, wide transparent tape, plastic bags and other crime tools and looked for a location where victim’s body could be disposed of. Then, two of them began to pick the victim, waiting for an opportunity to commit the crime. On October 3, 2012, Liu X and Wang X conspired to rob Zuo X, who was said to be Wang X’s poker friend. At approximately 19:00 in the evening on the same day, Liu X invited Zuo X out for playing poker. Then, Wang X drove a BYD car rent by Liu X, picked up Zuo X, and then drove to a remote section of XX Administrative Lot, XX New Region of Xinyang City, which is a place pretrekked by the two. Arriving at the chosen place, the two used preprepared tape and had Zuo X’s hands and feet bound to carry out

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the robbery. Altogether they have robbed CNY 5000 in cash, 4 bank cards, one gold necklace and an Apple 4S mobile phone, then the two have obtained the bank card password by way of coercion and force, and checked the balance in the bank card with Zuo X’s mobile phone. Out of fear of being discovered, the two knocked Zuo X unconscious by choking or pressing the legs of Zuo X’s. Originally, the two thought Zuo X was dead, so they placed Zuo X into a well-prepared plastic bag and put the bag into the trunk of the car, then drove toward Gugang reservoir to sink the “body”. On the way, Wang X bought a bag of cement, and Liu X cut a section of electric line roadside that was placed there by a villager on the trees to dry the clothes. When the two accused drove to the reservoir and opened the trunk, only to find that Zuo X had been awakened and he broke free from the plastic bag and attempted to escape from the accused; the two accused began to chase after Zuo X. Finally, the two accused choked Zuo X on the neck until Zuo X became unconscious. After that, the two accused replaced Zuo X into the plastic bag, and filled the bag with half a bag of cement, with electric wire tying the bag mouth. With the help of Liu X, Wang X carried the plastic bag into the reservoir, threw it into the reservoir and drowned Zuo X to death. After that, the two accused had the shoes worn by Zuo X, tape used for tying Zuo X, white gloves and other things placed into Zuo X’s satchel, together with some stone, put into the satchel, had the satchel thrown into the reservoir, then drove away from the scene. On January 13, 2012, the accused Liu X, together with Meng X (also sentenced), planned to rent cars. When things done, they had the cars mortgaged to others and have used money for their own consumption and debauchery. From May to August 2012, the accused Liu X and Meng X pretended to do car rent business, so they consecutively concluded car rent contracts with Xinyang Times Car Rent Company and Xinyang Jun’an Car Rent Company through their own ID cards, ID cards borrowed from others or driving licenses. Altogether, seven cars were fraudulently cheated into their hands, which were appraised to be worth CNY 399,218. The accused Wang X participated in the fraudulent rent of two cars, which were appraised to be worth CNY 139,425. The accused Liu X falsely claimed that the cars were his own or a relative’s. Under the pretext of financial constraints, the cars were pledged to Luo X, Yu X and others, and the accused had CNY 136,000 for his own consumption and ingestion. On 18 April 2014, the Intermediate People’s Court of Xinyang City, Henan Province, handed down a criminal judgment with incidental civil damages (No. 44 [2013]Trial, Crim. Division, the Intermediate People’s Court of Xinyang City), finding the accused Liu X guilty of intentional homicide and sentenced to death and deprivation of political rights for life, and finding the accused Liu X guilty of robbery and sentenced to five years’ imprisonment and a fine of CNY 10,000, and finding the accused Liu X guilty of contract fraud and sentenced to six years’ imprisonment and a fine of CNY 60,000, to be performed in combination with another judgment (yet to be performed, with the outstanding sentence two years and two months and 21 days, and a fine of CNY 5,000) issued by the People’s Court of Jiaozhou City, Shandong Province, numbered No. 297 [2006] Trial, Crim. Division, the People’s Court of Jiaozhou City (in which the accused Liu X was sentenced to nine years of imprisonment and a fine of CNY 5,000 for the crime of robbery). As a combination

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of several offences are to be punished concurrently, the Intermediate People’s Court of Xinyang City decided to award death penalty, together with a fine of CNY 75,000, and deprivation of political rights for life. The accused Wang X was found guilty of the crime of intentional homicide, sentenced to death and deprived of his political rights for life; was found guilty of the crime of robbery, sentenced to four years and six months of imprisonment, together with a fine of CNY 8,000; was found guilty of the crime of contract fraud, and sentenced to two years of imprisonment and a fine of CNY 5,000. As a combination of several offences are to be punished concurrently, the people’s court decided to award death penalty, together with a fine of CNY 13,000, and deprivation of political rights for life. In addition, in the judgment with incidental civil damages, the accused Liu X and Wang X are to make a payment of CNY 17,101.5 to compensate the plaintiff Zuo X and Yan X. After the judgment was pronounced, the accused Liu X lodged an appeal. On November 17, 2014, the Higher People’s Court of Henan Province, after holding a court trial and hearing the case in accordance with law, issued a criminal ruling (No. 150 [2014] Ruling, Crim. Division, the Higher People’s Court of Henan Province), in which the appeal was rejected and the judgment made in the first instance was affirmed, and reported the case in accordance with law to the Supreme People’s Court for approval of death penalty.

Issue Whether the death penalty with immediate execution of the accused Liu X and Wang X can be approved in the death penalty review process in cases of joint crimes resulting in death of one person.

Holding The Supreme People’s Court, after reviewing the case, holds that the accused Liu X and Wang X gang up and rob other people of property by violent means for the purpose of illegal possession, which constitutes the crime of robbery; the accused Liu X and Wang X, after committing robbery, fearing that their crime would be detected, have deliberately and unlawfully deprived another person of his life in order to silence the commission of crime, which constitutes the crime of intentional homicide; the accused Liu X and Wang X has cheated others into concluding contract by falsifying facts and concealing the truth in order to obtain other people’s property for the purpose of illegal appropriation, which constitutes the crime of contract fraud. In the crimes of robbery and intentional homicide, Liu X led the planning of the commission of crime, Wang X actively carried out specific criminal acts; in the process of commission of crimes, the two assisted each other and complemented each other, both played a major role, thus both are deemed principal perpetrators.

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In the crime of contract fraud, Liu X is the principal, the amount is enormously huge, Wang X is an accessory, the frauded amount is large. Liu X, during a period of provisional release from prison, and Wang X, during his release from prison after serving the full sentence, jointly committed robbery and murder, resulting in the death of one person. The circumstances of the crime, the subjective malice, the consequences and the commission of crime are extremely serious and socially harmful, all of which should be severely punished in accordance with law. The facts found in the first instance and second instance judgments are clear, the evidence was identified conclusively and sufficiently, the conviction was accurate, the sentencing was conducted appropriately, and the court trial procedures were handled lawfully. In accordance with the provisions of Articles 2351 and 2392 of the Criminal Procedure Law and Subparagraph 1 of Article 350 of the Judicial Interpretation of the Supreme People’s Court on the Application of the Criminal Procedure Law of the People’s Republic of China, it is ruled that the decision of the Higher People’s Court of Henan Province (No. 150 [2014] Final, Crim. Division, the Higher People’s Court of Henan Province), ruling that the decision made by the first instance court that Liu X and Wang X are to be awarded death penalty with immediate execution and deprivation of political rights for life, is to be affirmed and approved.

Comment on Rule Accurate understanding and strict implementation of the “prudent imposition of death penalty to place it under control” and insistence on “killing less and killing cautiously” are key to the criminal policy of tempering severity with leniency and basic to a better command of the sentencing standards for death penalty cases. The imposition of a death penalty on specific cases of intentional homicide requires a comprehensive consideration of factors such as the nature of the case, the cause, the motive, the purpose, the means and other circumstances; social consequences arising from commission of a crime, subjective malice of the accused, and danger posed to the person(s) or the society at large; and other factors or circumstances influencing the sentencing outcome should also be taken into consideration before a prudent sentencing decision is made judiciously. This case at hand is a joint crime resulting in the death of the victim because of robbery and intentional homicide; thus, it is crucial to accurately identify the status, the role of the accused, the distinction between the principal and the accessory, and the final determination of the culpability and sentencing. The Opinions on Implementing the Criminal Policy of Tempering Justice with Mercy specifically pointed out in handling the court trial of joint crime cases that the status, the role of each perpetrator in the joint crime, the difference in subjective malice or evil and danger to person(s), facts and evidence distinguished from the principal and accessory, should be fully 1 2

See Article 246 of this Law (Rev. 2018). See Article 250 of this Law (Rev. 2018).

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considered and identified as the principal and the accessory. In the joint crimes of robbery and intentional homicide committed by the accused Liu X and Wang X, the two accused have reached consensus in terms of co-planning, preparation in advance of the crime tools, selection of crime scene and site to sink the dead body. In addition, both had actively and positively carried out robbery and killing. Thus, the two accused should be accurately identified as principal offenders. The Opinions on Implementing the Criminal Policy of Tempering Justice with Mercy also pointed out that if more than one principal perpetrator is identified, the perpetrator whose commission of crime is most serious should be further distinguished. In cases where multiple perpetrators jointly bring about the death of a victim, the role of each perpetrator has to be further distinguished to accurately determine the culpability of each perpetrator so as to treat perpetrators differently rather than simply imposing a heavy sentence on the ground that it is not possible to distinguish between the principal and the accessory. However, in practice, there are cases in which perpetrators in the joint crime may enjoy the same status or play a mutually important role. If a comprehensive analysis of the facts and evidence necessarily entail a heavy sentence for the perpetrators, sentencing shall be justified, punishment balanced proportionately. The two accused in the case at hand are in a special position, the accused Liu X was disabled in his left leg, while the accused Wang X is unfamiliar with the local situation, so in the commission of the crime, the accused Liu X mainly made plans for committing the crime, contributing more “wisdom”, while the accused Wang X actually carried out the commission of the crime, contributing more “labor”. Specifically, the accused Liu X provided the money and the vehicle, identified the target and called the victim out, pressed for the bank card password, inquired about the bank card money information, assisted Wang X in the act of tying and strangling, and jointly put the victim into a plastic bag and sank the dead body. The accused Wang X actively carried out robbery and homicide, and when Liu X was to move inconveniently, Wang X acted as the specific perpetrator of the crime. The mens rea sounds firm, even after the victim broke free from the plastic bags and began to run away, Wang X chased after the victim and killed the victim. In Liu X’s assistance, both carried the plastic bag filled with the dead body of the victim and had it thrown into the reservoir to sink the body, so it can be observed, although the division of labor is different, the implementation of specific acts is different, but in the whole process of committing the robbery and bringing about the death of the victim, both helped each other, complemented each other, and played a major and mutually equally important role. This case of robbery and intentional homicide has posed a serious threat to social security and people’s sense of security. Different from cases arising from matrimonial conflict, neighborhood disputes or other civil controversies, such a case should be severely punished in accordance with law. Where the death penalty applies, capital punishment is to be imposed so that the purpose of maintaining social order, punishing crime and doing justice can be achieved. Meanwhile, in cases of joint crimes resulting in the death of one person, the death penalty for immediate execution is generally not imposed on more than two persons, which is a principle generally accepted by the

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judiciary and admitted into criminal law theory. However, in the cases of intentional homicide, robbery, rape, kidnapping, arson, explosion and other seriously violent crimes, resulting in the death of one person, if the crime is committed in a particularly cruel and savage manner, the circumstances are particularly pernicious, and the crime is extremely serious, and the social impact is extremely deleterious, the punishment can be imposed severely according to law, and death penalty for immediate execution can also be imposed on two persons to fully reflect the criminal policy of tempering justice with mercy or leniency. The two accused in this case jointly participated in the robbery, and have attempted to kill the victim intentionally, so the criminal intent is despicable; after the victim broke free from the plastic bags, they still chased and did not give up the idea of committing a crime, so the intention to kill is resolute; When the first two assaults failed, the perpetrators have strangled and choked the victim on the neck, and had the victim sunk into a reservoir with half a bag of cement filled in the plastic bag and had the victim drowned to death, so the means for commission of crime is cruel and barbarous, the circumstances are pernicious. In addition, the two perpetrators have already been convicted previously because of robbery and intentional homicide, the accused Liu X was sentenced to nine years in prison and was granted provisional release from prison at the time of committing the crime, and the accused Wang X was previously sentenced to life imprisonment and had just been released from prison after serving full sentence, and this time, Wang X has committed same kind of serious crime. All this has pointed toward the deeply rooted subjective evil or malice of the perpetrators, threat to person(s) and harmfulness to the society at large are enormous. Therefore, a comprehensive analysis of the status, the role played by the accused, together with analysis of the nature, the plot, and social consequences arising from the commission of crime, entails a severe punishment of the accused Liu X and Wang X, and there is nothing improper to approve of the death penalty with immediate execution for the accused.

The People v. Qin X (Reopening the Case after a Protest by the Prosecution Agency against Child Rape and Child Molestation): Admissibility and Determination of Evidence in Cases of Sexual Abuse of Infants and the Decision-Making and Identification of Such Circumstances as “Abominableness in the Rape of Infant Girls” and “Public Indecency in Public Places” Haiying Xing

Rule 1. It is a cardinal principle for a people’s court to lay emphasis on evidence and on the court’s investigation and research rather than give ready credence to oral statements or confessions. If no confessions were obtained from the accused in the first instance, but evidence has been ascertained clear, certain and sufficient, the accused in the first instance trial can be found guilty and sentenced or punished. 2. Any person who has made use of his teacher status and repeatedly raped a girl or girls under 12 years of age should be considered as “committed a crime of raping infant girl or girls under aggravating circumstances”. 3. Public places are characterized by a feature of being “public”, and a dormitory housing more than ten people is deemed “public”. Under this special setting, as long as the conduct of indecent assault or molestation is committed in the presence of others or is possibly perceived by others, it can be considered an “indecent assault in public”, thus constituting “public indecency in public places”. Collegial Bench: Su Qi, Qing Zhou and Haiying Xing Edited by Xianrong Bao; translated by Daxuan Zheng and Yi Zheng H. Xing (B) Judicial Supervision Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_3

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Case Information 1. Protest Authority and Parties Procuratorial Organ in Charge of Protest: The Supreme People’s Procuratorate of the People’s Republic of China The Accused: Qin X 2. Procedural History First Instance: No. 00011 [2013] Trial with Incidental Civil Damages, Crim. Division (Juvenile Delinquency Branch), the Intermediate People’s Court of Shijiazhuang City, Hebei Province (dated Sep. 23 of 2013) Second Instance: No. 61 [2013] Review, Crim. Division (Death Penalty Review), the Higher People’s Court of Hebei Province (dated Dec. 24 of 2013) Retrial (First Instance): No. 00008 [2014] Trial, Crim. Division (Juvenile Delinquency Branch), the Intermediate People’s Court of Shijiazhuang City, Hebei Province (dated Nov. 13 of 2014) Retrial (Second Instance): No. 2 [2015] Final, Crim. Division, the Higher People’s Court of Hebei Province (dated Jan. 20 of 2016) Reopening: No. 1 [2017] Protest, Crim. Division, the Supreme People’s Court (dated Jul. 27 of 2018) 3. Cause of Action The crime of child rape and child molestation

Essential Facts It is ascertained by the Supreme People’s Court when it reopened the case for a new trial that, from the summer of 2011 to October 2012, the accused, Qin X, serving as the head teacher of a class where the victims Chai X, Li X, Yan X, Jin X, Yuan X, Liu X (A) and Liu X (B) were grouped into the same class, at X X Primary School located in X X County, Hebei Province, respectively taking advantage of lunch break, or evening study and or dormitory check-ups, or taking students to see doctors, has repeatedly raped Chai (even took Chai X back to his home to have her raped), has raped and molested and harassed Li X, has for many times molested and harassed Jin X, Yan X and Liu X(A), has for one time molested and harassed Yuan X and Liu X (B), in the school office, in the classrooms, in the bathrooms, or in the dormitory. On September 23, 2013, the Intermediate People’s Court of Shijiazhuang City, Hebei Province, issued a criminal judgment supplemented with civil damages numbered No. 00011 [2013] Trial with Incidental Civil Damages, Crim. Division (Juvenile Delinquency Branch), the Intermediate People’s Court of Shijiazhuang City, Hebei Province, finding Qin X guilty of rape and sentenced to death with a two-year stay of execution, deprived Qin X of political rights for life; and finding

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Qin X guilty of child molestation and sentenced to four years and six months of fixed-term imprisonment. In all, the court decided to sentence the accused Qin X to death penalty with a two-year stay of execution and deprive Qin X of political rights for life. The plaintiff, Liu X (A), in the incidental civil litigation, was compensated monetarily at CNY 2,763.7. The claims by other plaintiffs’ incidental civil compensation were overruled. In accordance with law, the Intermediate People’s Court of Shijiazhuang City requested the Higher People’s Court of Hebei Province for death penalty review. On December 24, 2013, the Higher People’s Court of Hebei Province made a criminal ruling numbered No. 61 [2013] Review, Crim. Division (Death Penalty Review), the Higher People’s Court of Hebei Province, reversing the original sentence and remanding the case for retrial. After retrial, the Intermediate People’s Court of Shijiazhuang city issued a criminal judgment on November 13, 2014 numbered No. 00008 [2014] Trial, Crim. Division (Juvenile Delinquency Branch), the Intermediate People’s Court of Shijiazhuang City, Hebei Province, finding the accused Qin X guilty of rape and sentenced him to life imprisonment and deprived of political rights for life, and finding Qin X guilty of child molestation and sentenced him to four years and six months in prison. After the judgment was pronounced, Qin X lodged an appeal. The Higher People’s Court of Hebei Province retried the case, and on January 20, 2016, it issued a judgment numbered No. 2 [2015] Final, Crim. Division, the Higher People’s Court of Hebei Province, finding Qin X guilty of rape, sentenced to six years in prison, deprived of political rights for one year, and finding Qin X guilty of child molestation, who is to be concurrently punished for a combination of several crimes, thus, the accused Qin X is to be sentenced to ten years in prison, deprived of political rights for one year. After the judgment took legal effect, the People’s Procuratorate of Hebei Province reckoned that there were errors in the effective judgment, so it requested the Supreme People’s Procuratorate to file a protest in accordance with the trial supervision procedure. The Supreme People’s Procuratorate filed a protest with the Supreme People’s Court on March 3, 2017. The reasons offered by the Supreme People’s Procuratorate in its protest against the judgment are listed as follows: (1) as the conduct that Qin X has for several times raped two young girls under the age of 12 by making use of his teacher status constitutes commission of crime of raping infant girl or girls under aggravating circumstances, Qin X should be sentenced to more than ten years of fixed-term imprisonment, or life imprisonment or death penalty; (2) Qin X’s molestation of infants in a dormitory by making use of evening check-up constitutes a public indecent assault in public places, so he should be sentenced to more than five years of fixed-term imprisonment. That the court of second instance modified the sentencing in the rape crime to six years’ imprisonment and upheld the crime of child molestation can be said to have made mistakes in the conviction and sentencing, and constitute inappropriate application of the law, which should be corrected and rectified.

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Issues 1. When statements produced by the infant victims and other circumstantial evidence were accepted into incriminating the accused Qin X, because no confessions were made by the accused Qin X, and no trace evidence, physical evidence or other objective evidence could be admitted to incriminate the accused Qin X in the commission of crime, whether the evidence thus obtained can satisfy the standard of proof of reliability and sufficiency; 2. Whether the conduct by the accused Qin X, who made use of his position as a teacher to have repeatedly raped a young girl or girls under the age of 12, fell under Article 236 (3) (1) of the Criminal Law, which provides for a crime of “rape of an infant girl or girls under aggravating circumstances”; 3. Whether Qin X’s molestation or harassment of infants by making use of evening check-ups in a dormitory where more than ten female students were placed under one roof constitutes a public indecency in public places.

Holding The Supreme People’s Court holds that the conduct that the accused Qin X has raped and molested young girls under the age of 14 constitutes a commission of crime of rape and child molestation, which should be concurrently punished for a combination of several crimes in accordance with law; the conduct by the accused Qin X, who made use of his position as a teacher to have repeatedly raped two young girls under the age of 12, constitutes a commission of crime of raping infant girl or girls under aggravating circumstances; the conduct by the accused Qin X by making use of his teacher status and convenience, has repeatedly molested or harassed several young girls under the age of 12 years, and has publicly molested or harassed several infant girls in the public places, should be punished with severe penalties in accordance with law. The crime committed by the accused Qin X has not only seriously harmed the physical and mental health of the victims, but also brought about serious consequences among the victims, such as psychological panic, school truancy and dropout; as a teacher, Qin X’s conduct of raping and molesting or harassing several young female students has not only breached teacher ethics but also seriously challenged the bottom line of social ethics and morality, and the impact is extremely pernicious; Qin X’s continual rape or indecency (for more than a year) by taking advantage of the victims’ youthful ignorance and fear of his status as a teacher poses extremely serious harm to society at large, so the accused should be severely punished according to law. That the trial judgment found Qin X guilty of rape and child molestation is affirmed to be founded on solid facts and evidence, and the sentencing is accurate. The trial

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procedure has been conducted legally. However, in the first instance judgment, the court has not ascertained that Qin X’s commission of raping infant girls for several times falls within the legal requirement of “commission of crime under aggravating circumstances”, and Qin X’s indecent assault on infant girls in public places also falls within the legal requirement of “commission of crimes under aggravating circumstances”, so the court of first instance has wrongly applied the law and has imposed improper sentencing, which is to be corrected according to law. Thus, in accordance with Article 236 (2), Article 236 (3) (1), Article 237 (2), Article 237 (3), Article 57 (1), Article 69 (1) the Criminal Law of the People’s Republic of China and pursuant to Article 389 (3), Article 384 (2) of the Judicial Interpretation of the Supreme People’s Court on the Application of the Criminal Procedure Law of the People’s Republic of China, the conviction part that the accused Qin X has committed crimes of rape and child molestation in the judgment (No. 2 [2015] Final, Crim. Division, the Higher People’s Court of Hebei Province) is affirmed; the penalty awarded to Qin X’s crime of rape and crime of child molestation and the decision to concurrently punish the accused in the judgment (No. 2 [2015] Final, Crim. Division, the Higher People’s Court of Hebei Province) is reversed, and it is therefore held by this court that accused Qin X was sentenced to life imprisonment and deprivation of political rights for life for the crime of rape; sentenced to 10 years’ imprisonment for the crime of infant molestation, and as several crimes are to be concurrently punished, the accused Qin X was sentenced to life imprisonment and deprived of political rights for life.

Comment on Rule 1. Whether the conclusive evidence obtained can satisfy the standard of proof of reliability and sufficiency The Criminal Procedure Law provides for the principle of “laying emphasis on evidence, on investigation and research, and not taking confessions lightly”. “Laying emphasis on evidence” means emphasis is to be taken seriously by people’s courts in collecting and confirming all the evidence, especially objective evidence other than confessions. “Not taking confessions lightly” means that confessions are to be admitted by the court if all the unfounded and uncorroborated evidence is not verified or proven. Confessions, that is, the statements made by the suspect or the accused, are deemed material evidence in criminal proceedings and have played an important role in fact-finding. However, on the one hand, the suspect, or the accused, the one to be pursued with possible criminal liability, may adulterate the confession(s) or even provide false confession(s) to their advantage; On the other hand, the confession or confessions inheres in uncertainty, which may be changed at any time. If judicial authorities tend to be gullible or rely solely on confessions without attending to the collection of other evidence, it is likely that the suspect or the accused will retract the confession(s), so that the case cannot be adjudicated for lack of evidence, which is unconducive to combating crime and improving the quality of handling the case.

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In addition, too much reliance on confessions can easily induce confessions to be obtained by unscrupulous means such as torture, extortion or use of force so that the legitimate rights and interests of criminal suspects or the accused will be infringed upon. Therefore, as a concretization of the said principle, the Criminal Procedure Law provides that “(a)n accused cannot be found guilty and sentenced to a criminal punishment if there is only his oral statement or confession but no evidence; the accused may be found guilty and sentenced to a criminal punishment if evidence is sufficient and reliable, even without his oral statement or confession”, which means, on the one hand, the conviction cannot be based on confession alone; on the other hand, even if the accused does not confess, but other evidence verified by the court can prove that the accused is guilty, the accused can also be convicted and sentenced. The case at hand typifies crime of sexual assault of infants on the campus. As such behavior is characterized by covertness, the collection of evidence is subject to certain limitations. In this case, seven victims are students in the same class where the accused Qin X is the head teacher, out of fear and scruples of his identity of a teacher, victims dare not resist and take the initiative to get the matter exposed, and they have to yield to long-term tolerance; in addition, the victims are approximately 10-year-old girls, unaware of self-protection and without necessary cognitive and discriminatory ability to recognize the sexual assault, not to mention their awareness and ability to preserve or collect any evidence related to the crimes. Therefore, no eyewitness can be found, and no trace or physical evidence or other objective evidence can be obtained to target the accused Qin X as a criminal. Meanwhile, Qin X has always denied any fact as to the crime of rape or child molestation. In this case, whether the admission of several victims’ statements and other relevant evidence to determine whether the facts of the crime can meet the “reliable and sufficient” requirement in the burden of proof has become a core issue for judicial review. Specifically, in other words, the court of review has to analyze and judge whether the statements of the victims and witness testimony are objectively true and reliable, whether there are contradictions, and whether reasonable doubt can or cannot be ruled out, and only on this basis, combined with other evidence, can the court review the facts of the crime. First, the cracking down and the detection process of the case occurred spontaneously. At the beginning, one student Li X heard the victim Chai X (A) said to her that the head teacher Qin X had sexually abused and assaulted Chai X (A) and felt much scared. Li X told the matter to her mother Chai X (B). Then, accompanied by her mother, they complained to the school authority Yu X, a head in charge. Then, Yu X called in the victim Chai X (A) for verification. Later, Wang X, the mother of Chai X (B), questioned her daughter Chai X (A) and, on the next day, took Chai X (A) to the Public Security Bureau and requested police involvement. The police investigators found six more victims and verified the investigation one by one. The case was thus exposed and cracked down. Second, seven victims all testified against the accused Qin X. Perceived from statements that Chai X (A) and Li X made about sexual organ contact, the statements that seven victims made about hugging and kissing, picking and gouging private parts, the content is complete and coherent, language expression is natural, and

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the description of specific time, place, behavior and psychological reaction to the sexual assault and the disposal after the incident is consistent with the cognitive characteristics and expression at their younger age; contradictions or unreasonable explanations against common sense that cannot be excluded have not been detected. Thus, objectivity and legitimacy can be justified. Third, it is verified that witnessing testimony of sexual assault from the victims made by the victims may fall into the category of hearsay evidence, but the victims are Qin X’s students, and it is found that no contradictions or disputes arise between the victims or their parents and the teacher Qin X. It also runs counter to the common sense that the victims are to fabricate the fact of sexual assault to taint their own integrity and reputation; therefore, the motive and the possibility that several victims would falsely frame up or accuse Qin X can be excluded, so the victims’ statements and witness testimony can be found objectively true. Although the victims are approximately 10-year-old fourth-grade infant girls, they possess the ability to protect the private parts of their bodies from being easily exposed or being contacted abominably by other males. Several victims had even asked about and discussed with each other in private about Qin X’s contact with their bodies, but out of awe toward the head teacher and out of curiosity, fear and shame of physical contact between men and women, it may not follow that the victims’ descriptions of sexual assaults were fabricated and exaggerated, which is not in conformity with the psychological age characteristics of girls in their teens. Fourth, the outpatient diagnostic certificate produced by the Renmin (People’s) Hospital of XX County indicates hymen ruptures in Chai X (A) and Li X, indirectly confirming the fact that the victims were sexually assaulted, and the statements produced by the victims are true. Although the diagnostic certificate cannot directly prove that the accused Qin X has committed the crime, as fourth grade students in the accused Qin X’s class, and as only 10-year-old girls without sexual experience at the time of commission of crime, and as no other evidence can prove that the sexual assault was committed by others, and as two victims clearly testified that Qin X has committed the crime, the possibility of others rather than Qin X who has committed the crime can be excluded. Fifth, the transcript of designated identification of the crime scene environment can confirm the details of Chai X (A) being raped by Qin X in a standing position. Viewed on the crime scenes, it is found that a dozen centimeters high podium was located in the classroom, and twenty centimeters threshold step was laid toward the bathroom in the restroom, the location and the height of the podium and threshold step (close to the height difference between Qin X and Chai X (A)) match the statement made by Chai X (A), which otherwise indirectly confirms that Chai X (A) was asked by Qin X to stand on the podium, or on threshold high platform for sexual organ contact. For a 10-year-old student without any sexual experience who grew up in a rural area, attended a county boarding school, and had little exposure to any information about sexual behavior, this detailed description could only come from personal experience rather than fabrication and imagination. Sixth, many contradictions and irregularities were detected in the accused Qin X’s confessions, defense and other relevant evidence. For example, Qin X claimed

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that the blood on the bed sheet in his bedroom was the nosebleed of Chai X(A), but Chai X (A) stated that on that night she has not been injured nor had a nosebleed, and the forensic identification report has proved that the suspicious blood stains were not left by Chai X (A); for another, apart from teacher-student relationship, Qin X claimed that several victims took the initiative to recognize him as godfather, but these victims and their parents testified that it was Qin X who wanted to recognize these children as goddaughters, and was refused; in addition, Qin X has always denied calling the victims out of the classroom alone, but several victims and other students in the same class have testified that Qin X often called several victims out of the classroom alone during the evening study. After comparing the statements made by the accused and those made by the victims, statements made by the victims were found to be more objective and truthful. Many contradictions have been found in the confessions produced by Qin X, the victims’ statements, witness testimonies and forensic identification opinion, which does not exclude the fact that the accused wished to have a stroke of fluke to avoid punishment, so he intentionally concealed the facts of the crime. Therefore, the confession and defense produced by the accused is not to be admitted. In sum, for the case at hand, the fact that the victim’s statements, witness testimonies and other relevant evidence are admitted by the court to find the accused Qin X guilty of rape, child molestation, is true, sound and sufficient. 2. Whether in the trial judgment the accused Qin X’s committing the crime of rape of young girls falls within the commission of crimes under aggravating circumstances The Criminal Law provides that the “rape of infant girls under aggravating circumstances” is an aggravating circumstance, but no specific circumstances are defined. To implement the principle of special and paramount protection of infant victims in the field of criminal justice, reflecting the guiding ideology of “maximum protection” and “minimum tolerance”, the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security and the Ministry of Justice jointly issued the Opinions on Punishing Crimes of Sexual Assault against Minors (Infants) in Accordance with Law, emphasizing the severe punishment of crimes of sexual assault and maximal protection of infant victims. Article 25 of the said Opinions specified severe punishment for the crime of infant rape and child molestation from such aspects as the perpetrator, the place of crime, the means of crime, the target of the crime, the consequences of the crime, the consistent performance of the perpetrator and others. Particularly, those (1) who have special duties to the minors/infants, who have a common family life relationship with minors/infants, those state officials or those who impersonate as state officials; (2) who enter the residence of minors/infants, students’ dormitories with intent to commit rape and indecent assault; (3) who use violence, coercion, anesthesia and other coercive means to commit rape and indecent assault on young girls and children; (4) who committed rape and indecent assault on children under 12 years of age, or on children left behind in the rural areas, or on minors/infants with severe disabilities or mental and intellectual retardation; (5) who committed indecent assault on more than one infant, or who have repeatedly committed rape and indecent assault; (6) who have incurred such consequences as

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minor injuries, pregnancy, infection with sexually transmitted diseases and others on the infant victims; and (7) who have rape, indecent assault criminal record, will be severely punished and cracked down. In practice, if more than one of the abovementioned situations occurs, the commission of the crime of rape and indecent assault can be deemed the crime of “rape of infant girls under aggravating circumstances”, and punishment is imposed severely according to law. In the case at hand, the accused Qin X, as a teacher, deemed a person imposed with special duty to take care of the infants, has raped the infant victims by taking advantage of his role of the head teacher of victims’ class, which not only runs counter to teacher ethics but also poses a serious challenge to the bottom line of social ethics and morality, seriously tarnishing the purity of the professional teacher ethics, the impact and influence on the society at large is extremely serious. As two victims in the case are less than 12-year-old female students, the crime committed by the accused Qin X by taking advantage of the victims’ immature physical and mental development, inability to differentiate the harmfulness of sexual assault, and fear of Qin X’s status as a teacher, and Qin X’s continual rape or indecent assault of infant girls for more than a year has not only seriously harmed the physical and mental health of the victims but also brought about such serious pernicious social consequences among the aggrieved girls as psychological panic, school truancy and drop-out, in all, has posed extremely serious harm to the society at large. In summary, Qin X’s conduct of raping and molesting several infant female students has been included in Subparagraphs (1), (4) and (5) of Article 25 of the Opinions on Punishing Crimes of Sexual Assault against Minors (Infants) in Accordance with Law, thus falls into the commission of crime of raping and sexually assaulting infant females under aggravating circumstances. 3. Whether the accused Qin X’s molestation of children was in a public place “in the presence of the general public” or “in public” The Criminal Law provides that indecent assault in public places in the presence of the general public or in public is an aggravating circumstance; thus, accurate determination of whether an act falls into the category of “indecent assault in public places in the presence of the general public or in public” entails accurate and correct understanding of terms of art such as “in public places” and “in the presence of the general public” or “in public”. Literally speaking, the term “public place” is generally used to refer to all public buildings, places and facilities for most people in society to work, shop, study, entertain, play sports, socialize, visit, travel and satisfy part of their living needs. This interpretation highlights the functional characteristics of public places as opposed to private places and the fact that they can be accessed and used by a majority of people.

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From the perspective of the strictest interpretation of “public places”, it is generally emphasized that the functional characteristic of such public places “for nonregular access or use” reflects the public feature thereof.1 In practice, whether school classrooms and dormitories where many students are placed under one roof can be recognized as public places is still controversial. The Opinions on Punishing Crimes of Sexual Assault against Minors (Infants) in Accordance with Law specifically points out that the classroom is a special place for students to study, and the range of students using the classroom for a certain period of time is relatively fixed, so if from the perspective of narrowest interpretation of the Opinions alone, it seems that classroom is different from the general sense of public places, but the school classroom is not a private place, and is a place for most students to use, possessing public feature of a public place. Taking this feature into account, the interpretation of “classroom” as a “public place” does not exceed the broadest meaning of the concept of “public place” and is in line with the general public understanding and cognition, which may fall into the category of reasonable and liberal legal interpretation. Therefore, the court holds that the dormitory in the case at hand where twenty girls were placed and accommodated under one roof is a place for common use by many students, it is not a private place, and is relatively “public” and falls into the category of a specific public place.2 With respect to understanding indecent sexual assault in public or in the presence of the general public, one view holds that “public indecent assault” should be said to include the perpetrator openly committing indecent assault, fearing no seeing or detection by others of the indecent sexual assault by the public; another view believes that “public indecent sexual assault” is committed in the presence of the general public or a crowd. These two views either focus on the subjective aspects of the perpetrator or focus on the objective behavior of the perpetrator, which may fall into the category of the narrowest or literal legal interpretation of the text, far from the purposive interpretation, which may not be appropriately proper in the application of law.3 In terms of indecent sexual assault, the reason why the Criminal Law is to deem indecent assault in public places in the presence of general public or in public as an aggravating circumstance is that sexual activity is highly private, whereas rape of infant victims or child molestation or indecent assault on the infant victims in public not only violates the most basic sense of integrity in terms of sex or sexual conduct and moral feelings of ordinary citizens, more importantly, the commission of such act is to impose serious harm upon the victim’s physical and mental health, worse still is the social harmfulness. Severe legal punishment is thus imposed to match the seriousness of social harmfulness. 参见黄尔梅主编: 《最高人民法院、最高人民检察院、公安部、司法部性侵害未成年人犯 罪司法政策案例指导与理解适用》 ,人民法院出版社2014年版,第219页。 2 参见黄尔梅主编: 《最高人民法院、最高人民检察院、公安部、司法部性侵害未成年人犯 罪司法政策案例指导与理解适用》 ,人民法院出版社2014年版,第220页。 3 参见黄尔梅主编: 《最高人民法院、最高人民检察院、公安部、司法部性侵害未成年人犯 罪司法政策案例指导与理解适用》 ,人民法院出版社2014年版,第220页。 1

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Article 23 of the Opinions on Punishing Crimes of Sexual Assault against Minors (Infants) in Accordance with Law provides that rape of infants and indecent assault on the infants/minors in public places, such as schoolyards, swimming pools, children’s playgrounds, etc., can be considered rape of women, or coercive indecent assault on women or children “in public” in accordance with the provisions of Articles 236(3) and 237 of the Criminal Law, regardless of whether the persons present actually see it so long as there are people at present. In other words, the said Opinions is based on the policy of strictly punishing the crime of sexual assault in the school and other special places where children are intensively concentrated, the concept of “in public” is not limited to the narrowest interpretation of the text, that is, “in public” does not require the presence of people who can actually see or watch. Meanwhile, the said Opinions also emphasizes that although the crime of sexual assault committed in public does not require the actual presence of many other people, but based on the general semantics of the concept of “in public” and upgrading “in public” in general sense to the severity of statutory punishment, from a spatial point of view, other people who are present in the scene of perpetrator’s commission of crime are generally said to be within sight, that is, the sexual assault may be seen or observed and perceived at any time in the other people’s presence. In the case at hand, the beds in the girl’s dormitory were interconnected, and girls slept next to each other. The accused Qin X entered the dormitory in the name of checking up the dormitory after the students went to bed and committed indecent assault on the victims despite the presence of a number of students. Although Qin X’s act was not found by other students in the same dormitory because the victims made no resistance out of fear, the act itself or the behavior is still in a state of being readily discovered and perceived. Therefore, the indecent behavior by the accused Qin X in the dormitory meets the requirements of legal provisions and should be deemed as “molesting children in public”.

The People v. Rou X (Death Penalty Review of Cases Involving Intentional Homicide): Applicability of the Criminal Policy of Tempering Justice with Leniency in Cases of Extraordinarily Serious Criminal Consequences Aniwar Simayi and Xu Liu

Rule The “leniency” in the criminal policy of tempering justice with leniency is applicable to both less serious and less socially harmful crimes, as well as to the accused who, despite the seriousness of the crime, may have been accorded leniency because of statutory or discretionary mitigating circumstances, whose subjective culpability of the mind is relatively insignificant and whose harmfulness to person is not great. The crime of intentional homicide in the adjudicated case is a serious crime because the accused has intentionally killed four innocent minors. The consequences are particularly serious, but in consideration of the fact that the case results from family and marital conflicts, the subjective culpability of the accused is relatively insignificant, and harmfulness to person is not serious, the accused behaves well in confessing guilt and shows repentance for the committed crime. The sentence of death penalty may not be immediately executed. Article 250 of the revised Criminal Procedure Law provides that the Supreme People’s Court shall review death penalty cases and make a ruling to approve or Collegial Bench for the First Instance: Kulban Muzi, Bilicz Abulla and Hasmu Saiti Collegial Bench for the Second Instance: Adili Abulimiti, Muhtar Abdureyim and Patty Gurley-Kurban Death Penalty Review Collegial Bench: Rong Ran, Aniwar Simayi and Lizhu Hao Edited by Xianrong Bao; translated by Daxuan Zheng and Yi Zheng A. Simayi (B) · X. Liu The Second Criminal Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_4

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disapprove of the death penalty. If the death penalty is not approved, the Supreme People’s Court may remand the case for a new trial or reverse the sentence. Considering the significance of disapproving of the review decision on the death penalty for the accused in this case, the Supreme People’s Court directly reversed part of the sentence and made some changes.

Case Information 1. Public Prosecution Authority and Party Public Prosecution Authority: Aksu Branch of the People’s Procuratorate of Xinjiang Uygur Autonomous Region The Accused: Rou X 2. Procedural History First Instance: No. 286 [2015] Trial, Crim. Division, the Intermediate People’s Court of Aksu District, Xinjiang Uygur Autonomous Region (Dated Dec. 3, 2015) Second Instance: No. 67719162 [2017] Review, Crim. Division, the Higher People’s Court of Xinjiang Uygur Autonomous Region (Dated Jan. 16, 2018) Death Penalty Review: No. 36871335 [2018] Review, Crim. Division, the Supreme People’s Court (Dated Dec. 19, 2018) 3. Cause of Action The crime of intentional homicide

Essential Facts The accused Rou X married in October 2000 to Mai X (handled separately and sentenced in another case) and subsequently gave birth to four daughters. In October 2014, Mai X divorced Rou X by reciting the “talaq” (Uyghur transliteration, meaning oral repudiation of marriage or dissolution of marriage) and drove Rou X back to her maternal family. Two months later, Mai X called Rou X back home, forced her to divorce and asked her to raise two daughters alone. On March 5, 2015, Mai X was criminally detained for allegedly committing bigamy. Only until then had Rou X learned that her husband had been illegally married with others. Thus, she felt drastically desperate and wished for a suicide to end her life, but on the thought of no one taking care of her four daughters, she decided to bring her four daughters along with her to part with the world. At approximately 00:00 on March 6, 2015, Rou X, in her home in the X X County of Xinjiang Uygur Autonomous Region, upon falling asleep of her four daughters, Mu X (A) (12 years old), Mu X (B) (eight years old), Mu X (C) (seven years old), Mu X (D) (one year old), buckled the door fast from

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inside the room, adding soot and other combustion materials to the stove, stuffing the chimney with a pair of strap pants to block the flue, and then she lay down next to her four daughters. At 14:00 the next day, Rou X’s relatives found out the anomalies, so they broke in, only to find four girls had died, but luckily Rou X survived and was sent to the hospital and rescued. After forensic identification, the four girls were found to be suffocated by reason of CO (carbon monoxide) and lack of oxygen. On December 3, 2015, the Intermediate People’s Court of Aksu District, Xinjiang Uygur Autonomous Region, in its criminal judgment numbered No. 286 [2015] Trial, Crim. Division, the Intermediate People’s Court of Aksu District, Xinjiang Uygur Autonomous Region, found the accused Rou X guilty of intentional homicide and sentenced her to death and deprived her of political rights for life. After the sentence was pronounced, no appeal or protest was lodged within the statutory period. The Higher People’s Court of Xinjiang Uygur Autonomous Region reviewed the judgment on January 16, 2018, and issued its death penalty review ruling, numbered No. 67719162 [2017] Review, Crim. Division, the Higher People’s Court of Xinjiang Uygur Autonomous Region, agreeing with the criminal judgment made in the first instance and reporting in accordance with law the case to the Supreme People’s Court for approval.

Issues 1. In the case of Rou X’s intentional homicide, which resulted in particularly serious consequences, can she be sentenced to death without immediate execution under the criminal policy of tempering justice with leniency; 2. Whether the Supreme People’s Court can in accordance with law make a direct change to overrule the judgment when it disapproves of the death penalty review decision made in the inferior people’s court.

Holding The Supreme People’s Court holds that the accused Rou X had intentionally and unlawfully taken away the lives of others in committing suicide, which constituted the crime of intentional homicide. The death of four innocent infants is a crime bringing about particularly serious social consequences and should be punished by death. However, in view of the fact that the case was triggered by her husband’s bigamy and the practice of religion to compel her to divorce, Rou X herself was the victim of her husband’s bigamy and religious extremism. She was so desperate for her end of life as to commit suicide; she put an end to her four daughters because of her worry that her underage daughters would be left unattended. The mens rea in the said crime was not particularly egregious and deplorable, and she also admitted her

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guilt and repented for her conduct, so she may not be put in the position of a criminal whose crime is so serious that the death penalty must be executed immediately. The judgment made in the first instance and the death review ruling made by the Higher People’s Court of Xinjiang Uygur Autonomous Region are based on clear facts and conclusive and sufficient evidence. The legal processes have been conducted lawfully, but the sentencing is made partly improper and should be rectified in accordance with law. It is therefore held by this court that the death penalty review ruling made by the Higher People’s Court of Xinjiang Uygur Autonomous Region is disapproved, the sentencing part in the judgment made in the first instance and the death penalty review ruling made by the Higher People’s Court of Xinjiang Uygur Autonomous Region are reversed; and it is further held that the accused Rou X is to be sentenced to death for the crime of intentional homicide, with a two-year suspension of execution and deprivation of political rights for life.

Comment on Rule 1. Correct understanding and command of the spirit embodied in the criminal policy of tempering justice with leniency The criminal policy of tempering justice or balancing severity with leniency is an important policy proposed by the Central Committee of the Communist Party of China under the current situation of building a harmonious socialist society, and it is a basic criminal policy of China at this stage. It is particularly of great significance to prevent and reduce crime to the maximum extent possible, resolve social conflicts, promote social harmony and stability, and safeguard enduring peace and stability of the country. Correct understanding of the criminal policy of tempering justice with leniency entails an accurate definition of three key words: “leniency”, “severity” and “balancing (tempering justice)”. In accordance with the requirements of the Opinions on the Implementation of the Criminal Policy of Tempering Justice with Leniency, the policy of tempering justice with leniency is to be practiced according to the specific circumstances of the crime, leniency is accorded where leniency must be practiced and severity is practiced when strictness and severity must be carried out so that punishment is meted out proportionately to the crime so as to achieve the ultimate purposes of isolating and cracking down on the minority, educating, rehabilitating and saving the majority, minimizing social antagonism, promoting social harmony and stability, and maintaining a long-term national security. The handling of this case involves accurate grasp and correct application of the policy requirement of leniency. The “leniency” in the criminal policy of tempering justice with leniency can be divided into two situations: for less serious crime and for serious crime. In other words, “leniency” is accorded not only for the crime with less serious and less socially harmful circumstances but also for the accused. Although the crime is serious, there are statutory and discretionary mitigating circumstances,

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the subjective culpability of the mind of the accused is relatively insignificant, and the harmfulness to the person is not drastic. It is an inevitable requirement to balance crime and punishment when less serious crime is punished with lighter penalties. Leniency is accorded in serious crimes when the perpetrator can admit guilt or make confessions or surrender, or perform deeds of merit or some other statutory or discretionary circumstances that can enable lighter punishment when a sentence is to be made. This is also the meaning of the tolerant rule (self-restraint) of criminal law. As a rule, the implementation of said rule of tolerance of criminal law requires that in criminal justice, punishment is meted out proportionately to the crime, and excessive application of punitive measures is to be avoided.1 The “leniency” in the criminal policy of tempering justice with leniency is also a reflection of this requirement. Returning to the case of Rou X’s intentional homicide, the accused met the criteria of serious crime, but the subjective culpability of the mind of the accused was relatively insignificant and the harmfulness to the person was not great. The subjective culpability of the mind and harmfulness to the person, as discretionary sentencing circumstances, have an important value in death penalty cases, which means that in some death penalty cases, if discretionary sentencing circumstances indicate that the perpetrator is less socially harmful and less dangerous, the death penalty with immediate execution should not be applied.2 The discretionary sentencing circumstances in this case are as follows: first, the case was triggered by marital and family conflicts, and the accused was in a state of extreme mental depression before she committed the crime, which can be punished leniently for crimes caused by love, marriage, family, neighborhood disputes and other contradictions or conflicts among the folks. Second, the accused Rou X’s motive is not particularly evil; she only harbored a motive of her minor daughters left unattended. Third, the accused Rou X possessed no prior criminal record, behaved well after the crime, harmfulness to the person was not great, and she also showed repentance. Fourth, other relatives of the victims have not requested severe punishment of the accused, nor has incidental civil compensation been raised. For the crime caused by civil disputes such as marriage and family, if the victim and/or his family expressed understanding, this could be deemed a discretionary sentencing circumstance. In the specific application of the criminal policy of tempering justice with leniency in the death penalty review process, the policy of “retaining the death penalty, strictly controlling and cautiously applying the death penalty” should be accurately understood and strictly implemented. Starting from the Amendment to Criminal Law (VIII) and later the Amendment to the Criminal Law (IX), the general trend of China’s death penalty reform is to restrict and abolish the death penalty. The Amendment to the Criminal Law (VIII) has abolished the death penalty for 13 economic and non-violent crimes, and the Amendment to the Criminal Law (IX) has further abolished 9 death penalty crimes. Under this trend, the policy of “retaining the death penalty, strictly controlling and cautiously applying the death penalty” needs to be accurately understood and strictly implemented in three aspects. The “retention of the death penalty” 1 2

参见龙宗智:《宽严相济政策相关问题新探》 ,载 《中国刑事法杂志》 2011年第8期。 参见高铭瑄:《宽严相济刑事政策与酌定量刑情节的适用》 ,载 《法学杂志》 2007年第1期。

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is meant to impose a death penalty in accordance with law for criminals who have committed extremely serious crimes; “strict control” means unifying the application standard for imposing a death penalty to obtain the application of a death penalty under strict control so as to ensure that the death penalty is applied only to a very small number of extremely serious crimes; “cautious application” is directed at the fact that although a death penalty can be imposed, a death penalty can be maintained for immediate execution according to law. According to this requirement, from the perspective of the criminal policy of tempering justice with leniency, the conduct of Rou X falls into the situation that although the crime is extremely serious, the death penalty may not be immediately executed according to law. Under such circumstances, the Supreme People’s Court decided not to approve the review decision of the immediate execution of the accused Rou X but changed the original sentence to a death penalty with a two-year reprieve. This judgment also reflects that in the process of implementing the criminal policy of tempering justice with leniency, the unity of the legal and social effects of the court judgment should be realized. On the one hand, the case must be handled strictly in accordance with law to maintain the unity and authority of the law and to ensure a good legal effect. On the other hand, the treatment of the case has to be conducive to winning the support of the general public and the maintenance of social stability, to dismantling the crime and resolving conflicts, to educating and rehabilitating the criminals, to reducing social confrontation, and to promoting social harmony and striving for better social effect. In this case, the accused Rou X was sentenced to death with a two-year stay of execution, which has achieved not only a good legal effect but also a social effect, which is more conducive to resolving social conflicts and educating and reforming criminals than awarding a review ruling of death penalty with immediate execution. In the past ten years, since the implementation of the criminal policy of tempering justice with leniency, great progress has been achieved in the control of the death penalty, and the number of imposed death penalties has drastically dropped, which has greatly affected the overall situation of crime control and prevention. 2. Whether the Supreme People’s Court can in accordance with law make a direct change to overrule the judgment when it disapproves of the death penalty review decision Article 250 of the revised Criminal Procedure Law provides that the Supreme People’s Court shall review death penalty cases and make a ruling to approve or disapprove of the death penalty. For the disapproval of the death penalty, the Supreme People’s Court may remand the case for a retrial or make changes to the sentence. This forms the legal basis for the Supreme People’s Court to make a change of sentence in cases where the death penalty ruling is not approved. However, the Judicial Interpretation of the Criminal Procedure Law has specified different situations. Article 350 (5) hereof provides that if the original sentence finds the facts are ascertained to be correct and clear-cut, but the death penalty should not be imposed according to law, the court shall make a decision to disapprove of the death penalty and the original sentence shall be reversed and remanded for a new trial. Articles 351 and 352 hereof

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provide that in cases where one person is sentenced to death for two or more crimes or where two or more accused are sentenced to death, the Supreme People’s Court after review may make changes to the sentence if it believes that facts are adjudged in the imposition of death penalty to be true and correct for some part of the crimes or some accused, but the death penalty should not be imposed in accordance with law. In comparison with said provisions of the Judicial Interpretation of the Criminal Procedure Law, there is no mention of whether the Supreme People’s Court can directly change the sentence in cases where the judgment of the first instance finds the facts are ascertained correct and true but the death penalty should not be imposed according to law. Specifically, in this case, the Supreme People’s Court can reverse part of judgment or ruling and make a change for the following reasons: first, the case concerning the accused Rou X’s intentional homicide has been deliberated by the Criminal Trial Subcommittee of the Adjudication Committee of the Supreme People’s Court. In addition, the Judicial Interpretation of the Criminal Procedure Law is discussed and adopted by the Adjudication Committee of the Supreme People’s Court. In terms of legal force, the resolution by the Criminal Trial Subcommittee of the Adjudication Committee of the Supreme People’s Court of the case of the accused Rou X’s intentional homicide is on par with the Judicial Interpretation of the Criminal Procedure Law. Second, the Criminal Procedure Law was revised in 2018, while the Judicial Interpretation of the Criminal Procedure Law was formulated and adopted in 2012. In the case that the state legislature revised the Criminal Procedure Law after the Judicial Interpretation hereof was made according to the provisions of the preexisting Criminal Procedure Law, the provisions of this revised Law can be directly cited without citing the Judicial Interpretation hereof. Considering the significance of disapproving of the death penalty review ruling in the case of Rou X’s intentional homicide, the Supreme People’s Court can directly make a change or changes to the sentence in accordance with Article 250 of the revised Criminal Procedure Law.3

3

参见卢建平:《宽严相济与刑法修正》 ,载 《清华法学》 2017年第1期。

Yang X v. Guizhou Xinguixing Automobile Sales & Service Co., Ltd. and Volkswagen Group Import (China) Co., Ltd. (Dispute over Sales Contract): Determination of Fraud and Resulting Liability in the Case of Failure to be Informed of Minor Defects Yan Shang

Rule Whether an auto dealer’s failure to inform the consumer of the relevant information constitutes “fraud” under Article 55(1) of the Law of the People’s Republic of China on the Protection of Consumer Rights and Interests (hereinafter referred to as the Law on the Protection of Consumer Rights and Interests) and what liability results from the said failure should be comprehensively judged and determined by referring to No.17 Guiding Civil Cases on the basis of whether the said failure to inform runs contrary to the fundamental purpose of entering into a consumer contract and whether the auto dealer has deliberately concealed facts and other factual information. The fundamental purpose of entering into a consumer contract can be comprehensively examined from whether any special agreement has been reached between the parties, whether the problems and measures for handling the said problems are apparently insignificant for the entire vehicle, whether the safety performance, main functions, and primary purposes of the vehicle are endangered, and whether major adverse effects have been imposed upon the consumers and other factors.

Collegial Bench for the Second Instance: Zaiyu Guo, Xingye Yang and Dan Wang Edited by Zaiyu Guo; translated by Daxuan Zheng and Lei Yue Y. Shang (B) The Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_5

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Case Information 1. Parties Appellant: Guizhou Xinguixing Automobile Sales & Service Co., Ltd. (hereinafter referred to as Xinguixing Auto Sales & Service Company) Appellee: Yang X Defendant in the first instance: Volkswagen Group Import (China) Co., Ltd. (hereinafter referred to as Volkswagen Sales Company) 2. Procedural History First instance: No. 166 [2016] Trial, Civ. Division, the Higher People’s Court of Guizhou Province (dated Oct. 16 of 2017) Second instance: No. 12 [2018] Final, Civ. Division, the Supreme People’s Court (dated Nov. 22 of 2019) 3. Cause of Action Dispute over sales contract

Essential Facts Yang X claimed that he entered into a sales contract with Xinguixing Auto Sales & Service Company on June 24, 2014, in which it is agreed that Xinguixing Auto Sales & Service Company is to sell a newly imported British Bentley Mulsanne at a price of CNY 5,500,000 and the vehicle purchase tax is CNY 470,085.47. After the purchase of the vehicle, Yang X has continually encountered many problems in the said vehicle but has not received a favorable response after repeatedly inquiring Xinguixing Auto Sales & Service Company. In 2016, in one of the daily maintenances of the vehicle, Yang X inadvertently discovered that the vehicle had a major repair (overhaul) record before it was delivered. Therefore, the vehicle sold by Xinguixing Auto Sales & Service Company is a problematic vehicle, but Yang X was not informed. The fraudulent selling practices of Xinguixing Auto Sales & Service Company and Volkswagen Sales Company have caused substantial harm to Yang X. In accordance with the provisions of the Law on the Protection of Consumer Rights and Interests, Yang X requested in the lawsuit that, (1) the sales contract between Xinguixing Auto Sales & Service Company and Yang X be rescinded; (2) Xinguixing Auto Sales & Service Company refund to Yang X the purchase price of CNY 5,500,000 plus the vehicle purchase tax of CNY 470,085.47, totaling CNY 5,970,085.47; (3) treble punitive damages be incurred on Xinguixing Auto Sales & Service Company and paid to Yang X, that is, CNY 16,500,000; (4) Volkswagen Sales Company be jointly and severally liable for the aforesaid second and third claims; and (5) the costs and expenses incurred in this

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legal action be borne by Xinguixing Auto Sales & Service Company and Volkswagen Sales Company. Xinguixing Auto Sales & Service Company argued that there was no fraudulent concealment of any vehicle information in the sales process. The vehicle in question is a brand new vehicle imported from the UK without major repair or overhaul. In addition, according to the relevant provisions of the Law on the Protection of Consumer Rights and Interests, Yang X’s request to return the vehicle has exceeded seven days. Therefore, Yang X is not entitled a right of contract rescission, and his request to return the vehicle and treble punitive damages stand without factual and legal basis. Volkswagen Sales Company argued that: (1) the vehicle in question is a newly imported one, and there is no record of major repair or overhaul when sold to consumers. The so-called record of major repair/overhaul claimed by Yang X turns out to be the record made during the routine check of the vehicle when the auto dealer found out a slight flaw in the paint surface of the left front door of the vehicle and a problem with the right rear curtain. Then, the auto dealer had the paint surface polished and waxed, and after declaring to the manufacturer, had the right rear curtain replaced with the original parts. The abovementioned problems do not fall into the major repair/overhaul of the vehicle, and the auto dealer’s measures to handle the said problems conform to what is required for the normal operational process. Properly handling the said problems does not affect the normal use of the vehicle for Yang X. That Yang X files a lawsuit on the basis of his sought public information after three years of use of the vehicle has exaggerated the problems of the vehicle; (2) the sales contract in question was entered into and signed in June 2014, and the vehicle in question has not reached the store at that moment, so auto dealer did not know relevant situation, either. Therefore, auto dealer’s conduct cannot be said to have concealed anything and intentionally informed the customer of false situation, and does not constitute fraud; (3) Volkswagen Sales Company, who is neither the seller in the contractual sense (only charged with distribution of the vehicle), nor acted fraudulently, shall not be held jointly and severally liable. After the trial, the court ascertained that Volkswagen Sales Company imported from the UK a Bentley Mulsanne with complete import procedures on March 20, 2014. On June 24, 2014, Yang X signed a sales contract with Xinguixing Auto Sales & Service Company, agreeing that Xinguixing Auto Sales & Service Company sold him a Deluxe Bentley Mulsanne at a price of CNY 5,500,000. Xinguixing Auto Sales & Service Company promised that the sold vehicle is handled with properly lawful procedures and meets the inspection standards of the State Administration of Commodity Inspection; the quality standards and warranty period of the vehicle also conform to what is required by the manufacturer. The expected delivery date is July 30, 2014, which shall be subject to full payment of the purchase price of the vehicle by Yang X to the account of Xinguixing Auto Sales & Service Company, and the final delivery date shall be subject to the notice issued from Xinguixing Auto Sales & Service Company to Yang X for his actual control of the automobile and handover of all the information or documents about the vehicle. Yang X was to inspect and accept the vehicle at the delivery location, and Xinguixing Auto Sales & Service Company

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was to hand over the vehicle to Yang X for his actual control and deliver all the vehicle-related documents to Yang X. The signing of the vehicle handover letter was deemed the official delivery of the vehicle. However, neither party stipulates the engine number and frame number of the vehicle in the sales contract. Subsequently, Xinguixing Auto Sales & Service Company purchased the said imported Bentley Mulsanne from Volkswagen Sales Company. On July 30, 2014, the purported vehicle reached Xinguixing Auto Sales & Service Company. On the same day, when carrying out auto inspection for handover to the customer, Xinguixing Auto Sales & Service Company detected paint surface damage in the left front door of the vehicle, polished and waxed the paint surface damage, and then wrote this down in the Maintenance Record. On October 8, 2014, Xinguixing Auto Sales & Service Company replaced the window curtain assembly due to abnormal noise of the curtain in the right rear window, which was written down in the Maintenance Record. On October 30, 2014, Yang X completed vehicle registration. On May 31, 2016, Yang X inquired about the said handling measures and repairing records of the vehicle in question while searching the repair and maintenance records of the purchased vehicle through www.chejianding.com (a website about automobile inspection and appraisal). Then, Yang X filed a lawsuit on the grounds that the failure of Xinguixing Auto Sales & Service Company and Volkswagen Sales Company to have informed him of the said repair and of any other similar circumstances at the time of delivery of the vehicle constituted fraud and caused substantial damage.

Issue Whether an auto dealer’s failure to inform consumers of relevant information constitutes “fraud” under Article 55 (1) of the Law on the Protection of Consumer Rights and Interests. How should the parties be held liable?

Holding After trial, the Supreme People’s Court holds that “major repair or overhaul”, “problematic vehicle”, or “substantial damage” and other facts claimed by Yang X stand without evidence. The damage to the paint surface of the vehicle in question was only one under the left front door, rather than multiple places of the car body, no evidence can be presented to prove that damaged area of the paint surface covers a larger proportion. The handling measures taken by Xinguixing Auto Sales & Service Company do not involve the sheet metal operation of the corresponding parts and do not even involve paint materials, which is completely imperceptible to the naked eye in terms of the processing effect. Therefore, the conduct of Xinguixing Auto Sales & Service Company to eliminate or remove such insignificant defects arising

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from the new vehicle in circulation or storage is a reasonable finishing act before the delivery of the new vehicle. Such defects and the corresponding finishing acts are significantly negligible, which may not affect the personal health and safety of consumers and can hardly shelter any substantial property interests. Thus, the said failure does not constitute a violation of the legal duty to notify, nor does it constitute a violation of consumers’ right to know. For similar information, a car dealer can choose to inform consumers on the basis of good business judgment to enhance their long-term business competitiveness with a more standardized and higher level of information disclosure. As for the problem of curtains and corresponding handling measures. For such automobile with minor defect(s) found out by the auto sales departments and repair shop inspector after the new car reaches the store, if returned to the manufacturer for processing, or if the manufacturer or car dealer has to invest more to further reduce the probability of negligible defect(s), it will inevitably lead to an increase in the operating costs, which, in turn, leads to an increase in consumer transaction costs. For new cars with such negligible problems, the authorized auto dealer can repair the car with measures that meet the standards of an industry’s code of practice, and under the condition that minor problems can be eliminated, any rational or reasonable consumer may deem auto dealer’s repair of the new car as the repair conducted by the manufacturer(s). However, Xingguixing Auto Sales & Service Company could not prove that the problems incurred were related to the transportation or storage of the new car, and the replacement of parts, the material cost and the labor costs included in the processing measures, could be priced independently, and the market price of the auto parts and labor hours consumed were not significantly low. The measures taken by Xinguixing Auto Sales & Service Company for the curtain on the right rear window are measures to rectify the defects of the new vehicle instead of finishing measures to correct the minor defects of the vehicle. As such information may exert a certain impact on consumer psychology and property interests, consumers should be informed of such an impact. Thus, the failure of Xinguixing Auto Sales & Service Company to inform consumers of such information has violated consumers’ right to know. The following factors should be taken into account in evaluating whether the failure of Xinguixing Auto Sales & Service Company to inform consumers of curtain problems constitutes fraud under the Law on the Protection of Consumer Rights and Interests: 1. Whether the fundamental purpose of entering into a sales contract has been affected From the content of the contract, no specific agreement on the issues related to window curtains or similar matters was reached in the sales contract. Yang X claimed that the vehicle in question is a problematic vehicle with major overhaul rather than a new vehicle, which is clearly inconsistent with the reasonable perception of major overhaul of the general public. In the absence of evidence to prove that the vehicle has been registered by others before delivery or that the vehicle has been substantially used by another person, although the formalities of registration have not been gone through, the vehicle delivered by Xinguixing Auto Sales & Service

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Company may be taken as the new vehicle agreed upon in the contract. The defects of the curtain and the resulting repair measures do not have much to do with power systems such as engines and transmissions, nor do they have to do with steering systems, braking devices, suspension systems, security systems, the main parts of the front and rear axles and the main wiring harness of the whole vehicle; thus, the safety performance, main function and basic use of the vehicle are not jeopardized. Furthermore, the corresponding repair measures are immaterial, the time for repair lasts short, the information related thereto is not the critical information that would affect the fundamental purpose of Yang X’s contracting, and no adverse effect has been incurred upon the customer(s). First, no evidence can be produced to establish that the defect of the curtain and corresponding repair measures have posed a potential threat to the personal health and the safety of Yang X, not to mention the substantial damage; second, the vehicle has been put to actual use for more than three years with more than 29,000 km of driving mileage, and no evidence can establish that the problem of the curtain has caused adverse effects on the daily use of the vehicle; third, Yang X has claimed substantial damage or injury resulting from “major repair or overhaul”, but no evidence was produced by Yang X in the course of hearing in the first and second instances; and fourth, the total cost of the replacement of curtain is not significantly high and accounted for a significantly slight proportion compared to the purchase price of the vehicle. To consumers for such vehicles, the repair cost does not constitute a large property interests. 2. Whether Xinguixing Auto Sales & Service Company harbors any subjective intention to conceal the relevant information First, before the delivery of the vehicle, Xinguixing Auto Sales & Service Company had the said two operations recorded in the Maintenance Book and had the information uploaded immediately to the network which can be publicly accessed by the customers in certain ways. The record and uploading of information were done by the dealer on its own initiative. Regardless of the subjective purpose of the auto dealer, as the record and uploading information were done by the auto dealer on its own initiative, such practice has objectively helped consumers gain access to such information; thus, it can be concluded that the auto dealer does not have the intention to deliberately conceal the relevant information. Second, from the sales process of the vehicle in question, Yang X contracted with Xinguixing Auto Sales & Service Company to place an order of the vehicle before Xinguixing Auto Sales & Service Company ordered the vehicle from Volkswagen Sales Company, so the purchased vehicle was not specifically tailored when Yang X contracted with Xinguixing Auto Sales & Service Company, and no evidence has been found to establish the fact that Xinguixing Auto Sales & Service Company was aware of the said problems when it entered into contract with Yang X. In sum, the failure of Xinguixing Auto Sales & Service Company to inform Yang X of the defect of curtain and the car repair does not fall into the important information that affects the fundamental purpose of executing a contract. In addition, no evidence has been found to establish the fact that Xinguixing Auto Sales & Service Company harbors any subjective intention to conceal any information, such minor

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defects cannot be categorized as a special event or matter that is clearly beyond the psychological reach of an average consumer, and the subject matter of the dispute does not involve food or medicine. In view of the abovementioned factors, the failure of Xinguixing Auto Sales & Service Company to fulfill its obligation to inform the customer, which to a certain extent violated Yang X’s right to know, will not constitute fraud, as provided in Article 55(1) of the Law on the Protection of Consumer Rights and Interests. The measures to rectify the minor defects on the paint surface of the automobile taken by Xinguixing Auto Sales & Service Company can be categorized as a finishing act of the auto dealer before the delivery of the vehicle, and said company is not to bear the liability to make compensation for the failure to inform the customers of the minor defects. The measures of replacing the window curtain taken by Xinguixing Auto Sales & Service Company can be categorized as a repair act to eliminate minor problems, and Xinguixing Auto Sales & Service Company should inform the information related to this before or at the time of delivery but failed to do so. Although Xinguixing Auto Sales & Service Company has disclosed the relevant information to a certain extent, it has not informed the consumers in a more direct, clearer and more convenient way before or when the vehicle was delivered, which has affected customers’ right to know in a certain way. In this regard, Xinguixing Auto Sales & Service Company is to bear the corresponding liability for compensation. As the problems are insignificant and the handling measures has not significantly endangered the safety performance, the main function and the basic use of the vehicle, and no evidence can establish the fact the adverse impact has been exerted upon Yang X, and furthermore the auto dealer has replaced free of charge the curtain assembly before the delivery of the vehicle, the Supreme People’s Court, taking into account the protection of cognitive ability and consumer psychology, as well as the encouragement and guidance for auto dealer to have the auto repair recorded and had such information uploaded for customer’s access in a timely manner, decided that Xinguixing Auto Sales and Service Company was to compensate Yang X at CNY 110,000. The fees and charges for handling the case in the first and second instances amounts to CNY 308,300.8, of which CNY 306,790.8 is to be borne by Yang X and CNY 1,510 is to be borne by Xinguixing Auto Sales & Service Company. The property preservation fee and charges amount to CNY 5,000, of which CNY 4975 is borne by Yang X and CNY 25 is borne by Xinguixing Auto Sales & Service Company.

Comment on Rule 1. Current scenario of the auto consumption disputes With the rapid growth of automobile production and sales in China, consumer disputes involving automobile distribution have been increasing annually. According

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to data released by the China Consumers Association, 20,474 complaints about automobiles and parts were recorded in the Complaint and Consultation Information System of China Consumers Association in 2017, an increase of 5227 complaints compared with the previous year, an increase of more than 34.3%. The main object of complaints is directed at auto sales enterprises or auto service enterprises. According to the statistics of auto dealer infringements, the right to safety, fair trade, and consumers’ right to compensation are major incidences of automobile consumption, accounting for more than 50%. A total of 19,348 complaints were accepted to be handled throughout the year, with an acceptance rate of 94.50%, while the rest were either refused, or pending or transferred. Among the cases accepted to be handled, 13,931 complaints were settled through mediation agreements, 2445 complaints were handled without mediation agreements, 503 complaints were withdrawn by consumers, and the rate for settling the complaints was 68.88%, which helped save consumers CNY 192 million in economic losses.1 In judicial practice, whether an auto dealer has committed fraud has been a commonly complained automobile consumption dispute. Usually, a fraudulent act is an act intended to cause, reinforce or maintain an incorrect perception by the other party. That act can be manifested as a positive action, such as informing the other party of a falsity, or as a negative omission, such as concealing the truth.2 Article 68 of the Opinions of the Supreme People’s Court on Several Issues Concerning the Implementation of the General Principles of the Civil Law of the People’s Republic of China (for trial implementation) (hereinafter referred to as the Opinions on Implementing General Principles of the Civil Law)3 provides that “(a) party who deliberately informs the other party of any falsity, or deliberately conceals the truth, to induce the other party to make a false expression of intent, may be deemed as having committed fraud.” In 2015, Article 6 of the Measures for Awarding Penalties for Infringement of Consumer Rights and Interests made by the State Administration for Industry and Commerce of the People’s Republic of China4 in accordance with the Law on the Protection of Consumer Rights and Interests emphasized that any goods or service information provided to consumers should be true, comprehensive and accurate, and some conduct falling into false or misleading publicity is detailedly listed. As automobiles are a special product with many distribution links, auto parts and other technical factors, in judicial practice, the abovementioned rules seem too principled once a dispute arises between the parties and is brought to court. The minor 参见方彬楠、濮振宇: 《“最贵退一赔三案”尘埃落定,最高院首次明确汽车流通 “欺诈”认定 》 ,载 《北京商报》 2018年12月2日。 2 朱庆育: 《民法总论》 (第2版), 北京大学出版社2016年版, 第279页。 3 The Opinions on General Principles of the Civil Law was discussed and adopted by the Adjudication Committee of the Supreme People’s Court on January 26, 1988, issued on April 2, 1988, and has been in effect since the date of issuance, and is now partially repealed. 4 According to the institutional reform and deployment of central authority by the State Council in 2018, relevant functions and responsibilities of the State Administration for Industry and Commerce of the People’s Republic of China has been exercised by the State Administration for Market Regulation. 1

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defects or some delicate or subtle problems of the vehicle are most striking. If an auto dealer fails to inform the consumer, the problem remains whether it constitutes fraud under the Law on the Protection of Consumer Rights and Interests and whether the punitive rule of “returning the original car and awarding treble damages” should be applied. In this regard, some inconsistencies in court decision-making are found among different levels of the people’s courts. Some courts have fully supported the purchaser’s request for “unconditional refund and treble damages”, while others have completely dismissed the purchaser’s claim. This “all or nothing” or “black or white” adjudication path of not compensating or giving great compensation for minor defects has aroused much controversy. In particular, if the failure of the auto dealer to inform exerts little or no effect upon the purchaser or auto dealer harbors no apparent intention to conceal the truth, should this still be deemed “fraud” under the Law on the Protection of Consumer Rights and Interests, or is the fraud under Article 55 of the Law on the Protection of Consumer Rights and Interests too rigid? These issues, which should be somewhat mitigated by the facts of each case, have also generated more discussion and attention. In recent years, there has also been the practice of courts awarding treble damages based on the price of the auto parts involved in the dispute. 2. Ideaology for hearing such cases (1) Attention is to be paid to the differentiated facts for each specific case Back in 2008, the Second Intermediate People’s Court of Beijing Municipality found that the dealer had committed fraud by failing to inform the purchaser of the relevant information. The Supreme People’s Court had that case issued as a guiding case in 2013. In that case, a vehicle is worth CNY 130,000, auto dealer failed to inform the purchaser of such repair item as paint on the right front fender, the right front door and right rear fender, metal plated for right front door, right rear fender and right front fender, replaced bottom side big snap, gas tank door and total front fender light. However, the Supreme People’s Court found in the case at hand that there was only one paint under the left front door of the vehicle, the area is not large and polishing and waxing is sufficient to make car good instead of metal plate and painting. The case at hand differs significantly from the abovementioned guiding case in terms of facts. The details of the facts which affect the judicial determination of fraud vary from case to case in cases of fraud in automobile sales. For some material facts, especially those involving professional and technical knowledge, the possibility of calling expert witnesses into the court for assistance will not be excluded, which can help the court further accurately identify the facts and accurately apply the law. (2) Emphasis on substantive protection of customers’ right to know Articles 8 and 20 of the Law on the Protection of Consumer Rights and Interests provide for the consumer’s right to know of the purchase or use of goods or services and the business owners’ duty to supply true and comprehensive information about goods or services. Thus, substantive protection should be emphasized for the protection of consumers’ right to know.

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First, the information provided by the business owner should be true; that is, the owner should provide consumers such information about goods or services as price, country or place of origin, producer or manufacturer, use, performance, specifications, grade, chief ingredients, production date, expiry date, test certificate, instructions for use, after-sales service, or service content, specifications, costs and other information. Such information shall be objective, truthful and accurate and shall not contain false content, false or misleading advertising or publicity. Second, the information provided by business runners should be comprehensive. Two aspects of the issue of “being comprehensive” should be attentive in trial practice. On the one hand, in practice, although consumers are provided with true information, the information provided is selective or some important information is deliberately concealed so that the consumer’s right to choose is affected; therefore, the Law on the Protection of Consumer Rights and Interests lays more emphasis on the important information that affects consumers’ right to choose. On the other hand, that the information given by the business owner or runners should be comprehensive does not require the owner to provide all and any information about the goods or services, but the important information affecting the consumer’s right to safety, the right to choose are requested. It is no good to provide consumers with all and any information about goods or services for some important information affecting consumer’s right to choose will be submerged in the mass of all or any given information.5 Furthermore, as pointed out in the judgment of the case at hand, there are many parts and components of modern automobiles, and the structure is also complex. Vehicles need to go through many links from production to final delivery to consumers, such as transportation and storage, and the amount of information involved in the products and logistics is huge. Requiring a business owner or runner to inform consumers of all the said information indiscriminately is not conducive to the substantive protection of the consumer’s right to know. At the same time, full disclosure of all and any information about all links and all parts of the automobiles to consumers will result in unnecessary increases in transaction costs, and all these nonessential increases in the cost of the production chain will ultimately be passed on to consumers, which is detrimental to the protection of consumer rights and interests. (3) Attention is given to the balance between the protection of consumer rights and interests and the reasonable, orderly development of an industry, transaction costs and other factors In hearing consumer rights protection cases, it is a principle unswervingly adhered to for the people’s court to be favorable to the consumers in fact-finding and application of the laws so as to strengthen the protection of the rights and interests of disadvantaged and vulnerable consumers. Under this premise, due consideration should also be given to transaction costs and reasonable and orderly development of an industry, which runs no counter to the weakening protection of consumers, 参见贾东明主编: 《中华人民共和国消费者权益保护法解读》 ,中国法制出版社2013年版, 第85页;(原)国务院法制办公室编: 《中华人民共和国消费者权益保护法(含产品质量法)注解 与配套》 (第4版),中国法制出版社2017年版,第20页。

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but is more conducive to overall protection of the rights and interests for a majority of consumers. Taking the case at hand for example, if a newly arrived vehicle with minor defects is required to be returned to the manufacturer, it will incur additional logistics costs and a risk of re-scratching during the logistics process, and the increase in logistics costs will ultimately be shared with consumers. Even if manufacturers, auto dealers or logistics companies transfer the risk to the insurer by purchasing insurance policy, the costs or charges shared by the insurer will still be transmitted in the upstream and downstream industry chain and finally be borne by consumers. From a technical point of view, there is generally no substantial difference in quality between returning the car with minor defects to the manufacturer and leaving it to an authorized dealer for handling the defects. The requirements of returning the car to the manufacturer for repair and to forcibly prohibit relevant cost share are not only difficult to implement, but may also sabotage the reasonable and orderly development of an industry, which in turn is harmful to the protection of consumer rights and interests. Truly as expected by consumers, a newly bought vehicle should be brand new and free of any defects. From the point of view of maximizing consumer psychology, this view has some merits. However, consumer psychology based on the subjective feelings of customers varies from person to person. Even in the case of balancing transaction costs and reasonable and orderly development of an industry, the law can hardly benefit every individual in terms of consumer psychology, but only reasonable and rational consumers in the general sense. (4) Allocation of litigation costs As far as an individual case is concerned, although auto dealer can bear all litigation costs to minimize litigation costs of Yang X in the case at hand, Yang X filed a lawsuit on the grounds that the vehicle is problematic vehicle with major overhaul records, which has caused substantial harm and thus claimed for “unconditional refund of the vehicle and treble damages”, totaling nearly CNY 20,000,000. However, based on the evidence he had submitted, as an ordinary consumer, Yang X should be able to make a reasonable judgment on whether the vehicle in question was a problematic vehicle with major overhaul records and whether there was significant harm. If the litigation costs are assigned to the auto dealers indiscriminately regardless of any circumstances, it may encourage consumers to sue indiscriminately for “unconditional refund and treble damages” without distinguishing between the specific circumstances. From the perspective of maintaining the integrity of litigation and reasonable protection of the legitimate rights and interests of law-abiding auto dealers, litigation costs can in principle be shared based on the proportion of parties’ requests supported by the court in accordance with the relevant provisions of the Measures on the Payment of Litigation Costs made by the State Council. However, in view of technicalities in the automobiles, in hearing the case at hand, although the claim for “unconditional refund and treble damages” cannot be supported, customers’ request for “unconditional refund and treble damages” could be made because of the difficulty of making an accurate judgment on the complexity of the issues. Thus, the allocation of litigation costs can be discretionarily awarded on the basis of specific

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facts of each case. Therefore, the final amount of compensation is determined to be approximately three times the claimed price after taking into account the encouragement and guidance factors. Litigation costs are determined in strict accordance with the principle of allocation thereof, which seems to indicate an attempt to establish some rules for adjudicating “partial fraud” on the premise of distinguishing between part and partialness.

Chongqing Zhongji Logistics Co., Ltd. v. Chongqing Sanxia Guarantee Group Co., Ltd., Chongqing Import and Export Credit Guarantee Co., Ltd. et al. (The Lawsuit against Objection to the Distribution Plan in the Enforcement Proceeding): Affirmation of the Subject Capacity Where the Creditor Files a Lawsuit against Objection to the Distribution Plan in the Enforcement Proceeding as the Party Subject to Enforcement is a Business Entity Xingye Yang

Rule Article 513 of the Judicial Interpretation of the Supreme People’s Court of the Application of the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as the Judicial Interpretation of the Application of the Civil Procedure Law) does not restrict the right to action when the applicant for enforcement files a lawsuit against objection to the distribution plan in the enforcement proceeding where the party subject to enforcement is a business entity. Where the party subject to enforcement is a business entity, if the creditor objects to the distribution plan made by the people’s court enforcing the judgment, he is entitled to file a lawsuit against the distribution plan.

Collegial Bench: Xingye Yang, Yanchen Li and Zaiyu Guo Edited by Yi Yang; translated by Daxuan Zheng and Lei Yue X. Yang (B) The Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_6

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Chongqing Zhongji Logistics Co., Ltd. (hereinafter referred to as Zhongji Logistics Company) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Chongqing Sanxia Guarantee Group Co., Ltd. (hereinafter referred to as Sanxia Guarantee Company) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Chongqing Import and Export Credit Guarantee Co., Ltd. (hereinafter referred to as Chongqing Imp. and Exp. Credit Guarantee Company) Defendant in the First Instance: Chongqing Renshou Nonferrous Metals Co., Ltd. (hereinafter referred to as Renshou Nonferrous Metals Company) Defendant in the First Instance: Sun X Defendant in the First Instance: Ou X 2. Procedural History First Instance: No. 747 [2016] Trial, Civ. Division, the First Intermediate People’s Court of Chongqing Municipality (Chongqing 01) (dated Feb. 13 of 2017) Second Instance: No. 208 [2017] Final, Civ. Division, the Higher People’s Court of Chongqing Municipality (dated Dec. 4 of 2017) Reopening: No. 1180 [2018] Appeal, Civ. Division, the Supreme People’s Court (dated Nov. 21 of 2018) 3. Cause of Action The lawsuit against objection to the distribution plan in the enforcement proceeding

Essential Facts The judgment by the Fifth Intermediate People’s Court of Chongqing Municipality numbered No. 00230 [2013] Trial, Civ. Division, the Fifth Intermediate People’s Court of Chongqing Municipality, held that Huaxia Bank (Chongqing) Dadukou Subbranch (hereinafter referred to as Dadukou Subbranch of Huaxia Bank) shall enjoy priority to be reimbursed with the money collected from discounting, auctioning or selling the 264.54 tons of aluminum scrap owned by Renshou Nonferrous Metals Company or with the money collected from discounting, auctioning or selling of a housing with a covered area of 4,524.38 m2 located in the XX Group, XX Village, XX Town, XX District of Chongqing Municipality. After the judgment came into effect, in the course of enforcing the judgment, Dadukou Subbranch of Huaxia Bank transferred the rights confirmed by the said civil judgment to Zhongji

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Logistics Company, and the Fifth Intermediate People’s Court of Chongqing Municipality issued a ruling numbered No. 00541 [2015]Alteration, Enforcement Division, the Fifth Intermediate People’s Court of Chongqing Municipality to make an alteration of the applicant for enforcement on June 12, 2015, naming Zhongji Logistics Company as the applicant for enforcement of the case. The judgment by the First Intermediate People’s Court of Chongqing Municipality numbered No. 00868 [2012] Trial, Civ. Division, the First Intermediate People’s Court of Chongqing Municipality, confirmed that Chongqing Imp. and Exp. Credit Guarantee Company shall have priority to receive the floating mortgaged property (the First Intermediate People’s Court of Chongqing Municipality has taken preservation measures to the extent of realizable cash value of CNY 10,000,000) that have been crystallized by Renshou Nonferrous Metals Company within the scope of Renshou Nonferrous Metals Company’s failure to comply with the payment obligation confirmed by the judgment and real estate mortgage list. The said judgment has come into effect. The civil mediation made by the First Intermediate People’s Court of Chongqing Municipality numbered No. 00309 [2013] Mediation, Civ. Division, the First Intermediate People’s Court of Chongqing Municipality, stated that Sanxia Guarantee Company is entitled a right to apply in time for compulsory enforcement and has priority to be reimbursed with the money collected from houses owned by Renshou Nonferrous Metals Company located in No. 1–1, XX Building, XX Village, XX District of Chongqing (Lvzhibu) (Premises Permit No. XX [2009] XX), factory site located at No. 1–1, XX Building, XX Village, XX Town, XX District of Chongqing (Premises Permit No. XX [2009] XX), and factory site located at No. 1–1, X Building, XX Village, XX Town, XX District of Chongqing (factory site) (Premises Permit No. XX [2009] XX), and factory site located at No. 1–1, XX Building, XX Village, XX Town, Yubei District of Chongqing (Premises Permit No. XX [2009] XX). The meditation has come into legal effect. As Renshou Nonferrous Metals Company and et al. have failed to fulfill the obligations confirmed by the abovementioned effective legal documents, the obligees, Sanxia Guarantee Company and Chongqing Imp. and Exp. Credit Guarantee Company, applied to the First Intermediate People’s Court of Chongqing Municipality for compulsory enforcement, and the Fifth Intermediate People’s Court of Chongqing Municipality also submitted its judgment numbered No. 00230 [2013] Trial, Civ. Division, the Fifth Intermediate People’s Court of Chongqing Municipality to the First Intermediate People’s Court of Chongqing Municipality, specifying Zhongji Logistics Company to participate in the distribution plan in the enforcement proceeding. On July 4, 2016, the Enforcement Department of the First Intermediate People’s Court of Chongqing Municipality issued an Enforcement and Settlement Plan for the Auction of Industrial Occupancy, located in XX Village, XX Town, XX District, as well as the auction of personal property owned by Renshou Nonferrous Metals Co. Ltd. Zhong Ji Logistics Company raised an objection to the said plan and filed this lawsuit.

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The court of first instance held that the cause of action stated by Zhongji Logistics Company stands without factual and legal bases, and its claim cannot be established and is therefore dismissed. The court of second instance held that the Judicial Interpretation of the Supreme People’s Court of the Application of the Civil Procedure Law of the People’s Republic of China came into effect on February 4, 2015, which shall be applied in this case as the settlement plan was made by the First Intermediate People’s Court of Chongqing Municipality on July 4, 2016. The abovementioned Judicial Interpretation has clearly provided that a lawsuit against objection to the distribution plan shall not be initiated where the party subject to enforcement is a business entity. Article 508 hereof provides, where the party subject to enforcement is a citizen or any other organization, if other creditors who are qualified for an amount through enforcement proceeding find that after commencement of the enforcement proceeding the properties of the party subject to enforcement cannot repay all the debts, then they can apply to the people’s court for participating in the distribution of properties. Articles 509 through 512 hereof provide procedural content, settlement order, production of the distribution plan, objection to the distribution plan and procedural formalities to file an action for objection. Article 513 hereof specifically provides for the settlement of debts in cases where the party subject to enforcement is a business entity. Therefore, from the perspectives of the logic and the text of the Judicial Interpretation, a lawsuit against objection to the distribution plan shall not be applied where the party subject to enforcement is a business entity. Articles 25 and 26 of the Judicial Interpretation of the Supreme People’s Court of Several Issues Concerning the Enforcement Procedure in the Application of the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as the Judicial Interpretation of Several Issues Concerning the Enforcement Procedure) provide that, as long as a creditor applies for participating in the distribution, he can do it regardless of whether the party subject to enforcement is a natural person, legal person or other entity. If a creditor or the party subject to enforcement objects to the property distribution plan made by the court enforcing the judgment, he can file a lawsuit against objection to the distribution plan within the statutory period after other creditors or the parties subject to enforcement raised dissenting opinions to the objection. After the Judicial Interpretation of the Supreme People’s Court of the Application of the Civil Procedure Law of the People’s Republic of China came into force, in accordance with the provision of Article 552 that “any judicial interpretation previously issued by the Supreme People’s Court which runs counter to this Interpretation shall no longer be applied”, the aforementioned Judicial Interpretation shall not be applied because of inconsistency. If a debtor entity meets the conditions of bankruptcy, according to Article 513 of the Judicial Interpretation of the Supreme People’s Court of the Application of the Civil Procedure Law of the People’s Republic of China, the applicant for enforcement or the party subject to enforcement shall be explained to liquidate the debt in accordance with the Enterprise Bankruptcy Law of the People’s Republic of China. Moreover, according to Article 516 of the Judicial Interpretation of the Supreme People’s Court of the Application of the Civil Procedure Law of the People’s Republic of China, where a party disapproves of the transfer to bankruptcy proceeding, or the people’s court at the

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place of domicile of the party subject to enforcement does not accept a bankruptcy case, the court enforcing the judgment shall realize all the properties, deducting expenses incurred in the enforcement and expenses for settling the prioritized claims by those enjoying the priority, and settle other claims enjoyed by the ordinary creditors in the order of sequestration, seizure and freezing of the properties in property preservation and judgment enforcement. This provision provides the parties with a different channel of relief from filing a lawsuit against objection to the distribution plan, and the court enforcing the judgment can handle the parties’ disputes in the enforcement proceeding accordingly. In summary, the court of second instance ruled to vacate the judgment numbered No. 747 [2016] Trial, Civ. Division, the First Intermediate People’s Court of Chongqing Municipality (Chongqing 01), and dismissed the lawsuit raised by Zhongji Logistics Company. Zhongji Logistics Company applied to the Supreme People’s Court for reopening this case, claiming that the second instance judgment was wrong in holding that a lawsuit against objection to the distribution plan not be applied where the party subject to enforcement is a business entity, and Zhongji Logistics Company should take a share of the auctioned price.

Issue Where the party subject to enforcement is a business entity, whether a creditor is entitled to file a lawsuit against objection to the distribution plan after the court enforcing the judgment has made the property settlement plan.

Holding After deliberation, the Adjudication Committee of the Supreme People’s Court unanimously holds that Article 513 of the Judicial Interpretation of the Supreme People’s Court of the Application of the Civil Procedure Law of the People’s Republic of China does not impose any restriction on the right of action when the applicant files a lawsuit against objection to the distribution plan where the party subject to enforcement is a business entity. If a creditor objects to the distribution plan made by the court enforcing the judgment, he is entitled a right to file a lawsuit against objection to safeguard his legitimate rights and interests. The court of second instance should hear the appeal raised by Zhongji Logistics Company in accordance with law. After reopening via certiorari, the Supreme People’s Court issued a ruling numbered No. 146 [2019] Reopening, Civ. Division, the Supreme People’s Court on May 21, 2019, which vacated the second instance judgment and remanded the case to the Higher People’s Court of Chongqing Municipality to rehear the merit of the case in accordance with the second instance procedure.

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Comment on Rule The provisions for lawsuits against objection to the distribution plan in the enforcement proceeding in the Judicial Interpretation of Several Issues Concerning the Enforcement Procedure have failed to distinguish whether the party subject to enforcement is a natural person, legal person or other entity. However, after the introduction of the Judicial Interpretation of the Civil Procedure Law, the identity of the party subject to enforcement has been differentiated. Because of this distinction, inconsistencies among different levels of people’s courts nationwide occurred as to whether the creditor is entitled to file a lawsuit against objection to the distribution plan where the party subject to enforcement is a business entity after the court enforcing the judgment has made a property settlement plan. 1. Differing views on whether a business entity as the party subject to enforcement can file a lawsuit against objection to the distribution plan in the enforcement proceeding One opinion holds that the provisions for lawsuits against objection to the distribution plan in the enforcement proceeding in the Judicial Interpretation of Several Issues Concerning the Enforcement of Judgment do not differentiate the identity of the party subject to enforcement: natural person, legal person or other entity. However, Articles 508 through 512 of the Judicial Interpretation of the Civil Procedure Law specifically state that the party subject to enforcement is a citizen or other entity, which is applicable prerequisites for the creditor to apply for participation in distribution, to object to the property distribution plan and to file a lawsuit against objection to the distribution plan. Articles 513 through 515 hereof separately provide that where the party subject to enforcement is a business entity and the circumstances stated in the Enterprise Bankruptcy Law are met, the enforcement against the party subject to enforcement shall be stayed and the case shall be transferred to bankruptcy proceeding. Article 516 hereof provides that the court enforcing the judgment shall directly settle the relevant claims in a certain order by enforcing the realized property where the bankruptcy proceeding cannot be conducted. The Judicial Interpretation of the Civil Procedure Law does not explicitly provide that the court enforcing the judgment should make a property distribution plan when it needs to distribute multiple claims, nor does it allow the applicant to raise an objection to the distribution plan or file a lawsuit against an objection. It is so believed that the distribution system shall be excluded from the application where the party subject to enforcement is a business entity, and the creditors are not entitled to a right of action against the distribution plan issued by the court. For example, Article 1 of the Explanation by the Higher People’s Court of Chongqing Municipality of Several Issues about the Lawsuit against Objection to the Distribution Plan in the Enforcement Proceeding (No.300 [2017] the Higher People’s Court of Chongqing Municipality) states, “(w)here the party subject to enforcement is a business entity, if a party files a lawsuit against objection to the distribution plan in the enforcement proceeding made by the court, the people’s court shall reject the filing; if the case has been

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successfully filed in the court, the court shall make a ruling to dismiss the action, and the matter is to be handled by the court in charge of enforcing the judgment in accordance with the provisions of Articles 513 and 514 of the Judicial Interpretation of the Civil Procedure Law.” Another opinion holds that the application described in Article 513 of the Judicial Interpretation of the Civil Procedure Law shall be subject to certain conditions, that is, in conformity with the circumstances provided in Article 2 (1) of the Enterprise Bankruptcy Law, so it is not appropriate to hold that the lawsuit against objection to the distribution plan shall not be filed as long as the creditor is a business entity. After the court enforcing the judgment has made a settlement plan for the property of the party subject to enforcement, a creditor is entitled to request relief if he objects to the treatment of his own interests, and it is not appropriate to block his channel to relief. An example can be cited in the Opinions on Several Issues in the Application of the Law on Enforcement Procedure issued by the Enforcement Department of the Higher People’s Court of Guangdong Province in May 2017. Various interpretations from different Higher People’s Courts for the same issue have resulted in different judgments for identical or similar cases, which have greatly affected the judiciary. To this end, the Supreme People’s Court handled the said case to clarify the judgment rules for such cases in judicial practice through deliberations of the Adjudication Committee of the Supreme People’s Court. 2. The purpose of distinguishing the identity of the party subject to enforcement is intended to guide “transference from enforcement to bankruptcy” Enforcing backlogged cases poses a perennial issue for the people’s court because it has seriously affected the judiciary. To switch from impossibility to enforce to bankruptcy proceeding, on the one hand, is conducive to clearing up the backlog; on the other hand, it is beneficial to clear up the “zombie enterprises” in a timely manner so as to achieve a win–win between supply-side structural reform and clearing-up of the backlog. However, as the number of bankruptcy cases accepted by the courts nationwide has remained low ever since the implementation of the Enterprise Bankruptcy Law, the function thereof has not been given full play. For example, 5665 bankruptcy cases were filed in the people’s court nationwide in 2016, although up 53.8% compared with the previous year, but 1,386,000 businesses were cancelled and suspended on the same year, and the proportion of enterprises subject to bankruptcy proceeding accounted for only 4%1 Compared with enforcement proceeding, creditors lack an incentive to file for bankruptcy proceeding because bankruptcy proceeding are costly and lengthy and the rate of reimbursing payments is low, which accounts for the “bankruptcy law dilemma”. That problem is also exacerbated by the fact that the Judicial Interpretation of Several Issues Concerning the Enforcement Procedure does not differentiate the identity of the party subject to enforcement, thus expanding the scope of the business entity engaging in the distribution system. 参见唐屾: 《供给侧改革和清理执行积案背景下的执行不能转破产》 ,载 《人民司法(应用) 》 2018年第19期。

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To solve the problem of “switch from enforcement proceeding to bankruptcy proceeding”, the Supreme People’s Court proposed an establishment of “transference from enforcement to bankruptcy system” when the Civil Procedure Law was revised in 2012. During the drafting process of the Judicial Interpretation of the Civil Procedure Law, the Supreme People’s Court initially designed two alternatives: one is to establish a system of direct transfer to bankruptcy, and the other is to restrict the application of distribution procedures to business entities, “forcing” creditors to file for bankruptcy after the sequestration application. As the establishment of a direct transfer to the bankruptcy system is inconsistent with the provisions of the Enterprise Bankruptcy Law, the appropriateness of which still requires further study. Therefore, the Supreme People’s Court has chosen to design in its judicial interpretation a system within the framework of the Enterprise Bankruptcy Law. In other words, the purpose of differentiating the identity of the party subject to enforcement in the Judicial Interpretation of the Civil Procedure Law is to guide the creditor to initiate bankruptcy proceeding where the party subject to enforcement is an insolvent business entity so as to maximize the completion of “transference from enforcement proceeding to bankruptcy proceeding”. 3. Creditors are entitled to judicial remedy in the property distribution plan for the enterprise juristic person The Judicial Interpretation of the Civil Procedure Law provides for a system of transference to bankruptcy by the people’s court enforcing the judgment with the consent of the parties so as to comply with the provisions of initiating the bankruptcy proceeding in the Enterprise Bankruptcy Law. However, there are cases where the parties disagree upon the transference to bankruptcy in practice. To this end, Article 516 of the Judicial Interpretation of the Application of the Civil Procedure Law provides for a sequence of repayment where the business entity is unable to join in the bankruptcy proceeding, thereby excluding the application of the distribution system to the business entity and achieving the purpose of “forcing” creditors to file for bankruptcy. It should be noted that although Article 516 of the Judicial Interpretation of the Application of the Civil Procedure Law does not grant creditors the right to apply for participation in the distribution, it does not mean that the court enforcing the judgment is not required to prepare a property distribution plan. In contrast, when multiple creditors are business entities, the court enforcing the judgment often needs to make a more elaborate and detailed property distribution plan because the determination of the sequence of repayment for business entity or entities as creditors is more complicated than that of natural persons or other entities. Furthermore, in creating the property distribution plan, the possibility for the court enforcing the judgment to make mistakes cannot be excluded. Thus, any mistaken or wrong property distribution plan may jeopardize the legitimate rights of relevant creditors. Therefore, allowing creditors to remedy their rights through litigation is consistent with the general jurisprudence of “where there is a right, there is a remedy”. Article 1 of the Explanation by the Higher People’s Court of Chongqing Municipality of Several Issues about Lawsuit against an Objection to the Distribution

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Plan in the Enforcement Proceeding (No.300 [2017] the Higher People’s Court of Chongqing Municipality) states, where the party subject to enforcement is a business entity, if a creditor cannot file a lawsuit against objection to the distribution plan in the enforcement proceeding made by the court, he is required to handle the matter in accordance with the provisions of Articles 513 and 514 of the Judicial Interpretation of the Application of the Civil Procedure Law, which are clearly intended to resolve relevant disputes through bankruptcy proceeding. However, the initiation of bankruptcy proceeding is subject to the consent of the applicant for enforcement or that of the party subject to enforcement. If the bankruptcy proceeding fails to be initiated and the right of creditors to file a lawsuit against objection to the distribution plan is restricted, this is obviously unconducive to the protection of legitimate rights of the parties concerned. The Adjudication Committee of the Supreme People’s Court deliberated on divergent views in trial practice, reached consensus and advanced the standard for judicial decision-making.

Wu’ai Building Materials Factory of Lintao County v. Lintao Electric Power Company of Gansu Electric Power Company of the State Grid Corporation of China (Dispute over Contract for the Supply and Consumption of Electricity): Where a Dispute over Compensation Arising from Implementing an Administrative Order of an Administrative Agency Falls without the Scope of Civil Cases Handled by the People’s Court, the Administrative Counterparty is Entitled to Launch an Administrative Litigation Ming Chen

Rule Citizens, legal persons and other entities are obligated to execute administrative orders and decisions. If the said citizen, legal person or other entities has incurred harm or loss to the rights of an administrative counterparty due to the execution of the administrative orders or decisions, the complaint for damages filed by the administrative counterparty can be directed against an administrative act, which shall be more reasonably resolved through administrative litigation and administrative compensation.

Collegial Bench: Tao Wang, Guoxian Wang and Guangyu Ding Edited by Ming Li; translated by Daxuan Zheng and Lei Yue M. Chen (B) The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_7

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Wu’ai Building Materials Factory of Lintao County (hereinafter referred to as Wu’ai Building Materials Factory) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Lintao Electric Power Company affiliated with Gansu Electric Power Company of the State Grid Corporation of China (hereinafter referred to as Lintao Electric Power Supply Company) 2. Procedural History First Instance: No.47 [2017] Trial, Civ. Division, the Intermediate People’s Court of Dingxi City, Gansu Province (Gansu 11) (dated Nov. 16 of 2017) Second Instance: No. 53 [2018] Final, Civ. Division, the Higher People’s Court of Gansu Province (dated Jan. 31 of 2018) Reopening: No. 2093 [2018] Appeal, Civ. Division, the Supreme People’s Court (dated Dec. 28 of 2018) 3. Cause of Action Dispute over contract for the supply and consumption of electricity

Essential Facts Wu’ai Building Materials Factory had entered into a contract for the supply of electricity with Lintao Electric Power Supply Company. As destructive production in the business process of Wu’ai Building Materials Factory resulted in huge damage to the farmland, Land and Resources Administration Bureau of Lintao County, on October 14 of 2013, issued a notice requesting Wu’ai Building Materials Factory to cease illegal activities, and awarded a punishment of “suspending its work”. On the same day, the Party Committee and the People’s Government of Lintao County notified via telephone that Wu’ai Building Materials Factory had conducted illegal activities and requested Lintao Electric Power Company to take immediate measures to shut off electric power. On the afternoon of the same day, Lintao Electric Power Company carried out the instructions and removed the power supply equipment of Wu’ai Building Materials Factory. Since then, Wu’ai Building Materials Factory has been in a state of shutdown. From May to July 2015, Wu’ai Building Materials Factory reported to the State Grid Corporation of China by calling 95,598 (national power supply service hotline) that Lintao Electric Power Company had shut off the electric power, and got the reply from the State Grid Corporation of China that Lintao Electric Power Company

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was carrying out the order of the people’s government. On August 31, 2015, Wu’ai Building Materials Factory reported the problem to the State Electricity Regulatory Commission (SERC) by calling 12,398 (national energy regulatory complaints and information hotline) and received a reply on October 27 of the same year that the factory shutdown carried out by Lintao Electric Power Company was implementing the order of the people’s government. On June 7, 2016, Wu’ai Building Materials Factory filed a civil lawsuit to the People’s Court of Lintao County on the ground that the shutdown by Lintao Electric Power Company had breached the contract for the supply of electricity, resulting in huge losses, requesting Lintao Electric Power Company to compensate for losses of more than CNY 7,000,000. As the claimed amount of compensation is too large, the case at issue was placed under the jurisdiction of the Intermediate People’s Court of Dingxi City, Gansu Province. On February 20, 2017, the General Office of the People’s Government of Lintao County issued a Statement on Shutting down Electric Power to Wu’ai Building Materials Factory which has stated that “(i)n the course of production and operation, Wu’ai Building Materials Factory has adopted destructive mining methods to extract soil, which is a serious violation of Article 32 (2) of the Mineral Resources Law of the People’s Republic of China, which provides ‘in mining mineral resources, land should be used sparingly by a mining enterprise or an individual. Where arable land, grassland, and woodland are damaged due to mining, mining enterprises shall take measures for reclamation and utilization, plant trees and grass, or take other utilization measures as appropriate to the local conditions’. According to the arrangements and requests of the Party Committee and the People’s Government of Lintao County, Land and Resources Bureau of Lintao County, on 14 October of 2013, took the lead and cooperated with the public security department, departments or agencies in charge of law enforcement, the People’s Government of Taoyang Township and other institutions, made an investigation into the illegal activities in accordance with law, and notified the Lintao Electric Power Company to take measures to shut off the electric power supplied to Wu’ai Building Materials Factory located in Wu’ai Village of Taoyang Township.” The court of first instance held that Lintao Electric Power Company was following the instructions of the Party Committee and the People’s Government of Lintao County, which was not based on the contract for the supply and consumption of electricity between the two parties. There was no relationship for civil compensation between the two parties, so the case did not fall into the scope of civil cases to be handled by the people’s court. Therefore, the court dismissed the lawsuit launched by Wu’ai Building Materials Factory. The court of second instance held that the shutoff of Lintao Electric Power Company was carrying out an administrative order, there is no purpose of creating, modifying or terminating civil legal relations in civil law terms, nor was there a mutual expression of intent. Therefore, the case in question shall not be decided on the basis of the contract for the supply and consumption of electricity between the two parties, and legal action should not be deemed an action in civil law terms. The appeal was dismissed, and the original decision was affirmed.

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After the ruling of the second instance came into effect, Wu’ai Building Materials Factory applied to the Supreme People’s Court for reopening this case, requesting the Supreme People’s Court to overrule the rulings of the first instance and second instance and support claims raised by Wu’ai Building Materials Factory. In addition, after the ruling of the second instance came into effect, Wu’ai Building Materials Factory also filed an administrative lawsuit against the People’s Government of Lintao County, requesting the people’s court to rule that the instruction for power shutoff made by the People’s Government of Lintao County had violated the law and asking for administrative compensation. In this case, the people’s court ruled that the administrative act by the People’s Government of Lintao County in ordering the shutoff was illegal, and the case for administrative compensation is still under trial. Furthermore, prior to the lawsuit, Wu’ai Building Materials Factory had already filed an administrative lawsuit against Land and Resources Bureau of Lintao County, and the people’s court had ruled that Land and Resources Bureau of Lintao County’s administrative acts were illegal and compensated Wu’ai Building Materials Factory at more than CNY 890,000.

Issue Where a power supply company executes an administrative order to shut off electric power to the electric power user, and the electric power user launches a legal action against the power supply company for damages caused by the shutoff in accordance with the contract for the supply of electricity, whether the dispute falls within the scope of civil cases to be handled by the people’s court.

Holding Upon reopening, the Supreme People’s Court holds that, as civil law regulates the property relationship and personal relationship between equal parties, the scope of civil litigation should be tailored to handle the disputes arising out of property relationship and personal relationship between equal parties. As a state-owned enterprise, Lintao Electricity Supply Company, in the process of investigating the destructive activities of an electricity user to extract soil for production, acted on the advice of the Party Committee and the People’s Government of Lintao County, and took measures to shut off the electric supply to electricity user on the notice of the people’s government, which is an act of executing the order of the administrative agency and does not have the purpose of creating, altering or terminating civil rights and civil obligations. It can be seen that the shutoff or disconnection of the power supply was not based on the contractual relationship between the electricity user and Lintao Electric Power Company, without producing legal consequences of civil damage. Therefore, the

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rulings made in the first instance and second instance were not improper in finding that the case shall fall outside the scope of civil cases to be handled by the people’s court. The shutoff by Lintao Electric Power Company was conducted on the advice of an administrative agency, not a civil act based on the relationship of contract for the supply and consumption of electricity between the supplier and the user. Therefore, even if the law-offending user is damaged by the shutoff or disconnection measures of the county electric power company, the user should file an administrative lawsuit and claim administrative compensation on the basis of the administrative legal relationship rather than claim civil compensation directly from the county electric power company. Moreover, as a matter of fact, the electricity user had filed an administrative lawsuit, and the outcome was on the way. From the perspectives of economics of litigation and final settlement of the dispute, the courts of first instance and second instance were not improper in finding that the case falls outside the scope of civil cases. Accordingly, it is hereby ruled by the Supreme People’s Court that the application for reopening this case be dismissed.

Comment on Rule The adjudication of the case at hand is essentially to define the scope of court acceptance of compensation disputes caused by the execution of administrative orders made by administrative agencies and to solve the problem of remedies where rights and interests of the parties are damaged. The issue to be adjudicated in the case at hand is whether the electricity or power user’s request of the power supply company to compensate for the losses caused by the execution of an administrative order by the people’s government falls within the scope of civil litigation. The intersections of civil legal relationship and administrative legal relationship involved in this case are controversial issues in judicial practice, which may concern how to achieve a balance between legal effects and social effects when a case is handled and to a certain extent related to judicial ideals and value orientations. In the reopening process, the Supreme People’s Court made a comprehensive deliberation and analysis from different perspectives and different aspects based on the specific circumstances of the case at hand and finally made a ruling. The following summarizes the opinions and viewpoints during the reopening process, which further explains the ideology for conducting the trial and the reasons for the ruling. 1. Legal relationship between the parties to the legal action and the legal subjects Civil law regulates the property and personal relations between equal parties, and the scope of civil cases accepted is the disputes over property and personal relations between equal parties. The scope of civil cases to be handled by the court is a matter of competence (competent authority), which is essentially a matter of eligibility of the parties involved. If the power supply company is the subject borne with civil legal relations, it is the eligible defendant, and the case should be accepted by the court as a civil case; if not, it is an ineligible defendant, and the case should be dismissed.

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One opinion holds that a contract for the supply and consumption of electricity exists between the electricity or power user and the power supply company because the contract for the supply and consumption of electricity is a typical contract provided in Chap. 10 of the Contract Law,1 which mainly handles the power supply and payment of electricity bills between the power supplier and the power user. The legal relationship between power supply and payment of electricity bills is therefore a civil legal relationship between the two parties. The electricity or power user and the power supply company are equal civil parties and parties to the legal relationship of the power supply and consumption contract. The power supply company’s shutoff act on the power user, and violations of the contract for the supply and consumption of electricity should be bound by the contractual relationship. The power supply company is not an administrative agency, and it is not an administrative party per se. It has neither statutorily defined duty to investigate and rectify the conduct of an enterprise nor legally authorized power. Its conduct is not a specific administrative act, and there is no administrative relationship between the two parties. The power user does not file an administrative lawsuit because the administrative act of the administrative agency infringes on its legitimate rights and interests but sues the power company based upon the contract for the supply and consumption of electricity. As compensation raised by the power user against the power supply company is founded upon the equal contractual relationship, whether it is an action for breach of contract or an action in tort, both falls into the scope of the civil litigation cases. Another opinion believes that the case at hand reflects the “intersection” of civil litigation and administrative litigation for the simple reason of the complex nature of the power supply company. It can be seen from the relevant provisions of the Electric Power Law of the People’s Republic of China2 that power supply companies are different from civil entities in general. In addition to being a party to dispatch 1

See Chap. 10 of Book III Contracts of the Civil Code of the People’s Republic of China (hereinafter referred to as the Civil Code). 2 Article 6 of the Electric Power Law of the People’s Republic of China states that “(t)he electric power administration department under the State Council shall be responsible for supervision and control of the electric power industry throughout the country. The departments concerned under the State Council shall be responsible for supervision and control of the electric power industry within their own limits of authority. The department in overall charge of the economy under the local people’s government at or above the county level is the electric power administration department of that administrative region and shall be responsible for supervision and control of the electric power industry there. The departments concerned under the local people’s government at or above the county level shall be responsible for supervision and control of the electric power industry within their own limits of authority.” Article 27 hereof states that “(t)he power-supply enterprise and the consumer shall, on the basis of the principles of equality, voluntary participation and agreement reached through consultation, sign a contract in line with the measures of power-supply and consumption drawn up by the State Council, in which the rights and obligations of both parties shall be defined.” Article 29 hereof states that “(t)he power-supply enterprise shall supply electricity continuously without shutoff under normal operation of the power-generating and supplying systems. When it is necessary to shut off because of overhaul of power-supply facilities, limited supply of electricity according to legal provisions or illegal use of electricity by consumers, the power-supply enterprise shall, in accordance with relevant State regulations, notify the consumers in advance. Consumers who disagree with a power shutoff by a power-supply enterprise may complain

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and supply power safely according to the contract for the supply and consumption of electricity, their power supply behavior is also placed under government regulation. Therefore, in deciding on the scope of civil litigation, the court should also, in addition to examining whether the case in question involves property and personal disputes between equal subjects, examine the source of the power supply company’s obligations for power shutoff. According to laws and regulations, if the power supply company has the obligation to cooperate with the government’s order to stop power supply to a specific enterprise under certain specified circumstances, it should not be considered as a party to the contract for the supply and consumption of electricity. Article 24 (3) of the Measures for the Supervision of Power Supply made by the State Electricity Regulatory Commission states, “(p)ower supply companies shall strictly implement the decisions made by relevant government departments in accordance with law to take measures to shut off and restrict power supply to the obsolescent enterprises or shut-down enterprises or enterprises that violate environmental laws. Without receiving a notice from the relevant government departments that it has decided to resume power supply to the abovementioned enterprises that are placed under rectification within prescribed period, the power supply company shall not arbitrarily resume power transmission or power supply.” According to the said regulations, although power supply companies do not possess administrative powers, they have the obligation to cooperate with administrative law enforcement agencies in power supply, the legal relationship between power supply and power consumption is restricted to a certain extent by government policy, supervision and other factors. Power shutoff or disconnection by power supply companies is instructed by the government to be unfavorable to enterprises in violation of environmental protection laws and can be deemed their obligation to implement the rules and regulations. It is an act of executing the instructions of the administrative agency rather than a breach of contract based on the contract for the supply and consumption of electricity. The resulting compensation for damages or losses should be directed at the administrative agency’s instruction, and it should be settled by way of administrative litigation. The writer of this ruling believes that, on the surface, both parties have a contractual relationship, and combined with the plaintiff’s claims, there is nothing wrong in saying that the case is a civil dispute. In the face of the intersection between civil litigation and administrative litigation, it is necessary to take into account the variability and diversity of legal relationship between the parties and the status of the subjects. In deciding on the nature of the dispute in the case at hand, we should not only look at the plaintiff’s claim and the static relationship between the parties; we should further explore the material cause, the conduct at which the compensation is directed, and the ultimate subject to bear the liability. Whether the first opinion can be established depends on whether the power supply company completely loses its autonomy, whether the government’s order to shut off power supply is an administrative act, and the possibility of the parties to file an administrative lawsuit. The second opinion to an electric power administration department; the department that receives the complaint shall handle the case in conformity with legal provisions.”

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paid attention to the root cause of the power supply company’s shutoff or disconnection and the liability subject behind the power company, which has correctly pointed out the “administrative core” under the civil contract dispute in the case at hand, contributing significantly to the substantive solution of the problem. 2. The nature of power shutoff or blackout by power supply company The characterization of the nature of power shutoff or blackout by the power supply company to follow the instructions given by the county people’s government depends on the nature of the shutoff order given by the county people’s government and the relationship between power shutoff and power shutoff order. Regarding the nature of the county government’s power to make a shutoff order. As a grassroots level local people’s government, the county government, in the process of investigating and rectifying the illegal activities of the power users, calls the power supply company to take shutoff measures against the power users, which is to exercise its regulatory authority. As a matter of form, the power supply company directly carried out power shutoff or blackout, which affected the power user, but as a matter of fact, it is the government who makes an order to shut off the power supply, so in essence, the power shutoff order has affected the power user. The county government’s power shutoff order has clear content and specific objects, which actually affects the rights and interests of the power user or administrative counterparty and is an actionable administrative factual conduct. Regarding the relationship between power shutoff and the power shutoff order. Although the county government did not directly issue an administrative order to the power user to have the power supply shut off, it did so by notifying the power supply company to take measures to shut off the power supply to the users (in practice, the government can only take measures to shut off power supply through power supply company, which is also a legal obligation that the latter cannot refuse), and the shutoff order is clear and specific; and the power supply company does not have the right or discretion to decide whether to shut off the power supply, when to shut off and when to resume the power supply. The shutoff or blackout is not a manifestation of the power company’s own will but the inevitable result of executing the administrative order, which means that the power shutoff or blackout is part of the administrative penalty of the county government and is an administrative act, reflecting the will of the administrative agency. Therefore, legal action by the power user when suffering damage or harm caused by the power shutoff or the blackout should be directed toward the administrative act; thus, administrative litigation can be a more reasonable path to settle the dispute. When hearing the case at hand, some judges thought that the power shutoff or blackout order by the county government and the shutoff or blackout by the power supply company should be judged separately. The former is an administrative act, while the latter is a civil act in which the county power supply company suspended the performance of the contract for the supply of electricity. This view splits the internal connection between the two. In this case, the power shutoff or blackout by the power supply company should be regarded as an execution of an administrative order, which is essentially an extension of the administrative act. In this process, the

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power supply company has no authority to review or reject the administrative order, which is, in a sense, only a “tool” or “instrument” for an administrative agency to implement administrative action. Thus, as no objective basis and subjective meaning for making an independent civil act can be ascertained, power shutoff or blackout should not be regarded as simply performing the contract for the supply of electricity. Other judges argued that the question of whether power shutoff or blackout by Lintao Electric Power Company is an implementation of an administrative order or whether the government-instructed power shutoff is an administrative act is an issue that can only be resolved on the merits of the case. Therefore, the case should be adjudicated on the merits of the case instead of directly dismissing legal action. In accordance with the constitutive theory or doctrine of litigation, the civil litigation process is generally divided into stages such as pleading and court trial, with each stage meeting the required conditions, thus forming the distinction among pleading elements, court trial elements and elements for the case at hand.3 The pleading elements refer to necessary preconditions for the achievement of the litigation effect. “In the absence of this requirement, even if there is an act of initiating a legal action, the said action is deemed untenable in the procedural law”.4 Court trial elements refer to the preconditions necessary to make a judgment in this case. Lack of these elements will result in a failure of the people’s court to make a judgment on the substantive claims raised by the parties or the substantive rights and obligations of the parties. The scope of civil case acceptance falls into this type. Although the hearing of court trial elements is to solve the problem of whether the litigation process can continue, the decision can only be made on the basis of trying substantive legal relationships. Prior to the filing and registration system, court trial elements were reviewed together with pleading elements at the filing stage. For the scope of civil case acceptance as court trial elements, there was a problem of ascertaining substantive legal relationships without actual trial or delay in filing and accepting the case to be tried. After the reform of the case registration system, court trial elements have been placed in the litigation stage after the case is accepted for substantive trial. However, because China’s civil procedure law does not in principle distinguish between pleading elements and court trial elements,5 if court trial elements are not established, the case lacking court trial elements can only be dismissed.6 Therefore, under China’s present civil litigation system, the ruling of dismissing a legal action does not mean that the case has 参见[日]中村英郎: 《新民事诉讼法讲义》 ,陈刚等译,法律出版社2001年版,第151 ~ 152页。转 引自陈亮: 《诉讼要件抑或本案要件?——美国关于原告资格定性之争及其对我国的启示》 ,载 《清华法学》 2015年第3期。 4 参见[日]中村英郎: 《新民事诉讼法讲义》 ,陈刚等译,法律出版社2001年版,第151 ~ 152页。转 引自毕玉谦: 《民事起诉要件与诉讼系属之间关系的定位》 ,载 《华东政法学院学报》 2006年第4 期。 5 参见万挺、张闻: 《管辖权异议之诉附带审查诉讼要件问题研究——以遏制滥诉为目标》 ,载 《法律适用》 2018年第1期。 6 The general rule in Japan as to the nature of the requirement of litigation is the theory of the requirement of judgment in this case, and the claim of plaintiff shall be dismissed if the requirement of litigation are not established in a civil litigation in Japan. 参见万挺、张闻: 《管辖权异议之诉 附带审查诉讼要件问题研究——以遏制滥诉为目标》 ,载 《法律适用》 2018年第1期。 3

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not been heard on the merits. The case at hand has been deliberated by the secondinstance collegial bench, and a second-instance ruling has been made, so judging from the ascertained facts, as two parties have fully debated and provided evidence on the abovementioned issues, the worry that the abovementioned issues have not been substantively heard should have been removed. 3. The relief sought by the parties and substantive resolution of the dispute From the perspectives of respecting and protecting the parties’ exercise of their right to litigation, this case at hand involves both administrative and civil legal relationships. The parties can either choose civil litigation or administrative litigation to remedy the rights. Both channels do not conflict. The trial on the merits of the case in civil litigation may not affect the parties’ subsequent choice of administrative litigation to seek relief. The ultimate goal of the administrative counterparty is to obtain corresponding compensation, and the power supply company is to implement the administrative order of the county government. Therefore, regardless of whether the counterparty initiates a civil lawsuit or an administrative lawsuit, the issue of reviewing the legality of the administrative act cannot be bypassed, and the abovementioned problems can be completely resolved through the method of administrative litigation. Civil litigation can hardly achieve the purpose of seeking relief, and it may even trigger new disputes. In administrative litigation, because the administrative order by the county government has actually affected the rights and obligations of the power supply company, the power supply company falls into a party that “has an interest in the administrative action in the dispute in question, or has an interest in the outcome of the case”7 ; thus, it may serve as a third party to legal action to facilitate a once-and-for-all investigation of the facts, clarify the rights and obligations, and ascertain the liability. In view of the economics of litigation and the substantive resolution of the dispute, it is more reasonable and appropriate to dismiss the legal action and urge the parties to seek relief through administrative litigation. It is to be noticed that the administrative counterparty has filed an administrative lawsuit against Land and Resources Bureau and the People’s Government of Lintao County and has already prevailed in the legal action and received compensation. It is pointed out that the court should adhere to the principle of “non bis in idem” and “once-for-all compensation” to avoid abuse of rights and repeated compensation; that is, the parties can only choose one remedy instead of any others and can only be compensated for one rather than another compensation. 4. Other factors to be considered Citizens (including legal persons and other organizations) have the obligation to execute administrative orders and decisions, and such behaviors of obedience and cooperation should be protected and encouraged in adjudication to create a sound 参见江必新主编: 《行政诉讼法及司法解释关联理解与适用》 (上册),中国法制出版社2018年 版,第259 ~ 260页。

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environment. When a citizen executes an administrative order or decision of an administrative agency, the administrative counterparty who has suffered damage or harm because of such conduct should file a lawsuit against the administrative agency that has made the administrative order or decision. If judicial decisions cannot dispel citizens’ concern about the potential risk of being litigated, citizens’ cooperation with the administrative agency will easily raise citizens’ suspicion of the administrative order. They will passively avoid or even resist administrative orders, which will increase the cost of social governance. However, it should be noted that citizens should follow the principles of reasonableness and lawfulness, prudence and proportionality in implementing administrative orders and should not arbitrarily narrow down or expand the scope of administrative orders or adopt illegal means; otherwise, they should be liable for the resulting damage, which is a complicated situation and deserves further elaboration. Furthermore, by attributing liability to the administrative agency who has issued the administrative order and by making the administrative agency assume the potential risks that may arise from its requesting citizens to carry out the administrative order, it is conducive to promoting the administrative agency to carry out administrative activities, to grant authorization and delegate authority in accordance with law so as to standardize the execution of administrative activities. It is also conducive to promoting the administrative agency to adopt stricter procedures and more reasonable methods when taking such enforcement measures as investigation and rectification against administrative counterparts and to take full account of the rights and interests of the parties when pursuing legal enforceability and legal effects so as to reduce unnecessary harm or damage. Meanwhile, with reference to the provisions of Article 7 of the State Compensation Law regarding the agency responsible for making state compensation, this attribution of liability is not difficult to choose.8 When reopening this case, the Supreme People’s Court has found that the said court has adjudicated similar cases that do not fall into the scope of civil case acceptance by searching like cases.9 That case is highly similar to the case at hand; thus, a decision of ruling or judgment needs to be, in principle, maintained for consistency if no special circumstances are allowed. Attention should also be paid to the opinions submitted by the competent regulatory agency and industry regulatory departments. Wu’ai Building Materials Factory had reported the problem to the State Grid Corporation of China and the State Electricity Regulatory Commission, and both the State Grid Corporation of China and the State Electricity Regulatory Commission clearly replied that the actions of Lintao County Power Supply Company were deemed an execution of the government order. Regarding the scope of compensation dispute arising from the implementation by power supply enterprises of the administrative order(s) issued by administrative 参见吴高盛主编: 《中华人民共和国国家赔偿法释义及实用指南》 ,中国民主法制出版社2015 年版,第42~47页。 9 See No. 897 [2017] Appeal, Civ. Division, the Supreme People’s Court, it is stated that “(t)he power outrage was not based on the contract for the supply of electricity between the two parties, and no civil damage relationship occurs between the two parties, therefore, this case could not fall within the scope of acceptance of civil cases by the people’s court”. 8

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agency, different understandings existed both in theory and in practice. Practically, particularized and specific reasons or circumstances for the administrative agency to take measures to suspend or shut off power supply to the parties in the legal action are complex and varied; thus, no generalization can be deduced. Even in hearing the present case, many different views have been put forward, all of which have certain justifications and value. Thus, the significance resulting from the resolution of dispute does not lie in which view or treatment is finally adopted but in the thought process, review perspectives and conceptual approach. The following points can be generalized: (1) identification of the substance of the dispute and characterization of the nature of the legal action have to be conducted from reasons for the parties’ conduct, manifestation of mutual assent, the root cause of the dispute, the status of the legal subject and other aspects of the case; (2) comprehensive knowledge of the logic and facts of the parties’ conduct helps identify correctly the legal action and the nature of the legal relationship; (3) the scope of the case acceptance is not only to solve the threshold problem of initiating a legal action, different paths of litigation for exit have to be taken into account so as to protect the rights and interests of the parties and obtain legal relief; (4) every effort shall be exerted to resolve a dispute or a problem once and for all to facilitate the economics of litigation and substantive resolution of disputes, and to avoid chain conflicts or chain disputes (that is, settlement of one conflict resulting in another, or resolution of one dispute resulting in more disputes)10 ; (5) the settlement of a case should not be for its own sake; adherence to the unity of legal effect and social effect in resolving a dispute need to be followed to maximize the social effect and minimize the transaction costs11 ; and (6) Like Case Search is to be emphasized to unify the scale or standard that the court uses to reach a decision. The decision of a ruling made in the case at hand is conducive to guiding the parties in similar cases to make a reasonable choice of litigation processes; it is also helpful for the court to make an endeavor to settle civil disputes in the process of an administrative litigation, and it further offers ideas and solutions to settle the problem of intersection in administrative litigation and civil litigation.

参见骆电:《民商事审判逻辑的研究与实践》 ,载 《人民司法》 2019年第10期。 [美]理查德·A. 波斯纳:《法律的经济分析》 , 蒋兆康译, 中国大百科全书出版社1997年版, 第13页。

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Chongqing Aosi Lidu Entertainment Co., Ltd. v. The Fifth Intermediate People’s Court of Chongqing Municipality (State Compensation for Wrongful Enforcement): Non-Bona-Fide Accessio is not Eligible for Indemnity by Way of State Compensation Li Jia

Rule 1. Whether accessio by the tenant during the process of enforcement is in good faith determines whether the tenant’s claim for state compensation shall be supported or not. If any accessio of significant value is made by the tenant to the property that the tenant leases after the property has been seized by the court, then the tenant shall assume sufficient responsibility for the risks associated with the tenant’s decoration of the property, which is made based on the tenant’s own decision. 2. The tenant’s right of first refusal as to the property it leases cannot be obtained by malicious accessio at a later stage. The right of first refusal shall be based on legal and bona fide tenancy relationships. Transfer of the property by the party subject to enforcement, which has been seized, sealed off, or frozen, or creation of any encumbrance on such property by such person, or any other conduct of the person hindering enforcement, will constitute obstruction of the court’s enforcement. The tenancy relationship between the tenant and the party subject to enforcement does not naturally extend to the buyer who obtains the ownership of the property through auction. In view of this, the enforcing court’s auctioning off of the property according to the status quo thereof does not involve any intentional damage to the legitimate rights and interests of an out-of-case tenant. Collegial Bench: Chuxiao Song, Li Jia and Qing Liang Edited by Deqiang Han; translated by Zhijian Cao L. Jia (B) State Compensation Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_8

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Case Information 1. Parties Petitioner (Claimant for State Compensation): Chongqing Aosi Lidu Entertainment Co., Ltd. (hereinafter referred to as Aosi Lidu Entertainment) Respondent (Institution Obligated to Make State Compensation): the Fifth Intermediate People’s Court of Chongqing Municipality 2. Procedural History Self-initiated Compensation: No. 00010 [2013] Decision, State Compensation Committee, the Fifth Intermediate People’s Court of Chongqing Municipality (dated Jul. 17 of 2013) Compensation by State Compensation Committee: No. 00006 [2013] Decision, State Compensation Committee, the Higher People’s Court of Chongqing Municipality (dated Jan. 9 of 2015) Reopening: No. 299 [2015] State Compensation Supervision, State Compensation Committee, the Supreme People’s Court (dated Jun. 29 of 2018) 3. Cause of Action State compensation for wrongful enforcement

Essential Facts On December 9, 2004, Chongqing Youtong Industrial Co., Ltd. (hereinafter referred to as Youtong Industrial) mortgaged its commercial property (two floors, with a floor space of 6, 376.48 m2 ) located at No. 6, XX District, Chongqing Municipality, China, to the Rural Credit Cooperative Union of Qijiang County (hereinafter referred to as the Qijiang Subbranch, as the Union has since been renamed as the Qijiang County Branch of the Chongqing Rural Commercial Bank Co., Ltd.), for a loan. On August 5 of the following year, Youtong Industrial leased the property to Qijiang County Wanjiafu Supermarket Co., Ltd. (hereinafter referred as Wanjiafu Supermarket), with the term of lease commencing as of October 1, 2005 and terminating on September 30, 2010. In 2007, the Rural Credit Cooperative Union of Qijiang County filed a lawsuit to the Fifth Intermediate People’s Court of Chongqing Municipality over the loan, and applied for preservation measures against the assets of Youtong Industrial. Then, on October 15, 2007, the Fifth Intermediate People’s Court of Chongqing Municipality reached a ruling to seal up the mortgaged property (but did not impose any restriction on the use of the property). On April 16, 2008, the Fifth Intermediate People’s Court of Chongqing Municipality meted out a civil judgment of No. 324[2007] Trial, the Fifth Intermediate People’s Court of Chongqing Municipality, supporting the Rural Credit Cooperative

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Union’s demand for repayment and ruling that if Youtong Industrial fails to fulfill the judgment, the Rural Credit Cooperative Union would have the right to auction off, sell or otherwise dispose of the mortgaged property of Youtong Industrial, and shall be given priority as to the proceeds from such auction, sale or disposal of the said property. As neither party lodged an appeal, the judgment came into effect. Subsequently, the Rural Credit Cooperative Union lodged an application for enforcement of the judgment. Later on September 29, 2009, the Fifth Intermediate People’s Court of Chongqing Municipality made a ruling to renew the seizure. On March 8, 2010, the Wanjiafu Supermarket surrendered its tenancy of the property, after which Youtong Industrial signed a 15-year contract with the shareholders of Aosi Lidu Entertainment in connection with the property. Commissioned by the Fifth Intermediate People’s Court of Chongqing Municipality, Chongqing Height Assets, Land and Real Estate Appraisal Co., Ltd. (hereinafter referred to as Height Appraisal) evaluated the seized property from August 2009 to November of the same year, and prepared an appraisal report based on the evaluation results (No. 48 [2009] Evaluation & Appraisal, Chongqing Height Assets, Land and Real Estate Appraisal Co., Ltd.), which was delivered to Youtong Industrial. On June 10, 2010, the Fifth Intermediate People’s Court of Chongqing Municipality entrusted Chongqing Huyu Auction Co., Ltd. (hereinafter referred to as Huyu Auction) to auction off the property at the reserve price of CNY17,930,300. As the first auction of the property failed, the Fifth Intermediate People’s Court of Chongqing Municipality commissioned Huyu Auction to conduct a second auction, with a 20% reduction in the starting price. After a field survey, however, Huyu Auction found that the auction subject had been rented out and the tenant was renovating the property; therefore, Huyu Auction then submitted a written application to the Fifth Intermediate People’s Court of Chongqing Municipality to confirm whether the tenant had the right of first refusal and to suspend the auction. After receiving the application, the Fifth Intermediate People’s Court of Chongqing Municipality posted an announcement on the site of the property on July 15, 2010, announcing that the tenant, Aosi Lidu Entertainment, must stop its renovation of the property; otherwise, it shall bear any and all consequences that might arise. On August 3, 2010, the Fifth Intermediate People’s Court of Chongqing Municipality notified Huyu Auction to resume the auction, on the ground that the lease contract between Aosi Lidu Entertainment and Youtong Industrial was concluded after the property had been seized by the court. After being so notified, Huyu Auction published an auction announcement, which stated that “the property will be auctioned according to its status quo” and that “the court will be responsible for the handover of the auctioned property, as the party subject to enforcement has leased the property out illegally”, on Chongqing Economic Times, a local newspaper, on November 5, 2010, and after that carried out an open auction of the property on the Chongqing United Property Rights Exchange by way of electronic bidding on December 9, 2010. Wang X, a bidder, won the bidding for the property in the auction in December 2010. The Fifth Intermediate People’s Court of Chongqing Municipality ruled on January 25, 2011 that the seizure of the property involved in the case shall be lifted

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and that the title to the property shall be transferred to the buyer, Wang X. After the ruling was meted out, Wang X obtained the ownership certificate of the property on June 20, 2012. On October 26, 2011, the Fifth Intermediate People’s Court of Chongqing Municipality instructed the People’s Court of Qijiang District to enforce rulings on the case. The People’s Court of Qijiang District issued an announcement on December 30, 2011, requiring the tenant to vacate the premises. In July of the same year, the People’s Court of Qijiang District issued a notice to Aosi Lidu Entertainment, requiring it to suspend business operation on the property; at the same time, the court also entrusted two duly qualified appraisal agencies to evaluate the cost of Aosi Lidu’s interior decoration and renovation of the property as well as the value hereof as of the date of such enforcement. Then, at the end of the year 2013, after the buyer paid to the People’s Court of Qijiang District a sum of security deposit for its use of the property, which is equivalent to the evaluated value of the assets of Aosi Lidu Entertainment at the property, Aosi Lidu Entertainment handed over the property. During the enforcement, however, Aosi Lidu Entertainment filed to the Fifth Intermediate People’s Court of Chongqing Municipality an objection to the enforcement, requesting that the auction result shall be withdrawn, that a new round of auction of the property shall be carried out after the value of the decoration and renovation that it made to the property after it was leased to Aosi Lidu was properly assessed, that it shall be confirmed that Aosi Lidu Entertainment shall have the right of first refusal as to the property, and that such enforcement measures as ordering Aosi Lidu Entertainment to terminate its operation at the property, vacate and hand over the property shall be suspended. However, the objection to enforcement was later rejected by the Fifth Intermediate People’s Court of Chongqing Municipality on August 13, 2012. Thereafter, Aosi Lidu Entertainment lodged a lawsuit against objection to the enforcement; however, the said company later withdrew its appeal and lawsuit on the ground that it had filed an application for state compensation with the Fifth Intermediate People’s Court of Chongqing Municipality, and the Higher People’s Court of Chongqing Municipality issued a civil judgment granting the withdrawal of the lawsuit. On May 30, 2013, Aosi Lidu Entertainment filed an application for state compensation with the Fifth Intermediate People’s Court of Chongqing Municipality, alleging wrongful enforcement by the latter. In response to this application, the Fifth Intermediate People’s Court of Chongqing Municipality meted out a decision on July 17, 2013 (No. 00010 [2013] Decision, State Compensation Committee, the Fifth Intermediate People’s Court of Chongqing Municipality), dismissing the application of Aosi Lidu Entertainment for CNY10, 676, 000 in state compensation for Aosi Lidu Entertainment’s loss of renovation of and early-stage operation investment in the property. Aosi Lidu Entertainment refused to accept the decision and therefore applied to the State Compensation Committee of the Higher People’s Court of Chongqing Municipality for compensation. On January 9, 2015, the State Compensation Committee of the Higher People’s Court of Chongqing Municipality meted out a decision (No. 00006 [2013] Decision, State Compensation Committee, the Higher People’s Court of Chongqing

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Municipality), arguing that reasons underlying the application for state compensation submitted by Aosi Lidu Entertainment should not be established, and therefore Aosi Lidu Entertainment’s request for state compensation not be justified. Aosi Lidu Entertainment refused to accept the decision and appealed to the State Compensation Committee of the Supreme People’s Court for reopening the case.

Issues 1. Whether the enforcement by the Fifth Intermediate People’s Court of Chongqing Municipality is flawed and is sufficient to constitute illegal enforcement; 2. Whether the property lease contract concluded by and between Youtong Industrial and Aosi Lidu Entertainment without the consent of the mortgagee, the Qijiang Subbranch, can be used to oppose enforcement by the court; 3. As the value added by Aosi Lidu Entertainment to the property on the basis of its lease of the property has been terminated on account of enforcement by the court, whether the actual loss of such value and the resultant loss in profits shall be attributed to the enforcement by the Fifth Intermediate People’s Court of Chongqing Municipality, which is alleged to violate the rule of “removal according to law”.

Holding After reopening the case, the Compensation Committee of the Supreme People’s Court holds that: (1) The property lease contract between Aosi Lidu Entertainment and Youtong Industrial was concluded in the absence of the consent of the Qijiang Subbranch, who is the mortgagee of the property; therefore, Aosi Lidu Entertainment does not have the right of first refusal as to the property under law; (2) The Aosi Lidu Entertainment’s leasing and renovation of the property obstructed the auction and handover of the property by the Fifth Intermediate People’s Court of Chongqing Municipality and, in this sense, hindered the realization of creditors’ interests confirmed by effective legal documents. Therefore, the “removal according to law” advocated by Aosi Lidu Entertainment shall be active removal (by the tenant); (3) When Aosi Lidu Entertainment signed the lease contract with Youtong Industrial, it failed to have an in-depth investigation as to whether the property that it intended to lease on a long-term basis had been subject to any mortgage, and later, after the property was seized by the people’s court and entered the auction procedure, it voluntarily invested a significant amount of money in the improvement of the property, thus putting its own assets at risk. Furthermore, Aosi Lidu Entertainment continued with its improvement of the property despite the fact that the Fifth

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Intermediate People’s Court of Chongqing Municipality put up a notice requiring the improvement of the property to be stopped; in this sense, the conduct of Aosi Lidu Entertainment was not justified. Therefore, Aosi Lidu Entertainment shall bear enough risk responsibility for its own decision to invest in the renovation of the property. In summary, the compensation decision made by the State Compensation Committee of the Higher People’s Court of Chongqing Municipality (No. 00010 [2013] Decision, State Compensation Committee, the Fifth Intermediate People’s Court of Chongqing Municipality) is valid, and the compensation appeal of Aosi Lidu Entertainment cannot be established. It is therefore decided to reject the appeal of Aosi Lidu Entertainment.

Comment on Rule 1. Whether Aosi Lidu Entertainment has the right of first refusal to the property or not Article 1 of the Rules on Enforcing the Mortgaged Houses by the People’s Courts provides that “(f)or a property owned by the party subject to enforcement and has been mortgaged in accordance with law, the people’s court may seal up such property, and may, upon application by the mortgagee, auction or sell such property, or use such property to offset debts.” Therefore, there is solid legal basis supporting enforcement by the people’s court against property of the party subject to enforcement that has been mortgaged and sealed off by the court, provided that a stakeholder in the corresponding civil judgment applies for such enforcement. The Guaranty Law and Article 66(2) of the Judicial Interpretation on the Guaranty Law provide that “(w)here the mortgagor leases out any mortgaged property, and the mortgagor fails to inform the tenant in writing that the property has been mortgaged, the mortgagor shall be liable for compensation for any loss that the tenant may sustain from the lease-out of the collateral; if the mortgagor has informed the tenant in writing that the property has been mortgaged, the tenant shall bear the losses arising from the realization of the mortgage.” In view of the fact that the lease contract between Aosi Lidu Entertainment and Youtong Industrial was signed after the property had been mortgaged and sealed up, when the property was auctioned, the argument made by the Fifth Intermediate People’s Court of Chongqing Municipality and Huyu Auction, in accordance with the abovementioned civil law and judicial interpretation, that Aosi Lidu Entertainment did not have the right of first refusal to the property, is solid and justified; furthermore, Huyu Auction had published an auction announcement on the local Chongqing Economic Times, detailing circumstances of the auction, and the final public auction of the property was conducted on the Chongqing United Assets

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and Equity Exchange by means of electronic bidding; therefore, the claim by the Claimant for State Compensation, Aosi Lidu Entertainment, that the Fifth Intermediate People’s Court of Chongqing Municipality had failed to notify the tenant in writing or in any other manner that could ensure the receipt of the notice before the auction date, and therefore had damaged the tenant’s right of first refusal, is not properly justified. 2. Whether the lease and renovation of the property by Aosi Lidu Entertainment has constituted obstruction to the auction and delivery of the property by the Fifth Intermediate People’s Court of Chongqing Municipality and whether it has hindered the realization of creditors’ interests determined by effective legal documents The property which Aosi Lidu Entertainment wished to lease on a long-term basis had already been seized and designated for enforcement, before the lease was even established under law; and Article 20 of the Judicial Interpretation on the Application of Laws in the Trial of Disputes over Urban Housing Lease Contracts provides that in the event that a property has been mortgaged before it is leased out, and the ownership of such property is subsequently changed after the mortgagee’s realization of the mortgage, then such change shall not be binding on the new buyer of the property. Therefore, Aosi Lidu Entertainment, which is not a party to the present case, cannot challenge the priority of Qijiang Subbranch in receiving compensation; as for its lost investment made in improvement of the property based on its trust in the lease contract, Aosi Lidu Entertainment may either claim for such loss against the lessor or the beneficiary. In addition, on July 15, 2010, the Fifth Intermediate People’s Court of Chongqing Municipality posted a notice on the decoration site, where renovation had been going on, indicating that the people’s court had officially informed Aosi Lidu Entertainment that any renovation or addition that it would make to the property without permission would not be protected by law. As for the claim by Aosi Lidu Entertainment that the Fifth Intermediate People’s Court of Chongqing Municipality, in violation of Article 31 of the Provisions on the Auction and Sale of Property in Civil Enforcement, had failed to “remove” the lease right on the auctioned property according to law, and therefore demanded that the auction procedure shall be confirmed as illegal, Aosi Lidu Entertainment was not legitimately entitled to the right of first refusal to the property, and therefore its claim was not adequately justified; instead, Aosi Lidu Entertainment is actually subject to the obligation of “prior removal” according to law, and does not have the right to claim for compensation on the ground the people’s court “has failed to remove in accordance with law” in the first place. 3. Whether Aosi Lidu Entertainment shall bear sufficient risk responsibility for its own decision to invest in renovation of the property When Aosi Lidu Entertainment signed the lease contract with Youtong Industrial, it shall have carried out an in-depth investigation as to whether the property that it intended to lease on a long-term basis was subject to any mortgage; furthermore, it voluntarily made significant investment in the renovation and improvement of

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the property, which had been seized by the court and designated for enforcement through auction, and in this way, exposed its own assets to risks. In this sense, Aosi Lidu Entertainment shall bear sufficient responsibility for the consequences of its own conduct. According to Article 1 of the Rules on Enforcing the Mortgaged Houses by the People’s Courts, Article 1901 of the Property Law, and Article 26 of the Rules for Sealing up, Distraining and Freezing Property in the Enforcement of Civil Cases by the People’s Courts, the lease-based contractual relationship between Aosi Lidu Entertainment and Youtong Industrial cannot oppose the mortgagee’s enforcement of mortgage and the people’s court’s disposal and realization of the collateral. Similarly, the claim by Aosi Lidu Entertainment, i.e., the People’s Court of Qijiang District, had confirmed the lease contract as valid because the court had ruled that rent shall be payable on the basis of such a contract, is also unjustified for the following reasons: First, the enforcement by the People’s Court of Qijiang District and that by the Fifth Intermediate People’s Court of Chongqing Municipality are not targeted at the same case; furthermore, the People’s Court of Qijiang District revoked its ruling on the collection of rent after the Qijiang Subbranch raised an objection to the ruling; second, the rent escrow ruling made by the People’s Court of Qijiang District cannot be deemed a permissive order for Aosi Lidu Entertainment to continue with its renovation and large-scale improvement of the property; therefore, Aosi Lidu Entertainment cannot take the ruling as the legal basis for renovation and improvement. There is no legal causal relationship between Aosi Lidu Entertainment’s choice as to the scale, style, method and result of its renovation and improvement on the one hand, and the rent collection by the People’s Court of Qijiang District and the enforcement by the Fifth Intermediate People’s Court of Chongqing Municipality on the other hand. In summary, Aosi Lidu Entertainment, which is an outsider of the present case, shall bear sufficient responsibility for the consequences of the transfer of all the value that it had added to the property, which was subject to enforcement by way of auction. In view of this, the enforcing court’s auctioning off of the property according to the status quo does not involve any intentional damage to the legitimate rights and interests of the tenant, who is not a party to the case. Therefore, the loss of the accessio values that Aosi Lidu Entertainment added to the property it leased is not covered by the provision that “the legitimate rights and interests of citizens, legal persons and other organizations are infringed upon by the exercise by state organs and their staff of their functions and powers” as provided for in Article 2 of the State Compensation Law. In the present case, the following issue is analyzed and reviewed: in the event that the tenant makes any significant renovation to the property it leases after it takes possession of such property, and the resultant accessio value is later transferred to another person after the property is disposed of by the court through auction 1

This article is now included as Article 405 of the Civil Code: “(i)f the mortgaged property has been leased and possession has been transferred prior to the creation of the mortgage, the original lease relationship shall not be affected by the mortgage.”

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according to the status quo, then is the loss of assets sustained by the tenant is eligible for state compensation. In the analysis and review, a gradual and multiplephased assessment is made as to whether the accessio made by the tenant during the enforcement process was subjectively bona fide or not, revealing the complexity in identifying the cause-effect relationship in hearing state-compensation cases. The decision not only upholds the rightfulness of enforcement by the people’s court, but also gives sufficient legal reasoning to the petitioner.

Typical Cases

Lin X v. Tianjin Jiuding Industrial Development Co., Ltd., Jiali Jingsheng (Tai’an) Real Estate Co., Ltd., et al. (Dispute over Contract for Assignment of Creditor’s Rights): Determination of Whether the Guarantor’s Guaranty Liability can be Exempted and the Scope of Guarantee Xuemei Zhang

Rule Although the principal creditor’s rights involved in the case are entrusted to the trust company by the creditor as trust property, the trust company is only a nominal creditor, and the identity of the principal and the beneficiary as the substantive creditors has not been altered. The trust company’s holding of the creditor’s rights involved in this case is not the act of assigning creditor’s rights under Article 79 of the Contract Law of the People’s Republic of China,1 and the creditor has no expression of intent to release the guarantor from the guaranty liability thereunder; therefore, the guarantor cannot be exempted. Where the guarantor issues a letter of commitment to the creditor, promising that if the debtor fails to repay the debts on time, it will repay the debts on behalf of the 1 This article is now included as Article 545 of the Civil Code: “(a) creditor may assign his claim in whole or in part to a third person, except that: (1) a claim is not assignable by virtue of its nature; (2) a claim is not assignable as agreed by the parties; or (3) a claim is not assignable in accordance with law. Where the parties agree that a nonpecuniary claim may not be assigned, such agreement shall not be asserted against a bona fide third person. Where the parties agree that a pecuniary claim may not be assigned, such agreement shall not be asserted against a third person.” Infra.

Collegial Bench for the Second Instance: Fubo Wang, Wei Li and Xuemei Zhang Edited by Yi Yang; translated by Zhijian Cao X. Zhang (B) The Second Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_9

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debtor with the shares of a value equal to the due and unpaid principal and interest of the debt in the case, and the parties concerned do not register equity pledge, then under the precondition that both the guarantor and the creditor confirm that the guarantee expressed in the said Letter of Commitment is in the form of suretyship, the guarantor shall be deemed to provide joint and several guaranty within the limit of its specific property equity, instead of providing equity pledge guarantee.

Case Information 1. Parties Appellant (Defendant in the First Instance): Lin X Appellee (Plaintiff in the First Instance): Tianjin Jiuding Industrial Development Co., Ltd. (hereinafter referred to as Jiuding Industrial Development Company) Defendant in the First Instance: Jiali Jingsheng (Tai’an) Real Estate Co., Ltd. [hereinafter referred to as Jiali Jingsheng (Tai’an) Real Estate Company] Defendant in the First Instance: Tianjin Meilin Holdings Co., Ltd. (hereinafter referred to as Meilin Holdings Company) Defendant in the First Instance: Guangdong Lin’gao Investment Management Co., Ltd. (hereinafter referred to as Lin’gao Investment Company) 2. Procedural History First Instance: No.38 [2017] Trial, Civ. Division, the Higher People’s Court of Tianjin Municipality (dated Jun. 14 of 2018) Second Instance: No.1189 [2018] Final, Civ. Division, the Supreme People’s Court (dated Dec. 28 of 2018) 3. Cause of Action Dispute over contract for assignment of creditor’s rights

Essential Facts On September 24, 2015, Jiuding Industrial Development Company signed a claimobligation restructuring agreement (serial number: CZ201509001) with Jiali Jingsheng (Tai’an) Real Estate Company, Meilin Holdings Company and an outsider, Ouya Building Materials Company. In accordance with the agreement, the outsider in the case, Ouya Building Materials Company, would transfer the claim of accounts receivable from Jiali Jingsheng (Tai’an) Real Estate Company to Jiuding Industrial Development Company. Jiuding Industrial Development Company would be entitled to the creditor’s rights to the accounts receivable against Jiali Jingsheng (Tai’an) Real Estate Company. Through claim-obligation restructuring, the entrusted loan

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originally belonging to Meilin Holdings Company was transferred to Jiali Jingsheng (Tai’an) Real Estate Company, with the principal of the debt after the restructuring being CNY 440 million. Of the principals, CNY 76 million is subject to a monthly interest rate of 0.75%, and CNY 364 million Yuan is subject to a monthly interest rate of 1.01667%. The repayment schedule is as follows: CNY 10 million should be paid before December 31, 2015, CNY 110 million should be paid on March 31, 2016, CNY 120 million should be paid on June 30, 2016, and CNY 124 million, and all interest due thereon should be paid on September 30, 2016. Meilin Holdings Company shall bear joint and several guaranty liability to guarantee the repayment obligation of Jiali Jingsheng (Tai’an) Real Estate Company. On the same day, Meilin Holdings Company, Lin’gao Investment Company and Jiuding Industrial Development Company signed a contract for securing the guaranty, agreeing that Meilin Holdings Company and Lin’gao Investment Company shall assume joint and several guaranty liability to the creditors for the debts of Jiali Jingsheng (Tai’an) Real Estate Company under the claim-obligation restructuring agreement numbered CZ201509001. In accordance with the said contract, the principal of the principal debt is CNY 440 million, the term of performance commences as of September 24, 2015 and terminates on September 30, 2016, and the guaranty period is two years starting from the date of maturity of the principal debt. On October 21, 2015, Jiuding Industrial Development Company and Tianjin Trust Co., Ltd. (hereinafter referred to as Tianjin Trust Company) signed a property rights trust contract, in accordance with which Jiuding Industrial Development Company shall entrust Tianjin Trust Company with the management of its creditor’s rights against Jiali Jingsheng (Tai’an) Real Estate Company, with both the principal and the beneficiary being Jiuding Industrial Development Company. On the same day, Tianjin Trust Company and Jiali Jingsheng (Tai’an) Real Estate Company signed a claim-obligation contract (No. 1515608004), which agrees that the principal of the principal debt CNY 440 million and the performance period shall commence as of September 24, 2015 and terminate on September 30, 2016. On the same day, Meilin Holdings Company, Lin’gao Investment Company and Tianjin Trust Company signed a contract for securing the guaranty, agreeing that Meilin Holdings Company and Lin’gao Investment Company shall bear joint and several guaranty liability for the debts of Jiali Jingsheng (Tai’an) Real Estate Company. Additionally, on that same day, Lin’gao Investment Company and Tianjin Trust Company signed an equity pledge contract, using the 100% equity interest it holds in Guangdong Aosheng Investment Development Co., Ltd. to provide a pledge guarantee for the claim-obligation contract (No. 1515608004) concluded by and between Tianjin Trust Company and Jiali Jingsheng (Tai’an) Real Estate Company. Specifically, Article 15 of the equity pledge contract stipulates that if the creditor transfers the creditor’s rights to a third party, the pledgor shall still nonetheless bear the pledge guaranty liability. Both parties registered the establishment of an equity pledge with the Industry and Commerce Administration of Foshan City, Guangdong Province, on October 23, 2015.

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Lin X has issued an undertaking to Jiuding Industrial Development Company with respect to the debts of Jiali Jingsheng (Tai’an) Real Estate Company and the performance thereof, promising that should Jiali Jingsheng (Tai’an) Real Estate Company be unable to repay the debts on schedule, Lin X will repay the debts on behalf of Jiali Jingsheng (Tai’an) Real Estate Company with the shares of Hsin Chong Construction Group Co., Ltd., a company listed on the Main Board of the Hong Kong Stock Exchange, or another company listed on the Hong Kong Stock Exchange, with the value of such shares to be equivalent to the principal and interest of the debts as they fall due. On October 23, 2015, Jiuding Industrial Development Company entered into a memorandum agreement on creditor’s rights trust with Jiali Jingsheng (Tai’an) Real Estate Company, Meilin Holdings Company and an outsider, Ouya Building Materials Company, which stipulates that the claim-obligation contract concluded by and between Tianjin Trust Company and Jiali Jingsheng (Tai’an) Real Estate Company shall not affect the effectiveness of the claim-obligation restructuring agreement. In case of any conflict between the two documents, the claim-obligation restructuring agreement shall prevail; the guaranty relating to the claim-obligation restructuring agreement shall continue to be valid. Respectively, Jiali Jingsheng (Tai’an) Real Estate Company repaid CNY 1 million to Jiuding Industrial Development Company on December 30, 2015, CNY 9 million to Tianjin Trust Company on February 2, 2016, and CNY 30 million to Jiuding Industrial Development Company on April 22, 2016. On September 30, 2016, Tianjin Trust Company sent a notice to Meilin Holdings Company and Lin’gao Investment Company, requiring them to fulfill their guaranty obligations. On September 30, 2016, the trust contract between Jiuding Industrial Development Company and Tianjin Trust Company was terminated. On October 13 of the same year, Tianjin Trust Company issued to Jiuding Industrial Development Company a liquidation report on trust affairs. On January 25, 2017, Jiali Jingsheng (Tai’an) Real Estate Company repaid CNY 10 million to Jiuding Industrial Development Company. Jiuding Industrial Development Company issued two copies of a letter of enquiry and debt interest calculation statement to Jiali Jingsheng (Tai’an) Real Estate Company, which prove that the amount of principal owed up to March 31, 2017 was CNY 390 million, and the interest due thereon shall be calculated according to the following formula: the principal of CNY 76 million shall be subject to a monthly interest rate of 0.75%, and the principal of CNY 364 million shall be subject to a monthly interest rate of 1%, and CNY 50 million that had been repaid by then shall be deducted from the principal (CNY 364 million) based on the repayment date. On March 30, 2018, Tianjin Trust Company entrusted Jiuding Industrial Development Company to send a notice of assignment of creditor’s rights to Jiali Jingsheng (Tai’an) Real Estate Company, Meilin Holdings Company and Lin’gao Investment Company. In accordance with the claim of the defendants in the first instance, Tianjin Trust Company submitted to the court of first instance on May 25, 2018 the Statement on

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the Property Trust of Tianjin Jiuding Industrial Development Company, which proves that the trust contract concluded by and between Tianjin Trust Company and Jiuding Industrial Development Company had been terminated and relevant liquidation had been carried out, that relevant creditor’s rights and guaranty had been transferred to Jiuding Industrial Development Company to be dealt with by the latter, that Jiuding Industrial Development Company had also been entrusted to send creditor’s rights transfer notices to Jiali Jingsheng (Tai’an) Real Estate Company, Meilin Holdings Company and Lin’gao Investment Company. By the time when Jiuding Industrial Development Company filed the lawsuit, Jiali Jingsheng (Tai’an) Real Estate Company still owed to Jiuding Industrial Development Company CNY 390 million in principal and interest thereon, for which Meilin Holdings Company, Lin’gao Investment Company and Lin X had failed to fulfill their guaranty obligations. The court of first instance held that the case was a dispute over contract for the assignment of creditor’s rights, and the claim-obligation restructuring agreement signed between Jiuding Industrial Development Company, Jiali Jingsheng (Tai’an) Real Estate Company, Meilin Holdings Company and the outsider, Ouya Building Materials Company, the property rights trust contract signed between Jiuding Industrial Development Company and Tianjin Trust Company, and the claim-obligation contract (No. 1515608004) signed between Tianjin Trust Company and Jiali Jingsheng (Tai’an) Real Estate Company, the memorandum agreement on creditor’s rights trust signed between Jiuding Industrial Development Company and Jiali Jingsheng (Tai’an) Real Estate Company, Meilin Holdings Company and the outsider, Ouya Building Materials Company, as well as the notice of assignment of creditor’s rights of Tianjin Trust Company, were all the expression of true intent of the parties concerned, and the content thereof did not violate any of the mandatory provisions of laws and administrative regulations and was therefore confirmed to be legal and effective. The guarantee provided by Meilin Holdings Company, Lin’gao Investment Company and Lin X in this case for the performance of the debts of Jiali Jingsheng (Tai’an) Real Estate Company was also confirmed to be legal and valid. In this case, Jiuding Industrial Development Company obtained the creditor’s rights involved in the case in accordance with the claim-obligation restructuring agreement. Through property trust in the case as well as termination of the trust and acceptance of the assignment of creditor’s rights, Jiuding Industrial Development Company became the eligible creditor in the case. Jiali Jingsheng (Tai’an) Real Estate Company Co., Ltd. failed to fulfill its repayment obligations in accordance with the said contract, thus giving rise to the dispute of this case, and shall therefore be liable for breach of contract. Meilin Holdings Company, Lin’gao Investment Company and Lin X, who have failed to perform their guaranty obligations, shall assume guaranty liability. For the calculation of interest on the principal of the debts owed in this case, both parties have no objection to the arrangement that CNY 76 million of the principal shall be subject to a monthly interest rate of 0.75%, as for the interest rate for CNY 364 million of the principal, although both parties had agreed on a monthly interest rate of 1.01667%, in actual performance of the debt, Jiuding Industrial Development Company sent a letter of enquiry and a debt interest calculation form specifying a

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monthly interest rate of 1%, which was accepted by Jiali Jingsheng (Tai’an) Real Estate Company and submitted as evidence; such a development should be regarded as a consent of both parties to modify the original agreement, and therefore, the defense claimed by Jiali Jingsheng (Tai’an) Real Estate Company shall be established and was accepted by the court of first instance. As for using the repayment by Jiali Jingsheng (Tai’an) Real Estate Company to offset the principal of debts, as the letter of enquiry and the debt interest calculation form sent by Jiuding Industrial Development Company were prepared after the repayment by Jiali Jingsheng (Tai’an) Real Estate Company, so the amount of principal offset was deducted within the CNY 364 million in principal, and hence the repayment by Jiali Jingsheng (Tai’an) Real Estate Company was used to pay off part of the CNY 364 million in principal. For the assumption by Meilin Holdings Company and Lin’gao Investment Company of the guaranty liability, Meilin Holdings Company agreed in the claimobligation restructuring agreement (No. CZ201509001) to assume joint and several guaranty liability for the repayment obligations of Jiali Jingsheng (Tai’an) Real Estate Company. On the same day, Meilin Holdings Company, Lin’gao Investment Company and Jiuding Industrial Development Company signed a contract for securing the guaranty, agreeing that the principal of the debts of Meilin Holdings Company and Lin’gao Investment Company to Jiali Jingsheng (Tai’an) Real Estate Company under the claim-obligation restructuring agreement (No. CZ201509001) shall be CNY 440 million and that they bear joint and several guaranty liability to the creditors with a guaranty period of two years after the maturity of the principal debts. Now that Jiali Jingsheng (Tai’an) Real Estate Company has failed to repay after the debts became mature, Meilin Holdings Company and Lin’gao Investment Company shall bear joint and several guaranty liability in accordance with the said contract. Lin’gao Investment Company and Tianjin Trust Company have signed an equity pledge contract, under which they agree to provide a pledge guarantee for Tianjin Trust Company with 100% equity of Guangdong Aosheng Investment Development Co., Ltd. held by Lin’gao Investment Company and agree that if the creditor transfers the creditor’s right to a third party, the pledgor shall still assume the pledge guaranty liability. Therefore, upon the transfer of the creditor’s rights by Tianjin Trust Company to Jiuding Industrial Development Company, Jiuding Industrial Development Company has the right of pledge over 100% of the equity interest in Guangdong Aosheng Investment Development Co., Ltd. held by Lin’gao Investment Company and guaranteed by the pledge. About the guaranty liability of Lin X: as is provided in Article 28 of the Judicial Interpretation of the Guaranty Law, “(i)f the creditor transfers the principal creditor’s right to a third person in accordance with law during the guaranty period, the guaranteed creditor’s right shall be transferred simultaneously, and the guarantor shall bear the guaranty liability to the transferee to the extent of the original guarantee.” As Lin X promised to Jiuding Industrial Development Company that if Jiali Jingsheng (Tai’an) Real Estate Company is unable to repay the debts on schedule, Lin X will repay the debts on behalf of Jiali Jingsheng (Tai’an) Real Estate Company with the shares of Hsin Chong Construction Group Co., Ltd., a company listed on the

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Main Board of Hong Kong, or shares of another company listed on the Hong Kong Stock Exchange, with a value equivalent to the principal and interest of the debts as they fall due. In this case, Jiuding Industrial Development Company entrusted the management of its creditor’s rights against Jiali Jingsheng (Tai’an) Real Estate Company to Tianjin Trust Company, which was then transferred back to Jiuding Industrial Development Company. In view of this, in the event that Jiali Jingsheng (Tai’an) Real Estate Company fails to pay its debts on schedule, Lin X should assume the guaranty liability in accordance with his promise. As the form of suretyship is not specified by Lin X, Lin X shall then bear joint and several guaranty liability in accordance with law. The court of first instance ruled that: (1) Jiali Jingsheng (Tai’an) Real Estate Company shall repay the amount of principal owed by Jiuding Industrial Development Company, i.e., CNY 390 million, plus the corresponding interest thereon, within 10 days after the judgment came into effect. (Interest calculation: CNY 76 million of the principal shall be subject to a monthly interest rate of 0.75% starting from September 24, 2015 to the date of repayment recognized in this judgment; CNY 364 million of the principal shall be subject to a monthly interest rate of 1% from September 24, 2015 to 30 December 2015; CNY 363 million of the principal shall be subject to a monthly interest rate of 1% from December 31, 2015 to February 1, 2016; CNY 354 million of the principal shall be subject to a monthly interest rate of 1% from February 2, 2016 to April 21, 2016; CNY 324 million of the principal shall be subject to a monthly interest rate of 1% from April 22, 2016 to January 24, 2017; CNY 314 million of the principal shall be subject to a monthly interest rate of 1% from January 25, 2017 to the date of payment confirmed by the judgment.) (2) Meilin Holdings Company and Lin’gao Investment Company shall bear joint and several guaranty liability to Jiuding Industrial Development Company for the principal and interest payable by Jiali Jingsheng (Tai’an) Real Estate Company; (3) Jiuding Industrial Development Company is entitled to the pledge of 100% equity interest in Guangdong Aosheng Investment Development Co., Ltd. held by Lin’gao Investment Company; (4) Lin X shall bear joint and several guaranty liability to Jiuding Industrial Development Company for the principal and interest payable by Jiali Jingsheng (Tai’an) Real Estate Company to the extent of the principal and interest payable by Lin X in respect of the shares of Hsin Chong Construction, a company listed on the Main Board of Hong Kong Stock Exchange, or those of another company listed on the Hong Kong Stock Exchange, and the value of the shares shall be equivalent to the principal and interest due and unpaid for such debt; (5) Meilin Holdings Company, Lin’gao Investment Company and Lin X shall have the right to recover from Jiali Jingsheng (Tai’an) Real Estate Company after assuming the guaranty liability; (6) rejecting other claims filed by Jiuding Industrial Development Company. The court acceptance fee of CNY 2,291,800 and preservation fee of CNY 5000, totaling CNY 2,296,800, shall be jointly borne by Jiali Jingsheng (Tai’an) Real Estate Company, Meilin Holdings Company, Lin’gao Investment Company and Lin X. Lin X refused to accept the first-instance judgment and lodged an appeal: (1) to cancel the fourth item of the first-instance judgment in accordance with law and change the judgment so that Lin X shall not assume any liability in this case; (2)

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to revise the judgment so that Lin X does not have to bear any part of the court acceptance and preservation fee in the first instance; (3) all litigation expenses in the second instance should be borne by Jiuding Industrial Development Company. The Supreme People’s Court confirmed the facts determined by the court of first instance. In the second instance, Jiuding Industrial Development Company, in support of its appeal claims, submitted a new item of evidence, the repayment plan, in accordance with law, which states that, pursuant to the claim-obligation restructuring agreement signed on September 24, 2015, Jiali Jingsheng (Tai’an) Real Estate Company promised to pay off all debt arrears before July 30, 2017, and all guarantors agreed to all terms and conditions of the repayment plan. The repayment plan, which was dated January 13, 2017, was apparently affixed with the corporate seal of Jiali Jingsheng (Tai’an) Real Estate Company and signature of Lin X at the signature block for the guarantor. However, Lin X and Jiali Jingsheng (Tai’an) Real Estate Company challenged the signature and corporate seal affixed to the repayment plan, but they did not apply for expert evaluation thereof, nor did they submit any other evidence to the contrary to overturn it. Therefore, the Supreme People’s Court confirmed the authenticity of that item of evidence.

Issue Whether Lin X should bear the guaranty liability involved in the case.

Holding After hearing the case, the Supreme People’s Court holds that Lin X’s appeal cannot be established and shall be rejected; the judgment of first instance is clear in its findings of fact and correct in its application of law and thus shall be upheld. In accordance with Article 170(1) (1) of the Civil Procedure Law of the People’s Republic of China, it is ruled to reject the appeal and uphold the judgment of first instance. The court acceptance fee in the second instance in the amount of CNY 2,291,800 shall be borne by Lin X.

Comment on Rule 1. Whether Lin X shall bear the guaranty liability involved in the case In this case, Lin X made it clear in his written appeal that the judgment by the court of first instance, i.e., Lin X shall assume the joint and several liability of repayment

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with the shares of the Hong Kong listed company he holds, involves an incorrect identification of the nature of the suretyship provided in the letter of commitment; What Lin X undertakes is a general guaranty liability, under which the secured property and manner of fulfilling obligation are sole and exclusive. Due to the lapse of the guaranty period, Lin X should not be required to assume the guaranty liability involved in the case. It can be inferred from the above statement that Lin X confirmed that the suretyship method he provided, as stated in the letter of commitment, was guaranteed. The guarantee is not provided on the basis of all the properties of Lin X; instead, it is a guaranty liability to the extent of specific properties of Lin X. Based on the ground of Lin’s appeal, the Supreme People’s Court mainly approaches the issue of whether Lin X should bear the guaranty liability in the case from the following three aspects: (1) On whether the guaranty liability assumed by Lin X is the general guaranty or the joint and several guaranty Article 17 of the Guaranty Law provides, “(w)here the parties agree in a guaranty contract that the guarantor shall undertake guaranty liability if the debtor is unable to perform his obligation, such a guaranty is a general guaranty.”2 It can be inferred from the abovementioned provision that general guaranty means that the guarantor does not assume guaranty liability unless the debtor cannot perform the debt. The general guarantor has beneficium ordinis, that is, the general guarantor has the right to be exempted from undertaking the guarantee before the debtor performs his obligations with his property. In this case, the Letter of Commitment states that Lin X has promised that in the event that Jiali Jingsheng (Tai’an) Real Estate Company is unable to repay the debts on schedule, Lin X will repay the debts on behalf of Jiali Jingsheng (Tai’an) Real Estate Company with the shares held by Lin X of Hsin Chong Construction Group Co., Ltd., a company listed on the Main Board of Hong Kong Security Exchange, or another company listed on the Hong Kong Stock Exchange, with a value equivalent to the principal and interest due and unpaid for the debts. From the text of the letter of commitment, it can be seen that Lin X assumes guaranty liability on the premise that the debtor fails to repay the debts on schedule, and the debtor’s failure thereto does not mean that the debtor cannot pay off the debts with his property. Therefore, Lin X has not undertaken to assume a general guaranty liability. The letter of commitment 2

This article is now included as Article 687 of the Civil Code: “(w)here the parties agree in a guaranty contract that the guarantor shall undertake guaranty liability if the debtor is unable to perform his obligation, such a guaranty is a general guaranty. A guarantor in a general guaranty may refuse to undertake guaranty liability to the creditor before a dispute arising from the principal contract is adjudicated or arbitrated and where the debtor is still unable to fully perform the obligation after his assets have been enforced in accordance with law, unless one of the following circumstances occurs: (1) the whereabouts of the debtor have been unknown and there is no property available for enforcement; (2) the people’s court has accepted the debtor’s bankruptcy petition; (3) the creditor has evidence to prove that the debtor’s property is insufficient to perform all of the obligations or the debtor loses his capacity to perform the obligation; or (4) the guarantor waives his right provided in this paragraph in writing.” Infra.

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does not clearly indicate the specific form of the suretyship that Lin X undertakes, and hence, there is ambiguity concerning the form of the suretyship. Article 19 of the Guaranty Law states, “(w)here there is no agreement in the guaranty contract on the form of the suretyship or the agreement is unclear, the guarantor shall bear the liability as in the form of a general guaranty.”3 In accordance with the above provision, the court of first instance found that it is not inappropriate or improper that Lin X should assume joint and several guaranty liability for the debts involved in the case. The grounds on which Lin X appeals that he should assume general guaranty liability cannot be established and is therefore dismissed by the Supreme People’s Court. (2) On whether Lin X can be exempted from liability on the ground that Jiuding Industrial Development Company claims the guaranty right to Lin X during the guaranty period In accordance with the claim-obligation restructuring agreement, the performance period of the principal debt in this case is from September 24, 2015, to September 30, 2016. In the letter of commitment, Lin X only promises to repay the debts on behalf of Jiali Jingsheng (Tai’an) Real Estate Company with shares “the value of which is equal to the principal and interest of the debts when they fall due”, without specifying the guaranty period. Article 26 of the Guaranty Law provides, “(w)here there is no agreement between the parties on the term of guaranty or the agreement is unclear, the term of guarantee shall be six months from the date of expiration of the time limit for performance of the principal obligation.”4 It can be inferred from the provisions of this article that the guaranty period assumed by Lin X is six months from the date of expiry of the performance period of the principal debt. In the second instance, Jiuding Industrial Development Company submitted a repayment plan dated January 13, 2017, and Lin X signed at the guarantor signature block of the plan. In view of this, it should be ruled that the creditor had asserted a claim to Lin X during the guaranty period, and therefore, the guaranty right was not extinguished. Therefore, Lin X’s appeal on the ground that the creditor did not claim for the guaranty right within the guaranty period and thus he could be exempted 3

This article is now included as Article 686(2) of the Civil Code: “(w)here there is no agreement in the guaranty contract on the form of the suretyship or the agreement is unclear, the guarantor shall bear the liability as in the form of a general guaranty.” 4 This article is now included as Article 692 of the Civil Code: “(t)he term of guaranty is the period during which the guarantor shall undertake guaranty liability, and such period shall not be suspended, interrupted, or extended. A creditor and a guarantor may agree on the term of guaranty. However, where the expiration date of the agreed term of guaranty is earlier than or the same as the expiration time for performance of the principal obligation, it is deemed as there is no agreement on the term of guaranty. Where there is no agreement between the parties on the term of guaranty or the agreement is unclear, the term of guaranty shall be six months from the date of expiration of the time limit for performance of the principal obligation. Where a creditor and a debtor fails to agree on the time limit for performance of the principal obligation or the agreement is unclear, the term of guaranty shall be counted from the date when the grace period for the creditor to request the debtor to perform the obligation expires.” Infra.

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from the guaranty liability cannot be established and is dismissed by the Supreme People’s Court. (3) Whether Lin X can be released from the guaranty liability on the ground of the fact that the principal debt and the guaranteed debt involved in the claimobligation restructuring agreement have been replaced by the debt involved in the claim-obligation contract In September 2015, Lin X issued a letter of commitment, stating that he was willing to use shares held by him as guaranty to secure that debts (in the amount of CNY 440 million) owed by Jiali Jingsheng (Tai’an) Real Estate Company to Jiuding Industrial Development Company under the claim-obligation restructuring agreement would be paid off. The letter of commitment does not prohibit the assignment of creditor’s rights or state that Lin X will only assume guaranty liability for debts whose creditor is Jiuding Industrial Development Company. On October 21, 2015, Jiuding Industrial Development Company signed a property rights trust contract with Tianjin Trust Company, according to which Jiuding Industrial Development Company shall entrust Tianjin Trust Company with the management of the former’s creditor’s rights against Jiali Jingsheng (Tai’an) Real Estate Company, with both the principal and the beneficiary being Jiuding Industrial Development Company. On October 23, 2015, Jiuding Industrial Development Company, Jiali Jingsheng (Tai’an) Real Estate Company and Meilin Holdings Company signed a memorandum agreement on creditor’s rights trust, in which they agreed that the claim-obligation contract signed by Tianjin Trust Company and Jiali Jingsheng (Tai’an) Real Estate Company would not affect the effectiveness of the claim-obligation restructuring agreement. In case of any conflict between them, the claim-obligation restructuring agreement shall prevail; the guarantee relating thereto shall remain valid. From the above agreement and facts, it can be seen that during the period when the creditor’s rights under the claim-obligation restructuring agreement were managed by Tianjin Trust Company, the validity of the claim-obligation restructuring agreement would not be affected, and the guarantee related thereto would remain valid. Jiuding Industrial Development Company does not have expression of intent to give up the guarantee provided by Lin X. During the period when the creditor’s rights under the claim-obligation restructuring agreement were held by Tianjin Trust Company, Jiuding Industrial Development Company was the principal and the beneficiary, and the identity hereof as a substantive creditor was not altered. Holding the creditor’s rights involved in the case by Tianjin Trust Company, as had been entrusted by Jiuding Industrial Development Company, does not constitute the assignment of creditor’s rights provided for in Article 79 of the Contract Law. However, due to the legal relationship based on trust management, nominal creditors have changed. From this perspective, it is also reasonable for the court of first instance to ascertain whether the guarantor should bear guaranty liability from the perspective of the assignment of creditor’s rights. Article 28 of the Judicial Interpretation of the Guaranty Law states, “(i)f the creditor transfers the principal creditor’s right to a third person in accordance with law during the guaranty period, the guaranteed creditor’s

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right is transferred at the same time, and the guarantor shall bear the guaranty liability to the transferee within the scope of the original guarantee.” In this case, the letter of commitment does not indicate the transfer of the creditor’s rights involved in the case, and the guarantor does not assume guaranty liability. Therefore, even if the creditor’s rights involved in the case are considered to have been “transferred” because a trust company has been engaged to manage them, the guarantor shall nonetheless have to bear the guaranty liability within the scope of the original guarantee. In fact, when the case was heard by the court of first instance, the property rights trust contract between Tianjin Trust Company and Jiuding Industrial Development Company had been terminated and liquidated, and the relevant creditor’s rights and guaranty rights had been transferred back to Jiuding Industrial Development Company. Jiuding Industrial Development Company is then the eligible creditor and guarantor of this case, and his claim for guaranty rights against Lin X based on the claim-obligation restructuring agreement and letter of commitment has both factual and legal basis. Lin X’s appeal that the creditor-debtor relationship involved in the claim-obligation contract has replaced the claim-obligation relationship involved in the claim-obligation restructuring agreement, and thereby the guaranty liability should be assumed, cannot be established, and is dismissed by the Supreme People’s Court. 2. Whether the court of first instance has failed to conduct cross-examination for relevant evidence and violated relevant legal procedures After consulting the trial transcript of court hearing in the first instance, it is found that Jiuding Industrial Development Company had submitted the memorandum agreement on the creditor’s rights trust as evidence to the court in the first instance, and Lin X had expressed opinions in the evidence cross-examination on the memorandum. Although Jiuding Industrial Development Company did not submit the property right trust contract as evidence to the court of first instance, Lin X approved the fact that Jiuding Industrial Development Company had entrusted the creditor’s rights involved in the case to Tianjin Trust Company as agreed in the contract. In the first instance, no cross-examination was conducted for the property right trust contract, and therefore the first instance procedure involves defects, but the defects are not sufficient to affect the validity of the principal contract and the guaranty contract involved in the case, as well as the identification of the parties’ liabilities. In addition, Article 29 of the Measures for the Payment of Litigation Costs states, “(l)itigation costs shall be borne by the losing party, except as where they are borne by the winning party voluntarily.” Article 203 of the Judicial Interpretation of the Civil Procedure Law states, “(i)f the parties who bear joint and several liabilities lose the lawsuit, they shall jointly bear the litigation costs.” In accordance with the provisions of this article and the terms and conditions of the letter of commitment, Lin X, as the party assuming the joint and several guaranty liability, should bear the litigation costs thereunder. Therefore, the court of first instance ruled that it was not inappropriate for Jiali Jingsheng (Tai’an) Real Estate Company, Meilin Holdings Company, Lin’gao Investment Company and Lin X to jointly bear litigation expenses.

Beijing Datang Fuel Co., Ltd. v. Shandong Baifu Logistics Co., Ltd (Dispute over Sales Contract): Determination of the Extinguishment of the Creditor-Debtor Relationship in a Subrogation Action Yuying Wang

Rule Article 20 of the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Contract Law of the People’s Republic of China (I) provides that in a subrogation lawsuit filed by the creditor against the secondary debtor, where the right of subrogation is confirmed as valid by the competent people’s court after proper hearing of the case hereby, the secondary debtor shall perform the repayment obligation to the creditor, thereafter, the corresponding creditor-debtor relationship between the creditor and the debtor, as well as that between the debtor and the secondary debtor shall be extinguished. According to this provision, the premise on which the corresponding creditor-debtor relationship between the creditor and the debtor is deemed to be extinguished is that the secondary debtor has duly fulfilled the corresponding repayment obligation to the creditor.

Collegial Bench for the Second Instance: Wei Li, Yuying Wang and Bei Su Edited by Yi Yang; translated by Zhijian Cao Y. Wang (B) The Second Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_10

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Case Information 1. Parties Appellant (Plaintiff in the First Instance): Beijing Datang Fuel Co., Ltd. (hereinafter referred to as Datang Fuel Company) Appellee (Defendant in the First Instance): Shandong Baifu Logistics Co., Ltd. (hereinafter referred to as Baifu Logistics Company) 2. Procedural History First Instance: No. 10 [2018] Trial, Civ. Division, the Higher People’s Court of Shandong Province (dated Aug. 13 of 2018) Second Instance: No. 6 [2019] Final, Civ. Division, the Supreme People’s Court (dated Jun. 20 of 2019) 3. Cause of Action Dispute over sales contract

Essential Facts From January 20, 2012 to May 29, 2013, Datang Fuel Company and Baifu Logistics Company signed a total of 41 purchase contracts, according to which Baifu Logistics Company shall sell ferronickel, nickel ore, clean coal, and metallurgical coke to Datang Fuel Company. Both parties to the contracts agreed on the contract prices and the payment and settlement methods thereof, delivery dates, liability for breach of contract and dispute resolution. During the performance of the contracts, a rolling settlement method was adopted by the two parties for the amounts payable thereunder. From March 15, 2012 to January 8, 2014, Datang Fuel Company paid a total of CNY 1,827,867,179.08 to Baifu Logistics Company, and Baifu Logistics Company issued VAT invoices to Datang Fuel Company for the total amount of CNY 1,869,151,565.63. Datang Fuel Company claimed that the cumulative value of the goods supplied by Baifu Logistics Company is CNY 1,715,683,565.63, and for its part, Baifu Logistics Company claimed that he had fully supplied goods according to the total amount indicated by the VAT invoice issued. On April 20, 2014, Datang Fuel Company and Baifu Logistics Company signed a debt offset agreement, which stipulates that as of the date when the agreement was signed, the accounts receivable by Datang Fuel Company from Baifu Logistics Company were much higher than the accounts payable by Datang Fuel Company to Baifu Logistics Company, and both parties agreed that the accounts payable, in the amount of CNY 41,284,386.55, from Datang Fuel Company to Baifu Logistics Company, shall offset an equivalent amount of accounts receivable on the effective date of the agreement, and that such offset should not affect Datang Fuel Company’s exercise of any rights under any other accounts receivable thereof.

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On November 25, 2014, Datang Fuel Company, as the plaintiff, filed a creditor subrogation lawsuit with the Intermediate People’s Court of Ningbo City, Zhejiang Province, in which Ningbo Wanxiang Import and Export Co., Ltd. (hereinafter referred to as Wanxiang Import & Export Company) is listed as the defendant, and Baifu Logistics Company as the third party. In the judgment (No. 74 [2014] Trial, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province), the court ruled that the evidence provided by Datang Fuel Company showed that Baifu Logistics Company still owed Datang Fuel Company CNY 147,500,000, while Wanxiang Import & Export Company admitted that he still owed Baifu Logistics Company CNY 36,369,405.32 in due debts, which was confirmed by Datang Fuel Company. Baifu Logistics Company has not claimed the debt against Wanxiang Import & Export Company by means of litigation or arbitration, thus resulting in the failure to realize the creditor’s rights of Datang Fuel Company. In view of this, Datang Fuel Company’s request that Wanxiang Import & Export Company pay off his debts directly to offset the debts owed by Wanxiang Import & Export Company to Baifu Logistics Company is justifiable in accordance with law and therefore should be upheld. The amount of debt should be based on the amount hereof that was recognized by Wanxiang Import & Export Company and can be confirmed. Therefore, the aforesaid court made the judgment, which had come into effect, that Wanxiang Import & Export Company shall pay CNY 36,369,405.32 to Datang Fuel Company. During the trial of the case, Datang Fuel Company admitted that the amount of CNY 153,468,000 claimed in this case included that of CNY 147,500,000 claimed in the civil case mentioned above. On December 25, 2014, Datang Fuel Company, as the plaintiff, filed a lawsuit with the Higher People’s Court of Shandong Province, with Baifu Logistics Company as the defendant, requesting that Baifu Logistics Company pay CNY 55,983,558.41 in purchase payment and interest thereon. The Higher People’s Court of Shandong Province rendered the judgment (No. 96 [2014] Trial, Civ. Division, the Higher People’s Court of Shandong Province), which had come into effect, supporting the abovementioned claims of Datang Fuel Company. On September 28, 2016, Datang Fuel Company applied to the People’s Court of Xiangshan County, Zhejiang Province for enforcement of the judgment for the case of No. 74 [2014] Trial, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province. Later, on October 8, 2016, the People’s Court of Xiangshan County, Zhejiang Province issued an enforcement notice to Wanxiang Import & Export Company in accordance with law; however, Wanxiang Import & Export Company still failed to perform his obligations after such performance became overdue; in addition, Wanxiang Import & Export Company should pay CNY 36,369,405.32 in enforcement payment and interest thereon and bear CNY 1

The amount of CNY 55,983,558.4 claimed by Datang Fuel Company herein was the result of calculation based on the following formula: CNY 132,594,558.4 (the amount of payment for goods owed by Baifu Logistics Company in the case) minus CNY 41,284,386.55 (the amount of debt to be offset by Datang Fuel Company against Baifu Logistics Company as confirmed in the Debt Offset Agreement dated April 20, 2014) minus CNY 35,327, 591.66 (the amount of the debt actually recovered by Datang Fuel Company as is identified by Datang Fuel Company in the case).

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209,684 in litigation fees and CNY 103,769.41 in enforcement costs. Within the time limit, Datang Fuel Company failed to provide enforceable property of Wanxiang Import & Export Company or raise any objection to the said court. Therefore, on March 25, 2017, the court entered a ruling on enforcement, No. 3676 [2016] Enforcement, Enforcement Department, the People’s Court of Xiangshan County, Zhejiang Province (Zhejiang 0225), ending the enforcement procedure. Datang Fuel Company filed a lawsuit with the court of first instance, requesting that Baifu Logistics Company be ordered to return CNY 153,468,0002 in principal and compensate Datang Fuel Company for his lost interest thereon. The court of first instance held that CNY 41,284,386.55 stated in the debt offset agreement had been offset in the case of No. 96 [2014] Trial, Civ. Division, the Higher People’s Court of Shandong Province, and therefore the aforementioned amount should not be used for the second time in the case at hand to offset payment of Datang Fuel Company; the Intermediate People’s Court of Ningbo City, Zhejiang Province adjudicated in the case of No. 74 [2014] Trial, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province that Wanxiang Import & Export Company shall repay Datang Fuel Company for goods in the amount of CNY 36,369,405.32, on behalf of Baifu Logistics Company, and the said judgment has come into effect, therefore, the amount of CNY 36,369,405.32 should be deducted from that claimed by Datang Fuel Company; Datang Fuel Company claimed that the abovementioned creditor’s rights have failed to be realized through enforcement, while the court held that as a judgment has already been made in case of the creditor’s rights, a second one should not be entered therefor, as is required by the principle of “non bis in idem”. On August 13, 2018, the court of first instance entered a judgment (No. 10 [2018] Trial, Civ. Division, the Higher People’s Court of Shandong Province), ordering Baifu Logistics Company to repay Datang Fuel Company for goods in the amount of CNY 75,814,208.13, and compensate Datang Fuel Company for the lost interest on the payment for the time in which the payment was due and unpaid. After the judgment came into effect, Datang Fuel Company lodged an appeal to the Supreme People’s Court, requesting that the first-instance judgment should be vacated and that Baifu Logistics Company should be ordered to return to Datang Fuel Company CNY 153,468,000 in principal and compensate Datang Fuel Company for lost interest thereon.

Issue Whether Datang Fuel Company has the right to file a separate lawsuit against Baifu Logistics Company on the basis of the creditor’s right underlying the CNY 2

The amount is the result of calculation based on the following formula: CNY 1,869,151,565.63 [CNY 1,827,867,179.08 (goods payment made by Datang Fuel Company) + CNY 41,284,386.55 (owed by Datang Fuel Company to Baifu Logistics Company as confirmed by the reconciliation agreement)] − CNY 1,715,683,565.63 (value of goods already delivered by Baifu Logistics Company).

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36,369,405.32 involved in the judgment of No. 74 [2014] Trial, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province.

Holding After review and deliberation, the Supreme People’s Court holds that in the second instance, Baifu Logistics Company raised no objection to the amount of CNY 41,284,386.55 involved in the judgment of No. 96 [2014] Trial, Civ. Division, the Higher People’s Court of Shandong Province, and recognized that the amount should not be deducted; in view of this, that amount of money shall not be deducted; as for the creditor’s right in the amount of CNY 36,369,405.32 involved in the judgment of No. 74 [2014] Trial, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province, the creditor’s rights have failed to be realized through the enforcement against assets of Wanxiang Import & Export Company, and therefore the court in charge of enforcement has ruled to terminate the enforcement procedure. It can be seen that Wanxiang Import & Export Company has not actually fulfilled his repayment obligation, and hence, the creditor-debtor relationship between Datang Fuel Company and Baifu Logistics Company has not been extinguished, and therefore, Datang Fuel Company has the right to make another claim against Baifu Logistics Company. In view of this, the appeal claim of Datang Fuel Company is established and shall be supported. Therefore, the judgment of first instance is canceled, and Baifu Logistics Company is ordered to return to Datang Fuel Company CNY 153,468,000 in payment for goods and compensate the latter for the lost interest thereon for the period time when the aforementioned amount is due and unpaid.

Comment on Rule The core issue underlying this case is whether the legal effectiveness of the extinction of the creditor-debtor relationship between creditors and debtors and that between the debtor and secondary debtor through subrogation litigation is subject to the precondition that the secondary debtor should actually perform the corresponding repayment obligations to the creditor and then whether the creditor can sue the debtor separately if the secondary debtor fails to actually perform his obligations to the creditor. Regarding this issue, there is a view in practice that as long as the judgment for a case of subrogation litigation is entered, the corresponding creditor-debtor relationship between the creditor and debtor and that between the debtor and secondary debtor can then be extinguished, regardless of the actual state of debt performance. If the creditor is allowed to lodge a new claim against the debtor, it may easily lead to the scenario in which the creditor may receive double compensation.

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In view of this, analysis and reasoning have been made in the case from the aspects of the textual interpretation of relevant judicial interpretations, the value orientation of the subrogation litigation system, and a comparison between subrogation litigation and creditor vs. debtor litigation against the debtor in terms of the elements thereof, so as to fully expound the reasons for the judgment. 1. Textual interpretation of relevant provisions of the judicial interpretation Article 20 of the Judicial Interpretation on Contract Law (I) states that if a subrogation lawsuit filed by the creditor against the secondary debtor is found to be established after being heard by the competent people’s court, the secondary debtor shall then perform the obligation of repayment to the creditor; after that, the corresponding creditor-debtor relationship between the creditor and the debtor and that between the debtor and the secondary debtor shall be extinguished. According to this stipulation, the premise on which the extinction of the corresponding creditor-debtor relationship between creditor and debtor rests is that the secondary debtor has actually fulfilled the corresponding repayment obligation to the creditor. In the enforcement case involved, as the enforcement does not involve any property of Wanxiang Import & Export Company that has not been subject to enforcement, the People’s Court of Xiangshan County, Zhejiang Province has made a ruling to terminate the enforcement. Therefore, given that Wanxiang Import & Export Company has not actually fulfilled his obligation of repayment, the creditor-debtor relationship between Datang Fuel Company and Baifu Logistics Company has not been extinguished, and therefore, Datang Fuel Company has the right to lodge another claim against Baifu Logistics Company. 2. Value orientation of the subrogation litigation system Subrogation litigation is part of the debt preservation regime, which is intended to avoid such scenarios as where the debtor’s property suffers any improper reduction or fails to receive any addition when it should, which thus hinders the creditor from realizing their creditor’s rights; it is not intended to require the creditor to choose between the debtor and the secondary debtor as the subject to perform the obligations. If the creditor is required to make such a choice, it is tantamount to demanding that the creditor should make a full investigation on the solvency of the secondary debtor before initiating a subrogation proceeding; otherwise, the creditor will have to bear the risk that their debts cannot be paid off, which not only increases the economic cost that the creditor incurs by initiating subrogation proceedings, but also seriously dampens the enthusiasm of the creditor to initiate subrogation proceedings, which runs against the purpose of the subrogation litigation system. 3. Comparison of the elements of subrogation litigation and creditor’s lawsuit against debtor The hearing of this case does not violate the principle of “non bis in idem”. According to Article 247 of the Judicial Interpretation on the Civil Procedure Law, the main conditions for determining whether repeated prosecution is constituted are whether the parties to the litigation, the object of litigation and the claim of two cases are the

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same, or whether the claim of the latter case essentially denies the judgment of the former case, etc. Subrogation litigation is different from litigation against the debtor: (1) in terms of the parties, in a case of subrogation litigation takes the creditor as the plaintiff and secondary debtor as the defendant, while in a case of litigation against the debtor, the creditor is the plaintiff and debtor is the defendant, and therefore, the defendants in the two cases are not identical; (2) in terms of the litigation object and litigation claims, in a case of subrogation litigation, the secondary debtor is required to directly fulfill his obligations to the creditor, and the litigation aims at the creditor’s rights and debts between the debtor and the secondary debtor; while in a case of litigation against the debtor, the debtor is required to fulfill his obligations to the creditor, and the litigation is aimed at the claims and obligations between the creditor and the debtor; in this sense, the two cases differ from each other in the scope of subject matter and legal relationship; (3) in terms of prosecution elements, unlike a case of litigation against the debtor, a case of subrogation litigation requires not only the prosecution conditions provided for in Article 119 of the Civil Procedure Law, but also the litigation conditions stated in Article 11 of the Judicial Interpretation for Contract Law (I). Based on the above differences, subrogation litigation and litigation against the debtor are not the same, although they do have some legal relevance to each other; therefore, the lawsuit filed by Datang Fuel Company in this case does not constitute repeated prosecution.

Yaodong Mining Co., Ltd., Zhashui County, Yang X v. Beijing Datang Fuel Co., Ltd., Tianjin Kaize International Trade Co., Ltd. (Dispute over Sales Contract): Determination of Whether the Guarantor is Liable for the Guarantee Huihui Liu

Rule The parties entered into a guaranty agreement for two sales contracts, whereby the guarantor guaranteed the total price of the two sales contracts. On the premise that the price guaranteed by the guaranty agreement did not distinguish between the prices of the two sales contracts, the creditor claimed the guarantor’s liability for one of the sales contracts, and the effect of such claim was to extend to the guaranty liability under the other sales contract.

Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance): Zhashui County Yaodong Mining Co., Ltd. (hereinafter referred to as Yaodong Mining) Applicant in the Reopening (Defendant in the First Instance): Yang X Respondent in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Beijing Datang Fuel Co., Ltd. (hereinafter referred to as Datang Fuel) Collegial Bench: Wenchao Wei, Hua Zhang and Xiaofei Liu Edited by Deqiang Han; translated by Benlin Niu H. Liu (B) Environment and Resources Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_11

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Defendant in the First Instance: Tianjin Kaize International Trade Co., Ltd. (hereinafter referred to as Kaize Trading) 2. Procedural History First Instance: No. 0182 [2015] Trial, Civ. Division, the First Intermediate People’s Court of Tianjin Municipality (dated Aug. 11 of 2016) Second Instance: No. 314 [2017] Final, Civ. Division, the Higher People’s Court of Tianjin Municipality (dated Dec. 14 of 2017) Application for Reopening: No. 4556 [2018] Reopening, Civ. Division, the Supreme People’s Court (dated Nov. 20 of 2018) 3. Cause of Action Dispute over sales contract

Essential Facts On December 14, 2012, Datang Fuel entered into a ferronickel sales contract (No. 12TRDY947-XFNT021-029602) with Kaize Trading, under which Datang Fuel sold 10,000 tons ±10% of ferronickel to Kaize Trading at a unit price of CNY 1,140 / 1% Ni. Datang Fuel on December 19, 2012 issued 8 special VAT invoices to Kaize Trading with a total amount of CNY 79.8 million, and signed on June 12, 2014 a repayment agreement with Kaize Trading, the latter of which confirmed the overdue payment of CNY 79.8 million to Datang Fuel under the ferronickel sales contract, to be repaid in May and June 2014 in a total amount of CNY 20 million; from July 2014 to March 2015 in an amount of CNY 6 million per month; in April 2015 in an amount of CNY 5.8 million. On June 15, 2014, Datang Fuel signed a guaranty agreement with Kaize Trading, Yaodong Mining and Yang X, agreeing that Yaodong Mining and Yang X shall provide joint and several guarantee for the outstanding payment of CNY 122.57 million from Kaize Trading to Datang Fuel for a period of one year from the date of the said agreement. In another civil case (No. 0171 [2014] Trial, Civ. Division, the First Intermediate People’s Court of Tianjin Municipality), Datang Fuel sued Kaize Trading for repayment of CNY 42.77 million under the ferronickel sales contract (No. 13RFXNT001029601) and for joint and several guaranty liability by Yaodong Mining, Yang X and others for the payment of CNY 42.77 million and the interest thereon, which was finally decided by the court at case reopening after the first trial and second trial that Kaize Trading repay CNY 42.77 million, and Yaodong Mining, Yang X and others assume joint and several guaranty liability for the payment and the interest thereon. On October 22, 2015, Datang Fuel sued to request Kaize Trading to repay Datang Fuel CNY 79.8 million and interest thereon, and Yaodong Mining, Yang X and other guarantors to be jointly and severally liable for the outstanding amount and interest. The courts of first and second instances supported the claim of Datang Fuel for joint and several liability by Yaodong Mining, Yang X and other guarantors for the

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overdue payment and interest thereon. Dissatisfied with the decision of the second instance, Yaodong Mining and Yang X appealed to the Supreme People’s Court for case reopening.

Issue Whether Datang Fuel’s claim in a separate case for guaranty liability under one principal contract on the strength of the guaranty agreement for assuming guaranty liability for two principal contracts can be extended to the guaranty liability under the other principal contract.

Holding Upon reopening, the Supreme People’s Court holds that Datang Fuel has claimed its right for the payment of CNY 42.77 million under the ferronickel sales contract (No. 13RFXNT001-029601) owed by Kaize Trading against Yang X and Yaodong Mining through the case (No. 0171 [2014] Trial, Civ. Division, the First Intermediate People’s Court of Tianjin Municipality) by requesting Yaodong Mining and Yang X to assume guaranty liability as agreed in the guaranty agreement. While the guarantee amount as agreed in the guaranty agreement is CNY 122.57 million, including CNY 42.27 million under the case (No. 0171 [2014] Trial, Civ. Division, the First Intermediate People’s Court of Tianjin Municipality) and CNY 79.8 million currently in dispute, the guaranty agreement involved in the case is indivisible, i.e., the claim of Datang Fuel on the strength of the guaranty agreement in the case (No. 0171 [2014] Trial, Civ. Division, the First Intermediate People’s Court of Tianjin Municipality) for guaranty liability by the guarantors Yaodong Mining and Yang X, regardless of the amount claimed, can be regarded as Datang Fuel having claimed the guaranty liability from Yaodong Mining and Yang X for all the guaranteed claims under the guaranty agreement during the guaranty period. The principal debt guaranteed by the guaranty agreement signed by Yaodong Mining and Yang X is the repayment agreement signed by Datang Fuel and Kaize Trading, with the performance period of the principal debt being repayment of the last installment CNY 5.8 million in April 2015. Datang Fuel indicates that, as agreed in Article 3 of the Repayment Agreement, which provides that “(i)f Party B makes insufficient monthly repayment and still fails to make full repayment by the 5th day of the following month, it shall pay double the interest of the amount owed, and Party A may deem Party B’s debt repayment period expired in advance and has the right to request Party B to make a one-time full repayment at once”, the deadline for the performance of the principal debt expires on May 5, 2015, Article 3 of the Repayment Agreement is a default clause, granting Kaize Trading a grace period rather than stipulating the repayment date as agreed in the Agreement. Because the guaranty period, being one year from the signing of

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the guaranty agreement signed on June 15, 2014, i.e., June 14, 2015, expires later than the period for the performance of the principal contract, being the end of April 2015 when the last installment shall be paid as agreed in the principal contract, and because Datang Fuel had claimed its right under the Guaranty agreement against Yaodong Mining and Yang X in the case (No. 0171 [2014] Trial, Civ. Division, the First Intermediate People’s Court of Tianjin Municipality), lodging a lawsuit by Datang Fuel on November 22, 2015 does not exceed the period of guarantee by Yaodong Mining and Yang X. Therefore, it is not inappropriate for the court of second instance to find Yaodong Mining and Yang X jointly and severally liable for the guarantee, and, due to lack of factual and legal basis, the Supreme People’s Court rules to dismiss their application for case reopening.

Comment on Rule During the guaranty period, the creditor has the right to demand the guarantor of the joint and several guarantee to assume guaranty liability. There are two elements that must be met for a creditor to exercise its claim against a guarantor. First, the debtor fails to perform the debt, i.e., the debtor of the joint and several liability guarantee fails to perform the debt upon the expiration of the performance period, as stipulated in the principal contract, which is the decisive element for the creditor to exercise the right to claim against the guarantor. Second, the claim is exercised within the guaranty period, i.e., the creditor in the joint and several liability guarantee must request the guarantor to assume the guaranty liability within the guaranty period as agreed in the guaranty contract or, if no guaranty period is provided, within 6 months upon the expiration of the debt performance period. The law does not clearly provide that if a guaranty contract provides guarantees for more than one principal contract, whether the request for assuming guaranty liability with regard to one principal contract extends to the guaranty liability with regard to other contracts, and there are different understandings in practice. Some argue that the two principal contracts are independent and that the guarantee should be claimed independently. In the present case, Datang Fuel claimed right under the ferronickel sales contract (No. 13RFXNT001-029601), demanding repayment by Kaize Trading and assumption of guaranty liability by Yang X and Yaodong Mining. The scope of the guaranty liability, although not made explicit, must be based on the loan contract on which it is based, i.e., the principal claim under the loan contract, and cannot be extended to the ferronickel sales contract (No. 12TRDY947-XFNT021029602) in the present case, nor to the principal debt of CNY 79.8 million because guaranty liability is claimed for the debt of CNY 42.77 million. When Datang Fuel filed the lawsuit with the court of first instance on October 25, 2015, the period of guarantee provided by Yaodong Mining and Yang X for the debt of Kaize Trading, expiring on June 14, 2015, already expired. According to Article 26 of the Guaranty Law, during the guaranty period as agreed in the contract, if the creditor fails to

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request the guarantor to assume guaranty liability, the guarantor shall be exempted from the guaranty liability. Others believe that although the two principal contracts are signed separately, the guaranty contract is integrated and inclusive. Pursuant to Article 5 of the Guaranty Law, which provides that “(u)nless otherwise provided in a guaranty contract, a guaranty contract is subordinate to a principal contract, and when the principal contract is nullified, the guaranty contract becomes invalid”,1 the guaranty contract is an accessory contract subordinate to the principal contract, i.e., the loan contract in the present case. The feature that a guarantor guarantees to pay the debt of another entails that a guaranty contract, once lawfully formed, does not necessarily establish an actual guaranteed credit-debt relationship between the creditor and the guarantor, but a right of probable expectancy for the creditor. The actual occurrence of the guaranty liability depends on the one hand on whether the principal debtor discharges the debt pursuant to the contract, and on the other hand on whether the creditor lawfully claims its right against the guarantor within the guaranty period. Whether the creditor’s claim of guaranty liability for part of the same credit as agreed in the guaranty contract extends to the remaining credit is essentially a value judgment on whether to assume guaranty liability. Guarantee has played a great role in practice as an important means to promote the financing of funds and commodities, secure the realization of claims and develop the socialist market economy. The creditor, debtor and guarantor specify in a contract entering into on an equal basis that the guarantor voluntarily assumes the guaranty liability for the performance of the principal contract, and when the debtor of the principal contract does not fulfill the debt, assume the guaranty liability under the principle of honesty and good faith so as to uphold the contractual obligations and maintain transaction safety and order. A people’s court, when adjudicating on a guarantee dispute, should decide from such aspects as respecting the true intention of the parties, maintaining transaction safety, protecting the creditor and honoring the basic attributes of the act of guarantee. First, the guarantor’s voluntary provision of guarantees with the psychological expectation of bearing the risk of guaranty liability entails a closer relationship between the guarantor and the debtor or an interest relationship, so the true intention of the parties should be fully respected and the legitimate rights and interests of creditors lawfully protected. Second, from the perspective of protecting the creditor, now that a real lending or sales contract relationship exists between the creditor and the debtor, when whether the guaranty liability is established or not is in dispute and ambiguous, the people’s court should be in favor of protecting the creditor. Third, the subordinate nature of the guarantee demands that it cannot exist independently of the principal contract. Although the principal contracts are signed in two occasions, the guaranty contract is signed with regard to both contracts, manifesting a true intention of providing guarantees for both payments. Therefore, if the principal debtor fails to discharge the debt upon the expiration of the period for 1

Currently Article 388 of the Civil Code: “(a) guaranty contract is subordinate to a principal contract. When the principal contract is nullified, the guaranty contract becomes invalid, unless otherwise provided by law.” Infra.

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discharging the principal debt, the lapse of the guaranty period—the maximum period in which the creditor can claim its right against the guarantor—will produce the legal effect of eliminating the guaranty liability. In this case, with regard to the principal contract that involves two sales contracts, only one guaranty contract is signed by the guarantor, in which neither the content covered by the amount of guarantee nor the number of contracts targeted by the principal credit is specified. Therefore, from the parties’ true intention, the guarantee is for the total purchase price of CYN 122.57 million under the sales contracts, and the amount of guarantee is indivisible. The creditor’s claim against the guarantor for assumption of guaranty liability with regard to the payment under one sales contract extends to the payment under the other sales contract. Datang Fuel’s having claimed its right under the guaranty agreement against Yaodong Mining and Yang X previously in the case (No. 0171 [2014] Trial, Civ. Division, the First Intermediate People’s Court of Tianjin Municipality) and claiming on October 22, 2015 in another case for guaranty liability against Yaodong Mining and Yang X with regard to other amounts covered by the guaranty agreement does not exceed the period of guarantee by Yaodong Mining and Yang X.

Jiangxi Lanhai International Trade Co., Ltd. v. China Arts & Crafts Import & Export Co., Ltd., Shanghai Kangcan Materials Co., Ltd., et al. (Dispute over Private Lending): Determination of Actual Legal Relationship between the Parties under Complex Transaction Forms Qian Zhang

Rule When the parties conceal their true intentions through closed-loop trading or false representation under other forms of complex transaction, the people’s court shall, through comprehensive examination of the content of the contract involved in the entire transaction, the actual performance of the contract and other factors, as well as the false manifestation of intentions directly embodied under the appearance of the transaction, reveal the true intentions of the parties and the true purpose of the transaction reflected under the terms of the contract, and then determine the true legal relationship between the parties and the validity of their contractual relationship. If the court finds that the contract is invalidated due to the parties’ circumvention of law through conspired false manifestation of intentions and all the parties are at fault, they shall be held legally liable therefor.

Collegial Bench for the Second Instance: Xuguang Wang, Lunjun Zhou, Zhanfei Wang Edited by Deqiang Han; translated by Benlin Niu Q. Zhang (B) Personnel and Organization Division of the Political Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_12

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Case Information 1. Parties Appellant (Plaintiff in the First Instance, Defendant in the Counterclaim): Jiangxi Lanhai International Trade Co., Ltd. (hereinafter referred to as Lanhai Internatioanl) Appellant (Defendant in the First Instance, Plaintiff in the Counterclaim): China Arts & Crafts Import & Export Co., Ltd. (hereinafter referred to as China Arts & Crafts) Appellee (Defendant in the First Instance, Third Party in the Counterclaim): Shanghai Kangcan Materials Co., Ltd. (hereinafter referred to as Kangcan Materials) Appellee (Defendant in the First Instance): Ning X Appellee (Defendant in the First Instance): Chen X Third Party in the First Instance: Fujian Furniture Import & Export Corp. (hereinafter referred to as Fujian Furniture) 2. Procedural History First Instance: No. 18 [2015] Trial, Civ. Division, the Higher People’s Court of Jiangxi Province (dated Sep. 11 of 2017) Second Instance: No. 103 [2018] Final, Civ. Division, the Supreme People’s Court (dated Dec. 27 of 2018) 3. Cause of Action Dispute over private lending

Essential Facts On October 29, 2013, Lanhai International and Kangcan Materials signed a purchase agreement, agreeing that Kangcan Materials will purchase imported compound rubber from Lanhai International throughout the year and the supplier is China Arts & Crafts; that for each transaction Lanhai International will firstly sign a purchase contract with China Arts & Crafts to make purchase therefrom, and then sign a sales contract with Kangcan Materials to effect the sale thereto; that within 3 working days after the signing of the sales contract Kangcan Materials will prepay 20% of the total contract price in cash to Lanhai International as a performance bond, upon receipt of which Lanhai International will issue a 3-month bank acceptance draft to China Arts & Crafts, and China Arts & Crafts will deliver all the goods to Lanhai International within 87 days from the date of receipt of the bank acceptance draft; that after receiving all the payments Lanhai International will issue a notice of delivery to Kangcan Materials, who will then take delivery of the goods by itself; that Kangcan Materials shall be responsible for the creditworthiness of the supplier and assume joint and several guaranty liability for the supplier’s on-time delivery of the goods with agreed quality and quantity; that Kangcan Materials shall compensate Lanhai

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International for all the losses caused thereby. Ning X, as a legal representative of Kangcan Materials, and Chen X signed a guaranty contract with Lanhai International to provide guarantees for the purchase agreement. From October 2013 to July 2014, there were 10 transactions going among Kangcan Materials, Lanhai International, China Arts & Crafts and Fujian Furniture. In each transaction, Lanhai International signed a purchase contract with China Arts & Crafts to purchase goods therefrom and a sales contract with Kangcan Materials to supply goods thereto; China Arts & Crafts signed a purchase contract with Fujian Furniture to purchase goods therefrom; and Fujian Furniture signed a purchase contract with Kangcan Materials to purchase goods therefrom. The subject matter of the four contracts involved in each transaction was the same in terms of the specifications, model and quantity, with its price increasing gradually from Kangcan Materials to Fujian Furniture, China Arts & Crafts, Lanhai International and then back to Kangcan Materials, and the mode of transfer of the goods being issuance of a title transfer document by China Arts & Crafts to the designated place of delivery, i.e., the warehouse of Qingdao Xinzhida International Freight Transportation Broker Co., Ltd. (hereinafter referred to as Xinzhida International), to transfer the title to the rubber stored to Lanhai International, which is confirmed by Xinzhida International with a letter of confirmation issued to China Arts & Crafts; and then issuance of a notice of release by Lanhai International to Xinzhida International to release the rubber to Kangcan Materials, which is confirmed by Kangcan Materials with a receipt issued to Lanhai International. With the first seven transactions mentioned above being completed and the payment for the latter three transactions being made by Lanhai International pursuant to the contract, Kangcan Materials paid under the ninth transaction on May 28, 2014 a performance bond of CNY 14,268,363.28 to Lanhai International, which then, on the same day, paid CNY 69,997,662 to China Arts & Crafts, which then, on the same day, paid CNY 69,798,380.4 to Fujian Furniture, which thereafter, on May 29, paid CNY 69,524,368.2 to Kangcan Materials, which thereafter, on October 15, 2014, issued a repayment plan to Lanhai International, contemplating repayment of CNY 250 million in installments by June 30, 2015. As the amount involved three purchase contracts between Lanhai International and China Arts & Crafts, the three purchase contracts were deemed to have been fulfilled with the repayment thereof. On August 13, 2015, Kangcan Materials issued a fact sheet, admitting borrowing from Lanhai International through closed-loop trading of “buy high, sell low”, and Kangcan Materials, as the borrower, shall assume the responsibility of repaying the three unpaid sums. From April 2014 to June of the same year, Lanhai International also had similar transactions with other companies, one of which was Shanghai Kangfeng Industrial Co., Ltd. (hereinafter referred to as Kangfeng Industrial), with Chen X serving as its legal representative. Lanhai International filed a lawsuit with the court of first instance, inter alia, requesting termination of the purchase contract with China Arts & Crafts under the 9th transaction and ordering China Arts & Crafts to refund the purchase price and pay liquidated damages and Kangcan Materials, Ning X and Chen X to assume joint

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and several liability. China Arts & Crafts counterclaimed to, inter alia, confirm the invalidity of the purchase contract and order Kangcan Materials to repay the amount under the purchase contract. The court of first instance rendered a civil judgment on September 11, 2017 (No. 18 [2015] Trial, Civ. Division, the Higher People’s Court of Jiangxi Province), confirming the invalidity of the purchase contract in question; ordering China Arts & Crafts to return the purchase price of CNY 55,729,298.72 and the interest thereof to Lanhai International; ordering Kangcan Materials, Ning X and Chen X to assume respectively 1/3 of the part of the above repayment obligation of China Arts & Crafts that could not be satisfied; dismissing the other claims of Lanhai International; and dismissing the other counterclaims of China Arts & Crafts. Dissatisfied with the aforesaid judgment, Lanhai International and China Arts & Crafts separately appealed to the Supreme People’s Court with basically the same claims as those of the first instance.

Issues 1. How to determine the nature of the legal relationships between the parties; 2. How to determine the validity of the contractual relationships between the parties; 3. How to determine the legal liability of the parties.

Holding Upon review, the Supreme People’s Court holds that the parties to the case formally establish a closed-loop trading chain, and a comprehensive examination of the parties to the trading activity and the trading purpose shows that there are three legal relations involved in the circular transaction. The first is a private lending contractual relationship established between Kangcan Materials and Lanhai International. During the validity period of the purchase agreement signed between Kangcan Materials and Lanhai International, the two parties, together with China Arts & Crafts and Fujian Furniture, successively signed ten contracts with basically the same content to engage in closed-loop trading with imported compound rubber of the same specifications but different quantities as the subject matter. In the 10 transactions, Kangcan Materials served as both the seller and the buyer, and each transaction involved “sell low, buy high” in a very short period of time. The real purpose of the transaction between Kangcan Materials and Lanhai International was not to buy and sell rubber, but to obtain borrowing from

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Lanhai International in the form of the “purchase price” by paying the price difference generated by “sell low, buy high” as the interest and expenses owed thereto and paying the “remaining purchase price” as the principal and interest of the borrowing. The second is business handling contractual relationships established between China Arts & Crafts and Fujian Furniture as one party respectively and Lanhai International and Kangcan Materials as the other respectively to assist and disguise the abovementioned private lending behavior. In this case, both China Arts & Crafts and Fujian Furniture confirmed that the closed-loop trading in question was actually a money lending activity, and their participation in the transaction in question was to provide assistance for the completion of the lending activity in question. Thus, business handling contractual relationships were formed between China Arts & Crafts and Fujian Furniture and between China Arts & Crafts and Fujian Furniture as one party respectively and Lanhai International and Kangcan Materials as the other respectively for the flow of the lending. The third is a guaranty contractual relationship established between Ning X and Chen X as one party and Lanhai International as the other. Kangcan Materials with Ning X serving as its legal representative and Kangfeng Industrial with Chen X serving as its legal representative engaged through different entities in closed-loop trading activities with Lanhai International, so the guarantee provided by Ning X and Chen X jointly to Lanhai International with actual knowledge of the lending by Kangcan Materials to Lanhai International is actually a guarantee provided to Lanhai International for the repayment of the debt of Kangcan Materials. As there was no true manifestation of intention among the parties in this case to enter into a sales contract, entering into a purchase contract and sales contract among the parties as a disguised act should be considered invalid civil conduct. First, the private lending contract between Lanhai International and Kangcan Materials is invalid. Lanhai International signed a framework purchase agreement with Kangcan Materials in advance to engage in lending transactions in the form of closed-loop trading for a total of ten times, and engaged in closed-loop trading with Kangfeng Industrial in a similar form. Lending a huge amount of money by Lanhai International to others for many times in less than a year beyond the scope of temporary lending by using the enterprise’s idle funds, which is characterized by business operation and regularity, should be held to be invalid. Second, the contractual relationships between China Arts & Crafts and Fujian Furniture and between China Arts & Crafts and Fujian Furniture as one party respectively and Lanhai International and Kangcan Materials as the other respectively are invalid. With knowledge of the fact that Kangcan Materials and Lanhai International were engaging in private lending transactions, participation by China Arts & Crafts and Fujian Furniture in the closedloop trading for several times to assist in accommodation of funds between Kangcan Materials and Lanhai International in the form of buying and selling rubber, which is detrimental to social public interest, should be considered invalid civil conduct. Third, the guaranty contractual relationship between Ning X and Chen X as one party and Lanhai International as the other is invalid. The true intention of Ning X and Chen X being to assume the guaranty liability for the performance of the debt by Kangcan Materials, the invalidation of the principal contractual relationship in this

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case, i.e., the private lending contractual relationship, also renders invalid the guaranty contractual relationship between Ning X and Chen X as one party and Lanhai International as the other. After the private lending contractual relationship was confirmed to be invalid, Kangcan Materials as the borrower shall return the money received to Lanhai International and pay to Lanhai International the civil fruits derived from its actual possession of the money. Because both Ning X and Chen X, as guarantors, are at fault, they shall be liable to Lanhai International for 1/3 of the part that could not be satisfied by Kangcan Materials as the principal debtor. China Arts & Crafts and others participating in the purchase contract as false manifestation of intention to help and facilitate private lending transaction in the case shall also be legally liable for compensation to Lanhai International. Therefore, it is ruled that the purchase contract between Lanhai International and China Arts & Crafts is invalid; that Kangcan Materials shall return CNY 55,729,298.72 to Lanhai International and pay the interest thereof; that Ning X and Chen X shall assume the liability for supplementary compensation with 33% of the part of the above payment obligation of Kangcan Materials that could not be satisfied; that China Arts & Crafts shall assume the liability for supplementary compensation with 11% of the part of the above payment obligation of Kangcan Materials, Ning X and Chen X that could not be satisfied; that other claims of Lanhai International and China Arts & Crafts are dismissed.

Comment on Rule The conclusion of this case actually denied the nature of the legal relationships among the parties as determined by the written contracts under the structure of closed-loop sales contract. The core issue in this case is how to determine the nature of the true legal relationship between the parties through the appearance of the transaction structure arranged by multiple written contracts and how to determine the legal liability of the parties beyond the agreement of the written contracts. The following is a further explanation of the reasons for the decision in terms of the determination of the nature of the legal relationship between the parties, the determination of the validity of the contractual relationship, and the determination of the legal liability of the parties in this case. 1. Analysis of the nature of the real legal relationship between the parties under the form of complex transactions (1) Analysis of the apparent characteristics of closed-loop trading under the form of complex transactions (a) With necessary elements and typical characteristics of a sales contract In this case, Kangcan Materials and Lanhai International signed a framework purchase agreement, agreeing that Kangcan Materials shall purchase imported

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compound rubber from Lanhai International throughout the year. The purchase agreement specifies, inter alia, the type of subject matter, quality standard, mode of performance, liability for breach of contract and guarantee, under which Kangcan Materials and Lanhai International conducted 10 transactions, and pursuant to which Lanhai International for each transaction will firstly sign a purchase contract with China Arts & Crafts and then sign a sales contract with Kangcan Materials. Both the purchase contract and the sales contract made specific agreements on the specifications and models of the subject matter, the quantity and mode of performance. In addition, the purchase contract signed by China Arts & Crafts and Fujian Furniture also species the specifications, models and quantity of the subject matter as well as the mode of performance. The parties had a complex form of transaction through multiple purchase agreements, purchase contracts and sales contracts, each of which had the necessary elements of a contract for the sale of goods and had the typical characteristics of a sale contract. (b) The practice of closed-loop trading is not in line with the essence of conventional sales contracts It is because of the perfect pursuit and deliberate arrangement by the parties for the apparent characteristics of a complex transaction form that in each transaction under the purchase agreement in this case Kangcan Materials, Fujian Furniture, China Arts & Crafts and Lanhai International together formed a complete end-toend closed-loop trading cycle through the transaction link between each other in sequence. First, it is against commercial rationality for Kangcan Materials to “sell low, buy high”. In the 10 transactions, Kangcan Materials as the initial seller sold the subject matter in the case at a lower price and, then in turn through Fujian Furniture, China Arts & Crafts and Lanhai International participating in the transaction, finally bought the same subject matter back from Lanhai International at a higher price. Such a “loss” to Kangcan Materials, being not derived from the abnormal fluctuations in market prices of the subject matter but based on the framework agreement signed with Lanhai International and prior arrangement of its overall contract structure thereunder, does not conform to the business purpose of any profit-making legal person to earn the price difference through buying and selling and is contrary to the basic common sense of businessmen seeking profits. Second, the special agreement of the parties on the supplier is against the business logic. The import and sale of compound rubber as the subject matter in this case does not fall under exclusive or restricted business, and there is no obstacle for Kangcan materials to engage in direct transactions with China Arts & Crafts. The arrangement by Kangcan Materials and Lanhai International under the purchase agreement that Lanhai International will first purchase rubber from China Arts & Crafts and then Kangcan Materials will purchase rubber from Lanhai International and that Kangcan Materials will assume joint and several guaranty liability with China Arts & Crafts to Lanhai International for making delivery with agreed quality and quantity will as a result exempt Lanhai International from the guaranty liability for the defect of the subject matter that should have been assumed thereby as the seller, and merely increase the transaction costs for Kangcan Materials. Finally, the actual flow of the subject matter in this

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case is contrary to the basic features of a sales contract. As agreed in the purchase contract and sales contract, all through the transaction, the subject matter shall be picked up by the demand side from the warehouse. However, from the actual flow of the subject matter, relevant parties neither took delivery of the goods at the warehouse of Xinzhida International nor obtained such documents of title as the bill of lading or warehouse receipt, only transferring such written documents as title transfer receipt, title confirmation receipt or other receipts, which is contrary to the contract. No actual transfer of the title to the subject matter in this case among all the parties all the way through is obviously inconsistent with the basic requirement in the sales contract that the seller shall deliver the subject matter to the buyer and transfer the title thereto. (c) There is no real sales contractual relationship in closed-loop trading Article 130 of the Contract Law, which provides that “(a) sales contract is a contract whereby the seller transfers the ownership of a subject matter to the buyer, and the buyer pays the price for it”,1 specifies the necessary elements of a sales contract, i.e., transfer of ownership of a subject matter; between the parties; in consideration of corresponding price, and the most basic feature in a sales contractual relationship is transfer of ownership of a subject matter. Pursuant to Article 387 of the Contract Law, where the subject matter is kept in a warehouse, the warehouse receipt is the voucher for retrieving the warehoused goods, and the depositor or warehouse receipt holder may transfer the right to retrieve the warehoused goods by endorsing the warehouse receipt and having it signed or sealed by the warehouseman.2 The principle of equal value exchange as stated in Article 4 of the General Principles of the Civil Law, although not reflected in the General Provisions of the Civil Law, is nevertheless a basic principle in most civil and commercial activities. Typically, the price of the subject matter in a sales contract should be determined pursuant to the principle of equal value exchange. In addition, fluctuations of the price of commodities in the market economy with the change of time and space, supply and demand, and market environment also opens up the possibility for profit-making legal persons to earn the price difference in civil and commercial activities, and profit seeking is also the main purpose for businessmen to engage in civil and commercial activities. In this case, Kangcan Materials’ abnormal behavior of actively engaging in “sell low, buy high” in a relatively short period of time, together with the fact that the ownership of the subject matter involved in the closed-loop trading was not actually transferred, are sufficient to show that the parties did not have the true intention to buy and sell rubber, and no actual sales contractual relationship is established among the parties. (2) The real legal relationship among the parties under complex transaction forms

1

Currently Article 595 of the Civil Code. Currently Article 910 of the Civil Code: “(a) warehouse receipt is the voucher for retrieving the warehoused goods, and the depositor or warehouse receipt holder may transfer the right to retrieve the warehoused goods by endorsing the warehouse receipt and having it signed or sealed by the warehouseman.”

2

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Through comprehensive examination of the content of the contracts involved in the entire transaction and the actual performance of the contracts, the people’s court goes beyond the false manifestation of intentions as embodied under the appearance of the transaction to determine the real legal relationship among the parties under complex transaction forms (a) Because in this case Kangcan Materials borrowed money from Lanhai International through closed-loop trading, a private lending contractual relationship was established between Kangcan Materials and Lanhai International Pursuant to Article 196 of the Contract Law, which states that “(a) loan contract is a contract whereby the borrower borrows a sum of money from the lender, and repays the borrowed money with interest thereof when it becomes due”,3 and Article 1 of the Rules of the Supreme People’s Court on Certain Issues about the Application of Laws in Hearing Private Lending Cases, which provides that “(f)or the purpose of these Provisions, “private lending” means financing among natural persons, legal persons and other organizations”, the closed-loop trading in this case is characterized by “flow of documents and money without transfer of goods”. The “payment” flows from Lanhai International in turn through China Arts & Crafts and Fujian Furniture eventually to Kangcan Materials, with China Arts & Crafts and Fujian Furniture as upstream suppliers of Lanhai International advancing no money. Taking the 9th transaction for example, Kangcan Materials paid as “performance bond” CNY 14,268,363.28 to Lanhai International on May 28, 2014 and received on the following day CNY 69.524,368.2 from Lanhai International as indirect “payment for the goods”, and, pursuant to the agreement, Kangcan Materials shall pay CNY 57,073,453.11 as “payment for the goods” to Lanhai International before August 13, 2014. According to the contract, a certain period of time delay exists between Kangcan Materials’ indirect receipt of the payment from, and its later payment to, Lanhai International, which means that it actually has the right to use the money for a certain period of time. On the other hand, Lanhai International, while participating in the transaction in question to obtain “price difference” earnings, also has to tolerate Kangcai Materials’ using the payment in question at its own discretion before the expiration of the period, as agreed in the contract. Lanhai International should be found to have full understanding of the true purpose of Kangcan Materials’ transactions due to its repeated dealing with Kangcan Materials and other enterprises to carry out closed-loop trading with knowledge of the fact that the subject matter in the case is not actually transferred. Because there is a true manifestation of intention between Lanhai International and Kangcan Materials for lending in the form of closed-loop trading, a private lending contractual relationship exists between Lanhai International and Kangcan Materials. (b) China Arts & Crafts and Fujian Furniture, when assisting and disguising private lending transactions, have respectively established business handling contractual relationships with Lanhai International and Kangcan Materials 3

Currently Article 667 of the Civil Code.

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China Arts & Crafts, Fujian Furniture, Lanhai International and Kangcan Materials together formed a complete closed-loop transaction chain, earning “price difference” through “buy low, sell high”. However, since the purpose of the whole closed-loop trading lies in financing loans, the transactions involving China Arts & Crafts and Fujian Furniture obviously do not fall within rubber trading. From the design of the contract structure and the actual performance of the transaction, China Arts & Crafts and Fujian Furniture, as intermediate links with different legal statuses than Lanhai International and Kangcan Materials, neither need to advance money in the whole transaction process nor care about the real existence or flow of the subject matter in the actual performance. From the flow and use of the money, China Arts & Crafts and Fujian Furniture, after deducting “price difference”, made payment to the subsequent trading counterparts without possessing or using the money. From the perspective of private lending, pursuant to the contractual arrangement, China Arts & Crafts and Fujian Furniture are under no contractual obligation to pay the principal and the interest thereof, serving only as a channel for financing loans, rather than a party to the private lending relationship, so there is no private lending relationship between China Arts & Crafts and Fujian Furniture on the one hand, and Lanhai International and Kangcan Materials on the other, nor among themselves. China Arts & Crafts and Fujian Furniture only provided assistance for the completion of the private lending transaction in this case, especially the flow of funds lent by Lanhai International, and received corresponding fees for this purpose. Therefore, between China Arts & Crafts and Fujian Furniture, and between China Arts & Crafts and Fujian Furniture as one party respectively and Lanhai International and Kangcan Materials as the other respectively, exists conspired false manifestation of intention with regard to concealing the true lending relationship under the form of buying and selling, and a contractual relationship to handle business with regard to the form of transfer of the money lent. (c) Because Ning X and Chen X in this case have manifested their intention to provide guarantee for the loan from Kangcan Materials to Lanhai International, a guaranty contractual relationship is established between them and Lanhai International Signing by Ning X and Chen X of a guaranty contract with Lanhai International to jointly provide guarantee for Kangcan Materials’ fulfillment of its contractual obligations to Lanhai International, with knowledge of the fact that Kangcan Materials obtained a financing loan from Lanhai International in the form of closed-loop trading, is ostensibly to provide joint and several guarantee to Lanhai International for Kangcan Materials’ fulfillment of its obligations under the relevant purchase contracts, but is in fact to provide guarantee to Lanhai International for Kangcan Materials’ fulfillment of its borrowing obligations. Therefore, a guaranty contractual relationship was established between Ning X and Chen X as one party and Lanhai International as the other, with Ning X and Chen X assuming joint and several guaranty liability.

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2. Analysis of the validity of contractual relationships among the parties under complex transaction forms (1) A civil juristic act is void if performed by false manifestation of intention Pursuant to Article 55 of the General Principles of the Civil Law, which provides that “(a) civil juristic act must meet the following requirements: (1) the actor has relevant capacity for civil conduct; (2) the actor manifests true intention; and (3) the act does not violate the law or the public interest”,4 Article 143 of the General Provisions of the Civil Law, which provides that “(a) civil juristic act is valid if: (1) the actor has relevant capacity for civil conduct; (2) the actor manifests true intention; and (3) the act does not violate any mandatory provisions of a law or an administrative regulation, nor it undermines the public order or good morals”,5 and Article 146 of the General Provisions of the Civil Law, which provides that “(a) civil juristic act based on false manifestation of intention by the actor and the counterpart is invalid”. The validity of a civil juristic act concealed by false manifestation of intention shall be dealt with in accordance with the relevant provisions of law”,6 a civil act performed by the parties through conspired manifestation of false intention is invalid for lack of manifestation of true intention, a requirement for an effective civil juristic act. The parties in this case have no true intention to conclude a sales contract, and their entering into the purchase agreement, purchase contract and sales contract, as disguise for private lending transactions, should be found as invalid civil acts. When the parties conceal their true intention in the form of complex transactions, the people’s court shall, in light of the nature of the concealed civil juristic act, lawfully determine the validity of the contractual relationship between the parties. (2) Determination of the validity of the civil juristic act concealed by false manifestation of intention (a) The private lending contract between Lanhai International and Kangcan Materials is invalid. Article 11 of the Rules of the Supreme People’s Court on Certain Issues about the Application of Laws in Hearing Private Lending Cases, which states that “(w)here a party claims the validity of a private lending contract signed as required for production or business operation between legal persons and other organizations or among themselves, except under the circumstances as set forth in Article 52 of the Contract Law7 or Article 14 of these Rules, the people’s court shall support such a claim”, distinguishes the purpose of lending between enterprises, and conditionally determines the lending contract entered into between enterprises as valid. Under circumstances where a lending enterprise engages in operational 4

Currently Article 143 of the Civil Code: “(a) civil juristic act is valid if: (1) the actor has relevant capacity for civil conduct; (2) the intention expressed is true; and (3) the act does not violate any mandatory provisions of a law or an administrative regulation, nor it undermines the public order or good morals.” 5 Currently Article 143 of the Civil Code. 6 Currently Article 146 of the Civil Code, infra. 7 There is no corresponding article in the Civil Code.

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lending business beyond its scope of business for production and business activities, which a borrowing enterprise knows or should have known, the private lending contract concluded between enterprises within the lender’s operational lending business in violation of the provisions of financial policy, and thus disrupting the financial order, undermining the financial supervision, and further endangering the national financial security, shall be determined as invalid pursuant to Article 52(4) of the Contract Law. In this case, lending a huge amount of money by Lanhai International to others for many times in less than a year, i.e., engaging in lending transactions in the form of closed-loop trading for a total of ten times in the total amount of more than CNY 480 million pursuant to a framework purchase agreement signed in advance by Lanhai International with Kangcan Materials, and in closed-loop trading with Kangfeng Industrial through intermediaries with contract price being more than CNY 50 million, is beyond the scope of temporary lending by using the enterprise’s idle funds, which is characterized by business operation and regularity, and for which Kangcan Materials has full understanding as the borrower. Therefore, the private lending contract between the two parties should be lawfully determined as invalid. (b) The business handling contractual relationships established between China Arts & Crafts and Fujian Furniture as one party respectively and Lanhai International and Kangcan Materials as the other respectively are invalid. Pursuant to the general characteristics of closed-loop trading, an intermediary is not dispensable as a channel for financing and lending, and the participation by such intermediary enterprises directly contributes to the formation of a complete chain for closed-loop trading. On the other hand, the parties’ choice of such intermediary enterprises is not arbitrary in that a lending party always hopes to enter into a sales contract with a powerful enterprise and, in case of failure to recover funds, transfer the risk by suing the enterprise through contractual arrangement. Certain trust is thus developed, with such intermediary enterprises in fact playing a role in adding credit to financing and lending, as evidenced by direct litigation by Lanhai International against China Arts & Crafts in this case for the return of the “payment for the goods”. Such intermediary enterprises’ participation in fabricating sales contractual relationships where there are no real transactions, with the aim of assisting the parties to finance and profit therefrom, disrupts the normal order of market economic activities, and damages social public interest. Therefore, the relevant business handling activities under the contract should be determined as invalid civil acts. (c) The guaranty contractual relationship between Ning X, Chen X and Lanhai International is invalid. Pursuant to Article 5(1) of the Guaranty Law, which provides that “(a) guaranty contract is an accessory contract to the principal contract. When the principal contract is invalidated, the guaranty contract also becomes invalid, unless otherwise agreed in the guaranty contract”, and the guaranty contractual relationship in this case between Ning X, Chen X and Lanhai International is invalid due to the invalidity of the principal contract.

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3. Assumption of legal liability by the parties under complex transaction forms If the contract is found to be invalidated due to the parties’ circumvention of law through conspired false manifestation of intention and all the parties are at fault, they shall be held legally liable therefor. Article 58 of the Contract Law states that “(t)he property acquired as a result of a contract shall be returned after the contract is confirmed to be null and void or has been revoked; where the property cannot be returned or the return is unnecessary, it shall be reimbursed at its estimated price. The party at fault shall compensate the other party for losses incurred as a result therefrom. If both parties are at fault, each party shall respectively be liable.”8 (1) Civil liability of Kangcan Materials. Because the civil lending contractual relationship in this case is invalidated, Kangcan Materials as the borrower shall return the money received to Lanhai International after deduction of the performance bond paid in advance to Lanhai International and pay to Lanhai International the civil fruits derived from its actual possession of the money. (2) Civil liability of Ning X and Chen X. Pursuant to Article 8 of the Judicial Interpretation of the Supreme People’s Court on Some Issues Regarding the Application of the Guaranty Law, which provides that “(w)here a guaranty contract is invalidated due to the invalidity of the principal contract, the guarantor shall, if not at fault, assume no civil liability; or, if at fault, assume the part of the civil liability that is no more than one third of the obligation that cannot be fulfilled by the debtor”, Ning X and Chen X shall be liable for compensating 33% of the part of the debt that Kangcan Materials fails to discharge because both Ning X and Chen X are at fault for knowing the fact of financing loan between Kangcan Materials and Lanhai International. (3) Civil liability of China Arts & Crafts and Fujian Furniture. The business handling contract concealed by the purchase contract entered into with the participation of China Arts & Crafts and Fujian Furniture as false manifestation of intention to assist and facilitate the private lending transaction in this case is invalid for damaging the social public interest, so China Arts & Crafts and Fujian Furniture shall be secondarily liable for making compensation to Lanhai International for the losses. China Arts & Crafts, Fujian Furniture and Lanhai International itself are at fault for the losses incurred and shall assume in reasonable proportion the part of the debt that cannot be discharged by Kangcan Materials as the principal debtor and Ning X and Chen X as the guarantors, i.e., the losses suffered by Lanhai International for not recovering the lending. In order to regulate the channel financing business of nonfinancial enterprises and prevent those enterprises without financial qualifications from engaging in financial business in disguised form, the respective fault liability among 8

Currently Article 157 of the Civil Code: “(t)he property acquired as a result of a civil juristic act shall be returned after the act is confirmed to be null and void, revoked or determined to have no effect; where the property cannot be returned or the return is unnecessary, it shall be reimbursed at its estimated price. The party at fault shall compensate the other party for losses incurred as a result therefrom. If both parties are fault, each party shall respectively be liable. If the law provides otherwise, such provision shall prevail.” Infra.

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Lanhai International, China Arts & Crafts and Fujian Furniture shall be determined by weighing their proportion of benefits under the contract. 4. Review focus of the parties’ true intention under complex transaction forms How to identify the nature of the real legal relationship between the parties under complex transaction structures has been a real problem afflicting the people’s courts in the trial of civil and commercial cases. This case is a typical case of private lending transaction through closed-loop trading, with the whole contract structure composed of a framework purchase agreement and multiple purchase contracts and sales contracts. Thus, the private lending legal relationship between Lanhai International and Kangcan Materials was established by the specific agreement of each contract and its actual “performance”, and those contracts together establish the private lending contractual relationship between Lanhai International and Kangcan Materials. This case is also a relatively rare case in which all the links within the whole closed-loop trading chain are clearly identified. The purchase contract, which is signed between Lanhai International and China Arts & Crafts and based on which this lawsuit is filed, is apparently characterized by a sales contract at least in form from the written contract itself and the “performance” thereof alone. At the same time, a sales contract relationship is apparent in form between China Arts & Crafts and Fujian Furniture and between Fujian Furniture and Kangcan Materials, if traced backward in order as to the sources of the subject matter of the purchase contract; and between Lanhai International and Kangcan Materials, if traced forward as to the whereabouts of the subject matter of the purchase contract. However, if examined as a whole out of each transaction link, it becomes apparent that a complete end-to-end closed-loop trading cycle is formed among Lanhai International, China Arts & Crafts, Fujian Furniture and Kangcan Materials, where each purchase contract needs to cooperate with the sales contract between Lanhai International and Kangcan Materials for its “performance”, and all transaction links need to be interlocked to realize the true purpose of the parties under the overall contract structure. It should be said that the deepening development of the market economy and the enterprises’ actual needs to avoid risks and even circumvent the law or escape from regulation compel the parties to create more and more complex forms of transactions. There are often multiple and intertwined civil contracts rather than a single civil contract among the parties, such as hierarchical relationship between a master framework agreement and each single business contract thereunder; parallel relationship among multiple relatively independent contracts that can together constitute a large contractual framework; and intertwined relationship among multiple contracts relatively independent in form that need to cooperate with each other to achieve the overall intention of the parties. The true intentions of the parties are often concealed through false representation in the complex transactions among them. In this case, in addition to the specific content of each contract among the parties, we should also holistically examine the overall framework composed of each contract, as well as

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the relationship between each contract in the overall contract structure and the role of each transaction thereunder, and, in light of transactional activities and the actual performance by the parties, make a comprehensive judgment as to the true purpose of the parties, and accordingly determine the true legal relationship among the parties and their respective legal liabilities.

Shanghai Fengrui Investment Consulting Co., Ltd. v. Shanghai Automotive Industry Sales Co., Ltd., Yangzhou Electromechanical Equipment Co., Ltd. (Dispute over Loan Contract): Determination of the Elements of Joint and Several Liability to be Assumed to the Company’s Creditors by the Shareholders of a Limited Liability Company as Liquidation Obligors Xuemei Zhang

Rule All the statutory elements must be present for the shareholders of a limited liability company to assume joint and several liability as liquidation obligors to the company’s creditors. The shareholders shall not thus be held to assume joint and several liability to the company’s creditors if there exists no legal causation between the shareholders’ failure to perform their obligations in liquidation and the losses suffered by the company’s creditors because the company has no asset or capacity for discharging its obligations prior to the occurrence of the cause for liquidation.

Collegial Bench: Xuemei Zhang, Zhigang Li and Haiquan Lin Edited by Ming Li; translated by Benlin Niu X. Zhang (B) The Second Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_13

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Shanghai Fengrui Investment Consulting Co., Ltd. (hereinafter referred to as Fengrui Investment Consulting) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Shanghai Automotive Industry Sales Co., Ltd. (hereinafter referred to as Automotive Industry) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Yangzhou Electromechanical Equipment Co., Ltd. (hereinafter referred to as Electromechanical Equipment) 2. Procedural History First Instance: No. 00019 [2014] Trial, Civ. Division, the Intermediate People’s Court of Yangzhou City, Jiangsu Province (dated Oct. 20 of 2015) Second Instance: No. 00012 [2015] Final, Civ. Division, the Higher People’s Court of Jiangsu Province (dated Jan. 20 of 2016) Reopening: No. 37 [2016] Reopening, Civ. Division, the Supreme People’s Court (dated Jun. 21 of 2016) 3. Cause of Action Dispute over loan contract

Essential Facts On February 23 and March 24 of 1998, the Bank of Communications Co., Ltd. Yangzhou Branch (hereinafter referred to as Bank of Communications Yangzhou Branch) loaned a total of CNY 5 million to Shanghai Automotive Industry (Yangzhou) Sales Co., Ltd. [hereinafter referred to as Automotive Industry (Yangzhou)], in which CNY 2 million matured on June 19, 1998, and CNY 3 million matured on June 27, 1998. Upon maturity of the loan, Automotive Industry (Yangzhou) repaid the principal only in the amount of CNY 1 million on September 16, 1998. The Bank of Communications Yangzhou Branch made several calls on the debtor and guarantor for the abovementioned debt on October 13 of 1999, September 20, September 29 and December 20 of 2000, March 20 of 2002, and February 27 of 2004. The Bank of Communications Yangzhou Branch on June 7, 2004 assigned its claim against Automotive Industry (Yangzhou) (including the principal in the amount of CNY 4 million and interest thereof in the amount of CNY 2,073,754.22) to China Cinda Asset Management Co., Ltd. Nanjing Office (hereinafter referred to as Cinda Asset Nanjing Office) and on September 29, 2004 mailed a notice of assignment

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and claim collection to Automotive Industry (Yangzhou), including assignment of claim and a request for the debtor to discharge its obligations toward the assignee of the claim, with the act being notarized by a notary public. On October 20, 2004, the Bank of Communications Yangzhou Branch and Cinda Asset Nanjing Office published an announcement in Xinhua Daily, announcing the assignment of the claim and the request for the debtor to discharge its obligations toward the assignee, Cinda Asset Nanjing Office. On June 6, 2006, Cinda Asset Nanjing Office published an announcement in Jiangsu Legal Daily, including a request for discharging the relevant claims involved in this case. Cinda Asset Nanjing Office assigned through auction on November 28, 2006 a package of 52 claim assets in Yangzhou including the claims involved in this case to Blue Cove Pte. Ltd. and published on March 8, 2007, a joint announcement together with Blue Cove Pte. Ltd. on Xinhua Daily, including a notice of assignment of the claim involved in this case to Blue Cove Pte. Ltd. and a request for the debtor to discharge the debt to Blue Cove Pte. Ltd. Thereafter, Blue Cove Pte. Ltd. on February 19, 2009 published an announcement for claim collection on Jiangsu Economic News, including the claim involved in this case; on March 4, 2009 entrusted Jiangsu Tianze Asset Management Co., Ltd. (hereinafter referred to as Tianze Asset Management) to mail a notice of claim collection to Automotive Industry (Yangzhou) in respect of the claim involved in this case, with the act of mailing the notice being notarized; and on January 7, 2011 entrusted Tianze Asset Management for the second time to mail a notice of claim collection to Automotive Industry (Yangzhou) in respect of the claim involved in this case, with the act of mailing the notice being notarized. On November 8, 2011, Blue Cove Pte. Ltd. and Fengrui Investment Consulting entered into an assignment of claim agreement, assigning the claim involved in this case to Fengrui Investment Consulting. On November 1, 2012, Fengrui Investment Consulting sent a notice of claim assignment to Automotive Industry (Yangzhou) by express mail, requesting the debtor to discharge the debt to Fengrui Investment Consulting. On September 17, 2013, Fengrui Investment Consulting applied to the court of first instance for compulsory liquidation of Automotive Industry (Yangzhou) to discharge the debt involved in this case. When examining case filing, the court of first instance examined whether Fengrui Investment Consulting had a claim against Automotive Industry (Yangzhou) by notifying Jiang X as the registered legal representative of Automotive Industry (Yangzhou) to appear in court, who had no objection to the loan in the amount of CNY 4 million. In this context, the court of first instance further examined such proof of claim and documentary evidence for assignment of claim as furnished by Fengrui Investment Consulting before ruled on October 24, 2013 to accept the application for compulsory liquidation filed by Fengrui Investment Consulting against Automotive Industry (Yangzhou) and confirm the status of Fengrui Investment Consulting as the creditor. After case acceptance, the court of first instance appointed by lottery Yangzhou Jiacheng Certified Public Accountants Co., Ltd. to form a liquidation team, which, in performing its duties, found that the liquidated company had long abandoned its business premises and business activities, and upon investigation, found no property of the liquidated company. After the court of

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first instance explained to the two shareholders of the liquidated company (Electromechanical Equipment and Automotive Industry in this case) the legal consequences for them as liquidation obligors not to fulfill their legal obligations, the legal representative of Electromechanical Equipment (being revoked of its business license in 2013) as one shareholder still expressed that the whereabouts of all the documents of the liquidated company were unknown except stating that the documents might be taken over by Yangzhou Materials Holding Co., Ltd. (hereinafter referred to as Yangzhou Materials Holding), the person in charge of which, after being inquired, declared that the company did not receive any documents about the liquidated company; and Automotive Industry as the other shareholder of the liquidated company only maintained and furnished the joint venture agreement and the articles of incorporation of the liquidated company when it was established in 1995 (with two shareholders each contributing CNY 500,000) and increased its capital in 1997 (with two shareholders each contributing another CNY 500,000), the audit reports of the liquidated company from 1995 to 1997, as well as the civil judgment and related enforcement ruling of Automotive Industry against the liquidated company in 1999, which did not help in carrying out the compulsory liquidation work. Then, the court of first instance made a civil ruling on December 17, 2013 (No. 0002 [2013] Liquidation, Civ. Division, the Intermediate People’s Court of Yangzhou City, Jiangsu Province) to terminate the compulsory liquidation proceedings of Automotive Industry (Yangzhou) because the liquidated company falls within the circumstances of not being able to be liquidated as stated in Article 28 of the Summary Minutes of the Supreme People’s Court Symposium on Hearing Cases Involving Compulsory Liquidation of Companies. On January 21, 2014, Fengrui Investment Consulting filed this lawsuit with the Intermediate People’s Court of Yangzhou City, requesting that Electromechanical Equipment and Automotive Industry be jointly and severally liable for the loan principal of CNY 4 million and interest of CNY 2,073,754.22 owed by Automotive Industry (Yangzhou) to Fengrui Investment Consulting. Established in March 1995, Automotive Industry (Yangzhou) had two shareholders: Electromechanical Equipment and Automotive Industry (Shanghai Automotive Industry Sales Co., Ltd. was named Shanghai Automotive Industry Sales Corporation before September 2005, hereinafter referred to as Automotive Industry without distinction), with each contributing CNY 500,000 and another CNY 500,000 for capital increase in 1997. The articles of association of Automotive Industry (Yangzhou) specifies that its term of operation would end on February 28, 1999, and the industrial and commercial records show that the company’s last annual inspection was conducted in 1999 when, as indicated in the relevant forms, the company had total assets of CNY 4.26 million and total liabilities of CNY 6.63 million. The business license of Automotive Industry (Yangzhou) was revoked on November 2, 2001, but no liquidation team was established within 15 days from the date when the cause for dissolution arose, and the company has not been liquidated since then. Because Automotive Industry (Yangzhou) had owed Automotive Industry for car payment, Automotive Industry filed a lawsuit on September 1, 1999 with the court of first instance, which issued a civil judgment (No. 163 [1999] Trial, Civ. Division, the Intermediate People’s Court of Yangzhou City, Jiangsu Province) on December

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21, 1999, ordering Automotive Industry (Yangzhou) to make car payments to Automotive Industry in the amount of CNY 9,424,216.95 and, upon the application of Automotive Industry for enforcement, made a civil ruling (No. 96 [2000] Enforcement, Enforcement Department, the Intermediate People’s Court of Yangzhou City, Jiangsu Province) on September 1, 2000 to suspend enforcement of the said civil judgment because the judgment debtor was out of business due to operating losses and had no assets available for enforcement, and the applicant could not provide any clues about the judgment debtor’s property. The court of first instance holds that the issues in the first instance are: (1) whether Fengrui Investment Consulting has a claim of CNY 6,073,754.22 against Automotive Industry (Yangzhou); (2) whether the claim by Fengrui Investment Consulting is time-barred; (3) whether Automotive Industry, as one shareholder of Automotive Industry (Yangzhou), has neglected to fulfill its liquidation obligations, resulting in the loss of the company’s property and books and the inability of the company to carry out liquidation, and whether it should be jointly and severally liable for the debt of Automotive Industry (Yangzhou). In September 2013, when Fengrui Investment Consulting applied as a creditor for compulsory liquidation of Automotive Industry (Yangzhou), the court of first instance examined and confirmed Fengrui Investment Consulting’s status as a creditor against Automotive Industry (Yangzhou). In this case, Fengrui Investment Consulting once more provided as evidence the loan certificate of Bank of Communications Yangzhou Branch and the corresponding loan contract as for the creation of the obligation, and the agreements and notices for the assignment of the corresponding claims as for the assignment of the obligation from Blue Cove Pte. Ltd., which was assigned from Cinda Asset Nanjing Office, which was assigned from Bank of Communications Yangzhou Branch. The claims claimed by Fengrui Investment Consulting in this case can be recognized after examination. The loan claims in this case matured on June 19, 1998, and June 27, 1998, after which the creditor claimed its rights by such means as requesting the debtor and guarantor to confirm by signature, sending letters and publishing newspapers, thus interrupting the limitation of actions several times from October 13, 1999, to November 1, 2012, with an interval between any two of them of less than two years. Although after the year 2000 Automotive Industry (Yangzhou) may not have anyone to receive the letters due to the closure of business, the debtor’s business registration address has the effect of public notice, and the creditor’s mailing of the debt collection letter to the address also has the legal effect of interrupting the limitation of actions. Therefore, the claims of Fengrui Investment Consulting in this case are not time-barred. Automotive Industry’s claim that the books of Automotive Industry (Yangzhou) were not lost but kept by the other shareholder Electromechanical Equipment is not well founded because the court of first instance did not find any property and books of Automotive Industry (Yangzhou) in the compulsory liquidation proceedings thereof. As to whether Automotive Industry (Yangzhou) had no property for liquidation, it could not be ascertained through the compulsory liquidation proceedings, and the fact that Automotive Industry (Yangzhou) was not found to have any property during

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the enforcement of the relevant cases could not prove that it had no property when the cause of liquidation arose. Fengrui Investment Consulting sued Electromechanical Equipment for joint and several liability for the debt owed by Automotive Industry (Yangzhou) to Fengrui Investment Consulting due to its negligence in fulfilling its liquidation obligations, which caused loss of property and books of Automotive Industry (Yangzhou) and prevented its liquidation. The court of first instance supported the claim of Fengrui Investment Consulting against Electromechanical Equipment because, on the one hand, Fengrui Investment Consulting furnished basic evidence, and, on the other hand, Electromechanical Equipment had the standing to be sued despite of its being revoked of business license in 2013, and its nonappearance is regarded as a waiver of the relevant litigation rights to confrontation and defense. Regarding whether Automotive Industry was negligent in fulfilling the liquidation obligations of Automotive Industry (Yangzhou), thus leading to the loss of the company’s property and books, the court of first instance held that after February 28, 1999, when the period of operation determined by the Articles of Association of Automotive Industry (Yangzhou) expired, and before November 2001, when Automotive Industry (Yangzhou) was revoked of its business license, Automotive Industry had filed a lawsuit against Automotive Industry (Yangzhou) for its claim of more than CNY 9 million. Since Automotive Industry (Yangzhou) was out of business, there were no assets available for enforcement and Automotive Industry could not provide any clues of the judgment debtor’s property, the enforcement of the corresponding judgment was ordered to be suspended. If Automotive Industry was in a position to organize the liquidation of Automotive Industry (Yangzhou), it would be beneficial to Automotive Industry—subjectively, Automotive Industry was not negligent in liquidation; objectively, its application for enforcement was unsuccessful because the court did not find any property available for enforcement of Automotive Industry (Yangzhou). Therefore, it cannot be concluded that the loss of the company’s property and books was caused by negligence of Automotive Industry in performing its obligations. The court of first instance rendered a judgment that: (1) Electromechanical Equipment shall be jointly and severally liable for the loan principal of CNY 4 million and interest of CNY 2,073,754.22 owed by Automotive Industry (Yangzhou) to Fengrui Investment Consulting within 10 days after the judgment becomes effective; (2) the claims of Fengrui Investment Consulting against Automotive Industry are dismissed and the court acceptance fee of CNY 54,316 is to be borne by Electromechanical Equipment. Dissatisfied with the judgment of first instance, Fengrui Investment Consulting appealed to set aside Item 2 of the judgment of first instance, and order Automotive Industry to be jointly and severally liable for the loan principal of CNY 4 million and interest of CNY 2,073,754.22 owed by Automotive Industry (Yangzhou) to Fengrui Investment Consulting, and Electromechanical Equipment and Automotive Industry to bear the litigation costs. The court of second instance ruled to reject the appeal and affirm the original judgment and that the court acceptance fee of CNY 54,316 is to be borne by Fengrui Investment Consulting.

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Dissatisfied with the decision of second instance, Fengrui Investment Consulting applied to the Supreme People’s Court for reopening of the case, requesting to set aside Item 2 of the judgment of first instance and the decision of second instance, and order Automotive Industry to be jointly and severally liable for the loan principal of CNY 4 million and interest of CNY 2,073,754.22 owed by Automotive Industry (Yangzhou) to Fengrui Investment Consulting.

Issue Whether the liquidation obligor shall be jointly and severally liable for the principal and interest of the debt.

Holding Upon review, the Supreme People’s Court holds that the court of second instance rendered the judgment based on clear determination of facts and correct application of law, and, pursuant to Article 207(1) and Article 170(1) (1) of the Civil Procedure Law of the People’s Republic of China, decides to uphold the civil judgment of the Higher People’s Court of Jiangsu Province (No. 00012 [2015] Final, Civ. Division, the Higher People’s Court of Jiangsu Province). The Supreme People’s Court confirmed the facts ascertained by the court of second instance. Upon review, the Supreme People’s Court also ascertained that, in the Articles of Association of Shanghai Automotive Industry (Yangzhou) Sales Co., Ltd. signed and sealed by Automotive Industry and Electromechanical Equipment on February 18, 1997, Article 29 thereof provides that “(t)he chairman shall be selected and appointed by Yangzhou Electromechanical Equipment Co., Ltd.” and Article 31 thereof provides that “(t)he term of the joint venture is two years”. During the first and second instances, the photocopy of the backup copy of the industrial and commercial business license of Automotive Industry indicates that the company’s place of residence is No. XX, XX Road, XX District, Shanghai. During review of the case by the Supreme People’s Court, the statement of fact submitted by Automotive Industry specifies that “since May 7, 2007, our company has been working at No. XX, Xuhui District, Shanghai, and no change has ever been made to the business address.”

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Comment on Rule 1. On the Application of Law In this case, the term of operation indicated in the Articles of Association of Automotive Industry (Yangzhou) is until February 28, 1999, and on November 2, 2001, the company’s business license was revoked due to its failure to go through annual inspection. The basic principle of “nonretroactivity of law” requires that the law in force at the time when the act is done shall prevail if there are legal provisions with regard to such act. The Company Law was enacted in 1993 and amended in 1999, 2004, 2005 and 2013. In the Company Law as amended in 1999, Article 190 thereof provides that “(a) company may be dissolved if: (1) the term of operation prescribed in the articles of association has expired or other conditions for dissolution as provided for in the articles of association have appeared; (2) a resolution on dissolution has been adopted by meeting of shareholders; or (3) dissolution is necessary for merger or division of the company”, Article 191 thereof provides that “(w)here a company is to be dissolved pursuant to Item 1 or 2 of the preceding Article, a liquidation team shall be formed within 15 days of the decision, which is composed of shareholders in the case of a limited liability company; or members as determined by the meeting of shareholders in the case of a joint stock company. If a liquidation group is not formed within the prescribed time limit, creditors may request the people’s court to designate relevant personnel to form a liquidation team to carry out liquidation. The people’s court shall accept such request and timely designated members of the liquidation team to conduct liquidation”, and Article 192 thereof provides that “(a) company shall be dissolved if it has been ordered to close down for violating any law or administrative regulation and a liquidation team shall be formed by relevant competent authority participated by shareholders and relevant authorities and professionals.” In this case, Automotive Industry (Yangzhou) was not dissolved upon the expiration of the term of operation as stipulated in its Articles of Association but shall be dissolved in 2001 when its business license was revoked. Despite Article 192 of the Company Law as amended in 1999 provides for a circumstance when a company shall be dissolved, i.e., “if it has been ordered to close down for violating any law or administrative regulation”, dissolution for being ordered to close down due to violation of law is different from dissolution for being lawfully revoked of business license, because Subparagraph 4 of Article 181 of the Company Law as amended in 2005 treats “being lawfully revoked of business license” and “being ordered to close down” as two juxtaposed “reasons for dissolving a company”. Therefore, Article 192 of the Company Law as amended in 1999 does not apply to dissolution due to revocation of business license for its not being explicit thereon, nor does the Company Law as amended in 2004. Nevertheless, pursuant to Article 181 of the Company Law as amended in 2005, which provides that “(a) company may be dissolved if: … (4) its business license is revoked, or it is ordered to close down or to be dissolved according to laws …”, Article 184 thereof, which provides that “(w)here a company is dissolved pursuant to Subparagraphs 1, 2, 4, or 5 of Article 181 hereof, a liquidation

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team shall be formed within 15 days after the occurrence of the cause of dissolution to carry out liquidation, which is composed of shareholders in the case of a limited liability company; or members as determined by the board of directors or the meeting of shareholders in the case of a joint stock company”, and Article 2 of the Rules of the Supreme People’s Court on Certain Issues Regarding the Application of the Company Law of the People’s Republic of China (I), which provides that “(w)here a lawsuit is filed with the people’s court for any dispute over a civil act or event occurred prior to the implementation of the Company Law, if no specific provisions are made in the laws, regulations and judicial interpretations then in force, relevant provisions of the Company Law shall apply mutatis mutandis”, this case may take reference of the Company Law as amended in 2005 to ascertain the subject of liquidation obligation. Furthermore, Article 50 of the Articles of Association of Shanghai Automotive Industry (Yangzhou) Sales Co., Ltd. signed and sealed by Automotive Industry and Electromechanical Equipment on February 18, 1997 also specifies that “(t)he company shall within 15 days establish a liquidation team composed of both shareholders, relevant competent authorities and relevant professionals to liquidate the company pursuant to such procedures as stipulated in relevant laws and regulations.” It can be seen from the above provisions and agreement that Automotive Industry as the shareholder of Automotive Industry (Yangzhou) shall be the subject of liquidation obligation. 2. On the Assumption of Liability for Compensation by Liquidation Obligor Article 18(2) of the Rules of the Supreme People’s Court on Certain Issues Regarding the Application of the Company Law of the People’s Republic of China (II) [hereinafter referred to as the Rules on Certain Issues Regarding the Application of the Company Law (II)], which provides that “(w)here a limited liability company or a joint stock company cannot be liquidated due to loss of the company’s substantial property, books, or important documents because the shareholders of the limited liability company, or directors or controlling shareholders of the joint stock company, are negligent in fulfilling their obligations, the people’s court shall support the creditor’s claim for their assumption of joint and several liability for the company’s debts”, indicates the tort liability that shall be assumed by the liquidation obligor toward the creditor for its negligence in fulfilling its liquidation obligations, the jurisprudence basis for the application of which are the theory of disregard of corporate entity and theory of infringement on the creditor’s rights. Therefore, the liquidation obligor shall assume the above liability for compensation in liquidation if: (1) the liquidation obligor has the act of violating the law by being negligent in fulfilling its liquidation obligations, i.e., failing to conduct or complete liquidation affairs within the statutory time limit, and subjectively has the fault of inaction or improperly conducted liquidation affairs, thus infringing on the interests of creditors; (2) the liquidation obligor’s act causes direct loss to the company’s creditors; and (3) there is legal causation between the liquidation obligor’s negligence in fulfilling its liquidation obligations and the company’s property loss or the creditors’ loss. In this case, although Automotive Industry (Yangzhou) as the liquidated company in question should be dissolved and liquidated after its business license was revoked

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on November 2, 2001 and by far the two shareholders, Automotive Industry and Electromechanical Equipment, as its liquidation obligors, have not fulfilled their liquidation obligations, as far as Automotive Industry is concerned, this case does not fall within the circumstances of joint and several liability as stated in Article 18(2) of the Rules on Certain Issues Regarding the Application of the Company Law (II). Then, Automotive Industry shall not assume joint and several liability for the claims of Fengrui Investment Consulting against Automotive Industry (Yangzhou) for the following two main reasons: First, the act of Automotive Industry to apply for enforcement with regard to its claim against Automotive Industry (Yangzhou) indicates that Automotive Industry has liquidated the assets of Automotive Industry (Yangzhou) and there is no causal relationship between Automotive Industry’s failure to fulfill its liquidation obligations and the loss of Fengrui Investment Consulting. The civil judgment (No. 163 [1999] Trial, Civ. Division, the Intermediate People’s Court of Yangzhou City, Jiangsu Province) entered on December 21, 1999 orders Automotive Industry (Yangzhou) to pay Automotive Industry CNY 9,424,216.95 for the goods. The industrial and commercial records of Automotive Industry (Yangzhou) indicated that the company underwent its last annual inspection in 1999, and the relevant forms showed that the company then had total assets of CNY 4.26 million and total liabilities of CNY 6.63 million, with liabilities exceeding its assets. The facts established by the Supreme People’s Court in its review demonstrated that Automotive Industry (Yangzhou) in its actual operation did not employ independent staff, with its specific financial operations handled by the staff of the automotive office of Electromechanical Equipment; nor did it have any special financial management office, with its financial management actually conducted by the finance office of Electromechanical Equipment, the finance managed by Electromechanical Equipment; and the chairman of the liquidated company was served by person from Electromechanical Equipment. During the enforcement proceeding applied by Automotive Industry, Electromechanical Equipment responsible for the finance of Automotive Industry (Yangzhou) and Automotive Industry (Yangzhou) also produced to the court as evidence the status report, balance sheet, profit and loss statement and list of claims of Automotive Industry (Yangzhou) to verify the company’s assets and settle the debts. The above evidence showed that the company then had no assets to discharge its debts. Because of this, the Intermediate People’s Court of Yangzhou City, in its civil ruling (No. 96 [2000] Enforcement, Enforcement Department, the Intermediate People’s Court of Yangzhou City, Jiangsu Province) made on December 27, 2000, states that “during enforcement, it was found that the judgment debtor Automotive Industry (Yangzhou) was out of business due to operating losses, and its external claims were difficult to recover because its debtors were out of business or bankrupt. This court had ruled on September 1, 2000, to suspend the enforcement, during which period the applicant Automotive Industry also failed to provide clues to the property of the judgment debtor.” Accordingly, this court ruled to terminate the enforcement.

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From the above facts, it can be seen that, out of consideration of protecting its own claims, Automotive Industry in the enforcement case had done its best to ascertain the liability assets of Automotive Industry (Yangzhou), and Electromechanical Equipment also provided relevant financial statements and explanations, but the company had no debt-servicing assets. Under the circumstances that Automotive Industry (Yangzhou) in 2001 was insolvent and its business license revoked, even if it was then liquidated, it had no liability assets to discharge the claims of Fengrui Investment Consulting. Therefore, failure of Automotive Industry to discharge its liquidation obligations did not cause any loss to Fengrui Investment Consulting, and there is no causal relationship between failure of Automotive Industry to discharge its liquidation obligations and the loss caused by the claims of Fengrui Investment Consulting not being discharged. Second, analyzed from the perspective of the law, judicial interpretation, judicial practice and avoiding abuse of joint and several liability, before the promulgation and implementation of the Rules on Certain Issues Regarding the Application of the Company Law (II) in 2008, there was no provision on the liquidation obligor’s assumption of joint and several liability for failure to fulfill liquidation obligations. In this case, the cause for the liquidation of the liquidated company occurred in 2001, when there were no clear provisions on the liability for failure to fulfill the liquidation obligations despite the provisions on the liquidation obligations stated in the Company Law; thus, in judicial practice, very few cases were initiated to hold the liquidation obligors legally liable. Although the “filling-gap exception” to the principle of nonretroactivity of law demands application to this case the Rules on Certain Issues Regarding the Application of the Company Law (II), considering the protection of the parties’ expectation interest, it would be unfair to hold the parties jointly and severally liable pursuant to the Rules on Certain Issues Regarding the Application of the Company Law (II), which was promulgated and implemented several years after the legal facts occurred, especially in the case that the liquidation obligor has tried its best but failed to have its claim of CNY 9 million against the subject of liquidation obligation discharged in the enforcement proceeding.

Gansu Jianxin Industrial Group, Co. Ltd. v. Minmetals International Trust Co., Ltd., Inner Mongolia Zhongxi Mining Co., Ltd., et al. (Dispute over Loan Contract): Handling the Disputes Arising from Credit Instruments Notarized as Enforceable Guangyu Ding, Xin’er Chen, and Liang Zhang

Rule In case of a dispute over a credit instrument notarized as enforceable (legally notarized as enforceable by a notary public), the parties in dispute may, in principle, only apply for enforcement of that debt instrument rather than directly file a civil litigation. However, a credit instrument notarized as enforceable is formed by the consensus of the parties thereto to accept enforcement of the instrument by a court; therefore, the parties may still reach a new consensus on the method of settlement. If either of the parties files a litigation with respect to the debt instrument notarized as enforceable and the other party only objects to the venue rather than settlement by litigation, the objecting party shall be deemed, in accordance with legal provisions on forum prorogatum, to have agreed with and accepted the jurisdiction over the litigation.

Collegial Bench: Guangyu Ding, Guoxian Wang and Tao Wang Edited by Yi Yang; translated by Jialiu Xiao G. Ding (B) · X. Chen The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China L. Zhang The Second Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_14

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Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Gansu Jianxin Industrial Group, Ltd. (hereinafter referred to as Jianxin Industrial Company) Respondent in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Minmetals International Trust Co., Ltd. (hereinafter referred to as Minmetals Trust Company) Respondent in the Reopening (Defendant in the First Instance): Zhongxi Mining Co., Ltd. (Inner Mongolia) (hereinafter referred to as Zhongxi Mining Company) Respondent in the Reopening (Defendant in the First Instance): Gansu Wanxing Industrial Co., Ltd. (hereinafter referred to as Wanxing Industrial Company) Respondent in the Reopening (Defendant in the First Instance): Liu X Respondent in the Reopening (Defendant in the First Instance): Wang X 2. Procedural History First Instance: No. 66 [2016] Trial, Civ. Division, the Higher People’s Court of Qinghai Province (dated May 18 of 2017) Reopening: No. 292 [2018] Appeal, Civ. Division, the Supreme People’s Court (dated Feb. 28 of 2018) 3. Cause of Action Dispute over loan contract

Essential Facts In August 2014, Minmetals Trust Company entered into a trust loan contract with Wanxing Industrial Company, agreeing that Minmetals Trust Company would offer a trust loan to Wanxing Industrial Company in an amount of no more than CNY1 billion with an annual rate of 14% and the interest shall be settled quarterly on the 21st day of the last month of each quarter; the term of the trust loan is 24 months, and Wanxing Industrial Company shall repay the principal of the trust loan in an amount of CNY 200 million and the corresponding interest to Minmetals Trust Company on the last day of a period of 12 months since the establishment of the trust plan, repay the principal of the trust loan in an amount of CNY 300 million and the corresponding interest to Minmetals Trust Company on the last day of a period of 18 months since the establishment of the trust plan, and repay the principal of the trust loan in an amount of CNY 500 million and the corresponding interest to Minmetals Trust Company on the last day of a period of 24 months since the establishment of the trust plan. In the event of delay in repayment on the part of Wanxing Industrial Company, Minmetals Trust Company is entitled to immediately announce that the principal of the trust loan

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and the interest owed become due and payable in advance and seek repayment from the borrower by various means. Meanwhile, Minmetals Trust Company is entitled to charge default interest at an annual rate of 21% on the overdue principal amount on and after the due date until (including) the date of settlement by Wanxing Industrial Company; for the interest Wanxing Industrial Company fails to pay by the time as agreed in the trust loan contract, Wanxing Industrial Company shall pay compound interest at an annual rate of 21% on and after the due date until (including) the date of settlement. In August 2014, Minmetals Trust Company and Zhongxi Mining Company entered into a guaranty contract and a mining right mortgage contract, agreeing that Zhongxi Mining Company would provide Minmetals Trust Company with irrevocable unlimited joint and several guaranty liability for Wanxing Industrial Company’s repayment of all debts under the trust loan contract, and agreeing that Zhongxi Mining Company, by virtue of the right to mine the Dasuji Platinum Mine located at Zhuozi County of Inner Mongolia Autonomous Region, would provide mortgage guarantee for the principal debt. Later, Minmetals Trust Company and Zhongxi Mining Company went through the formality of registering the mining right mortgage. In August 2014, Minmetals Trust Company and Jianxin Industrial Company entered into a guaranty contract and an equity interest pledge contract, agreeing that Jianxin Industrial Company would provide Minmetals Trust Company with irrevocable unlimited joint and several guaranty liability for Wanxing Industrial Company’s repayment of all debts under the principal contract, and agreeing that Jianxin Industrial Company, by virtue of its 9 billion shares in Wanxing Industrial Company, would provide pledge guarantee for the repayment of the principal debt. Later, Minmetals Trust Company and Jianxin Industrial Company went through the formality of registering the equity interest pledge. In August 2014, Minmetals Trust Company entered into a guaranty contract with Liu X and Wang X, agreeing that Liu X and Wang X would provide Minmetals Trust Company with unlimited joint and several guaranty liability for Wanxing Industrial Company’s repayment of all debts under the principal contract. Minmetals Trust Company and Liu X entered into a separate equity interest pledge contract, agreeing that Liu X, by virtue of 100 million shares in Wanxing Industrial Company and 220 million shares in Jianxin Industrial Company, would provide pledge guarantees for Wanxing Industrial Company’s repayment of the principal debt. Later, Minmetals Trust Company and Liu X went through the formality of registering the equity interest pledge. On August 25, 2014, the Applicant and Respondent in the reopening of the case went through the formality of notarizing the said trust loan contract, mining right mortgage contract, equity interest pledge contracts and guaranty contracts as enforceable with the Lvzheng Notary Public of Chengdu City, Sichuan Province. On September 5, 2014, Minmetals Trust Company offered Wanxing Industrial Company a trust loan of CNY 1 billion, as stipulated in the trust loan contract. Wanxing Industrial Company, after paying the loan interest accrued before June 21, 2015 as stipulated in the trust loan contract, failed to repay Minmetals Trust Company the other amounts thereunder and further failed to repay such amounts after repeated

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reminders from Minmetals Trust Company. On January 6, 2016, Minmetals Trust Company announced that all loan principal and interest became due and payable in advance and demanded Wanxing Industrial Company to immediately repay all loan principal, interest, and default interest and compensate Minmetals Trust Company for all losses arising therefrom. On December 2, 2016, the Intermediate People’s Court of Longnan City, Gansu Province, by rendering a civil ruling of No. 01 [2016] Bankruptcy, Civ. Division, the Intermediate People’s Court of Longnan City, Gansu Province, (Gansu 01), accepted the bankruptcy reorganization application of Jianxin Industrial Company and appointed a bankruptcy reorganization administrator. Minmetals Trust Company declared its creditor’s rights involved in this case with the bankruptcy reorganization administrator. The court of first instance rendered a civil decision (No. 66 [2016] Trial, Civ. Division, the Higher People’s Court of Qinghai Province), which sustained Minmetals Trust Company’s claims against the other defendants and held that Jianxin Industrial Company assume joint and several liability for the loan principal of CNY 1 billion and interest, default interest, and compound interest accrued before December 2, 2016, the date of the bankruptcy reorganization ruling. After the decision of first instance came into effect, Jianxin Industrial Company applied to the Supreme People’s Court for case reopening.

Issues 1. Whether it is proper for the court of first instance to accept the case; 2. Whether the decision of first instance is correct in its calculation of the interest, default interest, and compound interest.

Holding The Supreme People’s Court, after investigation, holds that Article 37 of the Notary Law of the People’s Republic of China and Article 238 of the Civil Procedure Law of the People’s Republic of China explicitly classify debt instruments legally notarized as enforceable by notary public as instruments that shall be enforced directly, which means in principle if the creditor or debtor disputes the content of a debt instrument and files a civil litigation directly with a people’s court, the people’s court will not accept the case. The notarization that makes the debt instrument enforceable, however, is based on the shared manifestation of intention of the parties thereto; therefore, the parties may change their previous agreement and reach a consensus that a dispute shall be settled by filing a litigation with a court. It is found in the investigation that both the equity interest pledge contract and guaranty contract between

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Minmetals Trust Company and Jianxin Industrial Company stipulate that in case of a dispute that cannot be resolved through negotiation, a litigation may be filed with the people’s court of competent jurisdiction at the place where Minmetals Trust Company is domiciled. The choice of litigation as the way of settlement and the matter of jurisdiction are also agreed upon in other contracts involved in the case. Minmetals Trust Company, as agreed in such contracts, filed a litigation with the court of first instance. After the court of first instance accepted the case, Jianxin Industrial Company filed an objection to jurisdiction within the defense period, contending that the case should be within the jurisdiction of the people’s court at the place where it is domiciled, i.e., the Higher People’s Court of Gansu Province. Jianxin Industrial Company merely objected to the venue of this case and did not object to the choice of litigation as the way of settlement, which may be deemed as accepting the jurisdiction of a court. Therefore, it was not improper for the court of first instance to accept the case in consideration of relevant facts. This court does not sustain Jianxin Industrial Company’s contention that Minmetals Trust Company’s claim for litigation shall be denied. The trust loan contract between Minmetals Trust Company and Wanxing Industrial Company stipulates the term of the loan, interest rate, calculation criteria of default interest and compound interest, and liability for breach of contract. The guaranty contract between Minmetals Trust Company and Jianxin Industrial Company stipulates that Jianxin Industrial Company shall provide Minmetals Trust Company with irrevocable unlimited joint and several guaranty liability for Wanxing Industrial Company’s repayment of all debts under the principal contract. Wanxing Industrial Company’s failure to pay the interest and loan principal due after June 21, 2015, as agreed in the principal contract, constitutes a breach of contract and therefore shall give rise to liability for breach of contract. As a guarantor, Jianxin Industrial Company shall, as agreed in the guaranty contract, be jointly and severally liable for repayment of all debts under the principal contract. As provided for in the Enterprise Bankruptcy Law of the People’s Republic of China, Jianxin Industrial Company is only jointly and severally liable for repayment of the loan principal and payment of the interest, default interest, and compound interest accrued before the date on which the bankruptcy reorganization application was accepted. The default interest rate and compound interest rate stipulated in the trust loan contract are not in violation of relevant legal provisions; therefore, it was proper to calculate the default interest and compound interest as per such rates in the decision of first instance. In summary, Jianxin Industrial Company’s application for case reopening is not in compliance with Subparagraph 6 of Article 200 of the Civil Procedure Law of the People’s Republic of China; therefore, this court dismisses Jianxin Industrial Company’s application for case reopening by law.

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Comment on Rule Article 238 of the Civil Procedure Law provides that “(i)f a party to a debt instrument legally notarized as enforceable by a notary public fails to perform its obligations under the debt instrument, the other party may apply to a people’s court with competent jurisdiction for enforcement of the debt instrument, and the people’s court to which the application is made shall enforce the debt instrument. If the notarized debt instrument contains an error, the people’s court shall render a ruling not to enforce the notarized debt instrument and serve both parties and the notary public with the ruling.” Article 37 of the Notary Law provides that “(i)n case of a notarized debt instrument that sets out the debtor’s obligation of repayment and promise to accept enforcement of the notarized debt instrument, the creditor may apply to a people’s court with competent jurisdiction to enforce the notarized debt instrument if the debtor fails to perform or performs its obligation of repayment improperly.” Article 40 of the Notary Law provides that “(i)f a party to a notarized debt instrument or a stakeholder to the notarization disputes the content of that notarized debt instrument, a civil litigation may be filed with a people’s court for the disputed content.” In practice, due to inconsistent interpretation of the aforementioned legal provisions, some courts accepted civil litigation with respect to debt instruments notarized as enforceable and others did not, which caused controversy and conflicts. 1. Two views on the question of whether a debt instrument notarized as enforceable is actionable The academic community holds two views on whether enforceable notarized debt instruments are actionable. One view is that, on the premise of a notarized debt instrument, should either of the parties thereto file a civil litigation with a people’s court, the court shall accept the case. This view is supported by the following arguments: (1) the Civil Procedure Law does not explicitly provide that the parties to a notarized debt instrument no longer enjoy the right to litigation; therefore, notarized debt instruments do not exclude the applicability of litigation. (2) The civil decision (No. 172 [2001] Final, Civ. Division, the Supreme People’s Court) published in the Gazette of the Supreme People’s Court supports the view that a debt instrument legally notarized as enforceable by a notary public is actionable. The decision points out that the parties thereto may either apply to a people’s court for enforcement by virtue of the enforceable notarized debt instrument or directly file a litigation with a people’s court. (3) Article 40 of the Notary Law provides that a party to a notarized debt instrument or a stakeholder to the notarization may file a litigation with a people’s court for the dispute over the content of that notarized debt instrument, which affirms by law that notarized debt instruments are actionable. The other view is that a court should not accept such cases. This view is supported by the following arguments: (1) the Civil Procedure Law and the Notary Law provide that enforceable notarized debt instruments have the same legal effect as court decisions and arbitration awards, which constitutes explicit legal authority for enforcement of enforceable notarized debt instruments. Therefore, the creditor’s practice

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of otherwise filing a litigation contradicts the basic principle of “non bis in idem”. (2) Whether a notarized debt instrument should be enforceable is the result of the consensual choice of the parties. This would be contrary to the previous manifestation of intention of the parties and inconsistent with the notarized debt instrument enforcement system to allow the debtor to file a litigation. 2. Clarification and expansion of the scope of litigation with respect to debt instruments notarized as enforceable in judicial interpretations The Official Reply of the Supreme People’s Court on the Issue of Whether a People’s Court Accepts a Litigation Filed by a Party for Any Disputed Content of an Enforceable Notarized Debt Instrument issued by the Supreme People’s Court on December 26, 20081 (hereinafter referred to as the Official Reply) provides that “(a) notarized debt instrument that sets out the debtor’s obligation of repayment and promise to accept enforcement of the notarized debt instrument shall be enforceable by law. If the creditor or debtor disputes the content of the debt instrument and files a civil litigation directly with a people’s court, the people’s court with which the civil litigation is filed shall not accept the case. If the notarized debt instrument contains an error and the people’s court has rendered a ruling not to enforce the notarized debt instrument, a party thereto or a stakeholder to the notarization may file a litigation with a people’s court for the disputed content of the notarized debt instrument.” The Official Reply answers the question of whether enforceable notarized debt instruments are actionable: if the parties to a notarized debt instrument that sets out the debtor’s obligation of repayment choose to make the notarized debt instrument enforceable, the creditor or debtor may apply to a court with competent jurisdiction for enforcement of the notarized debt instrument rather than directly file a litigation. If the notarized debt instrument contains an error and the people’s court has rendered a ruling not to enforce the notarized debt instrument and a party thereto or a stakeholder to the notarization files a litigation with a people’s court for the disputed content of the notarized debt instrument, the people’s court with which the litigation is filed shall accept the case by law. The “proviso” contained in the Official Reply is a further clarification of the relationship between Articles 37 and 40 of the Notary Law. It provides for the right to remedy of the parties to a notarized debt instrument.2 The said “disputed content”, namely, the subject matter of litigation, is not the relationship arising out of a debt instrument but the civil dispute between the parties, which is in essence a purely civil dispute that meets the conditions for litigation filed under Article 119 of the Civil Procedure Law. Article 22 of the Rules of the Supreme People’s Court on Several Issues Concerning the Enforcement of Notarized Debt Instruments (hereinafter referred to as the Rules Concerning the Enforcement of Notarized Debt Instruments), which came into force on October 1, 2018, provides that “(t)he debtor may, before the end of the enforcement procedure, file a litigation against the creditor with the enforcing 1

The Official Reply is no longer applicable on and after July 20, 2019. 参见林文学: 《析对具有强制执行效力的公证债权文书提起诉讼人民法院是否受理》 ,载 《中 国司法》 2009年第3期。

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court, requesting the enforcing court not to enforce the notarized debt instrument if: (1) the relationship of civil rights and obligations set out in the notarized debt instrument does not correspond to relevant facts; (2) the notarized debt instrument is null and void or revocable by law; or (3) the creditor’s right set out in the notarized debt instrument is wholly or partially extinguished due to discharge, deposit, set off, acquittal or other reasons.” Article 23 hereof provides that “(w)here the debtor files a litigation in accordance with Article 22(1) hereof, the people’s court shall, after hearing, decide that the notarized debt instrument shall not be enforced or wholly enforced if the debtor’s argument is sustained; or deny the debtor’s claims if the debtor’s argument is not sustained. Where a party to a notarized debt instrument simultaneously files a claim for a dispute over the civil rights and obligations set out in that notarized debt instrument, the people’s court may decide on the claim together with other matters in its decision.” Article 24 hereof provides that “(t)he creditor or a stakeholder to the notarization may directly file a litigation with a people’s court with competent jurisdiction for a dispute over the civil rights and obligations set out in that notarized debt instrument if: (1) the relationship of civil rights and obligations set out in the notarized debt instrument does not correspond to relevant facts; or (2) the notarized debt instrument is null and void or revocable by law. Where the creditor files a litigation and, after the case is accepted, applies for enforcement of the notarized debt instrument, the people’s court shall not accept the application for enforcement. Where the creditor files a litigation after the enforcement procedure commences, the people’s court may, after accepting the case, rule to end the enforcement of the notarized debt instrument; or where the creditor requests to continue the enforcement of the undisputed part of the notarized debt instrument, the people’s court may grant the request. The litigation filed by a stakeholder to the notarization does not affect the enforcement of the notarized debt document by the people’s court. Where a stakeholder to the notarization, by providing adequate and effective guaranty, requests to end the measures of disposal, the people’s court may grant the request; or where the creditor, by providing adequate and effective guaranty, requests to continue the enforcement, the people’s court shall continue the enforcement.” In summary, certain judicial interpretations further clarify the scope of litigation that may be filed by the parties to an enforceable notarized debt instrument for a substantive dispute. However, such judicial interpretations do not approve or deny the parties’ right to litigation or other ways of settlement by further joint and consensual choice. 3. Legal basis for otherwise consensual choice of litigation or other ways of settlement (1) The principle of disposition in civil litigation It is generally believed that in China, the principle of disposition in civil litigation means the norm that the parties to a civil litigation may, at their own discretion, dispose of their lawful civil rights and procedural rights within the scope of the law. The principle of disposition essentially supports the parties’ autonomy over the commencement, development, and end of a litigation and the scope of subject matters. Many provisions under the Civil Procedure Law follow the principle of

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disposition and emphasize that both in practice and in theory, the parties’ right to disposition is not absolute and subject to limitations. The principle of disposition contains two rules in litigation: (1) a civil litigation can only be initiated by the parties concerned through their exercise of procedural rights and end as a result of the parties’ withdrawal of the litigation. The principle of “no trial without complaint” embodies the principle of disposition. A court shall not adjudicate on a matter in respect of which no claim has been filed by the parties concerned. (2) During litigation, the plaintiff may waive or change the claim; the defendant may admit or refute the claim or file a counterclaim; both parties may reach a compromise or apply for conciliation during proceedings or enforcement. Being intended for the regulation of social relations, civil law must embody the axiomatic principle of voluntariness and equality. This axiomatic principle of substantive law must also be implemented and embodied in the settlement of civil disputes, which means that the parties concerned should also enjoy autonomy of will, i.e., they may also dispose of their substantive rights at their own discretion in civil proceedings. Since the parties’ disposition of their civil rights can only be realized through specific procedural actions in litigation, their right to take specific procedural actions actively or passively, namely, their right to dispose of their procedural rights, is also affirmed by law. Without the parties’ free disposition of their procedural rights, civil subjects’ free disposition of their substantive civil rights would be impossible. For the importance of the principle of disposition, the modern civil procedure law of many countries adopts it as a basic principle of civil litigation. In recent years, civil trial has been undergoing a reform of gradually transforming the civil litigation system from an inquisitorial system to an adversary system by continuously weakening courts’ ex officio intervention. However, the transformation is far from thorough. On the one hand, since the Civil Procedure Law retains many institutional provisions of ex officio intervention, the transformation of the civil litigation system is subject to restrictions of the prevailing legal system. On the other hand, people are not fully aware of the true value of the principle of disposition. Due to the influence of the traditional conception of trial, the parties’ right to disposition is also restricted in the practice of civil litigation, and the restrictions are usually arbitrary. The characteristics of civil litigation, the fact that civil disputes are subject to private law, and the concept of procedural justice compel us to adhere to the principle of disposition and respect the parties’ autonomy of will when constructing a modern civil litigation system. Only in this way can civil disputes be handled fairly and justice be done in civil litigation. To implement the principle of disposition, the parties’ right to disposition should be expanded to the largest extent rather than limited. The parties’ waiver of their application for enforcement of the notarized debt instrument and instead reaching a new consensus of settling the dispute through litigation constitute the disposition of their rights and shall be respected.

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(2) The consensus of forum prorogatum (a) The relationship between the meaning of “forum prorogatum” and “consensual jurisdiction” “Forum prorogatum” means the rule that where the plaintiff files a litigation with a court without competent jurisdiction and the defendant does not raise the plea that the court accepting the case lacks jurisdiction and responds to the litigation, the court is thus deemed a court of competent jurisdiction. It is generally believed that forum prorogatum is a kind of consensual jurisdiction and is also referred to as “implied consensual jurisdiction” or “fictional consensual jurisdiction”. Implied consent means consent expressed by a party who is aware of a certain fact through its behaviors or actions rather than verbally. The rule of forum prorogatum, however, does not require the defendant before he chooses not to raise the plea of lack of jurisdiction and responds to the litigation to be aware of the fact that the court has no competent jurisdiction. Article 127(2) of the Civil Procedure Law provides that the people’s court with which the litigation is filed is deemed to have jurisdiction, which means the defendant’s not filing an objection to jurisdiction and instead responding to the litigation is deemed as practicing fictional consensual jurisdiction. Compared with statutory jurisdiction, consensual jurisdiction avoids the abstractness and rigidity of statutory jurisdiction and lacks consensus in designated jurisdiction and focuses more on the intention of the parties and convenience in litigation. Consensual jurisdiction is by nature a procedural action and a litigation contract made by and between the parties for the litigation outcome of directly changing the competent court; therefore, the elements and outcomes of consensual jurisdiction shall be subject to the procedural law.3 The most conspicuous resemblance between consensual jurisdiction and forum prorogatum does not lie in the “consensus” but the fact that the jurisdiction derives from actions of the subjects in both cases. Consensual jurisdiction is an agreement between the parties, while forum prorogatum is a party’s unilateral action of not raising the plea of lack of jurisdiction and instead responding to litigation. The unilateral action of forum prorogatum may make a court competent by law; therefore, both consensual jurisdiction and forum prorogatum, to a certain extent, result in the same outcome of changing the statutory court of first instance to another court. (b) Elements of forum prorogatum The doctrine behind forum prorogatum is that the defendant’s not raising the plea of lack of jurisdiction and instead responding to the litigation is usually deemed as pursuit of economies in litigation rather than an action that causes detriment, therefore there is no need to raise objection to jurisdiction. The prevailing view is that forum prorogatum consists of three elements: (1) the plaintiff files a litigation with a court without competent jurisdiction in the first instance; (2) the defendant does not raise the plea of lack of jurisdiction and instead responds to the litigation; and (3) the litigation filed by the plaintiff is not a litigation subject to exclusive jurisdiction. “The defendant does not raise the plea of lack of jurisdiction and instead responds to the litigation” is more controversial than other elements because: (1) there is contradiction 3

参见陈荣宗、林庆苗: 《民事诉讼法》 (上册),台北,三民书局股份有限公司2009年版,第145页。

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between, and difficulties in, coordinating courts’ authority of jurisdiction through ex officio investigation and forum prorogatum. In China, the contradiction between the forum prorogatum system and courts’ authority of jurisdiction through ex officio investigation lies not only in the contradiction with ex officio transfer of jurisdiction by courts but also in the contradiction with our statutory conditions for litigation filing and acceptance.4 (2) The provision on forum prorogatum under Article 127 of the Civil Procedure Law only mentions “responding to the litigation” and does not specify the content and form of the response. Most scholars agree that the said response means a response to the subject matter of litigation because a response to procedural matters does not constitute forum prorogatum.5 (c) Forum prorogatum is a way of amicable action The principle of disposition requires consensus of the parties in civil litigation, and the forum prorogatum system fully embodies the principle of disposition. Legislation authorizes defendants to either actively object to the jurisdiction of courts or negatively disagree with the jurisdiction of courts by giving no response to litigation. The following is an analysis of the establishment of the forum prorogatum system in consideration of the principle of disposition: the plaintiff files a litigation with the court that can best protect his interests (even if the court has no jurisdiction), while the defendant (assumed to be a reasonable third party) is assumed to, subject to the forum prorogatum system, waive the right to file an objection to jurisdiction by not filing an objection and instead responding to the litigation. Such actions of the parties constitute forum prorogatum. The parties, as per their respective willingness, claimed part of their rights and waived part of their rights. Such a state of free disposition of rights typically embodies the “essence of the procedural justice of self-responsibility attribution under procedural protection”.6 Therefore, forum prorogatum is the consensus of settling a dispute through litigation reached by and between the parties through certain actions. In trial practice, judicators are facing problems in applying the forum prorogatum system. One of the most common conflicts is the conflict between forum prorogatum and arbitration agreements, namely, the scenario that after the parties conclude an arbitration agreement, one party files a litigation and the other party responds to the litigation instead of objecting to the jurisdiction of the court with which the 4

Article 39 of the German Code of Civil Procedure well resolves the contradiction by emphasizing judges’ obligation of elucidation. If a court lacks both subject matter jurisdiction and territorial jurisdiction, it shall, prior to the debate, inform the defendant of the situation and the consequences of proceeding with the case without objection. If the court fails to fulfill the obligation of elucidation, the rule of forum prorogatum does not apply to the case. 参见陈荣宗、林庆苗: 《民事诉讼法》 (上 册),台北,三民书局股份有限公司2009年版,第145页。 5 With respect to the meaning of “the defendant does not file an objection to jurisdiction and instead responds to the litigation”, Germany and Japan made similar interpretation: the defendant does not raise the plea of jurisdictional error and instead makes oral arguments in respect of the case or makes statements during debate preparation. This indicates that in most civil law countries, “the defendant’s response to the litigation” as one of the elements of forum prorogatum emphasizes the reply to the substantive aspects of the subject matter of the litigation and requires the defendant’s presence for verbal arguments. 参见姚瑞光: 《民事诉讼法论》 ,中国政法大学出版社2011年版,第38页。 6 胡宜奎: 《法经济学视角下的应诉管辖》 ,载 《学术界》 2015年第8期。

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litigation is filed. Article 26 of the Arbitration Law provides that “(w)here the parties had reached an arbitration agreement and a party did not declare the arbitration agreement when filing a litigation with the people’s court and the other party, after the people’s court accepts the case, files the arbitration agreement prior to the first hearing, the people’s court shall dismiss the litigation, provided that the arbitration agreement is null and void; if the other party fails to file an objection to the acceptance of the case prior to the first hearing, the failure to file an objection is deemed as waiver of the arbitration agreement and the people’s court shall continue the trial.” Arbitration is entirely voluntary for both parties. An arbitration agreement is an arbitration contract that may be concluded by consensus of the parties. Likewise, it may also be rescinded by consensus of the parties. After the arbitration agreement is rescinded as if no arbitration agreement has been made by and between the parties, either of the parties may resolve the civil dispute by filing a litigation with the court. The parties may rescind the arbitration agreement by either explicit or implied means. “By implied means” means rescinding an arbitration agreement tacitly. If the parties had reached an arbitration agreement and a party did not declare the arbitration agreement when filing a litigation with the people’s court and the other party failed to file an objection to the acceptance of the case prior to the first hearing on the grounds of the arbitration agreement, the parties will be deemed to have, by initiating a litigation and responding to the litigation, reached the tacit agreement of waiving the written arbitration agreement and rescinded the written arbitration agreement tacitly. The above interpretation should also apply to the forum prorogatum over notarized debt instruments because the interpretation of civil law rules shall be consistent and application by analogy is a basic rule in trial of civil cases. As provided for in the aforesaid provision on arbitration jurisdiction, the basis for making a notarized debt instrument enforceable is the consensus of the parties; therefore, the parties certainly may change the way of settlement by consensus, and the response to litigation may also be deemed consent to the change. The notarization that makes a debt instrument enforceable embodies the parties’ mutual manifestation of intention and consensus that they accept enforcement by the court, which is consistent with the theory of freedom of contract. The parties may dispose of their civil rights and procedural rights within the scope of law. Where the parties make a debt instrument enforceable by notarization and then one of the parties files a litigation with a court after a dispute arises and the other party responds to the litigation, such actions of the parties are deemed as waiver of the previous consensus on enforcement and the court shall respect the new way of settlement agreed upon by the parties.

China Huarong Asset Management Co., Ltd., Henan Branch, Ma X v. Qingdao Free Trade Zone Huale International Trade Company, Henan Tianhui Energy Development Co., Ltd., et al. (Dispute over Loan Guarantee Contract): Where a Factor Files a Lawsuit against Multiple Debtors, the Claims Involved should Normally be Consolidated in Hearing Fang Mei and Yiqian Fan

Rule In the case of recourse factoring, a factor is authorized not only to request the debtor under the underlying contract to pay off the debts thereof, but also to recover from the assignor of the receivables thereunder. When a factor claims his rights against multiple debtors, the court shall, upon determining the internal connections among the different legal relationships in light of the characteristics of factoring contract and the business essence thereof, consolidate in its hearing the multiple claims involved, and, based on the different legal relationships among different parties, determine the order and scope of the obligations to be assumed by different debtors, in an effort to reduce the litigation burden of the parties concerned and settle the dispute once and for all. Collegial Bench: Fang Mei, Lichu Yang and Xuemei Liu Edited by Ming Li; translated by Xiaohua Zhu F. Mei (B) The Second Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China Y. Fan Judicial Supervision Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_15

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Defendant in the Counterclaim, Appellee in the Second Instance): China Huarong Asset Management Co., Ltd., Henan Branch (hereinafter referred to as Huarong Asset Henan Branch) Applicant in the Reopening (Defendant in the First Instance): Ma X Respondent in the Reopening (Defendant in the First Instance, Plaintiff in the Counterclaim, Appellant in the Second Instance): Qingdao Free Trade Zone Huale International Trade Company (hereinafter referred to as Huale International Trade Company) Respondent in the Reopening (Defendant in the First Instance): Henan Tianhui Energy Development Co., Ltd. (hereinafter referred to as Tianhui Energy Company) Defendant in the First Instance: Century Golden Hawk Energy Holdings Co., Ltd. (hereinafter referred to as Golden Hawk Holdings) Defendant in the First Instance: Jingcheng (Zhengzhou) Technology Co., Ltd. (hereinafter referred to as Jingcheng Technology Company) Defendant in the First Instance: Wang X Defendant in the First Instance: Zheng X Defendant in the First Instance: Chen X 2. Procedural History First Instance: No. 147 [2014] Trial, Civ. Division, the Intermediate People’s Court of Zhengzhou, Henan Province (dated Jul. 4 of 2014) Second Instance: No. 215 [2015] Final, Civ. Division, the Higher People’s Court of Henan Province (dated Jul. 20 of 2016) Application for Reopening: No. 1538 [2017] Appeal, Civ. Division, the Supreme People’s Court (dated Dec. 19 of 2017) Reopening: No. 192 [2018] Reopening, Civ. Division, the Supreme People’s Court (dated Jan. 17 of 2019) 3. Cause of Action Dispute over loan guarantee contract

Essential Facts On April 12, 2013, a credit line agreement was entered into by and between Bank of China Ltd., Zhengzhou New District Subbranch (hereinafter referred to as BOC New District Subbranch, later renamed as Bank of China Ltd., Zhengzhou Free Trade Zone Branch, hereinafter referred to as BOC FTZ Branch) and Golden Hawk Holdings, under which BOC New District Subbranch promised to offer a line of credit in the amount of CNY 80 million to Golden Hawk Holdings. On the same day, Jingcheng

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Technology Company, Wang X, Ma X, Zheng X and Chen X concluded respectively, as joint and several guarantors maximum amount guaranty contracts with BOC New District Subbranch. On April 28, 2013, Golden Hawk Holdings applied to BOC New District Subbranch for domestic commercial invoice discounting, upon which a domestic commercial invoice discounting agreement and other relevant documents were concluded therebetween, expressly stating that, “(w)here the balance of the seller’s account is insufficient for the deduction, the authorized bank has priority in offsetting the arrears out of his incomes from other transactions, and BOC New District Subbranch may exercise the right of recourse against the seller, to wit, Golden Hawk Holdings”. On the same day, BOC New District Subbranch delivered a notice of the assignment of receivables to Tianhui Energy Company, upon which the latter issued a confirmation letter thereof to the former, which stated that, “(i)f we fail to make payment, you may recover from us the loan principal owed by Golden Hawk Holdings plus the interest and the compound interest thereon”. Afterwards, BOC New District Subbranch financed for Golden Hawk Holdings the discounting of CNY 17,697,280, with the interest (penalty interest included) thereon through March 4, 2014 totaling CNY 960,820.73. On June 25, 2013, Golden Hawk Holdings again applied to BOC New District Subbranch for domestic commercial invoice discounting, upon which another domestic commercial invoice discounting agreement and other relevant documents were concluded therebetween. On June 25 and July 10 of 2013, Huale International Trade Company issued a confirmation letter to BOC New District Subbranch for the assignment of receivables, promising to pay respectively before December 21, 2013 and January 5, 2014 the two sums payable to Golden Hawk Holdings in the amount of CNY 23,399,520 and of CNY 16,613,200 to the account designated by BOC New District Subbranch, failing which BOC New District Subbranch could recover from it the loan principal plus the interest and the compound interest thereon as owed by Golden Hawk Holdings to the Subbranch. The BOC New District Subbranch then financed for Golden Hawk Holdings the discounting of CNY 18,719,616 and of CNY 13,290,560, with the interest (penalty interest included) on the two sums through March 4, 2014 totaling CNY 1,308,061.07. Tianhui Energy Company and Huale International Trade Company, however, failed to fulfill the aforesaid obligations—to pay the aforesaid sums payable to Golden Hawk Holdings to the account designated by BOC New District Subbranch. On July 4, 2014, the court of first instance rendered its judgment (No. 147 [2014] Trial, Civ. Division, the Intermediate People’s Court of Zhengzhou), decreeing that: (1) Golden Hawk Holdings pay off the loan principal to BOC New District Subbranch in the amount of CNY 49,707,456 and the interest thereon in the amount of CNY 2,268,881.80; (2) Jingcheng Technology Company, Wang X, Ma X, Zheng X and Chen X be jointly and severally liable for the aforesaid debts assumed by Golden Hawk Holdings; (3) Tianhui Energy Company be jointly and severally liable for the loan principal and the interest thereon payable by Golden Hawk Holdings totaling CNY 18,658,100.73; (4) Huale International Trade Company be jointly and severally liable for the loan principal and the interest thereon payable by Golden Hawk

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Holdings totaling CNY 33,318,237.07; and (5) the counterclaim filed by Huale International Trade Company be dismissed. On July 20, 2016, the court of second instance rendered its decision (No. 215 [2015] Final, Civ. Division, the Higher People’s Court of Henan Province), decreeing to: (1) uphold item 1 and item 2 of the first instance decision; (2) reverse item 3, item 4 and item 5 of the first instance decision; (3) dismiss the lawsuit filed by BOC New District Subbranch against Tianhui Energy Company and Huale International Trade Company; and (4) dismiss the counterclaim by Huale International Trade Company against BOC New District Subbranch. After the second instance decision became effective, BOC New District Subbranch applied to the Supreme People’s Court for case reopening, requesting the Court to reverse the second instance decision and uphold the first instance decision. In the course of case reopening, BOC FTZ Branch assigned the involved claim to Huarong Asset Henan Branch.

Issue Whether or not can the legal relationship of financial guarantee and the legal relationship of the assignment of claim be consolidated in hearing.

Holding The Supreme People’s Court holds after the case reopening that: 1. The legal relationship of financial guarantee and the legal relationship of the assignment of claim involved in this case should be consolidated in hearing This case involves multiple parties, contracts and legal relationships, including the relationships of sales contract among Golden Hawk Holdings, Tianhui Energy Company and Huale International Trade Company as the result of the contracts for purchase and sale of coal concluded thereamong; the relationships of financial guarantee among BOC New District Subbranch, Golden Hawk Holdings, Jingcheng Technology Company, Wang X, Zheng X and Chen X based on the credit line agreement, the domestic commercial invoice discounting agreement and the maximum amount guaranty contracts entered into thereamong; and the relationships of assignment of claim among BOC New District Subbranch, Tianhui Energy Company and Huale International Trade Company due to the notices of the assignment of receivables and the confirmation letter of the assignment thereof thereamong. In terms of what is prescribed in the contracts and documents mentioned above, the underlying business arrangement in this case refers to BOC New District Subbranch financing for Golden Hawk Holdings, on the condition that Golden Hawk Holdings assigns to BOC New District Subbranch its receivables claims against Tianhui Energy Company

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and Huale International Trade Company arising from the performance of the sales contracts it has entered into with the same which become upon the assignment of the receivables the debtors of BOC New District Subbranch with the settlement obligations thereto to ensure the settlement of the loan under the domestic commercial invoice discounting agreement between Golden Hawk Holdings and BOC New District Subbranch; meanwhile, Jingcheng Technology Company, Wang X, Zheng X and Chen X are under joint and several obligation of guarantees for the debts of Golden Hawk Holdings. Therefore, it can be confirmed that the abovementioned transactions fall under an overall business arrangement. Pursuant to Article 6 of the Interim Measures for the Management of Factoring Business of Commercial Banks issued by the China Banking Regulatory Commission (CBRC)1 that “(f)actoring business is a comprehensive financial service including collection of receivables, maintenance of accounts, bad debt guarantee and financing, conditioned on the assignment of receivables by creditors”, the business in this case constitutes a bank factoring service conditioned on the legally effective assignment of receivables. In respect of the type of factoring involved, Section 22 of the domestic commercial invoice discounting agreement concluded by and between Golden Hawk Holdings and BOC New District Subbranch states that, “(i)f the receivables discounted is irrecoverable 30 days after the invoice is due, the factor has the right to immediately recover the loan principal and the interest thereon and to initiate deduction from the seller’s account or otherwise initiate collection until the loan principal and the interest thereon are completely recovered”. In addition, it is specified in Section 6 (3) of the application letter for domestic commercial invoice discounting filed by Golden Hawk Holdings with BOC New District Subbranch that, “…You can take any necessary measure to recover from us the loan principal and the interest thereon …”. Whereupon, it should be held that this case involves recourse factoring, in which case the factor has the right not only to request the debtor under the underlying contract to pay off his debts, but also to recover from the assignor of the receivables thereunder. In this case, BOC New District Subbranch claimed not only the right of recourse against Golden Hawk Holdings, but also the settlement of receivables against Tianhui Energy Company and Huale International Trade Company. Although the claims were raised by BOC New District Subbranch against different debtors based on different legal relationships, they fall within the scope of the same factoring relationship with the only purpose of recovering the factoring loan financed for Golden Hawk Holdings. Therefore, the court should consolidate the claims in hearing and determine, based on the different legal relationships among different parties, the order and scope of the obligations to be assumed by the debtors. The court of second instance, after the completion of the first instance proceedings and on the ground that the dispute over the loan guarantee contract and that over the assignment of claim were not based on the same legal fact and legal relationship and thus could not be consolidated in hearing, dismissed the claim filed by BOC New District Subbranch against Tianhui 1

According to the deployment of the central institutional reform, the relevant functions and responsibilities of the China Banking Regulatory Commission have been exercised by the China Banking and Insurance Regulatory Commission.

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Energy Company and Huale International Trade Company, and the counterclaim by Huale International Trade Company against BOC New District Subbranch, which case is not consistent with the features of factoring relationship, ignores the internal connections between various legal relationships, increases the litigation burden of the parties, fails to facilitate the integrated resolution of the dispute, and should therefore be corrected by the Supreme People’s Court. 2. The determination of the obligations to be assumed by Tianhui Energy Company and Huale International Trade Company Based on the findings of this case, after Tianhui Energy Company signed for the confirmation letter of the assignment of receivables, the claim enjoyed against it by Golden Hawk Holdings in the amount of CNY 22,121,600 was assigned to BOC New District Subbranch, which then financed for Golden Hawk Holdings the discounting loan of CNY 17,697,280 as set forth under the corresponding commercial invoice. In the case where Tianhui Energy Company failed to pay the corresponding amount to the designated account on the date specified in the confirmation letter of the assignment of receivable and Golden Hawk Holdings failed as well to pay the aforesaid loan principal and the interest thereon as scheduled, Tianhui Energy Company should, based on the promise it made in the confirmation letter of the assignment of receivables that, “(i)f, for whatever reason, we fail to pay the amount under the invoice to the aforesaid account, you have the right to recover from us what’s owed by the seller under this financing relationship, including the loan principal plus the interest (penalty interest included) and the compound interest thereon, and all such other costs as attorney’s fees and collection fees, etc.”, pay the aforesaid loan principal and the interest thereon to BOC New District Subbranch. Similarly, after Huale International Trade Company signed for the two confirmation letters of the assignment of receivables, BOC New District Subbranch financed for Golden Hawk Holdings two discounting loans in the amount of CNY 18,719,616 and of CNY 13,290,560 each. In the case where Huale International Trade Company failed to pay the corresponding amount to the designated account on the date specified in the confirmation letter of the assignment of receivables and Golden Hawk Holdings failed as well to pay the aforesaid loan principal and the interest thereon as scheduled, Huale International Trading Company should also pay the aforesaid discounting loan principal and the interest thereon to BOC New District Subbranch due to its commitment in the confirmation letter of the assignment of receivables. Regarding the order and scope of the obligations to be assumed by different debtors, as the payers of the receivables, Tianhui Energy Company and Huale International Trade Company were obligated to pay off the transferred part of the receivables in the first place, failing which Golden Hawk Holdings should assume the supplementary obligation of settlement, whose debts, however, were jointly and severally guaranteed by Jingcheng Technology Company, Wang X, Zheng X and Chen X. The first instance decision, although overall correct in consolidating in hearing the disputes among the different parties to this case, erred in its determination upon the order and scope of the obligations to be assumed by the debtors, and should be corrected by the Supreme People’s Court. Although the claim for joint and several

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obligations to be assumed by all the debtors save Golden Hawk Holdings is not established in this case, the order and scope of the obligation of settlement falls under the application of law and should be adjusted accordingly by the Supreme People’s Court considering the specific circumstances of this case. In conclusion, the Supreme People’s Court, in partial support of the application for case reopening by Huarong Asset Henan Branch, rules: (1) to uphold item 5 of the first instance decision, i.e., “dismiss the counterclaim filed by Huale International Trade Company”; (2) to reverse the second instance decision, and the item 1, item 2, item 3 and item 4 of the first instance decision; (3) that Tianhui Energy Company pay the sum of CNY 17,697,280 plus the interest thereon to Huarong Asset Henan Branch within 10 days after the decision becomes effective; (4) that Huale International Trade Company pay the sum of CNY 32,010,176 plus the interest thereon to Huarong Asset Henan Branch within 10 days after the decision becomes effective. (5) that Golden Hawk Holdings be liable for the settlement of the unpaid part of the debts as specified in aforesaid item 3 and item 4 hereof; (6) that Jingcheng Technology Company, Wang X, Zheng X and Chen X be jointly and severally liable for the settlement of the debts specified in the aforesaid item 5 hereof, and have the right to recover from Golden Hawk Holdings upon the fulfillment of the guarantee obligation; (7) to dismiss the remaining claims filed by Huarong Asset Henan Branch.

Comment on Rule 1. Characteristics of the legal relationship of factoring contract As a combination of claim management and financing, factoring, with its popularity in commercial practice, helps accelerate the development of inclusive financial system and facilitate that of enterprises, especially SMEs. Besides, with receivables as the principal source of settlement, factoring is especially favored by SMEs. However, factoring business is not adequately regulated due to the insufficiency of related laws and regulations, resulting in an increasing number of factoring-related civil disputes heard by courts in recent years. As a new type of dispute involving complex legal relationships and suffering insufficiency of regulating laws, the dispute over factoring contract has caused many urgent problems to be studied and resolved in judicial practice. This case is just a typical one concerning how to deal with the case procedurally and substantively when a factor files a lawsuit against multiple debtors. (1) Definition of factoring The concept of factoring has not yet been expressly defined in domestic laws, in which case related international conventions, administrative regulations and industry norms can be resorted to for the regulating rules. Under Article 1 of the Convention on International Factoring, factoring has as its precondition the assignment of receivables arising from contracts of sale of goods or those of supply of services, and the factor (assignee of the receivables) is to perform at least two of such functions as financing

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for the assignor; maintenance of accounts; collection of receivables and protection against default in payment by debtors, and notice of the assignment of the receivables is to be given to debtors. Under Article 6 of the Interim Measures for the Management of Factoring Business of Commercial Banks issued by the China Banking Regulatory Commission, factoring refers to a comprehensive financial service including collection of receivables, maintenance of accounts relating to the receivables, bad debt guarantee and financing, conditioned on the assignment of receivables by the creditor (the assignor) to a commercial bank, which provides him at least one item of the aforesaid services. A similar definition can be found in Article 4 (2) of the Factoring Business Norms for the Chinese Banking Industry issued by the China Banking Association on August 23, 2016. (2) Types of factoring There exist many different classification criteria by which factoring can be classified into international factoring and domestic factoring based on the nature of the underlying transaction and the location of the creditor and the debtor; disclosed factoring and undisclosed factoring (also called confidential factoring or non-notification factoring) on whether the debtor is informed of the assignment of receivables; and single-factor factoring or two-factor factoring on the number of factoring institutions involved. Under Article 6 of the Factoring Business Norms for the Chinese Banking Industry issued by the China Banking Association on August 23, 2016, factoring can be classified into recourse factoring and non-recourse factoring on whether the bank may counter-assign the receivables to the creditor or request the creditor to repurchase the receivables or repay the loan when the debtor, due to bankruptcy, is unreasonably delinquent or defaults in the settlement of receivables. Recourse factoring, also known as repurchase factoring, refers to the case where the bank may counter-assign the receivables to the creditor or request the creditor to repurchase the receivables or repay the loan in the event that the receivables cannot be collected from the debtor at maturity. Non-recourse factoring, also known as buyout factoring, refers to the case where the bank will bear the bad debt risk concerning receivables if the receivables cannot be settled under certain circumstances, including those without any commercial dispute. Because non-recourse factoring is essentially the sale of receivables by the creditor to the bank, resulting in a high risk thereon, recourse factoring is therefore dominant in the domestic factoring business of commercial banks, whereby it is the creditor who will bear the credit risk of the debtor’s default in the settlement of the loan when the receivables are due. This is the same with judicial practice, where most factoring contract disputes are concerned with recourse factoring. (3) Characteristics of the legal relationships under factoring contract Factoring has as its precondition the assignment of receivables or claims arising from underlying contracts such as contracts of sale of goods or those of supply of services. There are generally four parties involved in a factoring legal relationship, to wit, the factor, the seller under the underlying contract, the buyer under the underlying contract and the guarantor; and the legal relationships involved usually include the

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factoring relationship between the factor and the debtor, the underlying contract relationship between the debtor and the subdebtor, the relationship of the assignment of claim between the debtor and the factor, and the guarantee relationship between the factor and the guarantor. Therefore, a factoring contract cannot be simply treated as a loan contract, a contract of the assignment of claim or a guaranty contract. In this case, the dispute over the loan contract was determined as the cause of action in the first instance, and the dispute over the loan guarantee contract as the cause of action in the second instance. However, considering the conclusion and performance of the aforesaid agreements between the parties thereto, the cause of action of this case is a typical dispute over factoring contracts. In terms of the subjects involved, there are four parties thereto, to wit: BOC New District Subbranch as the factor, Golden Hawk Holdings as the assignor of the receivables and creditor under the underlying contract, Tianhui Energy Company and Huale International Trade Company as the debtors of the receivables and the ones under the underlying contract, and Jingcheng Technology Company, Wang X, Zheng X and Chen X as the guarantors. In terms of the legal relationships involved, there exist such four types as the factoring relationship, the underlying contract relationship, the relationship of the assignment of claims and the guarantee relationship. Although the dispute over the loan guarantee contract as determined by the second instance has been adopted as the cause of action in the case reopening, the involved dispute is essentially a dispute over the factoring contract. 2. Hearing scope of and judicial approach to disputes over factoring contract (1) Exploration into the nature of factoring contracts and the corresponding application of law Theoretically, there exist conflicting views in respect of the nature of factoring contracts, which include: (a) “the theory of claim as pledge”, by which it is actually the creditor who, in the operation of factoring, pledges his claim against the debtor to the factor in exchange for the loan from the latter; (b) “the theory of claim as guarantee”, by which factoring functions as a guarantee for payment, with the principal purpose of a factoring contract of guaranteeing the performance of the underlying contract, and the factor only fulfills the payment obligation under the factoring contract absent normal performance of the underlying contract or in the event of the non-payment by the buyer; and (c) “the theory of assignment of claim”, by which the assignment of receivables serves as the legal basis for factoring. Since a factoring contract is a combination of multiple contracts, a court should, in adjudicating a case, based on the claims filed by the parties thereto, the facts and the grounds presented, guided by the relevant evidence, and conditioned on a legally valid underlying contract, determine whether the creditor of the underlying contract has actually transferred bona fide his receivables to the factor and judge in an overall manner whether the involved contract is a factoring contract. As to the validity of the contract, save any circumstance as set forth in Article 52 of the Contract Law occurs under which the contract should be deemed invalid, the court should accept the agreement under the factoring contract as the principal contractual basis for the rights

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and obligations exercised by the parties thereto, and the provisions of the Contract Law concerning the assignment of claim as the legal basis, and, subject to Article 1242 thereof concerning non-categorized contract, apply the General Provisions of the Contract Law, with also the Specific Provisions of the Contract Law or other laws with similar provisions being applied mutatis mutandis. (2) Hearing scope of dispute over factoring contract It is particularly critical for a court to determine the hearing scope in handling this type of contract dispute. Regarding more common disputes such as those over recourse factoring, where the factor files a lawsuit against multiple debtors, there exists much controversy in judicial practice regarding whether the court should consolidate the involved claims in hearing or hear them separately based on different legal relationships. In light of the characteristics of the factoring relationship and in consideration of the principle of economic litigation, where the factor files a lawsuit against multiple debtors, the case should be heard in a consolidated manner. The factor, upon factoring the receivables, is not only the creditor under the underlying contract but also the creditor under the factoring contract. In the case of default in the settlement of the claim, the factor has the right not only to request the settlement of the claim from the debtor under the underlying contract but also to recover the claim from the assignor of the claim thereunder. Although based on different reasons and against different debtors, the different claims raised concurrently by the factor fall within a single scope of factoring relationship with the only purpose of recovering the factoring loan. What should be noted here is that the order and scope of the debtor’s settlement obligation should be delineated and determined according to the legal relationships among different parties. In judicial practice, similar to the practice in the second instance of this case, some courts treat the assignment of receivables as the consideration for factoring, divide the factoring contract relationship into the borrowing relationship and the relationship of the assignment of claim, and deal with them separately. Such an approach to the dispute over factoring contract does exist at an initial stage of litigation. However, it is procedurally improper, with the completion of the first instance proceedings, for the court of second instance, as in this case, to divide the case into separate hearings. Whereupon, it is in line with the legal characteristics of the dispute over factoring contract and the overall requirements for the administration of justice for the convenience and benefits of the people for the Supreme People’s Court, through the litigation supervision procedure, to reopen the case for the purpose of correcting the aforesaid error.

2

Now Article 467 (1) of the Civil Code, which states, “(f)or a contract not explicitly provided in this Code or other laws, the General Provisions of this Book shall be applied, and the provisions provided in this Book and other laws on a contract which is most similar to the said contract may be applied mutatis mutandis”.

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(3) Judicial approach to disputes over factoring contract Where the factor is unable to collect the receivables, he would concurrently and respectively claim the settlement obligation from both the assignor and the payer of the receivables, with as the legal basis for the obligation of the former his commitment under the factoring relationship to repurchase the receivables or settle the loan, and for the latter the claim of receivables under the underlying sales contract. In the case where the factor concurrently claims against multiple debtors, the court should delineate the order and scope of the debtors’ settlement obligations according to the legal relationships among different parties rather than directly dismiss his claim directly on the ground that the order or scope of the obligations asserted is not accurate. With regard to the order and scope of settlement obligation, the payer of the receivables shall firstly assume the full payment obligation, failing which the assignor of the receivables shall assume the supplementary settlement obligation, with the guarantor being concurrently under the guarantee obligation. In this case, Tianhui Energy Company and Huale International Trade Company as the payers of the receivables shall assume in the first place the full settlement obligation concerning the transferred part of the receivables to Huarong Assets Henan Branch, failing which Golden Hawk Holdings shall assume the supplementary obligation toward the same, with Jingcheng Technology Company, Wang X, Zheng X and Chen X being under joint and several guaranty liability for the debt assumed by Golden Hawk Holdings.

Gansu Huayuan Industrial Co., Ltd., et al. v. Bank of Lanzhou Co., Ltd., Qingyang Branch, et al. Gansu Longdong Auto Transport Co., Ltd. (Third Party in the First Instance), et al. (Dispute over Financial Loan Contract): Conditions for Consolidation of Actions with Correlative Legal Relationships Thereamong Xiaofei Liu and Junhong Zou

Rule When any party consolidates multiple claims in a single lawsuit on the ground of a number of legal relationships which have certain de facto correlation thereamong but are not based on the same fact, or the involved subject matters are not the same or of the same category, if such party, after express explanation by the court, still refuses to file lawsuits separately, the court may rule to dismiss his lawsuit, but shall protect his right to file lawsuits separately.

Collegial Bench for the Second Instance: Xiaofei Liu, Tao Wang and Honglei Yang Edited by Yi Yang; translated by Xiaohua Zhu X. Liu (B) · J. Zou The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_16

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Case Information 1. Parties Appellant (Plaintiff in the First Instance): Gansu Huayuan Industrial Co., Ltd. (hereinafter referred to as Huayuan Industrial Company) and five others Appellee (Defendant in the First Instance): Bank of Lanzhou Co., Ltd., Qingyang Branch (hereinafter referred to as Bank of Lanzhou Qingyang Branch) and five others Third Party in the First Instance: Gansu Longdong Auto Transport Co., Ltd. (hereinafter referred to as Longdong Auto Transport Company) and three others 2. Procedural History First Instance: No. 136 [2018] Trial, Civ. Division, the Higher People’s Court of Gansu Province (dated Oct. 31 of 2018) Second Instance: No. 77 [2019] Final, Civ. Division, the Supreme People’s Court (dated Mar. 14 of 2019) 3. Cause of Action Dispute over financial loan contract

Essential Facts Huayuan Industrial Company, et al. (totaling six) filed a lawsuit with the court of first instance, asserting that Bank of Lanzhou Qingyang Branch issued on September 30, 2014 a loan of CNY 30 million to 21 fruit planters as secured through mortgage created by Qingyang Chunyuan Fruit & Vegetable Storage Co., Ltd. (hereinafter referred to as Chunyuan Fruit & Vegetable Storage Company) on the warehouse thereof, with a loan term of one year. The aforesaid loan, however, was not actually allocated among the 21 fruit planters, but under the possession of Chunyuan Fruit & Vegetable Storage Company, which lent it out for profit. Upon the expiration of the loan term, Chunyuan Fruit & Vegetable Storage Company failed to repay the loan as scheduled, whereupon Bank of Lanzhou Qingyang Branch expected it to settle the matter in a timely manner by means of “borrowing a new loan to repay the prior one”. In November 2015, Mi X, to wit, the legal representative of Chunyuan Fruit & Vegetable Storage Company, went to Liu X, to wit, the controlling shareholder of Longdong Auto Transport Company, to consult with the latter on the aforesaid matter. Xiao X, as in charge of Bank of Lanzhou Qingyang Branch, promised to finance for Liu X shortly after the Spring Festival of the coming year, preconditioned on a loan of CNY 30 million in the name of Longdong Auto Transport Company from Bank of Lanzhou Qingyang Branch to help Chunyuan Fruit & Vegetable Storage Company repay the loan borrowed by the 21 fruit planters. With no collateral available for

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the loan by Longdong Auto Transport Company, Liu X contacted Qin X, the actual controller of Huayuan Industrial Company, in an attempt to take “Huayuan Holiday Inn” under the ownership of Huayuan Industrial Company as the required collateral. Since Qingyang Teheng Real Estate Development Co., Ltd. (hereinafter referred to as Teheng Real Estate Company) as a sole proprietorship company held by Qin X was in urgent need of funds for its project located in Zhenyuan County, Qingyang City, Qin X, after receiving the promise of financing from Xiao X, consulted a couple of times with Mi X, Liu X and Xiao X, and managed to reach a “blanket” verbal agreement with them, under which Qin X agreed to provide a mortgage guarantee created on his house by the end of 2015 on which Liu X was to borrow a loan in the amount of CNY 30 million from Bank of Lanzhou Qingyang Branch for the purpose of paying off on behalf of Mi X the debts owed by the 21 fruit planters to the bank, and Bank of Lanzhou Qingyang Branch promised to finance for Liu X and Qin X respectively shortly after the Spring Festival of the coming year. It was also concurrently agreed that, in the event that Qin X needed to create a different mortgage on the house, Liu X was obligated to settle the loan immediately, release the mortgage and return the certificate of title thereof to Qin X. Mi X, on behalf of Chunyuan Fruit & Vegetable Storage Company, offered Huayuan Industrial Company a written commitment, promising to mortgage the Company’s office building and warehouse, and promised to pay Liu X CNY 12 million in cash shortly after the Spring Festival of the coming year to guarantee his obligation to repay the loan, release the mortgage and return the aforesaid certificate of title. Liu X also made simultaneously a written commitment that if he failed to settle the loan, release the mortgage and return the aforesaid certificate of title as scheduled, he was to make as the guarantee for the repayment of the loan all of his property rights and interests in the contracting and operation of the “Huayuan Holiday Inn” including the rescission of the involved contractor agreement, and all of his personal property rights and interests including the contracting fee of CNY 5 million, the renovation deposit of CNY 1 million, and the preliminary renovation investment. On December 30, 2015, a loan agreement was entered into by and between Longdong Auto Transport Company and Bank of Lanzhou Qingyang Branch, under which Huayuan Industrial Company provided a mortgage guarantee with “Huayuan Holiday Inn” and Bank of Lanzhou Qingyang Branch transferred the CNY 30 million loan borrowed in the name of Longdong Auto Transport Company (with borrowing term of one year) to the account of Chunyuan Fruit & Vegetable Storage Company, which paid off, on behalf of the 21 fruit planters, the loan borrowed in the names thereof. Since March 2016, Qin X has repeatedly urged Bank of Lanzhou Qingyang Branch to grant the loan for him but learned from Xiao X that his application could not be processed. Meanwhile, Chunyuan Fruit & Vegetable Storage Company failed to fulfill its payment commitment and guarantee obligation, and Liu X failed his commitment to Huayuan Industrial Company, resulting in the suspension of the project invested by Qin X due to his inability to loan from Bank of Lanzhou Qingyang Branch and from other banks without required collateral.

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On August 28, 2017, Bank of Lanzhou Qingyang Branch filed a lawsuit with the Intermediate People’s Court of Qingyang City against Longdong Auto Transport Company and Huayuan Industrial Company, et al., requesting the court to order Longdong Auto Transport Company to repay the loan and enforce its exercise of the right of mortgagee over the aforesaid real estate (Huayuan Holiday Inn) of Huayuan Industrial Company to that effect. In the case where the borrower, to wit, Longdong Auto Transport Company, failed to take the initiative to repay the loan, considering the mortgaged property being bound to be involved in relatively lengthy litigation and execution procedures, Qin X chose to accept the program of “borrowing a new loan to repay the prior one” initiated by Bank of Lanzhou Qingyang Branch, whereby Qingyang Teheng Operating LLC. (hereinafter referred to as Teheng Operating Company), with Bian X (The mother of Qin X) as its controlling shareholder and Qin X its ordinary shareholder, was to loan from Bank of Lanzhou Qingyang Branch in the amount of CNY 23 million, which sum, together with the sum of CNY 13,488,949.99 as raised personally by Qin X, totaling CNY 36,488,949.99, was to be used by Teheng Operating Company for the settlement of the loan principal plus the interest thereon owed by Longdong Auto Transport Company to Bank of Lanzhou Qingyang Branch; Xiao X was to contact Qingyang Haowei Real Estate Development Co., Ltd. (hereinafter referred to as Haowei Real Estate Company), Gansu Ruixinyuan Import and Export Trade Co., Ltd. (hereinafter referred to as Ruixinyuan Import & Export Company), Gansu Hongda Road and Bridge Construction Group Co., Ltd. (hereinafter referred to as Hongda Road & Bridge Company) and their legal representatives for the purpose of providing joint and several guarantee for the aforesaid loan, which was also to be under the joint and several guarantee by Teheng Real Estate Company, Qin X, Bian X and Ding X (the wife of Qin X); meanwhile, Qin X was to pledge his 100% equity interest of CNY 33.6 million in Teheng Real Estate Company to Haowei Real Estate Company, Ruixinyuan Import & Export Company and Hongda Road & Bridge Company respectively, providing the counter-guarantees for the aforesaid loan guarantee. Qin X also issued a letter of commitment to Lanzhou Bank Qingyang Branch, promising to “not report on or sue Xiao X, or otherwise recover from him”. On September 28, 2017, Teheng Operating Company repaid for Longdong Auto Transport Company the sum of CNY 36,488,949.99 to Bank of Lanzhou Qingyang Branch, the part of which in the amount of CNY 23 million as borrowed by Teheng Operating Company from Bank of Lanzhou Qingyang Branch has not been repaid thus far. Huayuan Industrial Company, el at. (totaling six) asserted that, the promise made by Xiao X, as in charge of Bank of Lanzhou Qingyang Branch, of “financing shortly after the Spring Festival of the coming year” constituted an on-duty conduct, the responsibility for which should be assumed by Bank of Lanzhou Qingyang Branch; the mortgage contract between Bank of Lanzhou Qingyang Branch and Huayuan Industrial Company was concluded out of the former’s fraudulent promise toward the latter, constituting a contract fraud and should thus be revoked; after the contract was revoked, the revolved mortgage registration should also be revoked accordingly; since Bank of Lanzhou Qingyang Branch filed the lawsuit on August 28, 2017, a series of contracts between Qin X and Bank of Lanzhou Qingyang Branch

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have been concluded under the pressure of the former’s desperate situation and against his true will, which constituted revocable civil acts and revocable contracts as provided in Article 1511 of the General Principles of Civil Law and Article 542 of the Contract Law, and should be revoked; Bank of Lanzhou Qingyang Branch, due to its acts of fraud, made Huayuan Industrial Company and the five other appellants unable to obtain the loan or otherwise redeem the collateral as agreed, resulting in the suspension of the aforesaid construction project and huge losses accordingly, and should thus, pursuant to Article 1573 of the General Principles of Civil Law and Article 58 of the Contract Law, assume the major liability for compensation; Chunyuan Fruit & Vegetable Storage Company and Liu X issued corresponding letters of commitment to Qin X to ensure him the timely repayment by Liu X but failed to do so, directly leading to the mortgage for the project being not releasable in a timely manner and Qin X being unable to borrow money from other banks, which resulted in huge losses arising from the suspension of the project, and should be liable for compensation, whereupon, pursuant to Article 84 of the Tort Liability Law and Article 1285 of the Contract Law, Bank of Lanzhou Qingyang Branch, Liu X and Chunyuan Fruit & Vegetable Storage Company shall be jointly and severally liable for compensation. Based on the facts mentioned above, Huayuan Industrial Company, et al. (totaling six) filed a lawsuit with the court of first instance, requesting the court: (1) to revoke the repayment in the amount of CNY 36,488,949.99 made by Teheng Operating Company to Bank of Lanzhou Qingyang Branch for Longdong Auto Transport Company and order Bank of Lanzhou Qingyang Branch to refund the aforesaid repayment to Teheng Operating Company; (2) to revoke the loan agreement involving the amount of CNY 23 million borrowed from Bank of Lanzhou Qingyang Branch by Teheng Operating Company and the guaranty contracts entered into respectively by Bank of Lanzhou Qingyang Branch on the one side, and Teheng Real Estate Company, Qin X, Ding X and Bian X on the other, and ensure the refund by Teheng Operating Company upon the revocation of the aforesaid contracts of the CNY 23 million loan to Bank of Lanzhou Qingyang Branch; (3) to revoke the pledge contract 1

Now Article 151 of the Civil Code. Now Articles 147, 148, 150 and 151 of the Civil Code. Article 147 of the Civil Code states, “(w)here a civil juristic act is performed based on serious misunderstanding, the person who performs the act has the right to request the people’s court or an arbitration institution to revoke the act. ” Article 148 hereof states, “(w)here a party by fraudulent means induces the other party to perform a civil juristic act against the latter’s true intention, the defrauded party has the right to request the people’s court or an arbitration institution to revoke the act.” Article 150 hereof states, “(w)here a party performs a civil juristic act against its true intention owing to duress of the other party or a third person, the coerced party has the right to request the people’s court or an arbitration institution to revoke the civil juristic act.” Article 151 hereof states, “(i)n situations such as where one party takes advantage of the other party that is in a desperate situation or lacks the ability of making judgment, and as a result of civil juristic act thus performed is obviously unfair, the damaged party is entitled to request the people’s court or an arbitration institution to revoke the act.” 3 Now Article 157 of the Civil Code. 4 Now Article 1168 of the Civil Code. 5 This article has no counterpart in the Civil Code. 2

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and the registration thereof involving Qin X’s 100% equity interest of CNY 33.6 million in Teheng Real Estate Company which was pledged respectively to Haowei Real Estate Company, Ruixinyuan Import & Export Company and Hongda Road & Bridge Company in the amount of CNY 11.2 million each; (4) to revoke the letter of commitment issued by Qin X, by which he promised to “not report on or sue Xiao X, or otherwise recover from him”; (5) to revoke the mortgage contract entered into by Huayuan Industrial Company with Bank of Lanzhou Qingyang Branch for the purpose of guaranteeing the CNY 30 million loan borrowed by Longdong Auto Transport Company from Bank of Lanzhou Qingyang Branch, and the registration thereof; (6) to decree Bank of Lanzhou Qingyang Branch, Chunyuan Fruit & Vegetable Storage Company and Liu X to jointly compensate Huayuan Industrial Company for the interest loss arising from his self-raised CNY 13,488,949.99 loan which was borrowed for the purpose of repaying for Longdong Auto Transport Company the loan to Bank of Lanzhou Qingyang Branch; (7) to decree Bank of Lanzhou Qingyang Branch, Chunyuan Fruit & Vegetable Storage Company and Liu X to jointly compensate Huayuan Industrial Company for the proceeds loss of “Huayuan Holiday Inn” as the collateral; (8) to decree Bank of Lanzhou Qingyang Branch, Chunyuan Fruit & Vegetable Storage Company and Liu X to jointly compensate Teheng Real Estate Company for various losses temporarily totaling CNY 80 million as caused by the suspension, due to the fund break, of the construction of the “Xinhewan” commercial and residential community project from March 1, 2016 through September 30, 2017; (9) to decree Liu X to assume the guaranty liability for the involved debts with all his property rights and interests in the contracting and operation of “Huayuan Holiday Inn”, including the rescission of the involved contractor agreement, and all of his personal property rights and interests, including the contracting fee of CNY 5 million, the renovation deposit of CNY 1 million, and the preliminary renovation investment; (10) to decree Bank of Lanzhou Qingyang Branch, Chunyuan Fruit & Vegetable Storage Company and Liu X to assume all the litigation costs of this case. The court of first instance held after review that the claims raised by Huayuan Industrial Company, et al. (totaling six) were of different categories based on different legal relationships and did not constitute a joint action, which case failed to meet the circumstances required for consolidated hearing and should not be so dealt with. Since Huayuan Industrial Company, et al. (totaling six) refused to drop the lawsuit after the express explanation of the case by the court, the court ruled to dismiss the lawsuit. Dissatisfied with the first instance decision, Huayuan Industrial Company, et al. (totaling six) appealed to the court of second instance, requesting the court to reverse the first instance decision and remand the case to the court of first instance for a substantive trial.

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Issue Whether the claims concurrently filed by Huayuan Industrial Company with correlative legal relationships thereamong should be heard by the court.

Holding The Supreme People’s Court holds that the lawsuit filed by Huayuan Industrial Company, et al. (totaling six) involves a serial of disputes arising from three correlative legal relationships, yet independent from each other, rather than from the same fact, and thus does not constitute a joint action. The court of first instance, after its express explanation of the case to Huayuan Industrial Company, et al. (totaling six), dismissed the lawsuit filed thereby, which is a proper handling based on the actual situation of the case for the purpose of the full protection of the right to the choice of procedures enjoyed by the parties involved, and with no impropriety in the findings of facts and the application of law. Huayuan Industrial Company, et al. (totaling six) may file separate lawsuits, each with the claims arising out of the same legal relationship, and the court shall hear the lawsuits being in line with the requirements for hearing. Whereupon, the Supreme People’s Court rules to dismiss the appeal and uphold the first instance decision.

Comment on Rule The lawsuit involved is a consolidated one filed by multiple plaintiffs based on a number of borrowing legal relationships with certain de facto correlation. The major issue to be settled is whether the claims filed should be heard in a single lawsuit, focused on a correct judgment of whether the case meets the formal requirements for consolidated hearing. Pursuant to the Civil Procedure law and the Judicial Interpretation of Civil Procedure Law, the claims filed can be dealt with in a consolidated hearing if: (1) the claims are filed based on the same fact(s), (2) the subject matters of the lawsuit are the same or of the same category, or (3) the claims consist of both claims and counterclaims. First, in this case, the claims were not filed based on the same fact(s). Article 221 of the Judicial Interpretation of Civil Procedure Law states that, “(w)here the parties concerned file separate lawsuits against a dispute over the same fact(s) with the same court, the said court may consolidate the lawsuits in hearing.” The term “(legal) facts” refers to certain circumstances specified by legal norms, which can cause the occurrence, change and elimination of any legal relationship. A consolidatable lawsuit

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should be filed “on the same fact(s)”, with the fact(s) or legal relationship(s) on which each lawsuit is based being the same or significantly overlapping. Where such fact(s) or legal relationship(s) is/are not the same or do not overlap to a significant extent, resulting in conflicting adjudications, the lawsuit fails to meet the requirements for consolidated hearing. Under such provision, the lawsuit to be consolidated in hearing should be filed “based on the same fact(s)”, and the fact(s) or legal relationship(s) on which they are based should be the same or overlap to a significant extent. In this case, Huayuan Industrial Company, et al. (totaling six) filed the lawsuit based on three different borrowing relationships established between Bank of Lanzhou Qingyang Branch and different subjects of civil law, as well as the mortgage guarantee relationship, the warranty relationship and the counter-guarantee relationship derived therefrom. The three involved borrowing relationships are legally independent of each other, with different claimants having different claims based on different legal relationships. Whereupon, it can be safely concluded that the lawsuit was not filed based on the same facts, thus failing to meet the requirement for consolidated hearing as provided in the aforesaid judicial interpretation. Second, this case fails to meet the requirement for joint action. Under Article 52 of the Civil Procedure Law, joint actions include necessary joint actions and ordinary joint actions. A necessary joint action is an action with a common subject matter not divisible, in which common litigants are required to appear together before the judge, failing which the parties will be deemed ineligible. The three borrowing relationships in this case are independent of each other, constituting separate and independent subject matters of litigation without any material interconnection among them, on which the litigants can file their lawsuits separately, which case does not constitute a necessary joint action. An ordinary joint action is one with the subject matters thereof being of the same category, which is treated by the court as consolidatable and can be consolidated through consent from the parties in hearing. Although the three borrowing relationships involved are of the same category, they involve different subjects and different guarantee relationships; besides, the claims raised by Huayuan Industrial Company, et al. (totaling six) are also different against different subjects and based on different legal relationships. Whereupon, this case does not constitute an ordinary joint action and thus fails to meet the requirement for consolidated hearing. Third, where the claims fail to meet the requirement for consolidated hearing but the claimants refuse to drop their claims after the express explanation of the case by the court, the court may rule to dismiss the lawsuit but endeavors to protect their right to file lawsuits separately. In general, a civil lawsuit deals with only one legal relationship at a time. Where however, other legal relationships are involved, the court should examine to determine upon the filing of the lawsuit whether the involved legal relationships and the connections thereamong meet the circumstances required for consolidated hearing, in order to reduce the litigation costs, improve the litigation efficiency, and avoid conflicting decisions on the cases of the same category. However, where the parties raise, when initiating the litigation proceedings, a number of claims based on different legal relationships and the consolidation of such claims

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in hearing will fail to achieve, according to the court upon its review, the aforesaid procedural functions and values, the court may expressly explain the case to the parties, and deal with such procedural matter accordingly.

Anhui Qiangzheng Chinese Medicine Co., Ltd. v. Dongfang Zhongxin Microfinance LLC., Linchuan District, Fuzhou City (Dispute over Loan Contract): Allocation of the Burden of Proving the Alleged Facts Runzhi Qin

Rule 1. Since an adjudicating court is required to strictly observe the allocation of the burden of proof as provided in Article 108 of the Judicial Interpretation of the Supreme People’s Court on the Applicability of the Civil Procedure Law of the People’s Republic of China, what such court needs to take into consideration in its adjudication is by which way it is capable of determining whether the available evidence is sufficient to such an extent as to prove the alleged facts. 2. The statement and confession made by the parties, although not highly admissible, are still part of legal evidence. A confessed fact, however, should not be confirmed when coming into conflict with an identified fact. 3. The key constituent element of an agency by estoppel is whether the conduct of one party is to cause reasonable reliance by the other party, which needs to be determined through integrated weighing of multiple factors.

Collegial Bench: Feng Xiao, Hua Zhang and Chenghui Wang Edited by Yi Yang; translated by Xiaohua Zhu R. Qin (B) The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_17

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Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Anhui Qiangzheng Chinese Medicine Co., Ltd. (hereinafter referred to as Qiangzheng Chinese Medicine Company) Respondent in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Dongfang Zhongxin Microfinance LLC., Linchuan District, Fuzhou City (hereinafter referred to as Dongfang Zhongxin Microfinance Company) 2. Procedural History First Instance: No. 104 [2018] Trial, Civ. Division, the Intermediate People’s Court of Fuzhou City, Jiangxi Province (Jiangxi 10) (dated Sep. 25 of 2018) Second Instance: No. 59 [2019] Final, Civ. Division, the Higher People’s Court of Jiangxi Province (dated Feb. 28 of 2019) Reopening: No. 2199 [2019] Appeal, Civ. Division, the Supreme People’s Court (dated May 23 of 2019) 3. Cause of Action Dispute over loan contract

Essential Facts On December 27, 2017, Anhui Jisongtang Pharmaceutical Co., Ltd. (hereinafter referred to as Jisongtang Pharmaceutical Company) applied for a loan to Dongfang Zhongxin Microfinance Company, with a working capital loan agreement concluded therebetween, under which the two parties agreed upon the amount, term, purpose, interest rate and guarantee of the loan. For the purpose of the performance of the agreement, multiple guarantors, including Qiangzheng Chinese Medicine Company, entered into guaranty contracts with Dongfang Zhongxin Microfinance Company, agreeing upon the guaranteed principal debt as the sum of CNY 10 million loaned by Jisongtang Pharmaceutical Company from Dongfang Zhongxin Microfinance Company, the guarantee coverage including such various items as the loan principal under the underlying agreement, the interest thereon, late payment interest, compound interest, penalty interest, liquidated damages, compensation, as well as legal services, evaluation, registration, insurance, storage, appraisal, notarization and all other expenses for the purpose of the realization of the claim, and the guarantee in the form of suretyship with joint and several liability. Jisongtang Pharmaceutical Company, after its receipt of the CNY 10 million loan, has fully paid Dongfang Zhongxin Microfinance Company the interest incurred through May 20, 2018 totaling CNY 483,333.20, but has failed to repay any principal or the interest thereon

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since May 21, 2018. Whereupon, Dongfang Zhongxin Microfinance Company filed a lawsuit against Jisongtang Pharmaceutical Company. The court of first instance rendered its civil judgment on September 25, 2018 (No. 104 [2018] Trial, the Intermediate People’s Court of Fuzhou, Jiangxi Province), partially supporting the claims raised by Dongfang Zhongxin Microfinance Company without finding that Qiangzheng Chinese Medicine Company shall be jointly and severally liable for the debt. Dissatisfied with the first instance decision, Dongfang Zhongxin Microfinance Company filed an appeal on February 28, 2019, and the court of second instance reached its decision (No. 59 [2019] Final, the Higher People’s Court of Jiangxi Province), with its findings that Qiangzheng Chinese Medicine Company shall be jointly and severally liable for the involved debt. Qiangzheng Chinese Medicine Company subsequently applied to the Supreme People’s Court for case reopening, requesting the court to dismiss the claims filed by Dongfang Zhongxin Microfinance Company.

Issues 1. 2. 3.

Whether the guaranty contract with Qiangzheng Chinese Medicine Company as the guarantor is legally concluded; How to allocate between the parties the burden of proving the authenticity of the seal on the guaranty contract; Does the contract still result in an agency by estoppel in the event of a fake seal?

Holding The Supreme People’s Court holds after hearing the case that the expert opinion presented by Qiangzheng Chinese Medicine Company can only prove the inconsistency between the seal of Qiangzheng Chinese Medicine Company on the involved guaranty contract and the sample seal used in the judicial expertise by the public security organ with jurisdiction, but cannot sufficiently prove that the seal on the guaranty contract was fake. Moreover, it is only a unilateral statement by Liao X, to wit, the controlling shareholder of Qiangzheng Chinese Medicine Company at that time, that the official seal was forged by him. Pursuant to Article 73(1) of the Rules of the Supreme People’s Court on Evidence in Civil Actions, it can be confirmed that Dongfang Zhongxin Microfinance Company has presented relatively more sufficient evidence. In addition, the forgery of the official seal of Qiangzheng Chinese Medicine Company has already been reported to and accepted by the public security organ with jurisdiction, yet still pending, the crime of forgery, thus, cannot be said to have occurred; therefore, there is no sufficient ground to support the claim filed by Qiangzheng Chinese Medicine Company that the case should be moved to the public security organ with jurisdiction and the trial should be suspended. Besides,

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it is expressly agreed under the transfer agreement upon the transfer of all the real estates, equities, machinery and equipment, and the business licenses owned by Jisongtang Pharmaceutical Company and Liao X to Qiangzheng Chinese Medicine Company and Lu X, the price of all the transferred assets totaling CNY 26.6 million, but without the individual price for the equities and each item thereof, and without sufficient evidence presented by Qiangzheng Chinese Medicine Company to prove whether the agreement had been specifically performed. In this case, Qiangzheng Chinese Medicine Company has always existed throughout, and the second instance decision is not improper in its findings that it shall bear joint and several guaranty liability. In conclusion, the Supreme People’s Court rules to dismiss the application for case reopening by Qiangzheng Chinese Medicine Company.

Comment on Rule The core issues in this case are how to allocate the burden of proving the authenticity of the seal on the guaranty contract and whether an agency by estoppel occurs in the event that the seal cannot be proven authentic. The decision reasoning will be further illustrated below with reference to the specific circumstances of the case and general judicial practice. 1. How to allocate the burden of proving the authenticity of the seal It was found in the first instance decision, based on the confession made by Liao X to the forgery of the official seal, that the guaranty contract was concluded not out of the true intent of Qiangzheng Chinese Medicine Company, with no mutual consent between both parties, resulting in the contract not being legally concluded; since both parties did not apply for judicial expertise, the authenticity of the seal could not be determined, and Dongfang Zhongxin Microfinance Company failed to provide additional evidence to prove its case, which should thus bear the adverse legal consequences of such failure. However, it was held in the second instance decision that Dongfang Zhongxin Microfinance Company had already presented the guaranty contract and the resolution of the shareholders meeting, which could be admitted as prima facie evidence, and Qiangzheng Chinese Medicine Company should bear the burden of proof in its defense if it alleged the forgery of the seal. It is held in this case that, in light of the findings by the court of second instance, it can be determined that the guaranty contract is legally concluded, with the expression of intent by both parties. The guaranty contract and resolution of the shareholders meeting, the official seal of Qiangzheng Chinese Medicine Company and the personal seal of the legal representative thereof are sufficient, as prima facie evidence, to make the judge convinced of the validity of the involved contract and to exempt accordingly Dongfang Zhongxin Microfinance Company from its additional burden of proof to that effect. Under Article 108(2) of the Judicial Interpretation of Civil Procedure Law, Qiangzheng Chinese Medicine Company shall bear the burden of proof in its defense against Dongfang Zhongxin Microfinance Company. There are currently two pieces

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of evidence available in favor of Qiangzheng Chinese Medicine Company, namely, the unilateral statement by Liao X (the former legal representative of the company) as to the forgery of the seal, and the expert opinion that the seal of Qiangzheng Chinese Medicine Company on the guaranty contract is not consistent with the sample seal for the judicial expertise by the public security organ with jurisdiction, of which the former is just a confession by one party, which can only, pursuant to Article 92 of the Judicial Interpretation of Civil Procedure Law, produce the effect of the opposite party being not required to produce evidence to prove the same, and which, if inconsistent with the proved fact, shall not be admitted by the court. In this case, since the confession is only a unilateral statement without sufficient power to rule out the possibility of collusion between Liao X and Qiangzheng Chinese Medicine Company, additional evidence is needed in an attempt to overturn the already proved fact. The latter of the abovementioned evidence, namely, expert opinion, can only prove the inconsistency between the seal under inspection and the sample seal, but not the forgery of the seals on the guaranty contract and the resolution of the shareholders meeting. 2. The allocation of responsibility for the application for judicial expertise The key issue in this case is that, unlike a usual practice where it is up to the parties to a case to apply for judicial expertise concerning the authenticity of the seal, both parties to this case did not apply for judicial expertise. There exists much argument in judicial practice as to which party should assume the burden of proof through the application for judicial expertise, which, however, can be approached outside this case through the study of common situations frequently occurring in private lending cases. Suppose Lender A asserts that he has lent money to Borrower B, presenting a loan agreement to prove his case but without a supportive account statement, and Borrower B asserts in his defense that the seal on the loan agreement is a fake one. The two parties, however, have not applied for judicial expertise. In such case, which party shall bear the burden of proof? Pursuant to Article 108 (1) of the Judicial Interpretation of Civil Procedure Law, such burden of proof should be on the part of Lender A, who is under the duty to prove the occurrence of the lending. If Lender A has presented evidence to prove his case while Borrower B raises no objection, the judge may presume that there exists a high probability of the lending and shall find in favor of the existence thereof. If Borrower B asserts that he did not sign on the contract, his statement again clouds the authenticity of the evidence, in which case Lender A shall apply for judicial expertise to prove the authenticity of the signature on the contract. Let us suppose another situation where Lender A presents the IOU, signature and transfer voucher, which together are sufficient to convince the judge of a high probability of the lending, resulting in no need for judicial expertise. However, where the judge believes that such evidence is not sufficient, e.g., the signature is obviously different from the actual signature of Borrower B, Lender A then needs additional evidence to prove his case, with as usual practices calling witnesses to testify before the judge, or applying for handwriting identification. The reason behind is that, in the event of uncertainty as to the alleged facts, the party with the burden of proof,

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to wit, the party who uses the official seal as the evidence for the authenticity of the contract, shall apply for judicial expertise. In practice, however, such situation would sometimes occur as the borrower would apply for judicial expertise while the lender would not do so, which is generally a strategy employed by the borrower for the purpose of stalling for time, and it is generally unnecessary for the judge who has already been convinced by other evidence to approve the application. 3. Does the contract still result in an agency by estoppel in the event of fake seal In this case, where Dongfang Zhongxin Microfinance Company failed to prove the legal conclusion of the guaranty contract or where Qiangzheng Chinese Medicine Company presented sufficient evidence in its defense, making the authenticity of the seal under great uncertainty, the authenticity of which then cannot be determined, and whether this case involves an agency by estoppel should be necessarily further discussed. The judgment of the constitution of an agency by estoppel depends mainly on whether Liao X’s behavior is sufficient to bring about from Dongfang Zhongxin Microfinance Company reasonable reliance, which, in the case of an agency by estoppel, needs to be determined with multiple factors to be considered. In this case, the authenticity of the official seal and private seal is beyond the obligation of formal review by Dongfang Zhongxin Microfinance Company, and the fact that the authorization letter provided by Liao X is a copy may be the only defect concerning such reasonable reliance. However, Liao X is the controlling shareholder of Qiangzheng Chinese Medicine Company, and whether Dongfang Zhongxin Microfinance Company may have reasonable reliance on him based on such fact is at the discretion of the judge. It is held that such a situation in this case does not constitute an agency by estoppel due to the following grounds: first, when signing the involved contract, Liao X was not the legal representative of Qiangzheng Chinese Medicine Company, but only the controlling shareholder thereof, who, unless authorized by the company, could not act on behalf of the company. Second, the resolution of the shareholders meeting presented by Dongfang Zhongxin Microfinance Company is of little significance in proving the right of agency by Liao X, which is because it is pretty unreasonable for such a reasonable subject of civil law as Dongfang Zhongxin Microfinance Company to base its reasonable reliance only on a copy of a power of attorney, and a resolution of the shareholders meeting not available for the public. Therefore, in the event of admissible evidence for the fake official seal, the act of carving the official seal without authorization may constitute the crime of forgery. In summary, whether the dispute between the parties is a civil one or not will affect the choice of the handling of the case among continuation, suspension or dismissal thereof, of which the most appropriate approach to this case should be to dismiss the case and move it to the public security organ with jurisdiction.

Han X v. PetroChina Jilin Oilfield Company (Dispute over Liability for Water Pollution): Elements of Tort and Application of Burden of Proof in Fishery Water Pollution Cases Wenchao Wei and Kaimin Wu

Rule “Discharge of pollutants” not only includes the action of actively putting or introducing pollutants, but also negative pollution that accompanies the production activities of an enterprise.

Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Han X Applicant in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): PetroChina Jilin Oilfield Company (hereinafter referred to as PetroChina Jilin Company)

Collegial Bench: Wenchao Wei, Hua Zhang and Xiaofei Liu Edited by Deqiang Han; translated by Jialiu Xiao W. Wei (B) Environment and Resources Division and the Fifth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Beijing, China K. Wu Environment and Resources Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_18

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2. Procedural History First Instance: No. 1 [2015] First, Civ. Division, the Intermediate People’s Court of Baicheng City, Jilin Province (dated Nov. 26 of 2015) Second Instance: No. 460 [2016] Final, Civ. Division, the Higher People’s Court of Jilin Province (dated Nov. 24 of 2016) Reopening: No. 415 [2018] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 28 of 2018) 3. Cause of Action Dispute over liability for water pollution

Essential Facts Han X, by entering into a contract for contract management of a gully with the Village Committee of Baoshi Village in 1997, obtained the right to carry out contract management of and engages in fishery in the fishpond in question. On September 9, 2010, oil spilled from PetroChina Jilin Company’s Oil Well No. Da-119, which is approximately 1 km away from Han X’s fishpond. Part of the spilled crude oil flowed with the flood into Han X’s fishpond. PetroChina Jilin Company, from September 14 to September 19, 2010, performed spill cleanup operations at the site of pollution. The water quality monitoring report issued by an environment monitoring station by the commission of the Station of Fishery Management and Fishing Port Superintendence of Da’an City shows that the oil content of the fishpond was way above the mandatory limit and that the water quality was not suitable for fisheries. Han X requests the court to order PetroChina Jilin Company to compensate CNY 3,015,040.36 for economic losses incurred to Han X, including the loss for fish farming in 2010, the loss for not carrying out fish farming in 2011, the cost of repairing the fishpond box dam, and the cost of spill cleanup by water injection. The court of first instance held that the case shall be subject to the general criterion of liability and decided that Han X’s claim shall be rejected on the grounds that Han X failed to prove the fact of damage and the existence of a causal relationship. The court of second instance, on the grounds of Han X’s failure to prove the occurrence of three spill cleanups by water injection and the causal relationship between the cost of repairing the fishpond box dam, the loss for not carrying out fish farming in 2011 and the pollution by PetroChina Jilin Company, modified the decision of first instance and sustained compensation for the loss to Han X’s fish farming in 2010 in an amount of CNY 1,058,796.25.

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Issues 1. Whether this case is a dispute over tort liability for environmental pollution; 2. How to determine the liability for losses to the victim of tort’s fish farming and the amount of such losses.

Holding The Supreme People’s Court, after hearing the case, holds that the case is a dispute over tort liability for environmental pollution of a fishpond caused by a crude oil spill; Han X fulfilled his burden of proof by proving the pollution by PetroChina Jilin Company, the fact that the fishpond sustained damages due to the pollution, and the correlation between crude oil pollution and the damages; PetroChina Jilin Company failed to disprove the causal relationship between its discharge of pollutants and the damages sustained by Han X and therefore shall assume corresponding liability for damages; discharge of pollutants not only includes the action of actively putting or introducing pollutants, but also includes negative pollution that accompanies the production activities of an enterprise; PetroChina Jilin Company, as the owner of the abandoned oil well in question, shall be liable for losses and damages caused by the tort of pollution, whether or not it was at fault for the spill of crude oil from the abandoned oil well and into Han X’s fishpond; the flood was an important medium for the occurrence of the pollution incident and an important reason for the loss to Han X’s fish farming in 2010 and therefore may be taken into consideration as a mitigating factor of the liability of PetroChina Jilin Company. In light of the merits of this case, this court modifies the decision of second instance and orders that PetroChina Jilin Company compensates Han X CNY 1,678,391.25 for economic losses to Han X.

Comment on Rule The rule reaffirms the burden of proof on both parties in fishery water pollution cases, clarifies that “discharge of pollutants” includes both the action of actively putting or introducing pollutants and negative pollution that accompanies the production activities of an enterprise, and explores the criteria of liability that applies when a tort is caused by multiple factors. This case serves as a good model for the determination of the elements of a tort, identification of circumstances for mitigation of or exemption from liability, and application of the burden of proof in specific disputes over water pollution liability.

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1. Determination of the elements of an environmental tort The elements of civil liability are prerequisites for a tortfeasor to assume civil liability. It is generally believed that a general tort is constituted by the illegality of the action, the consequence of damage, the causal relationship between the illegal action and the consequence of damage, and the subjective fault of the tortfeasor. General tort liability is subject to the criterion of liability that attributes liability for fault, which means civil liability arises out of intention or negligence and in principle no liability arises if there is no fault; the victim of tort who claims compensation shall bear the burden of proving the tortfeasor’s fault. Environmental tort liability, based on the consideration that it is more conducive to sanctioning and curbing the polluter and providing the victim of tort with adequate relief, is subject to the doctrine of liability without fault, i.e., the tortfeasor, whether or not it is subjectively at fault, shall bear civil liability as long as there is a causal relationship between its action and the consequence of damage.1 The doctrine of no-fault liability shall not be applied at the discretion of judges, and the scope of its application is specifically provided for by law. Article 124 of the General Provisions of the Civil Law provides that “(a)nyone who, in violation of the state’s provisions on environmental protection and pollution prevention, pollutes the environment and thereby causes damage to other parties shall assume civil liability by law.”2 Article 65 of the Tort Law provides that “(f)or damage caused by environmental pollution, the polluter shall assume tort liability.”3 In addition, the Environmental Protection Law and all special laws on environmental protection4 do not count the polluter’s fault as an element of a tort. In other words, the law explicitly provides that faults are not a prerequisite for environmental pollution liability. Such provisions embody the doctrine of legal fairness and justice and therefore promote effective protection of the rights and interests of the victim of environmental pollution and cause polluters to endeavor to prevent and control environmental pollution, do better in protecting the ecological environment, and fulfill their social responsibility of environmental protection; such provisions are also consistent with internationally accepted criteria of liability for damage caused by environmental pollution and the evolution of such criteria of liability. Article 1(1) of the Judicial Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts (“Interpretation on 参见最高人民法院侵权责任法研究小组编著: 《 < 中华人民共和国侵权责任法 > 条文理解与 适用》 ,人民法院出版社2016年版,第452页。 2 This article is now included as Article 1229 of the Civil Code: “(f)or damage caused to other parties by environmental pollution or disruption of ecological balance, the tortfeasor shall assume liability for tort.” 3 This article is now included as Article 1229 of the Civil Code: “(f)or damage caused to other parties by environmental pollution or disruption of ecological balance, the tortfeasor shall assume liability for tort.” 4 See Article 41 of the Environmental Protection Law, Article 90 of the Marine Environment Protection Law, Article 85 of the Water Pollution Prevention and Control Law, Article 62 of the Atmospheric Pollution Prevention and Control Law, Article 85 of the Solid Waste Pollution Prevention and Control Law, Article 61 of the Environmental Noise Pollution Prevention and Control Law, and Article 59 of the Radioactive Pollution Prevention and Control Law, etc. 1

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Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts”) further clarifies that “(f)or damage caused by environmental pollution, the polluter shall assume tort liability regardless of whether the polluter is at fault.” Accordingly, the elements of environmental tort liability are environmental tort, the fact of damage, and a causal relationship between environmental tort and the fact of damage. As one of the main types of environmental tort disputes, disputes over water pollution are also subject to the doctrine of liability without fault. A polluter who discharges pollutants into a water body and objectively causes water pollution damage, regardless of whether it is subjectively at fault and unless otherwise provided by law and judicial interpretations, shall assume the corresponding liability for the damage. 2. The principle of allocating the burden of proving environmental torts and the application thereof In judicial adjudication, the foremost issue is allocating the burden of proof to the parties concerned as per the statutory elements of tort. The allocation of the burden of proof in environmental tort cases is also different from that in general tort cases. The impact of environmental torts is usually cumulative, delayed, insidious, and concealed, and the hazardous substances and ways of causing hazards are in most cases complex and diverse; therefore, the proof of damage to persons and properties requires professional skills. If the case is handled in strict accordance with requirement theory or equivalence theory, which is traditionally applied to the fact-finding of causality in tort law, it will be more difficult for the victim of tort, who is already in a vulnerable position, to protect his substantive rights. In response to this problem, many theories about the proof of causality, such as epidemiological causation theory, indirect disproof theory, prima facie evidence theory, and probabilistic causation theory, have emerged. In addition, to reduce the burden of proof on the victim of tort and to protect the victim of tort’s right to remedy, the burden of proof transfer or inversion system has come into being. Article 66 of the Tort Law provides that “(f)or disputes arising from environmental pollution, the polluter shall assume the burden of proving any circumstance of mitigation or exemption and disproving the causal relationship between its action and the damage.”5 That the principle of shifting the burden of proof is applied to disputes over environmental pollution liability does not mean the victim of tort is completely exempt from burden of proof. The victim of tort shall still assume part of the burden of proof for the main allegations. Article 6 of the Interpretation on Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts provides that “(t)he victim of tort who requests compensation under Article 65 of the Tort Law shall provide evidentiary materials that prove the following facts: (a) the polluter discharged pollutants; (b) the damage to the victim of tort; and (c) correlation between the pollutants discharged 5

This article is now included as Article 1230 of the Civil Code: “(f)or disputes arising from environmental pollution or disruption of ecological balance, the actor shall assume the burden of proving any circumstance of mitigation or exemption and the nonexistence of a causal relationship between its action and the damage.” Infra.

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by the polluter or the secondary pollutants thereof and the damage.” Pursuant to the aforesaid provisions, in disputes over liability for environmental pollution including water pollution, the victim of tort who contends that the polluter should be liable for environmental tort shall prove the pollution by the polluter and the damage to the victim of tort and provide prima facie evidence of correlation between the pollutants or the secondary pollutants thereof and the damage; the polluter shall bear the burden of proving that there is no causal relationship between its action and the damage. The burden of proving the underlying facts of pollution and damage to the victim of tort is on the victim of tort, i.e., the plaintiff. The proof of underlying facts is in nature an action of proof; therefore, the proof needs to be firm enough to convince the judge. If relevant criteria of proof cannot be met, a judge may refuse to apply the shift of the burden of proving the causal relationship. (1) The victim of tort shall bear the burden of proving pollution by the polluter Pollution is one of the elements of environmental tort liability; therefore, no environmental tort will arise in the absence of pollution. Environmental pollution generally means discharging or spreading hazardous substances (such as waste gas, wastewater, waste residue, dust, garbage, and radioactive substances), noise, vibration, or stink produced by industrial and mining enterprises into environments such as the atmosphere, water, and earth, thereby to a certain extent endangering the living environment of humans. Environmental pollution often involves many professional and technical fields, and this usually makes it impossible for the victim of tort to precisely prove the cause of pollution, but the victim of tort shall prove that the polluter in fact commits the pollution. In judicial practice, evidence that can testify the polluter’s discharge of pollutants includes environmental monitoring reports on pollution sources, forms for declaring discharge of pollutants, production records of enterprises, operation records of environmental protection facilities, reports on environmental tort accidents, investigation materials of authorities with duties of supervising and administering environmental protection, investigation and handling reports on environmental tort and accidents arising therefrom, audio-visual materials made during on-site notarization or on-site evidence perpetuation, inquest records, and physical evidence. With regard to the case of Han X, the evidence provided and relevant facts proved by Han X are sufficient for this court to find pollution by PetroChina Jilin Company. Faced with the ascertained facts, PetroChina Jilin Company acknowledges that crude oil spilled from its Oil Well No. Da-119 and part of the spilled crude oil flowed into Han X’s fishpond with the flood of the Nenjiang River, i.e., PetroChina Jilin Company does not dispute the existence of pollution. PetroChina Jilin Company enters a demurrer that Oil Well No. Da-119 was artificially damaged after the Nenjiang River flooded and thus spilled crude oil and it did not commit pollution or damage the environment, therefore the elements of environmental pollution tort are incomplete. In this regard, Article 68 of the Tort Law provides that for damage caused by environmental pollution for which a third party is at fault, the victim of tort may claim

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compensation from either the polluter or that third party.6 In addition, the discharge of pollutants not only includes the action of actively putting or introducing pollutants, but also includes negative pollution that accompanies the production activities of an enterprise. Abandoned oil wells are an inevitable product of oil and gas exploration and development operations. Due to technical or natural risks or human factors, incidents such as blowouts, oil spills, explosions, combustion, slow leaks, and contamination of groundwater may occur at abandoned oil wells, causing personal injury, loss or damage of properties, or environmental damage or risks thereof. Pursuant to the “preference for prevention” principle and “polluter pays” principle, the owner or controller of an abandoned oil well shall take measures by law to effectively control and prevent any risk that may arise out of the pollution source, compensate for the personal injury, loss or damage of property, and environmental damage sustained by other parties due to the pollution, and carry out environmental remediation. PetroChina Jilin Company is the owner of the abandoned oil well; therefore, whether it was at fault for the spill of crude oil from the abandoned oil well and into Han X’s fishpond, it shall be liable for losses and damages caused by the tort of pollution. (2) The victim of tort shall bear the burden of proving the damage to him The fact of damage caused by environmental pollution means the fact that environmental pollution causes damage to a state property, collective property, a citizen, a citizen’s property, or the environment. The fact of damage is a prerequisite of the victim of the tort’s claim for damages. Without the fact of damage, the victim of tort may not claim compensation, and the polluter is not liable for the damage. Since environmental pollution torts are usually insidious and concealed, it is difficult for the victim of tort to prove the potential loss precisely and forcefully, but conspicuous damages shall be proven by necessary means. With respect to the case of Han X, based on the water quality monitoring report, list of articles salvaged, photos of the fishpond, witness testimonies and other evidence issued by Environment Monitoring Station of Songyuan City on September 21, 2010 and thereafter submitted by Han X, this court affirms the crude oil pollution of the fishpond and mass mortality of fishes in the fishpond. It is a fact that Han X’s fishpond suffered damage due to crude oil pollution. (3) The victim of tort shall provide prima facie evidence of correlation between the pollutants or the secondary pollutants thereof and the damage As stated above, Article 66 of the Tort Law places the burden of proof on the polluter to disprove the causal relationship between its action and the damage. The Interpretation on Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts also adopts the presumption of a causal relationship, which 6

This article is now included as Article 1233 of the Civil Code: “(f)or environmental pollution or disruption of ecological balance caused by a third party, the victim of tort may claim compensation from either the tortfeasor or the third party. After making the compensation, the tortfeasor may lodge a compensation claim against the third party.” Infra.

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to a certain extent mitigates the burden of proof on the plaintiff. However, the burden of proof concerning the causal relationship is not transferred completely: the victim of tort shall still provide prima facie evidence of a causal link between the pollutants discharged by the polluter or the secondary pollutants thereof and the damage. The victim of tort’s prima facie proof of the possibility of the causal relationship makes the causal relationship presumption more scientific and reliable. The victim of tort needs to prove the possibility rather than certainty of the causal relationship, and the proof of correlation between the pollution and damage just needs to show a low level of probability rather than show a high level of probability or eliminate all reasonable doubts. Therefore, the evidence provided by the victim of tort does not have to show an inevitable direct connection between the damage and the polluter’s actions. As long as there is a proven logical relationship therebetween, i.e., there is a possibility that the pollution causes the damage, and the judge will ultimately find the existence of a causal relationship by presumption of facts unless the polluter proves otherwise. To prove the correlation between the pollution and the consequence of damage, the victim of tort may consider using investigation and handling reports of environmental protection authorities and other environmental supervision and administration authorities, opinions of expertise institutions, academic treatises and expert opinions as evidence. In respect of the case of Han X, the evidence provided and relevant facts proved by Han X are sufficient for this court to find a correlation between the pollution caused by the crude oil spill and the damage to Han X’s fishpond. The said water quality monitoring report shows that the oil content of the fishpond was way above the mandatory limit and that the water quality was not suitable for fisheries. Taking witness testimonies and other evidence into consideration, this court finds a certain correlation between the crude oil spill and the death of fishes in Han X’s fishpond. PetroChina Jilin Company claims that the water quality monitoring report does not bear evidence effect because: (1) the water quality samples were not taken from the site upon occurrence of pollution; and (2) PetroChina Jilin Company did not participate in the monitoring. For the consistency of water quality samples, the crude oil recovery record provided by PetroChina Jilin Company in the first instance and the witness testimony of Liu X, head of the safety department of PetroChina Jilin Company, during the review and questioning in the reopening of the case, show that PetroChina Jilin Company salvaged and cleaned up the spill by boat at the site of pollution on and after September 14 until September 19, 2010. On September 19, 2010, the Station of Fishery Management and Fishing Port Superintendence of Da’an City sent the said samples to the Environment Monitoring Station of Songyuan City for testing. It is logical that even if the water quality samples sent for testing on September 19, 2010 were not the same as those taken on September 9, 2010 just after the spill, the quality of the cleansed water should be better than that upon the crude oil spill if there is no new pollution. PetroChina Jilin Company claims that there may be other pollution in the same period. PetroChina Jilin Company carried out salvage and cleaning by boat every day and therefore should be aware of relevant situation if other pollution occurs in the same period, but PetroChina Jilin Company did not provide any evidence to prove it. With respect to the matter of monitoring

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procedures, Station of Fishery Management and Fishing Port Superintendence of Da’an City was just performing its duties of fishery management by law rather than acting by commission of either of the parties when it sent the said samples for testing. Article 15(1) of the Regulations on the Procedures of the Investigation and Handling of Water Pollution Accidents in Fisheries provides that “(t)he monitoring data or expert conclusion provided by a fishery environment monitoring station or expert evidence issued by other qualified authorities are bases for competent authorities to handle pollution accidents”, therefore the water quality monitoring report issued by Environment Monitoring Station of Songyuan City may serve as a basis for authorities of fishery management and fishing port superintendence to handle pollution accidents. PetroChina Jilin Company’s contention that the water quality monitoring report is null and void due to its absence from the monitoring lacks any legal basis. (4) The polluter shall bear the burden of proving that no causal relationship exists between its actions and the damage In light of the facts that environmental pollution cases are usually complex and technically tricky and there is an imbalance of ability and asymmetry of information between polluters and victims and to achieve social justice in an all-round way, Article 66 of the Tort Law provides that the burden of proving the nonexistence of a causal relationship between the action and damage lies with the polluter. Article 98 of the Water Pollution Prevention and Control Law also provides that “(f)or a damage suit arising from water pollution, the polluter shall bear the burden of proving any statutory exemptions and the nonexistence of a causal relationship between its actions and the consequence of damage.” Article 7 of the Interpretation on Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts provides guidelines on how a polluter disproves the existence of a causal relationship. A disproof stands under the following circumstances: (a) the pollutants discharged by the polluter cannot cause the damage. For instance, the polluter has taken reasonable prevention and control measures to treat the pollutant it discharges and the discharged substance is no longer harmful, or it has been verified that a series of chemical reactions are required to cause damage and the heavy metal discharged by the polluter, because of its properties, is unlikely to participate in such chemical reactions. (b) The polluter discharged pollutants that may cause the damage, but the pollutants did not reach the place of damage. For example, the pollutants discharged by the polluter are spatially too far away from the place where the victim of tort suffers damage and therefore cannot theoretically be the cause of damage. In the case of Han X, the abandoned Oil Well No. Da-119 is approximately 1 km away from Han X’s fishpond. Under such circumstance, spilled crude oil is likely to cause soil pollution or groundwater pollution rather than travel 1 km and pollute the fishpond. However, the field investigation shows that upon the accident, the flood of the Nenjiang River overwhelmed the whole area for several kilometers around the fishpond, thereby carrying spilled crude oil to the fishpond, which is 1 km away from Oil Well No. Da-119. A thing that is impossible under normal circumstances actually happened and caused damage in this case. (c) Damage occurred prior to the discharge of the pollutants. It should be

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noted that a polluter who claims that it is not liable for the damage to the victim of tort shall prove both the fact that it discharged the pollutants after occurrence of the damage and the fact that the pollutants it discharged did not aggravate the existing damage. (d) Other circumstances under which a court may find the nonexistence of a causal relationship between the pollution and the damage. In the case of Han X, PetroChina Jilin Company failed to disprove the causal relationship between its discharge of pollutants and the damage sustained by Han X. Oil floating on the water isolates oxygen and leads to a lack of oxygen in the water, and the toxic substances contained in the oil also endanger creatures in the water and cause the death of fishes. Since both parties acknowledge the facts that the flood of the Nenjiang River brought spilled crude oil to Han X’s fishpond and the death of fishes in the fishpond occurred after the spill of crude oil, there apparently are spatial and temporal correlations between the damage and the pollution in this case. PetroChina Jilin Company contends that the loss to Han X’s fish farming in 2010 was not caused by the crude oil spill, and it was the rising water of the Nenjiang River that carried away all fishes farmed. However, PetroChina Jilin Company, in support of its contention, only provided a certificate issued by Da’an Changjiang Petroleum Technology Co., Ltd. with the main content of “our company salvaged the spilled crude oil floating on the water in the area of river administration in September 2010; due to the flooding of the Nenjiang River, the area of river administration was completely overwhelmed and the flood connected the course of the Nenjiang River with the area of river administration and the fishpond and fishpond dam within the area of river administration were not observable on the water; the oil salvage personnel of our company entered the area of river administration and performed oil salvage operations therein by boat.” Judging from the above content, the said certificate cannot fully prove the contention that all fishes in the fishpond were washed away by the flood of the Nenjiang River, nor exclude the possibility that the spilled crude oil caused the death of fishes in the fishpond or the possibility that fishes in the fishpond were washed away by the water injected by Han X to clean up the oil after Han X dug a hole on the fishpond dam. Therefore, PetroChina Jilin Company fails to meet the statutory requirement of disproof and thus shall bear corresponding consequences. The above is a complete demonstration of how to analyze the elements of an environmental tort and allocate the burden of proof in cases of disputes over environmental tort liability. In this case, Han X, the victim of tort, bears the burden of proof that shall be borne by plaintiffs by proving the pollution by PetroChina Jilin Company, the fact that the fishpond suffered damage due to the pollution, and the correlation between crude oil pollution and the damage. PetroChina Jilin Company failed to disprove the causal relationship between its discharge of pollutants and the damage to Han X. Therefore, PetroChina Jilin Company shall be liable for the property damage caused to Han X by the spill of crude oil from the Oil Well Da-119 owned by PetroChina Jilin Company.

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3. Identification of circumstances for mitigation of or exemption from liability and application of the burden of proof Identification of the circumstance for mitigation of or exemption from liability is an issue different from the aforementioned identification of elements of an environmental tort. A judge should determine whether an action constitutes an environmental tort first. If not, there is no need to identify the circumstance for mitigation or exemption. Only when the action is found to constitute an environmental tort may the judge further review whether the polluter is under any circumstance for mitigation or exemption. Article 1(2) of the Interpretation on Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts provides that “(t)he circumstances under which a polluter’s liability shall be exempted or mitigated shall be governed by the provisions of the marine environment protection law, water pollution prevention and control law, air pollution prevention and control law, and other separate environmental protection laws; in absence of provisions in relevant separate environmental protection laws, the tort law shall apply.” According to this provision, legal provisions on grounds for mitigation or exemption (if any) shall apply. If the polluter is under a statutory circumstance for mitigation or exemption, its liability shall be mitigated or it shall be exempted from liability even if its action constitutes an environmental tort. Article 180 of the General Rules of the Civil Law provides that “(t)hose who cannot perform their civil obligations due to force majeure do not assume civil liability. Where it is otherwise provided by law, special provisions prevail. Force majeure means objective situations that cannot be foreseen, avoided and overcome.”7 Articles 96(2), 96(3) and 96(4) of the Water Pollution Prevention and Control Law provide that “(f)or water pollution damage caused by force majeure, the polluter assumes no liability for damages unless otherwise provided by law. If water pollution damage is intentionally caused by the victim, the polluter assumes no liability for damages. If water pollution damage arises from the victim’s gross negligence, the polluter’s liability for damages may be mitigated. If the water pollution damage is caused by a third party, the polluter, after assuming the liability for damages, may lodge a compensation claim against that third party.” According to the abovementioned provisions, in water pollution cases, force majeure (including irresistible natural disasters) and the victim of tort’s intention are statutory grounds for exempting the polluter from liability for damages, while the victim of tort’s gross negligence is a statutory ground for mitigating the polluter’s liability for damages. Force majeure may only be accepted as a ground for exemption from civil liability when it is the sole cause of the consequence of damage. If the action of the parties concerned exerts an effect on the occurrence and expansion of the damage, the relationship between force majeure and the consequence of damage shall be subject to further review to determine the effect of the parties’ actions on the damage in the presence of force majeure. In the event that the parties are at fault for the occurrence of the damage or for the expansion of the damage after the damage is caused by force

7

This article is now included as Article 180 of the Civil Code.

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majeure, the parties shall assume civil liability for their respective fault. The case of Han X is exactly a sample for analyzing this issue. If the water pollution damage is intentionally caused by the victim of tort, the polluter is not liable for the damage because under this circumstance the victim of tort may be deemed to have “assumption of risk”. In the event that water pollution damage arises from the victim’s gross negligence, the polluter’s liability for damages may be mitigated. This is based on the idea of equity and the principle of acting in good faith. Where the water pollution damage is caused by a third party, the polluter, after assuming the liability for damages, may lodge a compensation claim against that third party. This means: (a) if the water pollution damage is intentionally or negligently caused by a third party, the third party shall be liable for the damage; (b) where the victim of tort files a litigation against the polluter, the polluter, after assuming the liability for damages, may lodge a compensation claim against the third party; (c) the victim of tort may also file a litigation against the third party directly for compensation.8 Article 68 of the Tort Law provides that “(f)or damage caused by environmental pollution for which a third party is at fault, the victim of tort may seek compensation either from the polluter or the third party. After assuming the liability for damages, the polluter may lodge a compensation claim against the third party.” Article 5 of Interpretation on Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts further provides that “(w)here the victim of tort sues the polluter and the third party respectively or simultaneously in accordance with Article 68 of the Tort Law, the people’s court shall accept the case. If the victim of tort requests the decision that the third party assumes the liability for damages, the people’s court shall determine the third party’s liability as per the third party’s fault. If the polluter contends that it should be exempted from liability or assume mitigated liability for the environmental pollution damage for which the third party is at fault, the people’s court shall not sustain the contention.” This provision is formulated to better protect the victim of tort’s substantive rights and interests. In other words, at least in terms of external liability, a third party’s fault may only be the basis for determining the polluter’s ultimate liability rather than a ground for mitigating the polluter’s liability or exempting the polluter from liability. It should be noted that the “third party” does not include any staff of the entity discharging the pollutants since staff members are perpetrators of their employer’s discharging behavior; therefore, the consequences of their actions shall be borne by the entity discharging the pollutants. With respect to the case of Han X, PetroChina Jilin Company raises a number of defenses in respect of the loss to fish farming in 2010 claimed by Han X, but such defenses shall not be grounds of exemption. Only the effect of the flood may be considered a mitigating factor.

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参见安建,黄建初主编: 《中华人民共和国水污染防治法释义》 , 法律出版社2008年版。

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4. Liability for damages caused by environmental torts Article 96(1) of the Water Pollution Prevention and Control Law provides that “(a) party concerned who sustains damage due to water pollution may request the polluter to eliminate the hazard and compensate for the loss.” Article 13 of the Interpretation on Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts provides that “(a) people’s court shall, based on the claims of the victim of tort and merits of the case, reasonably decide that the polluter assumes the civil liability of ceasing the tort, removing the obstruction, eliminating the danger, restitution, making apologize, or compensating for the damage, etc.” Article 15 of the Interpretation on Issues Concerning the Application of Law in the Trial of Disputes over Liability for Environmental Torts provides that “(w)here the victim of tort files a litigation with the claim that the polluter compensates for the loss of property or personal injury caused by pollution and reasonable costs incurred in taking necessary measures to prevent the expansion of pollution or eliminate pollution, the people’s court shall sustain the claim.” Subject to the abovementioned provisions and in consideration of the merits of this case, this court reasonably sustains Han X’s allegation of the loss to fish farming in 2010, the loss for not carrying out fish farming in 2011, and costs for repair of the fishpond dam and spill cleanup by water injection, and modifies the decision of second instance and orders that PetroChina Jilin Company compensates Han X CNY 1,678,391.25 for economic losses to Han X, thereby forcefully protecting the legitimate rights and interests of the victim of tort. As a typical case of fishery water pollution, the case of Han X serves as an ideal sample for us to analyze disputes over liability for water pollution tort and a good demonstration of how to determine the elements of environmental torts, how to determine mitigation of or exemption from liability, and how to apply the burden of proof in specific cases. By hearing specific cases, judges, in strict accordance with special provisions on burden of proof in cases of water pollution tort, place more burden of proof on the polluters and strengthen the protection of the victims of tort, and urge petroleum enterprises to reinforce their supervision of abandoned oil fields, effectively preventing and lowering the possibility of environmental damage and pollution in areas where petroleum enterprises are located.

China Cinda Asset Management Co., Ltd., Liaoning Branch, Jia X (A) v. Dalian Qianyi Heavy Industry Co., Ltd., and Dalian Qianyi Heavy Equipment Co., Ltd., Jiang X (Defendants in the First Instance) (Dispute over Financial Loan Contract): Impact of the Issuance of Shareholders’ Undertaking by a Shareholder on the Effectiveness of the Corporate External Guarantee Weiming Ji

Rule 1. In a dispute over financial loan contract, where certain shareholders of an indebted company signed or stamped on a shareholders’ undertaking, the content of which is scattered and mixed, with words such as “the company adopted after deliberation the following decisions” as well as “all the shareholders undertake to…” and “… bear joint and several liability for this loan”, the determination of whether the undertaking falls within the category of internal resolutions adopted by the company’s shareholders or involves matters guaranteed to the outsiders should be the result of the consideration of different factors, including the specific matters contained therein, especially the identity of the party required for guarantee. 2. Regarding the presumption of a company’s intention in an external (both shareholders and actual controllers excluded) guarantee, if the shareholders representing Collegial Bench for the Second Instance: Xiaohan Yu, Shengye Li and Weiming Ji Edited by Yi Yang; translated by Xiaohua Zhu and Ting Sun W. Ji (B) The Second Circuit Court of the Supreme People’s Court of the People’s Republic of China, Shenyang, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_19

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over 50% of voting rights approve the company’s external guarantee, such approval shall be deemed to be an effective external guarantee made by the company in spite of the creditor’s failure to produce any resolution on external guarantee made by the shareholders meeting or the board of directors’ meeting.

Case Information 1. Parties Appellant (Plaintiff in the First Instance): China Cinda Asset Management Co., Ltd., Liaoning Branch (hereinafter referred to as Liaoning Branch of Cinda Asset Company) Appellant (Defendant in the First Instance): Jia X (A) Appellee (Defendant in the First Instance): Dalian Qianyi Heavy Industry Co., Ltd. (hereinafter referred to as Qianyi Heavy Industry Company) Defendant in the First Instance: Dalian Qianyi Heavy Equipment Co., Ltd. (hereinafter referred to as Qianyi Equipment Company) Defendant in the First Instance: Jiang X 2. Procedural History First Instance: No.10 [2018] Trial, Civ. Division, the Higher People’s Court of Liaoning Province (dated Sep. 25 of 2018) Second Instance: No. 332 [2019] Final, Civ. Division, the Supreme People’s Court (dated May 31 of 2019) 3. Cause of Action Dispute over financial loan contract

Essential Facts On August 28, 2012, a loan contract was concluded by and between Qianyi Equipment Company and Changxing Island Subbranch of the Industrial and Commercial Bank of China Co., Ltd. which is located in Dalian city (hereinafter referred to as Changxing Island Subbranch of ICBC), under which Qianyi Equipment Company loaned from the latter. What should be noted is that Qianyi Heavy Industry Company and Jia X (A) are the only shareholders of Qianyi Equipment Company, with respective shareholdings of 88% and 12% each, with Qianyi Heavy Industry Company having Jia X (A) and Jia X (B) (with the father-and-daughter relationship therebetween) as its only shareholders with shareholdings of 70% and 30% respectively. On July 26, 2012, Jia X (A) issued a certification to Changxing Island Subbranch of ICBC, providing joint guarantee for the involved loan, with Qianyi Equipment

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Company setting a mortgage on its land use right. In addition, Qianyi Heavy Industry Company and Jia X (A) issued a shareholders’ undertaking to Changxing Island Subbranch of ICBC, under which it is so stated as “the company adopted after deliberation the following decisions” as well as “all the shareholders undertake to…” and “…bear joint and several liability for this loan”. Qianyi Heavy Industry Company and Jia X (A) respectively signed and stamped on the shareholders’ undertaking, with no exact time marked thereon. Subsequently, Qianyi Equipment Company failed to repay the loan, and Changxing Island Subbranch of ICBC filed a lawsuit, claiming for: (1) Qianyi Equipment Company’s repayment of the loan principal and the interest thereon; (2) exercise of mortgage; (3) Jia X (A) and Qianyi Heavy Industry Company’s joint and several liability. During the course of first instance proceedings, Changxing Island Subbranch of ICBC assigned its credit to Liaoning Branch of Cinda Asset Company, which participated in the lawsuit as a successor to the former’s status as a Plaintiff. On September 25, 2018, the trial court made the civil judgment (No. 10 [2018] Trial, Civ. Division, the Higher People’s Court of Liaoning Province), ordering that Qianyi Equipment Company repay the loan principal and the interest thereon, Liaoning Branch of Cinda Asset Company have the right to exercise its mortgage, and that Jia X (A) bear his liability of guarantee. The claim raised by Liaoning Branch of Cinda Asset Company for the assumption of guaranty liability by Qianyi Heavy Industry Company was, however, dismissed by the court, mainly grounded on that, the shareholders’ undertaking was not issued, from a formal point of view, to Changxing Island Subbranch of ICBC, and appeared to be, considering its content, within both the scope of internal deliberations and that of shareholders’ external guarantee, meanwhile, Liaoning Branch of Cinda Asset Company had no other evidence to prove its conclusion of any guaranty contract or any other kind of mutual consent to that effect with Qianyi Heavy Industry Company and Jia X (A), and Qianyi Heavy Industry Company could not be thus held on the shareholders’ undertaking under any obligation of guarantee. Dissatisfied with the first instance judgment, Liaoning Branch of Cinda Asset Company filed an appeal with the Supreme People’s Court, asserting that, in light of the shareholders’ undertaking, the guaranty liability should be assumed by Qianyi Heavy Industry Company. In the second instance, Qianyi Heavy Industry Company’s asserted in its defense that: (1) the shareholders’ undertaking was merely an offer, and both the stamp of Qianyi Heavy Industry Company and the signature of Jia X (A) thereon were only the result of the personal conducts of the shareholders of Qianyi Equipment Company, not constituting a corporate consent to the bearing of the guaranty liability; (2) the shareholders’ undertaking was issued in the name of Qianyi Equipment Company rather than Qianyi Heavy Industry Company; (3)in the lack of a resolution of shareholders meeting of Qianyi Heavy Industry Company, the external guarantee as set forth in the shareholders’ undertaking was not valid; (4) the words “this bank” and “Qianyi Equipment Company” repeatedly appeared in the shareholders undertaking have no connection to Qianyi Heavy Industry Company.

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Issues 1. Whether the shareholders’ undertaking stamped and signed by Qianyi Heavy Industry Company and Jia X (A), which states “bear joint and several liability for this loan”, falls within the category of internal resolutions adopted by the shareholders of Qianyi Equipment Company or of matters guaranteed by Qianyi Heavy Industry Company and Jia X (A) to the outsiders; 2. In the event that Qianyi Heavy Industry Company was found to assume an external guarantee based on the shareholders’ undertaking, whether the signature of Jia X (A), who enjoys 70% shareholding of Qianyi Heavy Industry Company constitutes, without the support of any resolution of the company’s shareholders meeting, a manifestation of intention made by Qianyi Heavy Industry Company to make an external guarantee, and thus proves that the validity of the guarantee to be assumed by Qianyi Heavy Industry Company.

Holding The Supreme People’s Court holds upon review that: 1. On the nature of the shareholders’ undertaking First, although the shareholders’ undertaking is a unilateral act, the possession thereof by the creditor constitutes a manifestation of acceptance thereof, making it legally effective against the promisor; therefore, the shareholders’ undertaking is not an offer inviting the conclusion of a guaranty contract but essentially an undertaking. There are seven clauses contained in the shareholders’ undertaking, item 7 of which states that “…under joint and several liability of guarantee for this loan”, considering the preceding statement that “all the shareholders undertake to” as prescribed therein, it should be interpreted literally as that all the shareholders of Qianyi Equipment Company have made an undertaking. Second, Qianyi Heavy Industry Company asserts that the statement that “…under joint and several liability of guarantee for this loan” is merely an undertaking by Qianyi Equipment Company, not by Qianyi Heavy Industry Company. Such an assertation would lead to the conclusion that Qianyi Equipment Company bears a joint and several liability for its own debt, namely, the debtor also serves as the guarantor for its debts, which is obviously inconsistent with Article 71 of the Guaranty Law (Repealed in 2021), which prescribes a guarantor who has the capacity to pay off debts on behalf of others. Whereupon, such explanation made by Qianyi Heavy Industry Company is obviously contrary to common sense. It can be confirmed from what is stated above that, considering the shareholders’ undertaking, especially item 7 thereof, Qianyi Heavy Industry Company and Jia X 1

There is no corresponding provision in the Civil Code.

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(A), as the shareholders of Qianyi Equipment Company, are under joint and several liability of guarantee for the debts thereof. 2. Whether Qianyi Heavy Industry Company has made a valid external guarantee Although Liaoning Branch of Cinda Asset Company failed to produce the internal resolution of Qianyi Heavy Industry Company concerning its guarantee for Qianyi Equipment Company, in accordance with articles of incorporation of Qianyi Heavy Industry Company, which states that “… be legally entitled to receive dividends and exercise voting rights in proportion to its capital contributions by law”, Jia X (A), as the controlling shareholder of Qianyi Heavy Industry Company with 70% shareholding, has controlling voting rights thereof. In the case where both Qianyi Heavy Industry Company and Jia X (A) have stamped and signed on the shareholders’ undertaking, Qianyi Heavy Industry Company should be deemed to have created a valid external guarantee. In summary, the court of second instance reversed part of the first instance judgment, ruling that Qianyi Heavy Industry Company bear joint and several liability for Qianyi Equipment Company’s debts, and upheld the remaining items of the first instance decision.

Comment on Rule The holding of this case is essentially a comment and analysis on the interpretation and determination of nonstandard guarantees commonly existing in commercial transactions. Commercial transactions rely on relatively strict procedural requirements and regulatory systems; however, in the course of the improvement of China’s socialist market economy, a large number of businesses have participated in commercial transactions, yet without the full mastery of the rules of commercial transactions and procedural requirements, or have failed to operate their businesses in a standard and rigorous manner, which has led to massive disputes over the understanding and identification of nonstandard commercial activities. It is especially the case with the field of guaranty law, which is even much more complicated due to the involvement of multiple subjects and the overlapping of multiple legal relationships. In this case, the bank failed to, in offering its financing service, fulfill a complete and standard guarantee procedure for the debtor, to wit, Qianyi Equipment Company; it particularly failed to conclude a formal contract on joint and several liability with the shareholders of Qianyi Equipment Company, to wit, Qianyi Heavy Industry Company and Jia X (A), and to require, under Article 16 of the Company Law, Qianyi Heavy Industry Company to convene the “Three Meetings” (the shareholders meeting, board of directors’ meeting, and the board of supervisors’ meeting), reaching an effective resolution on external guarantee, instead, it only asked Jia X (A) to provide a certification, and asked Qianyi Heavy Industry Company and Jia X (A) to provide a shareholders’ undertaking with scattered and mixed contents, constituting nonshareholders’ standard guarantee procedure and giving rise to a dispute over the legal consequences of

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an external guarantee as only based on the nature of the shareholders’ undertaking but without a corporate resolution. The reasoning behind the decision will be further construed as follows in terms of the content and nature of the undertaking issued by the shareholders and the legal consequences affecting the company of the external guarantee by the shareholders. 1. Determination of the nature of various “undertakings” by debtors and the shareholders thereof As mentioned above, massive nonstandard guarantee documents exist in the field of commercial guarantees, many of which are in the form of “undertaking”, “certification” or “statement”, and determining the nature and effect of these documents is part of the puzzles confronted by trial practice. In this case, the shareholders’ undertaking is a typical nonstandard guarantee document. First, in this document, there is no targeted party or object of issuance or any business title that is normally required for documents of the same nature, where with no obvious conflict or contradiction between the identity of the holder and the content of the undertaking, such undertaking shall be deemed to be, in accordance with Article 262 of the Contract Law (Repealed in 2021) and Article 22 of the Judicial Interpretation on Several Issues Regarding the Application of the Guaranty Law (Repealed in 2021), an undertaking and guarantee for the holder. Second, with no subject of issuance or promisor set forth in the document, the subject of undertaking shall be determined; the analysis thereof, however, is likely to confront confusion due to various subject names found in the shareholders’ undertaking, such as “this company adopts the following resolution after deliberation”, “whereas our company applied for loans from Changxing Island Subbranch of ICBC”, “prior to the repayment of the loan from our bank” and “all the shareholders undertake to…”, which easily causes confusion in the analysis of the subject of the undertaking. At this point, the subject of the undertaking should be determined based on the subject of the signing and stamping together with the literal analysis of the content of the undertaking. In this case, the subjects of the signing and the stamping are, respectively, Jia X (A) and Qianyi Heavy Industry Company; with respect to literal construction, such statements can be found in the undertaking as “all the shareholders undertake to…” “… under joint and several liability of guarantee for this loan”, whereby, together with what’s stated above, it can be found that the subjects of the undertaking are Jia X (A) and Qianyi Heavy Industry Company, and such literal construction and finding also corroborate the fact that the subjects of the signing and the stamping are Jia X (A) and Qianyi Heavy Industry Company. Third, whether Qianyi Heavy Industry Company is under the liability of guarantee to the creditor shall be analyzed individually by law and based on necessary elements required for the legal relationship of guarantee. In its defense, Qianyi 2

This article is now included as Article 484 of the Civil Code, which states “(t)he effective time of an acceptance made in the form of a notice shall be governed by Article 137 of this Code. If notice of acceptance is not required, the acceptance shall become effective when an act of acceptance is performed according to the usage of trade or as required in the offer”.

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Heavy Industry Company has argued primarily that the undertaking made by Qianyi Heavy Industry Company only constituted an undertaking to Qianyi Equipment Company or an internal resolution adopted at the shareholders meeting of Qianyi Equipment Company, rather than a joint and several guarantee promised by Qianyi Heavy Industry Company to the creditor. However, it is clearly stated in the shareholders’ undertaking that “… under joint and several liability of guarantee for this loan”. In light of such defense argument, the joint and several liability of guarantee is valid only between Qianyi Equipment Company as the debtor and Qianyi Heavy Industry Company as the shareholder thereof and does not constitute an undertaking to the creditor. This case is obviously inconsistent with the basic legal principle that there should exist three parties under the relationship of “joint and several liability of guarantee”, to wit, the creditor, the debtor, and the guarantor, each of which shall be independent of each other, the debtor not being the guarantor simultaneously, and vice versa. Therefore, based on the analysis of legal provisions and the necessary elements required for the legal relationship of guarantees, the defense of Qianyi Heavy Industry Company cannot be established. Based on the aforesaid analyses, the involved shareholders’ undertaking can be found as a guarantee for the debts of the Qianyi Equipment Company by the shareholders thereof, to wit, Qianyi Heavy Industry Company and Jia X (A). Whether the external guarantee of Qianyi Heavy Industry Company is valid should be analyzed separately. It can also be learned from this case that necessary factors should be considered in a comprehensive manner in analyzing and determining nonstandard guarantee documents, including the form, content, and logic relationship therebetween in terms of legal provisions, and the fear of making a conclusion and/or a finding due to the scattering and confusing form or content should be avoided. 2. The presumption of intent of a corporate external guarantee without a department resolution as an exception Article 16 of the Company Law provides that, where a company intends to invest in any other enterprise or provide guarantees for others, the company shall make a resolution through the board of directors or the shareholders meeting in accordance with its bylaws. Under this provision, a company’s external (both shareholders and actual controllers excluded) guarantee shall, in principle, be supported by a resolution adopted at any of the “Three Meetings” pursuant to the company’s bylaws, which include the shareholders meeting, board of directors’ meeting, and the board of supervisors’ meeting. However, as mentioned above, a large number of nonstandard guarantees are commonly in the form of corporate external guarantees without any resolution adopted at any of the “Three Meetings”, especially for small and micro businesses, which is mainly because China’s modern enterprise system has not yet been applied uniformly and systematically to the whole country. To illustrate exactly, on the one hand, with the further economic flourish in China in recent years, as well as the establishment of the company’s capital subscription system, massive, small and micro businesses are coming into being and thriving with the passage of time, on the other hand, the businesses’ founders’ are still in need of much improvement in their mastery and familiarity of laws and regulations and their understanding of

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corporate governance structure, resulting in a large number of corporate guarantee without corporate resolution. Regarding this kind of dispute caused by nonstandard commercial activities, judicial adjudication should also function as the approach of regulation and evaluation rather than simply denying validity thereof due to the absence of formal requirements. Based on the poor professional knowledge of the parties mentioned above, laws have offered remedial channels to ensure thorough and complete protection in this field. Both Article 61 of the General Provisions of the Civil Law (Repealed in 2021) and Article 50 of the Contract Law (Repealed in 2021) have served as the fundamental basis for determining a corporate guarantee without resolution, which state respectively that “(t)he legal consequences of civil activities conducted by a legal representative in the name of a legal person shall be assumed by the legal person. Any restriction on the legal representative’s right of representation imposed by the bylaws or the supreme organ of the legal person shall not be set up against bona fide opposite parties”,3 and “(w)here a legal representative or a responsible person of a legal person or other organization oversteps his power and concludes a contract, the representative act shall be effective except that the counterpart knows or ought to know that he is overstepping his powers”.4 In other words, in the case of agency by estoppel, even with no resolution adopted at one of the “Three Meetings”, a corporate guarantee can be found based on certain circumstances as valid for the bona fide interested party. For a period of time, practicing community have also noticed this practical problem, and have continuously revised and detailed in recent years the determination of the validity of a corporate guarantee without any resolution adopted at one of the “Three Meetings”, which has been reflected from the initial “theory of representation restriction”5 to the four exceptional circumstances without corporate resolutions as provided in Article 19 of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference. Although the second-instance decision was rendered prior to the National Courts’ Civil and Commercial Trial Work Conference held in 2019, its fundamental spirits are consistent with the spirits of the conference minutes and can be determined as a decided case concerning a valid guarantee for a company. Specifically, in this case, although Liaoning Branch of Cinda Asset Company failed to produce an internal resolution made by Qianyi Heavy Industry Company on providing guarantee for Qianyi Equipment Company, nevertheless, Jia X (A), as a controlling shareholder of Qianyi Heavy Industry Company with 70% shareholding, enjoys more than two-thirds of the company’s voting rights, and, in accordance with Article 9(2) the Articles of Incorporation of Dalian Qianyi Heavy Industry Co., Ltd., which states that “… be legally entitled to receive dividends and exercise 3

This article is now included as Article 61 of the Civil Code, infra. This article is now included as Article 504 of the Civil Code, which states, “(w)here the legal representative of a legal person or the person in charge of an unincorporated organization enters into a contract ultra vires, the representation shall be effective, and the contract shall be effective against the legal person or unincorporated organization, unless the other party knows or should have known that he or she acts ultra vires”. 5 贺小荣主编: 《最高人民法院民事审判第二庭法官会议纪要》 ,人民法院出版社2018年版, 第192 ~ 193页。 4

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voting rights in proportion to its capital contributions by law”, as well as relevant provisions of the Company Law,6 enjoys the absolutely controlling voting rights thereof and has the power to make decision alone a series of major matters of Qianyi Heavy Industry Company, including external guarantee. Both Qianyi Heavy Industry Company and Jia X (A) signed/stamped on the shareholders’ undertaking, and Jia X (A), as a shareholder of Qianyi Equipment Company with 12% shareholding, not only undertook to assume a joint and several liability for the debts thereof but also, with the knowledge of the assumption through stamping by Qianyi Heavy Industry Company of joint and several liability for Qianyi Equipment Company’s debts, gave their confirmation rather than objection to the stamping and undertaking by Qianyi Heavy Industry Company, which should be deemed that, Jia X (A), as a controlling shareholder of Qianyi Heavy Industry Company, gave his consent to the external guarantee by the company, resulting in an effectiveness similar to a resolution by the shareholders meeting, which is consistent with the overall requirement on the decision-making right of Qianyi Heavy Industry Company (besides, in this case, Jia X (A) simultaneously holds shares of both Qianyi Equipment Company and Qianyi Heavy Industry Company, making him the actual controlling shareholder of the two companies). Hence, in this case, Qianyi Heavy Industry Company’s external guarantee is valid, and Qianyi Heavy Industry Company shall bear joint and several liability in this case. 3. Conclusion Guarantee is a common yet very important means of transaction in commercial transactions, with a large number of disputes and conflicts arising therefrom, among which disputes over the form of guarantee account for a large part, including the one over the determination of document nature in adopting atypical nonstandard undertaking letters and the one over the determination of the external guarantee as the intent of the company and the validity thereof in the case of the corporate external guarantee without corporate resolution or other requirements consistent with legal provisions. These issues and disputes will be gradually solved with the improvement of laws and the unification and convergence of understanding. A court should not, in handling such disputes, confine itself to the formal requirements and make a negative conclusion accordingly, but rather take into consideration various factors, weighing in a comprehensively manner multiple aspects, including content analysis, legal relationships, interests balancing, value judgment, etc., and exploring the true intentions of the parties for the purpose of properly settlement of disputes.

6

Article 43 of the Company Law states that “(u)nless it is otherwise provided for by this Law, the discussion methods and voting procedures of the shareholders meeting shall be provided for in the bylaw. A resolution made at a shareholders meeting on revising the bylaw, increasing or reducing the registered capital, merger, split-up, dissolution or change of the company form shall be adopted by the shareholders representing two-thirds or more of the voting rights.”

PowerChina Harbor Co., Ltd. v. Land Reserve Center of Pingtan Comprehensive Pilot Zone (Dispute over Contract for Building of Construction Project): The Arbitration Institution should be Deemed to have been Determinately Agreed upon Where it has Already been Established at the Time of Dispute Jun He and Lidan Zhong

Rule In the case where the agreed arbitration institution was not available upon the conclusion of the arbitration clause but had later been established at the time of dispute, the previous indeterminateness of the arbitration institution should be deemed to have been removed, and both parties to the agreement shall apply for arbitration thereby.

Case Information 1. Parties Appellant (Plaintiff in the First Instance): PowerChina Harbor Co., Ltd. (hereinafter referred to as PowerChina Harbor Company) Appellee (Defendant in the First Instance): Land Reserve Center of Pingtan Comprehensive Pilot Zone (hereinafter referred to as Pingtan Land Center)

Collegial Bench: Jun He, Aizhen Zhang and Chun Yang Edited by Ming Li; translated by Xiaohua Zhu J. He (B) · L. Zhong The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_20

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2. Procedural History First Instance: No. 18 [2019] Trial, Civ. Division, the Higher People’s Court of Fujian Province (dated Apr. 26 of 2019) Second Instance: No. 1500 [2019] Final, Civ. Division, the Supreme People’s Court (dated Sep. 29 of 2019) 3. Cause of Action Dispute over contract for building of construction project

Essential Facts On September 26, 2011, PowerChina Harbor Company and Pingtan Land Center entered into the BT Mode (the Investment and General Construction Contracting) Contract for the Project of Land Reclamation on Salt Flats in Jinjing Bay, Pingtan Comprehensive Pilot Zone, Fujian Province (hereinafter referred to as the BT Project Contract), which expressly stated that, PowerChina Harbor Company, as the investor and general construction contractor of the project, is to carry out the construction project of land reclamation on salt flats in an area of 5 million m2 , with the hydraulic filling workload of 20 million m3 plus temporary drains and roads, by means of block construction, block acceptance and block procurement. Following the conclusion thereof, PowerChina Harbor Company started as agreed the project as of October 1, 2011 and had completed all the construction tasks on December 1, 2013. On May 28, 2014, the project passed the overall handover and acceptance. It is agreed under Article 10.2.1 of the BT Project Contract that “(a)s to the dispute not settled amicably or settled through dispute review, either the Client or the Contractor shall have the right to submit it to arbitration by the arbitration commission at the place of construction.” When the contract was concluded, there was no arbitration institution available at the place of construction. On December 29, 2015, the Arbitration Center Across the Straits was established. On February 20, 2019, PowerChina Harbor Company filed a lawsuit with the Higher People’s Court of Fujian Province, requesting the court to decree Pingtan Land Center: (1) to repay immediately the arrears of the installation and construction cost totaling CNY 111,264,498.97; (2) to repay immediately the interest incurred after the procurement period as calculated from January 25, 2017 through the date of the full payment of all the procurement items at 220% of the 1–3 year bank prime loan rate based on the arrears of the installation and construction cost in the amount of CNY 111,264,498.97 (provisionally through January 25, 2019, with the interest incurred after the procurement period in the amount of CNY 23,586,961); and (3) to bear the filing fee, preservation fee and judicial expertise fee incurred in this case. The court of first instance reached its civil ruling (No. 18 [2019] Trial, Civ. Division, the Higher People’s Court of Fujian Province) on April 26, 2019, dismissing the lawsuit filed by PowerChina Harbor Company, which, dissatisfied with the first

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instance ruling, appealed to the Supreme People’s Court, requesting the court to reverse the first instance ruling and remand the case to the court of first instance for a substantive hearing.

Issue How to determine the effect of the arbitration clause in the case where the arbitration institution was not available upon the conclusion thereof but had later been established at the time of dispute.

Holding The BT Project Contract, as was concluded on September 26, 2011, out of the true intent of both parties, in no violation of any prohibitions, should be recognized as valid by law. The arbitration clause concluded between the parties was originally designed for resolution through arbitration of potential disputes by the arbitration institution at the place of construction. When PowerChina Harbor Company filed a lawsuit with the Higher People’s Court of Fujian Province in February 2019, the agreed arbitration institution, to wit, the Arbitration Center Across the Straits, had already been legally established, by which the arbitration clause should be deemed valid as the result of the removal of its previous indetermination. Specifically, when the dispute arose between the two parties regarding the BT Project Contract, PowerChina Harbor Company shall apply for arbitration in accordance with the arbitration clause of the BT Project Contract. Therefore, it is not improper for the court of first instance to dismiss the lawsuit. Pursuant to Article 170(1)(1) of the Civil Procedure Law of the People’s Republic of China and Article 5 of the Arbitration Law of the People’s Republic of China, the Supreme People’s Court rules to dismiss the appeal by PowerChina Harbor Company and uphold the first instance ruling.

Comment on Rule 1. Both parties have reached an agreement upon resolution of disputes by arbitration An arbitration agreement is essentially an agreement under which both parties to a contract agree upon the conclusion thereof to submit potential future disputes to arbitration for resolution. Article 4 of the Arbitration Law states, “(t)he parties’ submission to arbitration to settle their dispute shall be on the basis of both parties’ free will and an arbitration agreement reached between them. If any party applies

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for arbitration in the absence of an arbitration agreement, the arbitration commission shall not accept the case.” Article 16 thereof also states, “(a)n arbitration agreement shall include arbitration clauses stipulated in the contract and agreements on submission to arbitration that are concluded in other written forms before or after disputes arise. An arbitration agreement shall contain the following particulars: (1) an expression of intent to apply for arbitration; (2) matters for arbitration; and (3) a designated arbitration commission.” In this case, it is expressly agreed under Article 10.2.1 of the BT Project Contract that “(a)s to the dispute not settled amicably or settled through dispute review, either the Client or the Contractor shall have the right to submit to arbitration by the arbitration commission at the place of construction”. In conclusion, PowerChina Harbor Company and Pingtan Land Center have entered into an arbitration clause regarding the submission to arbitration of potential future disputes, which has already constituted an agreement upon the means of dispute resolution. 2. The agreement upon the arbitration commission is determinate under the arbitration agreement Article 6 of the Arbitration Law states that “(t)he arbitration committee shall be selected by the parties through agreement.” Article 18 thereof states, “(i)f an arbitration agreement contains no or indeterminate provisions concerning the matters for arbitration or the arbitration commission, the parties may reach a supplementary agreement. If no such supplementary agreement can be reached, the arbitration agreement shall be null and void.” The issue in this case is whether the situation constitutes a determinate agreement upon arbitration commission where the agreed arbitration institution, to wit, the Arbitration Center Across the Straits, was not available upon the conclusion of the arbitration clause but was already in existence at the time of dispute. Here, we need to approach the following two issues: (1) whether the abovementioned situation is concerning an indeterminate agreement upon the arbitration institution; and (2) the exact time adopted in determining the determinateness of the agreement. The first issue, namely, indeterminate agreements upon arbitration institution, can, under the Judicial Interpretation of the Arbitration Law, be divided into three categories as follows: first, the arbitration agreement contains an arbitration commission with inaccurate name; second, the arbitration agreement sets forth two or more than two arbitration institutions; third, it is agreed in the arbitration agreement upon arbitration by an arbitration institution at a specified place, in which, however, more arbitration institutions are located. As to the second issue, namely, the exact time adopted in determining the determinateness of the agreement, considering the purpose thereof of dispute resolution, it is more in line with the legislative purpose to adopt the time of the occurrence of dispute as the timing standard in determining whether the agreement concerning the arbitration commission is determinate. In this case, PowerChina Harbor Company and Pingtan Land Center jointly selected through agreement the arbitration institution at the place of the construction for potential future disputes, with the agreement to that effect determinate and

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unique, and under none of the circumstances as stipulated in the Judicial Interpretation of the Arbitration Law. In addition, the Arbitration Center Across the Straits had already been established at the time of dispute. 3. The choice of arbitration results from expression of the true intent of the parties It is one of the basic principles of the Arbitration Law to respect the parties’ autonomy, which specifies that the parties are free in deciding on arbitration as the means of dispute resolution. In this case, both parties, to wit, PowerChina Harbor Company and Pingtan Land Center, agreed upon arbitration as the means of dispute resolution, and jointly chose the arbitration commission located at the place of construction as the arbitration institution with the knowledge of the fact that the Arbitration Center Across the Straits had not yet been established, by which it can be confirmed that both parties had expectations of the establishment of the arbitration institution, and of the dispute resolution by arbitration when it arose. The true intent contained in the choice can be interpreted as follows: where the arbitration institution, to wit, the Arbitration Center Across the Straits, has been established when the dispute arises, the parties shall submit the dispute to it for arbitration; where there is no arbitration institution available when a dispute arises, the parties shall jointly figure out through negotiation a substitutive resolution to the dispute. In addition, since the parties had already reached an arbitration clause and the arbitration institution had been established at the time of dispute, the parties’ autonomy should be respected, and the dispute should be settled through arbitration, which is the core part of the basic principle of respecting the parties’ autonomy and the key to the substantive implementation thereof. 4. Consistency with the principle of judicial modesty Among the basic principles of civil law, the principle of autonomy of will is at the core, which can also best reflect the respect for the status and will of subjects of civil law. The observance of the principle of judicial modesty in the civil field is also a necessary part of civil law as private law. The choice of arbitration by the parties falls within the scope of the parties’ autonomy, which deserves judicial modesty, restraint and respect. Where the choice of arbitration as the means of dispute resolution results from expression of the true intent of the parties, the court should respect such expression of intent and ensure the primary jurisdiction of arbitration over the dispute, resulting in the true intent of the parties being achieved of choosing arbitration as the means of dispute resolution, and easy, excessive or undue judicial interference in arbitration being effectively discouraged as well.

Hainan Lingshui Baoyu Co., Ltd., Li X (A), et al. v. Sanya Zhicheng Color Printing Co., Ltd., Xu X, et al. (Dispute over Equity Transfer): Determination of Agency by Estoppel in Procuration for Equity Transfer Xianhe Jiang and Fei Luo

Rule In the case of equity transfer contracts, procuration by any family member of a shareholder constitutes an unauthorized agency without affirmative authorization or ex post facto ratification. Although equity is of personal attribute, such social relationships as that between husband and wife and between parent and child are so special that it is inconsistent with the rule of everyday experience for any party thereto has no any knowledge of the disposal of his property in such a huge amount by the other party. Therefore, it is deemed to constitute an agency by estoppel where the principal acquiesces in the role of a family member as his agent, causing the assignee of the equity to believe that the person signing the agreement on behalf of the shareholder has the power of agency.

Collegial Bench for the Second Instance: Xianhe Jiang, Yingxin Zhang and Yanzhu Gao Edited by Ming Li; translated by Xiaohua Zhu and Ting Sun X. Jiang (B) · F. Luo The First Circuit Court of the Supreme People’s Court of the People’s Republic of China, Shenzhen, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_21

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Case Information 1. Parties Appellant (Plaintiff in the First and Second Instances and in the Reopening, Defendant in the Counterclaim): Hainan Lingshui Baoyu Co., Ltd. (hereinafter referred to as Baoyu Company) Appellant (Plaintiff in the First and Second Instances and in the Reopening, Defendant in the Counterclaim): Li X (A) Appellant (Plaintiff in the First and Second Instances and in the Reopening, Defendant in the Counterclaim): Qian X Appellee (Defendant in the First and Second Instances and in the Reopening, Plaintiff in the Counterclaim): Sanya Zhicheng Color Printing Co., Ltd. (hereinafter referred to as Zhicheng Color Printing Company) Appellee (Defendant in the First and Second Instances and in the Reopening, Plaintiff in the Counterclaim): Xu X Appellee (Defendant in the First and Second Instances and in the Reopening, Plaintiff in the Counterclaim): Wang X Appellee (Defendant in the First and Second Instances and in the Reopening, Plaintiff in the Counterclaim): Li X (B) Third Party in the First and Second Instances and in the Reopening: Chen X Third Party in the First and Second Instances and in the Reopening: Li X (C) Third Party in the First and Second Instances and in the Reopening: Ma X 2. Procedural History First Instance: No. 24 [2017] Trial, Civ. Division, the Higher People’s Court of Hainan Province (dated Nov. 23 of 2017) Second Instance: No. 210 [2018] Final, Civ. Division, the Supreme People’s Court (dated Sep. 29 of 2018) First Instance of the Reopening: No. 64 [2018] Reopening, Civ. Division, the Higher People’s Court of Hainan Province (dated Dec. 29 of 2018) Second Instance of the Reopening: No. 424 [2019] Reopening, Civ. Division, the Supreme People’s Court (dated Jun. 28 of 2019) 3. Cause of Action Dispute over equity transfer contract

Essential Facts On August 22, 2016, Zhicheng Color Printing Company (Party A) signed the Agreement on Financing Cooperation, Increase of Investment, Change of Contribution Proportion, and Change of Legal Person with Baoyu Company (Party B), whereby both parties agreed to achieve, through bundling financing with their common assets,

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the increase of investment and the change the legal person, and to eventually transfer to Party B all the equity (100%) of Party A through the change of the shareholders’ contribution proportions, with affixed thereto the official seals of Zhicheng Colored Printing Company and Baoyu Company, as well as the signatures of the shareholders of Zhicheng Colored Printing Company, to wit, Wang X, Xu X, Li X (B), and the shareholders of Baoyu Company, to wit, Li X (A) and Qian X, among which the signature of Xu X is made by her husband Ma X on her behalf, and the signatures of Wang X and Li X (B) by Wang X’s husband Chen X on their behalf. On August 24, 2016, Zhicheng Color Printing Company published a debt announcement on its assets restructuring in Sanya Daily. On September 11, 2016, Chen X sent a WeChat message to Li X (A), notifying him of the rescission of the Agreement on Financing Cooperation, Increase of Investment, Change of Contribution Proportion, and Change of Legal Person as signed on August 22, 2016, which obtained consent from Li X (A) and Qian X. On November 26, 2016, Zhicheng Color Printing Company (Party A) and Baoyu Company (Party B) concluded another agreement with exactly the same title with the said agreement, under which Party A agreed to transfer, upon mutual consent of both parties, the two buildings thereof (along with Party A and the equity thereof) to Party B, with affixed thereto both the official seals of Party A and Party B, as well as the signatures of the shareholders thereof, to wit, Xu X, Wang X, Li X (B), Li X (A), and Qian X, among which the signature of Xu X is made by her husband Ma X on her behalf, and the signatures of Wang X and Li X (B) by Wang X’s husband, namely, Chen X, on their behalf. On the morning of November 26, 2016, Chen X sent a text message to Li X (A), to read: whereas Mr. Li X (B), as the shareholder of Zhicheng Color Printing Company, cannot, due to his work arrangement, go to Sanya to attend the signing ceremony of the Agreement on Financing Cooperation, Increase of Investment, Change of Contribution Proportion, and Change of Legal Person as concluded by and between Zhicheng Color Printing Company (Party A) and Baoyu Company (Party B) on November 26, 2016, Chen X is hereby authorized to attend the signing ceremony on his behalf. This principal hereby fully agrees with the said agreement after the complete review thereof and will go to Sanya to complement the signature for the registration of the change of legal persons. Principal: Li X (B), Li X (C). In the text message, however, the character “X” in “Li X (B)” was spelled as a homophone. During the trial, Li X (C) alleged that the said text message was first sent to him by Chen X, who then asked him to forward it back. Li X (C) is the father of Li X (B). On December 5, 2016, Zhicheng Color Printing Company issued a receipt with the signature of Xu X (the legal representative of the company) as the payee, stating its receipt of a deposit of CNY 3 million from Li X (A). On December 10, 2016, Zhicheng Color Printing Company issued a receipt with the signature of Xu X as the payee, stating the receipt of a down payment of CNY 3 million from Li X (A). On May 27, 2017, Zhicheng Color Printing Company sent the notice of the rescission of agreement to Baoyu Company, stating that there existed problems arising from signing and performance of the agreement as signed on November 26, 2016, which therefore should be rescinded.

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Repudiating the rescission of the agreement, Baoyu Company, Li X (A) and Qian X filed a lawsuit with the Higher People’s Court of Hainan Province, requesting the court to: (1) confirm the validity of the agreement as signed on November 26, 2016; (2) decree Zhicheng Color Printing Company, Xu X, Wang X and Li X (B) to continue to perform the agreement. On November 23, 2017, the court of first instance rendered its civil decision (No. 64 [2018] Trial, Civ. Division, the Higher People’s Court of Hainan Province), finding the agreement as signed on November 26, 2016 invalid, dismissing all the claims filed by Baoyu Company, Li X (A) and Qian X, and dismissing the rest counterclaims filed by Zhicheng Color Printing Company, Xu X, Wang X and Li X (B). Dissatisfied with the decision, Baoyu Company, Li X (A) and Qian X filed an appeal with the Supreme People’s Court, requesting the court to reverse the first instance decision (No. 64 [2018] Trial, Civ. Division, the Higher People’s Court of Hainan Province) and reach a new decision upholding all the claims filed in the first instance.

Issue Whether an equity transfer agreement is valid which is signed by either party in a martial relationship without authorization from the other party.

Holding The Supreme People’s Court holds after reopening that neither Ma X nor Chen X had been authorized by Xu X and Wang X prior to the signing of the agreement. The equity of the company constitutes the proprietary rights and interests under the company law, and the disposal thereof shall be carried out personally by the registered shareholder or the person authorized thereby. Although Ma X and Chen X are respectively under the husband-wife relationship with Xu X and Wang X, it still constitutes, until authorized thereby, an unauthorized agency for them to transfer the equity of the company under the names of Xu X and Wang X. By the same token, Chen X is required to obtain the authorization or ex post facto recognition from Li X (B) regarding his disposal of the equity under the names of Li X (B). Although Chen X signed the agreement on behalf of Li X (B) upon the authorization from Li X (C) [the father of Li X (B)], Li X (B) and Li X (C) are two independent civil subjects, and there is no evidence available in proving that Li X (C) is the actual owner of the equity or that the authorization via WeChat had been recognized by Li X (B). Hence, considering that Li X (B) expressly repudiated the signing by Chen X, the disposal by Chen X of the equity held by Li X (B) shall be found to be an unauthorized agency.

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Although the procuration by Chen X and Ma X is categorized into unauthorized agency, it shall be further determined whether such act constitutes apparent agency. First, Ma X and Chen X are under the husband-and-wife relationship with Xu X and Wang X respectively. Although equity is of personal attribute, such a social relationship as that between husband and wife is so special that it is inconsistent with the rule of everyday experience for any party thereto has no knowledge of the disposal of his property in such a huge amount by the other party. Whereby it is inconsistent with the rule of everyday experience for Li X (C), as the father of Li X (B), with his knowledge that the equity was under the name of Li X (B) and that Li X (B) did not know the specific content of the agreement, to forward the message to Chen X without informing Li X (B) of the content of the electronic authorization, allowing Chen X to sign on the agreement on behalf of Li X (B). Second, there previously existed an agreement by and between Baoyu Company and Zhicheng Color Printing Company as concluded on August 22, 2016 with the same title as the involved agreement, which, in the same way, was signed by Ma X on behalf of Xu X and by Chen X on behalf of Wang X and Li X (B) and pursuant to which Zhicheng Color Printing Company published a debt announcement on Sanya Daily. Although the agreement was eventually terminated, the shareholders of Zhicheng Color Printing Company ought to have knowledge of the equity transfer between Zhicheng Color Printing Company and Baoyu Company. Third, following the conclusion of the agreement by and between Baoyu Company and Zhicheng Color Printing Company on November 26, 2016, Xu X received on December 5 and December 10 two payments (CNY 3 million for each), noted respectively as deposit and down payment, which case constitutes, according to Baoyu Company, Li X (A), and Qian X, the performance of the agreement by Xu X, et al. Fourth, Chen X’s possession of the official seal of Zhicheng Color Printing Company safely indicates that the recognition by the shareholders of Zhicheng Color Printing Company as the representative thereof apart from the legal representative thereof, to wit, Xu X, in conducting external negotiation, and the negotiation concerning the involved agreement has always been conducted between Li X (A) and Chen X. What’s more, during the half-year-long negotiation, none of the three shareholders of Zhicheng Color Printing Company had ever expressed an objection to the negotiations and procuration by Chen X on behalf of the company. In addition, as found in the first and second instances, the procuration by Chen X and Ma X was not denied in the notice of the rescission of agreement sent by Zhicheng Color Printing Company to Ma X on May 27, 2017, indicating that Zhicheng Color Printing Company and the shareholders thereof recognized the procuration at that time. Considering all the said facts, the allegation filed by Baoyu Company, Li X (A) and Qian X that they have the reason to believe that Chen X has the power of agency and that the procuration by Chen X and Ma X constitutes apparent agency has factual and legal basis. In summary, the procuration of Chen X and Ma X constitutes apparent agency, and the agreement is legal and valid, with no violation of compulsory provisions of laws and regulations, legally binding on Xu X, Wang X, and Li X (B); therefore, each party to the agreement shall act strictly in line with the terms thereunder. In

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accordance with Article 172 of the General Rules of the Civil Law of the People’s Republic of China,1 and Article 49 of the Contract Law of the People’s Republic of China,2 the Supreme People’s Court rules to: vacate the civil decision numbered No. 64 [2018] Trial, Civ. Division, the Higher People’s Court of Hainan Province, and confirm the legality and validity of the Agreement on Financing Cooperation, Increase of Investment, Change of Contribution Proportion, and Change of Legal Person as concluded by and between Zhicheng Color Printing Company and Baoyu Company on November 26, 2016, which shall be continued be performed.

Comment on Rule The key issue in this case is whether the procuration on behalf of a family member without authorization thereof constitutes, in equity transfer, the agency by estoppel. Regarding disputes involving equity transfer, neither husband-wife nor father-son relationship constitutes the “Rechtsschein” required for an apparent agency; however, when a shareholder acquiesces the procuration by his family member without his authorization, such acquiescence can constitute a special form of “Rechtsschein” required for an apparent agency, causing an opposite party to believe with reason that the actor has the power of agency, resulting in a valid act of agency. 1. Overview of the theory of agency by estoppel There is no clear legal provision in China concerning Duldungsvollmacht (agency by estoppel).3 According to the writer, the concept of agency by estoppel in the 1

This article is now included as Article 172 of the Civil Code. Infra. This article is now included as Article 172 of the Civil Code: “(w)here an actor still performs an act of agency without a power of agency, beyond his power of attorney, or after his power of attorney terminates, the act shall be valid if the opposite party has reason to believe that the actor has the power of agency.” Infra. 3 Duldungsvollmacht arises from German case law, which refers to the case where the principal acquiesces in the act of any other person as his or her agent, and the opposite party, follows the principle of good faith, may and de facto does interpret such acquiescence of the principal as the accordance to such person of the power of agency, such person shall thus be deemed to have the power of agency by law. Such intended acquiescence is sufficient to bring the principal the liability equivalent to an authorized agency. According to German scholar Larenz,“(t)he prerequisite for Duldungsvollmacht lies in the fact that such personal knows of the act of the unauthorized agency yet without any intervention. Under such circumstance, there exists neither internal authorization nor external authorization, but the Rechtsschein of the power of agency knowingly made by the principal, with the consequent responsibility held thereby. To avoid misunderstanding, we can only call such circumstance Duldungsvollmacht”. “Silence”, as one of the causes of apparent agency, has as its typical basis under comparative law the Duldungsvollmacht created in German case law. The Federal Court of Justice (Bundesgerichtshof ) “held at first that Duldungsvollmacht was merely a special form of implied authorization of the power of agency, yet it subsequently changed its opinion, holding that a distinction should be made between the two in that: under the circumstance of Duldungsvollmacht, the principal lacks the intent of authorizing the power of agency”.参见[德] 卡尔·拉伦茨:《德国民法通论》 (下册), 王晓晔等译, 法律出版社2003年版, 第892页; Christoph 2

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legal system of China refers to the case where an actor concludes a contract in the name of the principal without a power of agency, beyond his power of attorney, or after his power of attorney terminates, however, due to the principal’s acquiescence of the actor as his agent, the opposite party believes with reason that the actor has the power of agency, such act of agency shall be valid. It is held by most scholars that agency by estoppel is contained in Article 66 of the General Rules of the Civil Law which states, “(i)f a principal is aware that a civil act is being executed in his name but fails to repudiate it, his consent shall be deemed to have been given.” The principal’s implied expression of intent shall be interpreted as ex post facto recognition of the unauthorized agency, with the acquiescence of the act of agency constituting authorized agency. However, the rule that “silence equals consent” as prescribed in Article 66 of the General Rules of the Civil Law is no longer recognized in the Chapter “Agency” of the General Rules of the Civil Law (2017), making it no longer appropriate to apply the aforesaid Article 66 to agency by estoppel. In this aspect, there exists one view that Article 140(2) of the General Rules of the Civil Law leads to the absence of legal basis for the application of agency by estoppel, which states “(s)ilence can be deemed as the expression of intent only when it is provided by law, agreed by the parties or consistent with the trade practices of the parties”.4 However, it is argued that, agency by estoppel is a special form for apparent agency, although the rule that “silence equals consent” was excluded from legislation, the “theory of apparent authority” can still be proved and should be recognized in Article 172 of the General Rules of the Civil Law.5 Agency by estoppel as a special form of apparent agency has de facto been recognized in Article 172 of the General Rules of the Civil Law concerning apparent agency. Apparent agency refers to the unauthorized agency where the actor has no power of agency yet the opposite party believes with reason that the actor does have such power. Under such circumstances, such unauthorized agency produces the same legal effect as the authorized one. Agency by estoppel, in the same way, is an agency where an unauthorized act of agency produces the same legal effect as the authorized one. Agency by estoppel shares the essential characteristics with apparent agency, with the same purpose of protecting the interests of the opposite parties and maintaining the security and order of transactions. Therefore, Article 172 of the General Rules of the Civil Law shall apply to agency by estoppel, with Article 49 of the Contract Law concerning apparent agency applying to an act of agency in the form of conclusion of contract. 2. Elements required for agency by estoppel (1) As a special form of apparent agency, agency by estoppel shall be consistent with the essential elements of apparent agency Hirsch, a.a.O., SS. 320, 321; 王泽鉴:《债法原理》 (第1册), 中国政法大学出版社2001年版, 第320 页。 4 This article is now included as Article 140 of the Civil Code. 5 参见冉克平:《民法典视野下“本人沉默视为同意”规则的再造》 ,载 《当代法学》 2019年第4期。

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Article 172 of the General Rules of the Civil Law provides that, where an actor still performs an act of agency without a power of agency, beyond his power of agency, or after his power of agency terminates, if the opposite party reasonably believes that the actor has the power of agency, such act of agency shall be deemed valid. Article 49 of the Contract Law also provides that, where an actor concludes a contract in the name of the principal without a power of agency, beyond his power of agency, or after his power of agency terminates, if the opposite party believes with reason that the actor has the power of agency, such act of agency shall be deemed valid. An apparent agency occurs upon the concurrence of the following elements: (a) The actor has no power of agency. The first element necessary for an apparent agency is that the actor has no power of agency. The statement “without power of agency” means that the actor has no power of agency when executing an act of agency or has no power of agency on the act already executed thereby. In the event of an agent having the power of agency, an authorized agency occurs without any potential dispute over apparent agency. (b) There exist facts or reasons upon which the opposite party believes that the actor has the power of agency. Such a requirement, as the objective element of an apparent agency, has as its basis the existence of some kind of factual or legal relationship between the actor and the principal. The general circumstances of transactions should be taken into consideration in determining whether such a relationship exists or whether such a relationship is sufficient to make the opposite party believe that the actor has the power of agency. Normally, the certificates held by the actor as issued by the principal constitute the objective basis for the findings of apparent agency, such as a letter of introduction, a blank agreement stamped with an official seal or a special seal for agreement, or a notice or announcement issued by the principal to the opposite party concerning the authorization by the legal person of the power of agency. (c) The opposite party is bona fide and without fault. Such a requirement, as the subjective element of an apparent agency, refers to a case where the opposite party has no knowledge of the absence of the power of agency in the actor’s conduct. Where the opposite party, out of mala fide, or with the knowledge of the actor having no the power of agency, gets involved in civil acts with the same, then legal protection becomes unnecessary, and apparent agency would not occur. (d) The civil act by and between the actor and the opposite party consists of the essential elements necessary for a civil act. With its legal effect as that of an authorized agency, an apparent agency should consist of the essential elements necessary for a civil act, that is, it shall not violate laws or endanger social and public interests. Without the essential elements of a civil act, apparent agency would not occur. (2) As a special form of apparent agency, agency by estoppel has some special essential elements different from those of a general apparent agency

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As a result of its combination with judicial practices in China, there are some necessary elements, especially for agency by estoppel, listed as follows6 : (a) The principal subjectively acquiesces as to the act of unauthorized agency. In China, it would not be taken into consideration in the legislation whether there is subjective fault on the principal of an apparent agency, however, the principal’s subjective fault shall, in determining whether such apparent agency constitutes agency by estoppel, be examined from the following two aspects: first, whether the principal knows of the actor’s conduct in the name of thereof; second, whether the principal acquiesces in such unauthorized act of agency7 ; (b) The Rechtsschein of the power of agency lies in the principal’s acquiescence, with no other objective fact required. Namely, the principal, with the knowledge to that effect, does not intervene in the agent’s act of unauthorized agency even if he could do so. Such a principal attitude in the form of noninterference reflects the special superficial feature or appearance of agency by estoppel. In addition, such nonintervention cannot be deemed the authorization of the principal because agency by estoppel results from neither internal authorization nor external authorization, while the Rechtsschein of the power of agency arises from an apparent agency that lies in various documents, such as certificates, contracts and the like, or objective facts, such as trade practices and fake appearances. (c) The opposite party knows of the chronic act by the agent and the acquiescence thereof on the part of the principal, and the opposite party, if observing the principle of good faith and taking into account the trade practices, may interpret such acquiescence on the part of the principal as the acquisition by the agent of the power of agency, which is de facto the interpretative approach employed by the opposite party. Since there still exists much academic controversy on this point, we can just understand as that, to constitute such act, the opposite party must be subjectively bona fide, and the aforesaid unauthorized act of agency must have continued for a 6

In the Munich Commentary on the Civil Code (Münchener Kommentar zum Bürgerlichen Gesetzbuch), after collation of the relevant precedents, German scholar Schramm believes that, a Duldungsvollmacht arises where the following requirements are met: (1) a person has no power of agency, yet has appeared as an agent for a long time and repeatedly; (2) the principal has aware of this situation but never intervened although he or she could have; (3) when executing the disputed juristic act, the opposite party knows the long-term act of the agent and the acquiescence of the principal, and follows the principle of good faith and takes into account the trade practices, it is reasonable for the opposite party to interpret such acquiescence of the principal as that the agent has already obtained the power of agency, and the opposite party has in fact made such interpretation. However, some scholars believe that the establishment of Duldungsvollmacht does not require the agent to act as an agent for a long time and repeatedly, sometimes Duldungsvollmacht can be established in just a certain transaction where the agent act as an agent. Some scholars even believe that, when executing a juristic act, if the opposite party knows that the principal has tolerated such juristic act, there is no need for the agent’s act to be long-term and repetitive, and such acquiescence is sufficient to constitute the Rechtsschein of the power of agency. MünchKomm/Schramm, §167 Rn.47. Reinhard Bork, Allgemeiner Teil des Bürgerlichen Gesetzbuchs, 2.Aufl., Mohr Siebeck, Tübingen, 2006, S.585. Erman/Palm, §167 Rn.15. 7 German scholars hold that, the principal’s sheer negligence in the apparent agency is obviously different from his or her intended acquiescence on the exercising of the power of agency. 参见[德] 迪尔特·梅迪库斯:《德国民法总论》 , 邵建东译, 法律出版社2000年版, 第733页。

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certain period of time, which concurrently result in the findings of no fault on the part of the opposite party.8 Different from the standard in general apparent agency for positive recognition of the bona fide opposite party with no fault, the standard in the agency by estoppel for the recognition of the bona fide opposite party is relatively low because acquiescence from the principal would result in reasonable reliance by the opposite party. As long as the opposite party observes the principle of good faith and trade practices and knows of the chronic act of the agent and the acquiescence thereof on the part of the principal, there is no need to examine the subjective fault of the opposite party. 3. The legal nature of the procuration of an equity transfer contract by a spouse without authorization (1) Equity transfer is not a family matter; therefore, a procuration of an equity transfer contract by a spouse without authorization shall not be presumed as an authorized agency on family matters In accordance with Article 17(1)(1) of the Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Marriage Law of the People’s Republic of China (I) concerning the power of agency on family matters, the husband and wife have equal disposition of their community properties. When there is a need to dispose of community properties due to the needs of daily life, either party of the spouses shall have the right to make the decision. This connotation contained herein is that either party in a marriage relationship does not naturally enjoy the power of agency by marriage; however, when executing certain juristic acts with any third party concerning daily affairs, he or she shall be presumed to have the power of agency on behalf of his spouse.9 In countries with a system of agency on family matters, the power of agency has been necessarily confined to only daily family matters, namely, the matters necessary for the daily life of a couple and their minor children, such as shopping, food and clothing, medical and health care, accepting gifts, and concluding educational contracts for their children. However, equity transfer is obviously not part of a family’s daily life and shall not, therefore, be included in the agency on family matters, which is presumed to be authorized. (2) Equity transfer is not a disposal of community properties, and the procuration on an equity transfer contract by a spouse without authorization does not constitute the apparent agency between the spouses on nonfamily matters Under Article 17(1)(2) of the Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Marriage Law (I) concerning the power of apparent agency on nonfamily matters, when there is a need to make an important decision on the disposal of the community properties not for the purpose of daily life, the spouses shall consult with each other on an equal footing and reach an agreement 参见沈鹏云: 《试论容忍代理的构成》 , 载https://www.docin.com/touch/detail.do?id=149916 6240, 最后访问日期: 2019年9月29日。 9 参见公维亮:《法院依 “夫妻表见代理权”认定股权代持的裁决之商榷》 , 载http://www.sohu. com/a/216598202_725762, 最后访问日期: 2019年9月29日。 8

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therebetween. Where any third party believes with reason that a decision by either spouse is a common expression of intent between the spouses, the other spouse shall not challenge such bona fide third party on the ground of repudiation or the lack of knowledge thereof to that effect. However, the aforesaid provision only deals with the disposal of community properties, and whether equity is part of the community properties of spouses is still under academic controversy. In addition, equity is a special form of property, not only with proprietary economic benefits in return but also of personal characteristics. In a sense, equity is more of a right than a kind of property in that the profits and values arising from equity constitute the community properties of the spouses, yet the status as the shareholder can only enjoyed by the spouse holding the equity and the other spouse being excluded therefrom. Therefore, the procuration by a spouse on an equity transfer contract shall not be dealt with by Article 17(1)(1) of the Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Marriage Law (I) concerning the power of apparent agency on nonfamily matters. (3) Equity transfer is a civil act of the shareholder as an individual, and the procuration made by an unauthorized spouse on an equity transfer contract may, under different circumstances, constitute unauthorized agency, general apparent agency or agency by estoppel (a) Where the shareholder has no knowledge of his spouse’s act of procuration, such act constitutes unauthorized agency, for the marriage relationship cannot constitute the only Rechtsschein of the apparent agency, and the assertion of apparent agency filed by the opposite party on the ground of such marriage relationship shall not be supported. (b) Where the shareholder has no knowledge of his spouse’s act of procuration, which, however, has its “Rechtsschein” in the form of an external or internal authorization, such as a forged power of attorney, a confusing and deceptive recording or video, a forged nominee shareholder agreement or resolution of shareholders’ meeting, etc., if the opposite party, upon prudent review, believes that the spouses procurator has the power of agency, a general apparent agency occurs. Under such circumstances, the marriage relationship may sometimes constitute one Rechtsschein corroborating another, while sometimes have absolutely nothing to do with the Rechtsschein of the power of agency. (c) Where the shareholder knows his spouse’s act of procuration, but only acquiesces in such act without express approval or disapproval thereof, such acquiescence of the shareholder and the aforesaid marriage relationship constitute the Rechtsschein, by which the opposite party obtains his reliance on the transaction, resulting in the occurrence of agency by estoppel in the form of the aforesaid spouse procuration, with the shareholder under the liability therefor. In judicial practices, some judges hold that the prerequisite for agency by estoppel lies in the chronic repetition of the act of procuration; otherwise, the opposite party cannot generate reasonable reliance. However, it should be noted that although the chronicity of the act of procuration can indeed become a superficial feature or appearance of a transaction practice, resulting in reliance from the opposite party, the transaction practice does not serve as the main

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cause of such reliance; instead, it is the shareholder’s acquiescence that shows the opposite party an appearance of authorization resulting in such reliance. Therefore, the chronicity of the act of procuration is not a necessary requirement for agency by estoppel. In addition, the standard of the subjective bona fide of the opposite party shall be that the opposite party has noticed the acquiescence of the shareholder and the marriage relationship between the shareholder and the procurator, with no other fact of subjective bona fide required for consideration. Upon the implementation of the General Rules of the Civil Law in 2017, the rule that “silence equals consent” was excluded from the Chapter “Agency”, whereas the application of agency by estoppel should still be recognized to avoid the indirect denial of the legal value of agency by estoppel in balancing the freedom of will enjoyed by the principal and the reliance interests on the part of the opposite party, as well as maintaining the stability of transactions. Agency by estoppel, as a special form of apparent agency, does not legally come from nowhere. In judicial practices, each court should take into consideration in a comprehensive way different circumstances of individual cases, and, in accordance with Article 172 of the General Rules of the Civil Law and Article 49 of the Contract Law concerning apparent agency, correctly apply agency by estoppel by law so as to supplement the loopholes and shortcomings of the existing apparent agency system.

Gansu August First State-Owned Farm v. Jinchang Cement (Group) Co., Ltd., State-Owned Assets Supervision and Administration Commission of the People’s Government of Jinchang City (Dispute over the Effect of the Resolution of Shareholders’ Meeting): Whether a Lawsuit Involving Conflicting Claims shall be Dismissed Jinqi Hao

Rule Any shareholder who believes that a resolution of shareholders’ meeting is invalid or whose preemptive right on the company’s increased capital was infringed has the right to file a lawsuit by law. Even with the two claims conflicting, the plaintiff may, when the former claim is not supported by the court, choose to raise the latter, and the court shall hear both claims filed thereby.

Collegial Bench: Dongmin Wang, Jizhong Chen and Guangyu Ding Edited by Ming Li; translated by Xiaohua Zhu and Ting Sun J. Hao (B) The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_22

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Gansu August First State-owned Farm (hereinafter referred to as Gansu August First Farm) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Jinchang Cement (Group) Co., Ltd. (hereinafter referred to as JC Company) Third Party in the First Instance: State-owned Assets Supervision and Administration Commission of the People’s Government of Jinchang City (hereinafter referred to as Jinchang SASAC) 2. Procedural History First Instance: No.85 [2016] Trial, Civ. Division, the Intermediate People’s Court of Jinchang City, Gansu Province (Gansu 03) (dated Jun. 27 of 2018) Second Instance: No. 647 [2018] Final, Civ. Division, the Higher People’s Court of Gansu Province (dated Sep. 19 of 2018) Application for Reopening: No. 500 [2019] Appeal, Civ. Division, the Supreme People’s Court (dated Mar. 21 of 2019) Reopening: No. 152 [2019] Reopening, Civ. Division, the Supreme People’s Court (dated May 31 of 2019) 3. Cause of Action Dispute over the effect of the resolution of shareholders’ meeting

Essential Facts Gansu August First Farm filed an action with the court of first instance, alleging that, on November 5, 1999, the Bureau of Economic Planning of Yongchang County, the Administration of Township and Village Enterprises of Jinchuan District, and Gansu August First Farm reached an agreement, for the purpose of restructuring the assets of their subordinate entities, to wit, Yongchang Building Materials Industry Co., Ltd. (deregistered), Gansu Liqian Cement Plant (deregistered), Jinchang Cement Plant (deregistered) and Gansu August First Cement Plant (deregistered) and creating JC Company with the assessed net assets thereof as the capital contributions, which was registered and established on April 26, 2000. The registered capital of JC Company totals CNY 72.188 million, with 53.87% thereof being CNY 38.8884 million (including CNY 11.8977 million in land use right) in kind by Gansu August First Farm; 34.35% thereof CNY 24.7988 million (including CNY 7.8185 million in land use right) was contributed by the Bureau of Economic Planning of Yongchang County; and 11.78% thereof CNY 8.5008 million (including CNY 7.2107 million

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in land use right) was contributed by the Administration of Township and Village Enterprises of Jinchuan District. In April of 2002, the land use right in the evaluated amount of CNY 855.4 thousand contributed by the Bureau of Economic Planning of Yongchang County was recovered by the People’s Government of Yongchang County, with the registered capital of JC Company therefore reduced to CNY 69.434 million, resulting in changes to the proportions of capital contributions of Gansu August First Farm, the Bureau of Economic Planning of Yongchang County, and the Administration of Township and Village Enterprises of Jinchuan District as 59.43%, 35.54% and 5.03%, respectively. On April 12, 2011, the People’s Government of Jinchang City decided to put the equities of JC Company as held by the People’s Government of Yongchang County and the People’s Government of Jinchuan District under the management of Jinchang SASAC, resulting in the shareholders of JC Company consisting of Gansu August First Farm and Jinchang SASAC, with capital contributions of CNY 41.2654 million (accounting for 59.43% of the total) and CNY 28.1686 million (accounting for 40.57% of the total), respectively. On October 22, 2014, JC Company passed a resolution of shareholders’ meeting on capital increase as follows: in accordance with relevant provisions on China’s SOE reform and in the light of the reassessed land value based on the benchmark price of the state-allocated land as used by JC Company, the registered capital of JC Company was increased from CNY 69.434 million to CNY 109.974 million, with the capital contribution thereto by Gansu August First Farm remaining the same in the amount of CNY 41.2654 million, yet its proportion of capital contribution being reduced from 59.43% to 37.52%; and the capital contribution thereto by Jinchang SASAC being increased from CNY 28.1686 million to CNY 68.7086 million with its proportion of capital contribution being increased to 62.48%. In November of 2014, in accordance with the resolution of the shareholders’ meeting, JC Company underwent modification registration with the Administration for Industry and Commerce of Yongchang County to that effect. In the reassessment, the reassessed value and the accordingly increased part of value as reassessed based on the benchmark price of land of the eight parcels of lands used by JC Company were considered as only the unilateral contribution increase by Jinchang SASAC. The said eight parcels of lands, however, include two parcels of lands that were the capital contributions by the original shareholders when JC Company was created in 2000, at which time the company failed in its restructuring to assess the original land assets of Gansu August First Farm and failed to do the same in a comprehensive manner with regard to the existing assets at the time of its registered capital increase in 2014. In carrying out its capital increase, JC Company reassessed the land use right contributed by the original shareholders and took the increased part of value as the investment of Jinchang SASAC, which violated relevant provisions of the Company Law concerning the right to legal person property, and infringed on the legal rights and interests entitled by Gansu August First Farm as a shareholder of the company. Meanwhile, JC Company took as the increased capital contribution by Jinchang SASAC to the company the assessed value of the use right on the remaining six parcels of lands without assessing the company’s existing

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assets under legal procedures, which violated the mandatory provisions of laws and regulations, including the Interim Measures for Administering the Evaluation of State-Owned Assets of State-Owned Enterprises and the Administrative Measures for Handling Certain Issues in the Valuation of State-Owned Assets. Prior to the completion of the assessment of all the assets of JC Company, the increased value as the result of the reassessment in the amount of CNY 40.54 million shall be shared by all the shareholders in proportions to their original equities. Whereupon, JC Company infringed on the right to the return on assets and the right to a share of the value-added assets entitled by Gansu August First Farm as a shareholder of the company. Gansu August First Farm filed a lawsuit with the court of first instance, requesting the court: (1) to find invalid the resolution of the shareholders’ meeting of JC Company as made on October 22, 2014; (2) to confirm the equity arising from the increased capital of JC Company in the amount of CNY 24.042922 million to be enjoyed by Gansu August First Farm; (3) to order JC Company, to apply to the registration authority for revoking the capital modification registration within a specified period of time; (4) to order JC Company to bear all the litigation costs. The court of the first instance held that Gansu August First Farm’s allegation that the resolution of the shareholders’ meeting of JC Company as made on October 22, 2014 was null and void and its claim for the entity arising from the increased capital of JC Company in the amount of CNY 24.042922 million to be enjoyed by it were conflicting, and Gansu August First Farm clearly expressed no change to its claims upon the express explanation by the court to that effect during the trial, the lawsuit filed by Gansu August First Farm shall therefore be dismissed in accordance with Article 35 of the Rules of the Supreme People’s Court on Evidence in Civil Actions (2001). Whereupon, the court ruled, in accordance with Article 119 and Article 154(1)(3) of the Civil Procedure Law, to dismiss the lawsuit filed by Gansu August First Farm and return to Gansu August First Farm the case acceptance fee of CNY 248,127 as paid in advance. Afterwards, Gansu August First Farm filed an appeal with the court of second instance, which held that items (1) and (3) of the claims asserted by Gansu August First Farm with the court of first instance were materially conflicting with item (2) thereof, resulting in the lawsuit filed by Gansu August First Farm failing to meet the statutory requirements for acceptance with the court being uncertain of the specific claims by Gansu August Frist Farm. In accordance with Article 208(3) of the Judicial Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China, which states that “(w)here the people’s court finds that the complaint does not meet the conditions for instituting a lawsuit after filing of the case or the complaint falls under the circumstances as prescribed in Article 124 of the Civil Procedure Law, the people’s court shall rule to dismiss the case”, the court of first instance did not err in its ruling to dismiss the lawsuit. Article 334 of the Judicial Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China states that “(w)here the results of the prior judgment or ruling are correct although the facts found by the prior judgment or ruling or the application of law are flawed, the people’s court of second instance may, after correcting the flaws in the judgment

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or ruling, affirm the prior judgment or ruling in accordance with Article 170(1)(1) of the Civil Procedure Law.” The first instance ruling hereby is correct in its decision though it is erroneous in the application of Article 35 of the Rules of the Supreme People’s Court on Evidence in Civil Actions. Therefore, the court of second instance shall affirm the first instance ruling while correcting the flaws in the application of law in the first instance ruling. Whereupon, the court of second instance held, in accordance with Article 170(1) (1) and Article 171 of the Civil Procedure Law and Article 208 and Article 334 of the Judicial Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China, to dismiss the appeal and affirm the first instance ruling. Dissatisfied with the second instance ruling, Gansu August First Farm applied to the Supreme People’s Court for reopening, requesting for reversing the rulings of first and second instances, and for reopening via certiorari or order of reopening by law, with the main facts and reasons as follows: (1) claims filed by Gansu August First Farm are clear and specific, and the invalidity of the resolution of the shareholders’ meeting is not conflicting with the applicant’s request for entitlement to shareholders’ rights and interests, so that the courts of prior instances failed to hear and find on such merits of the case as the procedures and content of the involved shareholders’ meeting, which constituted its error in the findings of fact; (2) no circumstance legally specified occurred under which the case shall be dismissed, and the claims filed by the applicant are specific with factual reasons, it therefore constitutes the error in the application of Article 119 of the Civil Procedure Law and Article 35 of the Rules of the Supreme People’s Court on Evidence in Civil Actions (2001), where the courts of the prior instances applied for the purpose of dismissing the lawsuit; (3) the court of first instance is procedurally illegal in illegally suspending and delaying the hearing of the case.

Issue Where there exist conflicting claims by the plaintiff, whether the lawsuit shall be dismissed on the ground of such conflict.

Holding Under Article 22 of the Company Law of the People’s Republic of China, where there is a vitiating factor in the resolution of shareholders’ meeting, shareholders may request invalidation of the resolution. In this case, Gansu August First Farm is entitled as a shareholder of JC Company to file a lawsuit for invalidation of the resolution of the shareholders’ meeting, with the claim for the determination of invalidity of JC Company’s resolution of shareholders’ meeting and for the completion of the corresponding modification registration are consistent with the requirements

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for acceptance as prescribed in the Civil Procedure Law of the People’s Republic of China, and the case shall be accepted by law. In accordance with Article 34 of the Company Law of the People’s Republic of China, which provides for the preemptive right entitled by shareholders of companies with limited liability on the company’s increased capital, Gansu August First Farm asserted the right of action on the ground of the infringement by JC Company at the time of capital increase on its rights and interests as the shareholder of the company. While filing a lawsuit for the invalidation of the resolution of the shareholders’ meeting, Gansu August First Farm requested concurrently for the court’s confirmation on its ownership of the shareholder’s rights and benefits arising from the increased capital as prescribed in the resolution of the shareholders’ meeting. Although conflicting, the two claims, with complete elements of an action, meet the requirements for acceptance as provided in the Civil Procedure Law of the People’s Republic of China; the litigant may, when one claim was not supported by the court, choose to file the other, and the court shall accept and hear both claims. In summary, the Supreme People’s Court rules after reopening via certiorari to reverse the rulings of the first and second instances and orders the Intermediate People’s Court of Jinchang City, Gansu Province, to this case by law.

Comment on Rule The main issue in this case is how a people’s court deals with the existence of conflicting multiple claims at the time of litigation. With reference to the judicial reasoning in the first and second instances, where the litigant’s claims are conflicting or diametrically opposed to each other and the litigant still insists on its claims even after the express explanation by the court, the court shall rule to dismiss the case. Regarding this case, the Supreme People’s Court after reopening holds that the claims are filed based on the different provisions of substantive laws: the claim for invalidation of the resolution of the shareholders’ meeting is filed under Article 22 of the Company Law, and the claim for the entitlement to the rights and interests on the increased capital is filed under Article 34 of the Company Law, both of which equally confer the right of action on Gansu August First Farm. In judicial practice, a court shall accept a case pursuant to the related standards as specified in the Civil Procedure Law. Since all the claims filed by Gansu August First Farm have complete elements of an action, consistent with the standards of acceptance provided in the Civil Procedure Law, such claims shall be heard by law. Regarding whether the claims would be supported wholly or partially, the court shall reach its adjudication accordingly after a substantive hearing instead of a mere dismissal. A few questions worth further exploration: (1) How to identify the conflicting claims filed by the litigant. A litigant normally files a lawsuit with multiple claims, which, if involve yes-or-no questions, or essentially contradictory to or incompatible with each other, shall be expressly explained by the court to the litigant. If the litigant refuses to make necessary change to his

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claims, the court shall dismiss the lawsuit by law. In this case, however, there exists a relationship of sequence or possibility of selectivity among the claims in this case, namely, if one of the claims is not supported by the court, the litigant can raise the rest claims, exactly put, “the claim for the invalidation of the resolution will be raised, failing which the claim for entitlement to the rights and interests on the increased capital will be raised based on the validity thereof”. Such claims can coexist, which case is similar to the preliminary joinder of actions under the theory of procedure law, and shall be accepted and heard by the court conditioned on their satisfaction of the requirements to that effect as provided in the procedure law. As to whether the claims would be supported wholly or partially, the court shall reach its adjudication accordingly after a substantive hearing. (2) In consideration of the economic cost of a lawsuit, if following a simple logical judgment on yes or no, existence or nonexistence as judicially practiced in the first and second instances, the proceedings of this case would suffer the waste of litigation resources and economic costs, or even serve as an approach for a malicious litigant to delay the trial and evade liabilities in the case where the litigant would first file a claim for the invalidation of the resolution of the shareholders’ meeting, and then, based on the outcome of the adjudication, claims for compensation and the deregistration thereof, failing which would further file a lawsuit for entitlement to the rights and interests on the increased capital. This case, however, is dealt with under a single procedure in a consolidated manner, resulting in both the litigation burden of the litigants and the cost of judicial resources being materially reduced. (3) From the perspective of protecting litigants’ rights of action, as the litigation practice in China, any party, when suffering any infringement, can file a lawsuit with the court for his rights and interests. However, due to the lack of his knowledge concerning the highly professional litigation procedure, the litigant, when believing that his rights have been infringed, tends to raise multiple juxtaposed claims without a professional analysis of the logical relations thereamong. Under such circumstances, the court, when examining whether the case shall be accepted, shall conduct procedural examinations pursuant to relevant provisions of the procedure law and accept and hear the multiple claims which meet the specified requirements. Especially under the registration system for case acceptance, it is an important duty of the “justice for the people” to maximize the protection of the litigation rights and interests enjoyed by the people. Therefore, the court should not merely dismiss a lawsuit due to logical contradiction but should conduct a substantive hearing thereof and reach decisions separately.

Liu X v. Henan Jinbo Land Development Co., Ltd., Henan Yuanheng Construction Group Co., Ltd. (The Lawsuit against Outsiders’ Objection to Enforcement): Whether the Principle of “Possession is Ownership” should Apply to Mistaken Transfer of Funds Jing Yan

Rule 1. Where the funds owned by the outsider are transferred mistakenly into the account of the party subject to enforcement, in the absence of an expression of true intent from the party who makes the mistake, the mistaken remittance hereof does not lead to the legal effect of transferring the substantive rights to the funds, so the outsider’s rights to the funds involved suffice to exclude the forcible enforcement on them. 2. The movement of the funds involved in the account of the party subject to enforcement is completed via bank account transfer, and the funds are directly freezed and rechanneled by a people’s court into its account for enforcement cases. As the funds are neither actually possessed by nor delivered in the actual currency as “a thing of a special kind” to the party subject to enforcement, the “possession is ownership” rule does not apply to the aforesaid funds. 3. The purpose of the lawsuit against outsiders’ objection to enforcement is to protect the legitimate substantive rights of outsiders. Where the substantive rights to the funds involved have been ascertained to be owned by the outsiders, the judgment of terminating the enforcement on the funds involved should be made by a people’s court Collegial bench: Jing Yan, Yunfei Wang and Zhuo Yang Edited by Yi Yang; translated by Zuoyong Liu and Yi Zheng J. Yan (B) The Third Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_23

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to protect the legitimate rights hereof, whereas a lawsuit against unjust enrichment should not be lodged for settling the dispute arising therefrom.

Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Liu X Respondent in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Henan Jinbo Land Development Co., Ltd. (hereinafter referred to as Jinbo Company) Respondent in the Reopening (Third Party in the First Instance): Henan Yuanheng Construction Group Co., Ltd. (hereinafter referred to as Yuanheng Company) 2. Procedural History First Instance: No. 134 [2016] Trial, Civ. Division, the Intermediate People’s Court of Yulin City, Shaanxi Province (Shaanxi 08) (dated Aug. 23 of 2016) Second Instance: No. 679 [2016] Final, Civ. Division, the Higher People’s Court of Shaanxi Province (dated Dec. 20 of 2016) Reopening: No. 322 [2017] Appeal, Civ. Division, the Supreme People’s Court (dated Jul. 27 of 2017) 3. Cause of Action The lawsuit against outsiders’ objection to enforcement

Essential Facts Jinbo Company was a successful bidder of the social fund-financed Program of Offsetting Repurposed Farmlands launched by the People’s Government of Qixian County in Henan Province (hereinafter referred to as Qixian Program) and contracted out to Yuanheng Company the reclamation works for three bid packages of the said Program. By the completion of the Program, Jinbo Company owed CNY 124,981.23 to Yuanheng Company based on the final accounting. Besides, Yuanheng Company also undertook related works for the Supplementary Farmland Reserve Program in Xiangcheng County, Henan Province (hereinafter referred to as Xiangcheng Program) from Henan Wanbo Land Development and Reclamation Co., Ltd. (hereinafter referred to as Wanbo Company) and was paid CNY 6,980,526 out of the total contract cost of CNY 7,352,905.65 based on the final accounting from Wanbo Company, with the balance of CNY 372,379.65 unpaid. The financial clerk employed by both Jinbo Company and Wanbo Company mistook the declaration settlement

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price from Yuanheng Company as the audited settlement price and mistakenly transferred the sum payable by Wanbo Company to Yuanheng Company from Jinbo Company’s account, having an excess amount of CNY 4,244,670.06 transferred to Yuanheng Company after deducting the amount of CNY 124,981.23 owed by Jinbo Company to Yuanheng Company. Thereafter, the Intermediate People’s Court of Yulin City, Shaanxi Province, by a court judgment, had Yuanheng Company’s account frozen in the enforcement of a separate lawsuit between Yuanheng Company and Liu X and retransferred the said payment into Yuanheng Company’s account from Jinbo Company into an enforcement account. After its objection to the enforcement on a mistaken transfer was raised with and rejected in a court judgment by the Intermediate People’s Court of Yulin City, Shaanxi Province, Jinbo Company lodged a lawsuit against the objection to enforcement with the Intermediate People’s Court of Yulin City, Shaanxi Province. On August 23, 2016, the court of first instance made the civil judgment, No. 134 [2016] Trial, Civ. Division, the Intermediate People’s Court of Yulin City, Shaanxi Province (Shaanxi 08), rejecting Jinbo Company’s lawsuit claims. On December 20, 2016, the court of second instance made the civil judgment, No. 679 [2016] Final, Civ. Division, the Higher People’s Court of Shaanxi Province, revoking the first instance judgment and ordering that CNY 4,244,670.06 transferred mistakenly from Jinbo Company to Yuanheng Company on July 3, 2015 shall not be enforced. As the second instance judgment took effect, Liu X applied to the Supreme People’s Court for reopening the case, requesting that the second instance judgment be reversed and changed or remanded for a new trial by law, and Jinbo Company’s lawsuit claims be rejected.

Issue Whether terminating the enforcement on the excess amount of CNY 4,244,670.06 transferred mistakenly from Jinbo Company to Yuanheng Company in the second instance judgment is correct and proper.

Holding Upon reopening, the Supreme People’s Court holds that in the absence of an expression of true intent from the party concerned (the person who made the mistake), the mistaken remittance of funds into the account of the party subject to enforcement does not lead to the legal effect of transferring funds. Besides, the party subject to enforcement has not actually possessed the said funds, and the rule of “possession is ownership” does not apply. Safeguarding the legitimate rights and interests of

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outsiders in the very process of outsiders’ objection to enforcement is more consistent with the real legislative intention of such action. Therefore, the Supreme People’s Court rules that Liu X’s application for reopening the case shall be rejected.

Comment on Rule The key legal issue in handling the outsiders’ objection to enforcement is whether or not the outsiders’ civil rights to the subject matters of enforcement suffice to exclude the said enforcement. The determination of this legal issue depends on various considerations, including the factual determination of whether the funds involved are truly transferred mistakenly, the theoretical basis for the determination of the true ownership of the funds involved, the application of laws for the funds involved, the conformity of the approaches to settling disputes arising from a mistaken transfer of the funds with the principle of judicial economy, and so on. In this case, based on the same facts, the courts of first instance and second instance came out with opposing conclusions mainly in that there is no comprehensive and unified understanding of the abovementioned considerations. The Supreme People’s Court has made a deeper elaboration on these considerations in the reopening procedure. The following are further illustrations to them: 1. The factual determination that the funds involved are truly transferred mistakenly is the precondition for the determination of whether the outsiders have sufficient civil rights to exclude the enforcement The outsider Jinbo Company in this case claimed that he had the civil rights to exclude the forcible enforcement on the grounds that the funds to the account of Yuanheng Company, the party subject to enforcement, was transferred by error instead of for the purpose of fulfilling normal obligations to him. Therefore, the determination of Jinbo Company’s sufficient civil rights to the funds involved in this case to exclude forcible enforcement is premised on the determination of the ownership of the funds. In this case, the ownership of the funds depended on whether the fund transfer from Jinbo Company to Yuanheng Company was truly a mistake. In other words, to determine whether the fund transfer was indeed a mistaken operation constitutes the premise and basis of handling the case and is also the crux of the matter of this case. According to the facts found in this case, Jinbo Company should have paid only CNY 124,981.23 of the outstanding project amount to Yuanheng Company in the Qixian Program but actually transferred a total sum of CNY 4,369,651.29 in four payments to Yuanheng Company on July 3, 2015. The difference was due to the mistaken calculations based on the declaration settlement price from Yuanheng Company rather than the audited settlement price. In addition, Jinbo Company mistakenly transferred the amount of CNY 372,379.65 owed by Wanbo Company to Yuanheng Company from Jinbo Company’s account to Yuanheng Company’s account. Yuanheng Company acknowledged that Jinbo Company owed only CNY 124,981.23 to it in the Qixian Program

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and expressed its willingness to refund the difference of the funds mistakenly transferred into its account to Jinbo Company. Thus, Jinbo Company’s claim that the transfer of the funds involved in this case was a mistaken act conforms to common sense and logic, and is consistent with the mentioned above facts, and should be affirmed. Based on the aforesaid fund transactions found between Jinbo Company and Yuanheng Company, the people’s court confirmed that the excess amount of CNY 4,244,670.06 between the total amount of payment made by Jinbo Company to Yuanheng Company and the outstanding project amount of CNY 124,981.23 was not for the purpose of Jinbo Company’s normal fulfillment of its obligations but the result from a mistaken operation. Therefore, the factual determination had a sufficient basis. However, the factual determination that the funds involved were truly transferred mistakenly is just the premise for the determination that the outsider has substantive rights and interests over the funds involved in the case. To determine whether the outsider had sufficient civil rights to exclude enforcement, further judgment should be made in light of the civil nature of the mistaken act and its legal effect. 2. In the absence of an expression of true intent, fund misappropriation produces no legal effect of transferring substantive rights and interests in private law Article 133 of the General Rules of the Civil Law of the People’s Republic of China (hereinafter referred to as General Rules) provides that “(a) civil juristic act is an act by which a civil subject creates, alters or terminates a civil juristic relationship by means of expression of intent.”1 Expression of intent is the act that a civil subject declares its intention to have certain effects in private law.2 The expression of true intent is an essential element for the validity of a civil juristic act. Therefore, it can be seen that a valid civil juristic act is one that is based on the expression of true intent and can result in some effects in private law. Since the transfer of CNY 4,244,670.06 in this case was a mistaken operation, Jinbo Company had no expression of intent for transferring the funds, and Yuanheng Company also had no expression of intent for accepting the funds, so there existed no consistent expression of intent between the parties concerned. Therefore, fund transfer cannot constitute a civil juristic act of creating, altering or terminating civil rights and obligations, and does not produce any effects in private law but constitutes only a civil act that can be changed or revoked. That is, the act of transferring mistakenly funds cannot produce the legal effect of transferring substantive rights and interests over mistakenly remitted funds. Therefore, substantive rights and interests over mistakenly remitted funds remain owned by Jinbo Company rather than Yuanheng Company.

1

See Article 133 of the Civil Code. The judgment was made prior to the implementation of the General Rules, and the illustrations of the legal basis is according to related provisions thereof. 2 参见梁慧星:《民法总论》(第2版), 法律出版社2001年版, 第189页。

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3. The actual possession of the funds mistakenly transferred did not materialize, so the principle of “possession is ownership” does not apply Possession is a state of having actual control over a thing, representing simply the fact rather than the right(s) and/or title(s) to and over the thing.3 Although the funds involved were remitted mistakenly into Yuanheng Company’s account, but the account had been earlier frozen by the Intermediate People’s Court of Yulin City, Shaanxi Province, and soon after having landed on the frozen account, the funds involved were rechanneled by the Intermediate People’s Court of Yulin City, Shaanxi Province into its account for enforcement cases, so in fact, the funds never came into the possession or the hold of, or under the control or the domination of Yuanheng Company. In addition, landing on the frozen account and then being retransferred into the account for enforcement cases had the funds involved been distinguished from other funds, namely, the funds involved became something of specified funds. Under such circumstances, Jinbo Company remained the owner of the excess amount of CNY 4,244,670.06 and had legal civil rights and interests over it, which sufficed to exclude the forcible enforcement thereon by the Intermediate People’s Court of Yulin City, Shaanxi Province. The court of first instance held that the disputed amount of CNY 4,244,670.06 out of the funds transferred into Yuanheng Company’s account should be recognized to be the property of Yuanheng Company as bank deposits, as a kind of property rights, has the attribute of indistinguishability, and the ownership of the excess amount should be determined based on the situation of its possession following the principle of demonstration of real right. In essence, the first instance judgment was made based on the principle of “possession is ownership”, and in the application for reopening the case, Liu X cited this principle once again. It is noted that the determination in the first instance judgment is inconsistent with both the facts found in this case and the connotations and legal provisions of relevant provisions of the General Rules, and the reasons for either the judgment or Liu X’s application for reopening are untenable. Currency is a thing of a special kind. Its nature and function determine that its ownership is difficult to part with its possession, and thus it follows the principle of “possession is ownership”. For this, the court of first instance and Liu X held that once landing on Yuanheng Company’s account, the funds involved in this case were in the actual possession of Yuanheng Company and further held that the funds involved should be owned by Yuanheng Company based on the said principle. The Supreme People’s Court indicates that although currency is a thing of a special kind and the principle of “possession is ownership” generally applies, the premise for its application is limited to the circumstances in which the “things” delivered or the subject matters in possession are the actual currency.

3

参见王利明:《物权法研究》 , 中国人民大学出版社2002年版, 第635页。

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In this case, the movement of the excess amount of CNY 4,244,670.06 from Jinbo Company to Yuanheng Company was completed via bank account transfer rather than by delivering the currency as “actual things”. In fact, Yuanheng Company did not obtain the currency equivalent to the excess amount of CNY 4,244,670.06 from Jinbo Company. As mentioned above, the funds involved in the case were directly rechanneled by the Intermediate People’s Court of Yulin City, Shaanxi Province from the frozen account into the account for enforcement cases, and so had never been actually possessed, held or controlled by Yuanheng Company. Therefore, in this case, on the one hand, there was no currency: the thing of “special kind”, claimed by Liu X, while on the other hand, Yuanheng Company did not possess the funds involved, so the base for this principle of “possession is ownership” to apply was not met. Therefore, the factual determination and application of laws in the first instance judgment were improper, the change of the first instance judgment by the court of second instance was supported by the fully proved facts and sufficient evidence, and the reasons for Liu X’s application for reopening the case could not be established. 4. Outsiders’ remedy options in the case of mistaken fund transfers What remedy options can outsiders resort to, in the case of mistaken fund transfers, to safeguard their rights and interests? Should the outsiders lodge lawsuits against unjust enrichment or against the objection to enforcement to reclaim the funds mistakenly transferred? In this regard, the courts of first instance and second instance had opposing conclusions. The first instance judgment held that due to an error in operation on the part of the outsider: Jinbo Company, Yuanheng Company came into the possession of and then became the owner of the funds mistakenly transferred, so the funds involved constituted Yuanheng Company’s obligations of unjust enrichment to Jinbo Company. Given obligations hereof are simply general creditor’s rights and do not have the right of priority to be repaid, the outsider had no sufficient civil rights to exclude enforcement on the disputed amount of CNY 4,244,670.06 in this case. The underlying reason for such judgment is in essence that even if the funds involved in this case on Yuanheng Company’s account could be confirmed to have been mistakenly transferred from Jinbo Company, Jinbo Company could not directly claim related rights to the funds and should seek remedies on the grounds of unjust enrichment. Based on the fund transactions found between Jinbo Company and Yuanheng Company, the court of second instance concluded that Yuanheng Company’s possession of the funds was the unentitled possession, negated the claim that Yuanheng Company was the owner hereof, determined that the outsider Jinbo Company had the civil rights to exclude the forcible enforcement on the funds involved in the case, and made the judgment in support of Jinbo Company’s request to terminate the enforcement on the funds involved. In addition to upholding and affirming the second instance judgment, the Supreme People’s Court held in its civil ruling that the purpose of the lawsuit against outsiders’ objection to enforcement is to protect the legitimate substantive rights of outsiders.

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Given that the substantive rights of the funds involved in this case have been ascertained to be owned by the outsider Jinbo Company, the judgment of terminating the enforcement on the funds involved to protect the legitimate rights of the outsider is consistent with the legislative purpose hereof and conducive to saving judicial resources and litigation costs for parties concerned. Otherwise, seeking remedies by outsiders on the grounds of unjust enrichment would not only lead to more litigation costs for the parties concerned, more waste of judicial resources and cannot produce better legal and social effects, but also deviate from the legislative purpose hereof.

Chen X v. Liang X, Sanya Huihong Tourism Development Co., Ltd. (The Lawsuit against Outsiders’ Objection to Enforcement): The Sequence of Rights to be Protected in the Lawsuit against Outsiders’ Objection to Enforcement Yanzhu Gao and Jingjing Wang

Rule 1. In a case of a mortgage guarantee with duly completed mortgage registration procedures on a company’s debts based on forged signatures of shareholders and falsified resolutions of the general meeting by an actual controller of the said company, such a mortgage shall be affirmed to be valid where the mortgagee can prove that he has fulfilled his obligation of reasonable examination and there does not exist any legal circumstance that invalidates such a mortgage. 2. The consumer right of a house buyer, subject to the full payment or a main part thereof having been made, has priority over the mortgage right. In practice, the doctrine of liberal construction shall be respected in identifying a house buyer as a “consumer” to ensure that the dual-use classification of the said home cannot deprive the aforesaid house buyer of the status of a consumer.

Collegial Bench: Yanzhu Gao, Xiangyang Xi and Yingxin Zhang Edited by Yi Yang; translated by Zuoyong Liu and Yi Zheng Y. Gao (B) The First Circuit Court of the Supreme People’s Court of the People’s Republic of China, Shenzhen, China J. Wang Judicial Supervision Division of the Intermediate People’s Court of Loudi City, Hunan Province, Loudi, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_24

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Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Chen X Respondent in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Liang X Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Sanya Huihong Tourism Development Co., Ltd. (hereinafter referred to as Huihong Tourism Company) 2. Procedural History First instance: No. 93 [2016] Trial, Civ. Division, the Intermediate People’s Court of Sanya City, Hainan Province (Hainan 02) (dated Dec. 30 of 2017) Second instance: No. 512 [2018] Final, Civ. Division, the Higher People’s Court of Hainan Province (dated Sep. 6 of 2018) Reopening: No. 484 [2019] Appeal, Civ. Division, the Supreme People’s Court (dated May 17 of 2019) 3. Cause of Action The lawsuit against outsiders’ objection to enforcement

Essential Facts Liang X concluded a real estate sales contract with Huihong Tourism Company on January 12, 2013, stipulating that Liang X bought Suite No. 28 located in Block A, XXX Plaza, XXX Avenue, Sanya City for a price of CNY 2.0 million from Huihong Tourism Company, transferred CNY 1.235 million in total to Huihong Tourism Company as part of the house payment and became the de facto possessor of the said Suite. However, there were no registration procedures on the change of house ownership completed between the parties. Later, Chen X concluded a loan contract and a mortgage loan contract with Huihong Tourism Company on April 16, 2013, stipulating Huihong Tourism Company, with its shopfronts No. 25, No. 26, No. 27 and No. 28 located in Block A, XXX Plaza, XXX Avenue, Sanya City as collateral, borrowed CNY 5.0 million from Chen X. Thereafter, Zhuang X, the actual controller of Huihong Tourism Company, completed the mortgage registration procedures for the above mentioned Suite based on forged signatures of some shareholders and falsified resolutions of the general meeting and remitted the borrowings from Chen X to the personal account of Zhuang X. Chen X lodged a lawsuit against Huihong Tourism Company for its failure to repay the loan as agreed with the Intermediate People’s Court of Sanya City, Hainan Province, which made on January 7, 2016, the civil judgment of No. 3 [2015] Retrial, Civ. Division the Intermediate People’s

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Court of Sanya City, Hainan Province, ordering that Huihong Tourism Company shall pay the principal of CNY 4.775 million and interest thereon to Chen X. After the aftermentioned civil judgment had taken effect, Chen X applied for its enforcement to the Intermediate People’s Court of Sanya City, Hainan Province, which seized and auctioned on April 19, 2016, shopfronts No. 25, No. 26, No. 27 and No. 28 in Block A, XXX Plaza, XXX Avenue, Sanya City by the enforcement decision of No. 17 [2016] Enforcement, Enforcement Department, the Intermediate People’s Court of Sanya City, Hainan Province (Hainan 02), whereas Liang X raised an objection to the enforcement. On August 5, 2016, the Intermediate People’s Court of Sanya City, Hainan Province issued the enforcement ruling of No. 38 [2016] Enforcement Objection, Enforcement Department, the Intermediate People’s Court of Sanya City, Hainan Province (Hainan 02), rejecting Liang X’s objection to the enforcement. Dissatisfied with the aforesaid ruling, Liang X filed a lawsuit with the court of first instance. The court of first instance, on December 30, 2017, made the civil judgment of No. 93 [2016] Trial, Civ. Division, the Intermediate People’s Court of Sanya City, Hainan Province (Hainan 02), rejecting the claims from Liang X. The court of second instance made the civil judgment of No. 512 [2018] Final, Civ. Division, the Higher People’s Court of Hainan Province, revoking the judgment of first instance, and ceasing the further enforcement on Suite No. 28 in Block A, XXX Plaza, XXX Avenue, Sanya City. Dissatisfied with the judgment of second instance, Chen X applied for reopening the case to the Supreme People’s Court.

Issues 1. Legal validity of the mortgage involved in the case; 2. Whether the rights and interests of Liang X on the Suite could be excluded from enforcement.

Holding Upon reopening, the Supreme People’s Court holds that: 1. Legal validity of Chen X’s mortgage Huihong Tourism Company affirmed that the corporate seal of the company affixed to the mortgage loan contract is authentic and that its legal representative, Ni X, was present at the time when the said contract was signed. Huihong Tourism Company secured the mortgage loan with the Suite as collateral and completed the mortgage registration procedures with the said Suite. Although no general meeting at Huihong

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Tourism Company was actually held and Zhuang X forged the signatures of some shareholders and falsified resolutions of the general meeting, Chen X fulfilled his duty of reasonable examination in accepting the mortgage guarantee provided by Huihong Tourism Company. In this case, there is no sufficient evidence that Chen X and Huihong Tourism Company were in malicious collusion to prejudice to the rights and interests of Liang X and invalidate the mortgage. The judgment of second instance that the mortgage was determined as invalid on the grounds that no general meeting was held at Huihong Tourism Company and the shareholders’ signatures in the general meeting resolutions were forged is improper and unjustified, and should be corrected. 2. Whether the rights and interests of Liang X on the suite could exclude Chen X’s right of enforcement over the same suite First, the Land and Housing Property Titles submitted by parties concerned states that the Suite involved in this case is classified in the category for “commercial and residential” purposes, which is mutually corroborated with Liang X’s statement that the Suite he purchased is for commercial and residential uses. The decision that Liang X was determined as a consumer of the Suite involved in the second instance is justified. Next, Liang X has already paid CNY 1.235 million for the Suite as part of the full payment and became the de facto possessor of the said Suite and used it. In accordance with the Written Reply of the Supreme People’s Court to Issues Concerning the Construction Project Priority Right of Claims (hereinafter referred to as Written Reply) and relevant provisions in Article 29 of the Rules of the Supreme People’s Court on Some Issues Concerning the Handling of Objection to Enforcement and Reconsideration Cases by People’s Courts (hereinafter referred to as Rules on Objection to Enforcement and Reconsideration), the consumer rights of commercial housing buyers shall be taken priority in cases involving commercial housing purchases. Therefore, the judgment of second instance that the right Liang X has as the consumer of the Suite involved may exclude Chen X’s right of enforcement over the same Suite involved is justified and not be affected by the validity or invalidity of Chen X’s mortgage. Despite the unjustifiable judgment in terms of the validity of the mortgage, the ruling made in the judgment of second instance is proper, and whereupon, Chen X’s application for reopening is rejected.

Comment on Rule This case is about the lawsuit against outsiders’ objection to enforcement, and the issue is the sequence of rights to be protected between the expectancy right of property of the house buyer, subject to a main part of the payment having been made, and his right to mortgage. In case of the defects of the resolutions of the general meeting on which the mortgage registration procedures involved in this case were completed, the validity of the said mortgage is also an issue in dispute between the parties and

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constitutes a precondition for determining the sequence of rights to be protected in this case. The reasons for the judgment made by the Supreme People’s Court are explained from the following two dimensions: 1. The reasonable examination obligation on the part of secured parties in the case of corporate guarantees Corporate guarantees come out in two forms: those for persons outside a company and those for its own debts. For the former, there are internal decision-making procedures for providing guarantees to outsiders and special rules for providing guarantees to related parties set forth in Article 16 of the Company Law. Whether this Article means that counterparties are obliged to examine internal decision-making procedures for providing corporate guarantees remains controversial in practice. One view holds that for corporate guarantees for others, the examination obligation on the part of secured parties is limited to the documents that meet the requirements of normal transactions rather than all other documents related hereto, such as articles of association and resolutions, as the authorization and procedures for providing such guarantees set forth in the articles of association are simply internal rules within a company, and normative documents on internal governance even if such articles of association has been put on record at corporation registration authorities or made public through other channels, and thus have no legal effects outside the said company.1 Since Article 16(1) of the Company Law shows a management regulation governing the corporate governance of a company, it has no legal binding force that affects the validity of the said company’s contracts with outsiders, and the company’s creditors are not obliged to examine whether the provision of such guarantees has been decided on and approved by the company’s resolution authority. Another view is that, in addition to examining the documents that meet the requirements of normal transactions, the secured parties should also have the obligation to give due attention to the voting rules concerning guarantees set forth in the articles of association hereof and, according to the contents thereof, examine the company’s internal resolutions authorizing the provision of such guarantees. The reason for this argument is that since Article 16 of the Company Law explicitly provides for the decision-making body and the authorization for corporate guarantees, it should be generally applicable. Legal decision-making procedures are restrictions and requirements on both the company and secured parties, who should pay due attention to related effective legal provisions when concluding security contracts with a company. Therefore, secured parties are obliged to examine the articles of association and resolutions of the said company. Article 18 of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference issued by the Supreme People’s Court on December 23, 2019 provides that “(t)he good faith as referred to in the preceding Article means that the creditors are not or should not have been aware that a legal representative enters into security contracts beyond his authority. Article 16 of the Company Law has different 参见陈冲、丁冬:《公司对外担保效力问题研究——基于司法裁判的分析与反思》 ,载 《金融 法苑》 2011年总第83辑, 中国金融出版社2011年版, 第144页。

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provisions on the resolution authority for related and nonrelated guarantees, and thus, the criteria for good faith should also be different. For related guarantees, namely, those provided by a company for its shareholders or actual controllers, Article 16 hereof explicitly requires that such guarantees be decided by resolutions of the general meeting, and any provision of such guarantees without resolutions hereof constitutes unauthorized representation. In this case, if claiming that the security contracts are effective, creditors shall present the evidence that resolutions of the general meeting have been examined and the procedures for voting on the resolutions conforms to Article 16 hereof at the time of the conclusion of such security contracts, namely, the resolutions should be voted for by a majority of the voting rights of all the shareholders except the secured ones at the general meeting, and signatories should also meet all the requirements in the articles of association. However, for nonrelated guarantees, namely, those provided by a company for persons other than its shareholders or actual controllers, according to Article 16 hereof, such guarantees may be decided by resolutions of the general meeting or the board of directors as designated in the articles of association. Regardless of the existence or nonexistence of related provisions on the resolution authority, and further the designated resolution authority being the board of directors or the general meeting, according to Article 61(3) of the General Rules of the Civil Law that the restrictions imposed by the articles of association or the authorities of legal person on the right of representation of its legal representative may not be asserted against a bona fide counterparty, any provision of such guarantees should be affirmed as a bona fide act providing that creditors have the evidence that resolutions of the general meeting or the board of directors have been examined at the time of the conclusion of such security contracts, and the number of shareholders voting for the resolutions and signatories conform to related requirements in the articles of association, except where the said company can present the evidence that the creditors have known that there are explicit provisions for the resolution authority in the articles of association. Creditors’ examination of the contents of the resolutions by corporate authorities should be generally limited to formal examination; that is, the fulfillment of the necessary duty of care should be sufficient, and the requirements should not be too demanding. Any defense by a company that creditors are not in good faith on the grounds that the resolutions are forged or altered by its legal representative, the resolution procedures are illegal, the corporate seals (signatures) are falsified, the guarantee amounts exceed the legal limits or similar arguments will not, in most cases, be supported by people’s courts except where it has the evidence that the creditors have known that the resolutions are forged or altered.” From the perspective of this provision, in the case of corporate guarantees to outsiders, the examination obligation of counterparties is limited to the formal examination of related documents, such as the company’s articles of association and resolutions, and the scope of this examination may cover the conformity of resolution authorities on the provision of such external guarantees with the provisions in the articles of association, the differences in content between the resolutions and guarantees, the guaranteed amounts in excess of the limit set in the articles of association, signatures by shareholders and corporate seals on the documents of resolutions, and so on. Where the aforesaid obligation of examination is duly fulfilled by secured creditors,

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security contracts should be deemed legal and valid. Even if the resolution documents are proven to be false or invalid in the future, the validity of the security contracts should not be affected from the standpoint of protecting third parties in good faith. The aforesaid is about the examination obligation of counterparties in the case of providing guarantees for persons outside a company. For the guarantees provided by a company for its own debts, there are no explicit provisions on the examination obligation on the counterparties in the prevailing laws and relevant judicial interpretations. Since the guarantees for its own debts are unlikely to endanger its assets, argumentum maiore ad minus should apply, so the examination obligation on the counterparties in this case should not be more demanding than that in the case of guarantees for persons outside a company. Let us take a look specifically at this case. On the resolution documents of the general meeting presented by Zhuang X to Chen X, there was the real signature by Ni X, the legal representative of Huihong Tourism Company, and he was also present at the time when the mortgage loan contract was signed. Besides, Huihong Tourism Company also recognized the authenticity of the corporate seal stamped on the mortgage loan contract. The signatures from other shareholders on the resolutions of the general meeting were forged by Zhuang X; however, forged signatures generally cannot be discerned and verified by a common person except authentication institutions since a common natural person usually does not have identification skills and capabilities, so the inclusion of such into the scope of examination obligation on the counterparties would be too demanding a requirement and would also deviate from the legislative intention to safeguard transactions in the Contract Law and the Guaranty Law. Based on the creditor’s trust in the identity of the guarantor’s legal representative and the authenticity of the company’s corporate seal as well as the fact that the resolution document of the general meeting has been signed by all shareholders, the creditor had good reason to believe in the authenticity of resolutions of the general meeting, so it is both unnecessary and impossible to further identify and verify the authenticity of resolutions of the general meeting. Therefore, it should be determined in this case that Chen X has fulfilled reasonable examination obligations while accepting the guarantee from Huihong Tourism Company. In addition, there was no sufficient evidence that Chen X and Huihong Tourism Company had maliciously colluded to prejudice to the rights and interests of Liang X and invalidate the mortgage. Therefore, the mortgage involved in the case should be recognized to be valid. The judgment of second instance that the mortgage was determined as invalid on the grounds that no general meeting was held at Huihong Tourism Company, resolutions of the general meeting were falsified as the signatures of some shareholders were forged, was improper application of laws, and should be corrected by law.

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2. The dual-use classification of the purchased house cannot deprive the said house buyer of the status of a consumer Article 1 of the Written Reply provides that “(i)n hearing cases of real estate disputes and handling enforcement cases, people’s courts shall, in accordance with the provisions of Article 2862 of the Contract Law of the People’s Republic of China, determine that the right for claims of a construction project contractor has priority over the mortgage right and other creditor’s right.” Article 2 hereof provides that “(w)here the full payment or the most part thereof for commercial houses has been made by a consumer, the contractor’s priority to the payment for the project on the commercial houses may not be asserted against the house buyers.” Article 29 of the Rules on Objection to Enforcement and Reconsideration provides that “(i)n the settlement of monetary creditor’s right, where a buyer raises an objection to a commercial house registered in the name of the developer subjected to enforcement, and one or more than one of the following circumstances is satisfied and the buyer’s rights can be excluded from the enforcement, the buyer’s objection should be supported by a people’s court: (1) a legal and valid written sales contract has been signed before the seizure of the said commercial house by a people’s court; (2) the purchased commercial house is used for living and the buyer has no living houses other than the said commercial house in his name; and (3) the amount already paid exceeds 50% of the total payment for the commercial house as agreed in the sales contract.” Based on the combined analysis of the above provisions, the sequence of rights to be protected in an enforcement case goes as follows: the expectancy right of property of a buyer as a consumer takes precedence over the contractor’s priority to the payment for the construction of the project, which is followed in order by the mortgage right and general creditor’s right. Therefore, a people’s court should give priority to protecting the rights and interests of a buyer who has paid the total amount or the main part thereof for commercial houses, where the expectancy right of property of the buyer is in conflict with the mortgage right of the mortgagee. It should be noted how we determine whether a buyer is a consumer. According to the meaning of the “consumer” in the Law on the Protection of Consumer Rights and Interests, the “house consumer” in the abovementioned provisions should be understood as the buyer of houses for living rather than for business purposes. In judicial practice, the classification of a house purchased is generally among important considerations in determining whether it is “for living”, and a buyer of a house for business purposes, such as shops, is not usually classified as a “consumer”, as defined in the abovementioned Written Reply. However, in judicial practice, there are different views on whether the dual-use classification of houses 2

Article 807 of the Civil Code stipulates that “(w)here a contract-offering party fails to pay the price in accordance with the agreement, the contractor may demand the contract-offering party to make the payment within a reasonable period of time. Where the contract-offering party still fails to pay the price upon expiration of the said period, the contractor may negotiate with the contractoffering party to appraise the construction project, or request the people’s court to sell the project through auction in accordance with law, unless the construction project is by its nature unsuitable for appraisal or auction. The payment for the construction of the project shall be satisfied, in priority, from the appraisal or auction of the said project.”

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a buyer purchases for both commercial and residential purposes should deprive the said buyer of the status of a consumer. Some hold that a dual-use house has various different functions from a common residential one. For example, it may act as a domicile of a registered entity but not as a registered permanent household residence for the owner(s), its owner(s) may have no allocation to access local schools, and its term of land use rights is shorter than that of a common residential house. In addition, such a house a buyer chooses to own is, generally speaking, mainly for business or investment rather than living – a basic need of life. Therefore, it should be determined as something of a shop, and thus, its dual-use classification should deny the buyer the status of a consumer. Others disagree to contend that the dual-use house is a brand-new residential form in response to recent urban development and the booming business startup by self-employed youth. Generally speaking, such a house is in a prime location, easily accessible and has flexible uses, thus being suitable for both commercial and residential purposes and preferred by an increasing number of groups. If the living purpose of such a house cannot be ruled out, the buyer should not be deprived of the status of a consumer. That is, the consumer status of the buyer should be recognized. The Supreme People’s Court holds that the key legal element in Article 29 of the Rules on Objection to Enforcement and Reconsideration, “the purchased commercial house is used for living”, is, in essence, designed for defining the representations or characteristics of a consumer. In specific cases, it is necessary to determine whether a buyer is a consumer based on the comprehensive facts of the said cases and should not deny a buyer the consumer status only and exclusively on the grounds of the dual-purpose classification of a house. Considering that the living purpose of a dual-use house cannot be ruled out, the doctrine of liberal construction shall apply to the term “for living”, and thus, the living function of a dual-use house should not be excluded without a good reason for protecting the lawful rights and interests of a buyer who has made the full payment or the main part thereof for such a house. In this case, the Land and Housing Property Titles for the house purchased by Liang X stated that the classification of the house involved is for “commercial and residential” purposes, and Liang X claimed that the house purchased by him is for residence. Considering that Liang X has paid the bulk of the total amount for the house and has actually possessed and used the house, he should be recognized as a “consumer”, and his expectancy right of property should be protected in priority. Therefore, Liang X’s rights and interests over the house involved may be asserted against Chen X’s mortgage and can also exclude forcible enforcement.

Northeast Electric Development Co., Ltd. v. China Development Bank (Enforcement Review of the Ruling on Dispute over Loan Contract & Revocation): Judicial Determination of Evasion of the Obligations Determined by a Judgment Chun Yang

Rule Where the effective judgment cancels the property assignment contract between the debtor and the transferee and orders the transferee to restitute the corresponding property to the debtor, and the transferee fails to perform the obligation hereof, the creditor may apply for enforcement with the debtor and the transferee as the parties subject to enforcement. The transferee’s restitution to the debtor is not only an obligation to the debtor, but also essentially an obligation to the judgment creditor. If the transferee fails to notify the creditor before restitution, so that the debtor receives the property and then transfers it forthwith, which defeats the purpose of the creditor’s revocation lawsuit, the behavior of the debtor and the transferee is an act of evading enforcement, whereas the creditor still has the right to apply to the people’s court for continued enforcement of restitution recognized in the effective judgment.

Enforcement Review Collegial Bench: Jinlong Huang, Chun Yang and Lifang Liu Edited by Ming Li; translated by Zuoyong Liu and Yi Zheng C. Yang (B) Enforcement Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_25

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Case Information 1. Parties Applicant for Review (Party Subject to Enforcement): Northeast Electric Development Co., Ltd. (hereinafter referred to as Northeast Electric Company) Respondent for Review (Applicant for Enforcement): China Development Bank (hereinafter referred to as CDB) 2. Procedural History Basis for Enforcement: No. 23 [2008] Final, Civ. Division, the Supreme People’s Court (dated Sep. 5 of 2008) Objection to Enforcement: No. 52 [2015] Enforcement Objection, Enforcement Department, the Higher People’s Court of Beijing Municipality (dated Dec. 30 of 2016) Review of Enforcement: No. 27 [2017] Enforcement Review, Enforcement Department, the Supreme People’s Court (dated Aug. 31 of 2017) 3. Cause of Action Review of enforcement of the ruling on dispute over loan contract & revocation

Essential Facts The loan contract and rescission right dispute among CDB and Shenyang High Voltage Switching Co., Ltd. (hereinafter referred to as Shenyang HVS Company), Northeast Electric Company, Shenyang Transformer Co., Ltd. (hereinafter referred to as Shenyang Transformer Company), Northeast Construction and Installation Engineering Corporation, New Northeast Electric Company (Shenyang) High Voltage Switching Co., Ltd. (now renamed as Shenyang Zhaoli High Voltage Electrical Equipment Co., Ltd., hereinafter referred to as New Northeast Electric HVS Company), New Northeast Electric (Shenyang) High Voltage Isolation Switch Co., Ltd. (formerly Shenyang Xintai High Voltage Electric Co., Ltd, hereinafter referred to as New Northeast Electric Isolation Company), Shenyang Beifu Machinery Manufacturing Co., Ltd. (formerly Shenyang Chengtai Energy Power Co., Ltd, hereinafter referred to as Beifu Machinery Co., Ltd.), Shenyang Dongli Logistics Co., Ltd. (formerly Shenyang Xintai Warehousing Logistics Company, hereinafter referred to as Dongli Logistics Company), the civil judgments have been made in the Higher People’s Court of Beijing Municipality of first instance, the Supreme People’s Court of second instance (the Supreme People’s Court rendered civil judgment No. 23 [2008] Final, Civ. Division, the Supreme People’s Court on September 5, 2008), and the final judgment is that: (1) Shenyang HVS Company repay CDB loan principal of CNY 150 million, interest and penalty interest thereon, and Shenyang Transformer Company assumes joint guarantee responsibility for the debt of CNY 140

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million and its interest and penalty interest, and Northeast Construction and Installation Engineering Corporation bears joint and several guaranty liaility for the debt of CNY 10 million, and its interest and penalty interest; (2) the contract of the equity swap between Northeast Electric Company using its external credit of CNY 76.66 million and interest thereon, and Shenyang HVS Company using its 95% equity in Beifu Machinery Co., Ltd. and 95% equity in Dongli Logistics Company be revoked; Northeast Electric Company and Shenyang HVS Company will return the equity and credits to each other. If they cannot return the above to each other, Northeast Electric Company will compensate Shenyang HVS Company for the loss within a range of CNY 247,116,500, and Shenyang HVS Company will compensate Northeast Electric Company for the loss within a range of CNY 76.66 million; (3) the contract for the equity swap between Shenyang HVS Company with its 74.4% equity in the New Northeast Isolation Company and Northeast Electric Company with its 98.5% equity in Shenyang Tiansheng Communication Equipment Co., Ltd. (hereinafter referred to as Shenyang Tiansheng Company) be revoked. Both parties shall return their equity to each other. If they cannot return the above, Northeast Electric Company should compensate Shenyang HVS Company for the loss within a range of CNY 130 million minus CNY 27,878,800. On the basis of the above judgment, Northeast Electric Company needs to return the following equity to Shenyang HVS Company: 95% equity in Beifu Machinery Company, 95% equity in Dongli Logistics Company and 74.4% equity in New Northeast Isolation Company; if it cannot return the above, after deducting the claims and shares of Shenyang HVS Company payable to Northeast Electric Company, the total amount to be paid by Northeast Electric Company to Shenyang HVS Company is around CNY 270 million. When the decision came into effect, upon application by CDB, the Higher People’s Court of Beijing Municipality accepted the case, and on March 24, 2009, it delivered the enforcement notice to Northeast Electric Company to order it to fulfill its obligations as determined by legal documents. On April 16, 2009, Northeast Electric Company, the party subject to enforcement, submitted to the Higher People’s Court of Beijing Municipality a Note on the Implementation of the Civil Judgment Titled No. 23 [2008] Final, Civ. Division, the Supreme People’s Court (hereinafter referred to as Note 1), indicating that the company had fulfilled its obligations under the effective judgment by paying the equity price. The Higher People’s Court of Beijing Municipality, after investigation, determined that according to the relevant notes of Tiexi Subbranch of Shenyang Branch of CITIC Bank, on December 20, 2007, Northeast Electric Company paid CNY 170.46 million (divided into CNY 58 million, CNY 57.46 million, and CNY 55 million) to Shenyang HVS Company by way of wire transfer; on the same day, Shenyang HVS Company paid to Liaoning Xintai Electrical Equipment Distribution Co., Ltd. (98.5% equity holder of Shenyang Tiansheng Company, hereinafter referred to as Liaoning Xintai Company), Liaoning Xintai Company paid to New Northeast HVS Company, and New Northeast HVS Company paid to New Northeast Isolation Company, New Northeast Isolation Company paid to Northeast Electric Company, respectively CNY 58 million, CNY 57.46 million and CNY 55 million. Therefore,

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the Higher People’s Court of Beijing Municipality did not approve the statement of Northeast Electric Company that it completed all the payments. On July 12, 2013, the Higher People’s Court of Beijing Municipality issued a notice of assistance of enforcement to the industrial and commercial administration, freezing 67.887% equity in Shenyang Gaodongjia Drying Equipment Co., Ltd. and 10% equity (CNY 100,000) of Shenyang Kaiyi Electric Co., Ltd. held by Northeast Electric Company. Therefore, Northeast Electric Company filed an enforcement objection to the Higher People’s Court of Beijing Municipality on July 18, 2013. The reasons are as follows: (1) the Higher People’s Court of Beijing Municipality did not make a ruling before seizing the property; (2) the subjects fulfilling the judgment obligation should be Shenyang HVS Company and Northeast Electric Company, CDB has no subject qualification to apply for enforcement; (3) Northeast Electric Company has fulfilled its obligation to return the equity to Shenyang HVS Company in accordance with the provisions of the effective judgment in this case, no further payment of CNY 170 million should be made to CDB. On September 2 of the same year, Northeast Electric Company issued to the Higher People’s Court of Beijing Municipality a Note on the Implementation of Judgment Titled No. 23 [2008] Final, Civ. Division, the Supreme People’s Court (hereinafter referred to as Note 2), where the performance of the final judgment in this case is specified: (1) the performance of returning the 95% equity in Beifu Machinery Company and 95% equity in Dongli Logistics Company. On September 18, 2008, Northeast Electric Company, Shenyang HVS Company, New Northeast HVS Company (the actual holder of 95% equity in Beifu Machinery Company at that time), Shenyang Hengyu Machinery Equipment Co., Ltd. (the actual holder of 95% equity in Dongli Logistics Company at that time, hereinafter referred to as Hengyu Machinery Company) signed a quadripartite agreement to return 95% equity in Beifu Machinery Company and 95% equity in Dongli Logistics Company to Shenyang HVS Company by New Northeast HVS Company and Hengyu Machinery Company in replacement of Northeast Electric Company. (2) The performance of the judgment returning 74.4% of the equity in New Northeast Isolation Company. Northeast Electric Company and Shenyang HVS Company, Fuxin Busbar, Liaoning Xintai Company signed a quadripartite agreement on September 18, 2008, agreed that Fuxin Busbar in replacement of the Northeast Electric Company to return 74.4% of the equity in New Northeast Isolation Company to Shenyang HVS Company. On September 22, 2008, the parties transferred their equity in accordance with the abovementioned agreement and completed the registration of the change of equity. In accordance with the relevant agreement, after the return of equity, Northeast Electric Company undertakes the corresponding obligations in replacement of the three companies. After examination by the Higher People’s Court of Beijing Municipality, on December 30, 2016, it made the ruling of No. 52 [2015] Enforcement Objection, Enforcement Department, the Higher People’s Court of Beijing Municipality, rejecting the objection of Northeast Electric Company. Northeast Electric Company dissatisfied, thus applied to the Supreme People’s Court for review. The reasons are as follows: (1) the matter of the effective judgment

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is about the mutual return obligation of equity and creditor’s rights between Northeast Electric Company and Shenyang HVS Company, CDB is not the opposite party to the judgment obligation of Northeast Electric Company. Therefore, CDB has no right to claim the enforcement of Northeast Electric Company on the content of the judgment, CDB does not have the subject qualification to enforce the enforcement of Northeast Electric Company; (2) Northeast Electric Company, in order to fulfill its judgment obligations, coordinated the signing of two quadripartite agreements among Fuxin Busbar, New Northeast HVS Company, Hengyu Machinery Company and Shenyang HVS Company on September 18, 2008, returned the shares involved in the case to Shenyang HVS Company, and completed the industrial and commercial registration of the change of equity on September 22, 2008. Under the quadripartite agreements, Shenyang HVS Company did not pay any fees to New Northeast HVS Company, Hengyu Machinery Company and Fuxin Busbar, and New Northeast HVS Company, Hengyu Machinery Company and Fuxin Busbar never required Shenyang HVS Company to pay any fees either. Although the registration data of the industrial and commercial administration recorded that on September 22, 2008, Shenyang HVS Company and New Northeast HVS Company, Hengyu Machinery Company and Fuxin Busbar respectively signed the equity transfer agreement which specified that Shenyang HVS Company should pay the corresponding equity transfer price to the three companies respectively, but based on the request of the industrial and commercial registration department at that time, the equity transfer agreement in the template form that must be filled in, and may not or would not be fulfilled. In this regard, New Northeast HVS Company, Fuxin Busbar issued a situation note and commitment, Shenyang HVS Company also issued a situation explanation to confirm the fact; (3) the results of the investigation conducted by the Higher People’s Court of Beijing Municipality in the relevant administrative departments for industry and commerce in Shenyang cannot be used as evidence or basis for determining the facts of the case. The object of investigation by the Higher People’s Court of Beijing Municipality is not the industrial and commercial registration office or the personnel who directly handled the registration of the change of ownership involved in the case at that time, but its superior department or the organization after the change of its functions, the content of the investigation transcript cannot reflect and prove the true situation at the time of the equity change involved in the case; the statement in the investigation content “(a)s for the specific circumstances of the registration of the equity change involved in the case on September 22, 2008, the industry and commerce administration recommended that the court inquire about the industry and commerce registration files”, which further proves that the object of investigation did not understand the facts; (4) Northeast Electric Company has separated from Shenyang HVS Company directly and indirectly since June 2004, Shenyang HVS Company’s actions after that had nothing to do with Northeast Electric Company. Shenyang HVS Company transferred the equity in this case on September 23, 2008 after the acquisition thereof, which was its own civil act, Northeast Electric Company was not liable therefor, and Shenyang HVS Company should bear the corresponding legal liabilities. In light of the above, the two quadripartite agreements among Northeast Electric Company, Shenyang HVS Company, Hengyu Machinery Company,

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Fuxin Busbar and New Northeast HVS Company, registration change of equity on September 22, 2008, announcement of major litigation by Northeast Electric Company, statement of information and commitment issued by New Northeast HVS Company and Fuxin Busbar, statement of information issued by Shenyang HVS Company, the civil judgment titled No. 66 [2013] Final, Civ. Division, the Supreme People’s Court of the People’s Republic of China, have formed a complete, objective, independent chain of evidence, which proved the facts that Shenyang HVS Company had obtained the equity involved in the case free of charge and Northeast Electric Company had fulfilled its judgment obligation.

Issue Whether the obligation determined by the judgment has been fulfilled.

Holding On August 31, 2017, the Supreme People’s Court issued the No. 27 [2017] Enforcement Review, Enforcement Department, the Supreme People’s Court, rejecting the review request of Northeast Electric Company, and upholding the No. 52 [2015] Enforcement Objection, Enforcement Department, the Higher People’s Court of Beijing Municipality.

Comment on Rule 1. Issue of whether CDB has the subject qualification of the applicant for enforcement After investigation, the transcript of the conversation of the Higher People’s Court of Beijing Municipality on December 20, 2016, indicates that the entrusted agent of Northeast Electric Company, Lei X, clearly stated two objection requests that the waiving of enforcement procedure was illegal, and CDB did not have the subject qualification. Lei X’s principal-agent authority is that applying for enforcement of dissent, response to the lawsuits, defense, recognition, waiver, change of objection to the enforcement, receipt of legal documents. Therefore, Lei X’s statements in the objection review process should be assumed by the client Northeast Electric Company according to law. Therefore, Northeast Electric Company abandoned the claim that CDB does not have the subject qualification of the applicant in the dissent examination and raised the claim again in the review examination procedure. The court may not examine its request according to law. Even if Northeast Electric

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Company did not give up the claim, CDB’s subject qualification to the application for enforcement has no doubt. In this case, the dispute is over loan contract and revocation and the court decided to support the request of CDB, ordered Northeast Electric Company to repay the loan, and revoked the action of equity swap between Northeast Electric Company and Shenyang HVS Company, and ordered Northeast Electric Company and Shenyang HVS Company to return their equity to each other. If Northeast Electric Company cannot return the equity, it should bear the corresponding compensation liability. The result of mutual return was not based on the dispute between Northeast Electric Company and Shenyang HVS Company but on CDB’s claim. The return of equity by Northeast Electric Company to Shenyang HVS Company was not only the obligation of Shenyang HVS Company but also the obligation of CDB to the judgment creditor. The CDB has the full right to apply to the people’s court to compel the obligator to perform the obligations determined in the judgment. 2. Issues relating to the performance of the obligations determined in the judgment of Northeast Electric Company (1) The legitimacy of the act of return in this case cannot be recognized The purpose of setting up the system of creditor’s right of rescission by law is to correct the improper disposition of property that the debtor damages the creditor’s rights and to restitute the debtor’s liability property to pay off the debt to the creditor. The purpose of returning equity and restoring the solvency of Shenyang HVS Company is to repay its debts to CDB. Only when the judgment creditor is notified so that it has the opportunity to apply to the court for freezing measures and thus the returned property can realize the creditor’s rights, the completion of the property return is in line with the purpose of the lawsuit in this case. Any so-called return which fails the purpose of the CDB action is a serious departure from the substantive requirements of the judgment. Therefore, whether the performance advocated by Northeast Electric Company constitutes the performance in accordance with the requirements of the judgment should be guided by the purpose of the judgment. Even during the proceedings in this case and after the judgment came into effect, there was indeed a return of equity between Northeast Electric Company and Shenyang HVS Company, which was carried out in private without prior notice to the people’s court and creditors. In fact, the change of equity is transferred to other companies the day after registration and should be regarded as an act of avoiding the obligation of judgment in essence. (2) The authenticity of the Northeast Electric Company coordinating the parties to fulfill the obligation of nonreimbursable return cannot be determined Northeast Electric Company claims that because the equity involved in the case has actually been transferred to New Northeast HVS Company, Hengyu Machinery Company and Fuxin Busbar, it cannot be returned directly under its own name to Shenyang HVS Company by Northeast Electric Company. Therefore, Northeast Electric Company coordinated New Northeast HVS Company, Hengyu Machinery

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Company and Fuxin Busbar to return the equity involved to Shenyang HVS Company free of charge. If the fact claimed is established, it may also be deemed to have fulfilled the obligation of return as required in the judgment. However, the facts cannot be found on the basis of the evidence in this case. (a) The evidence of Northeastern Electric Company conflicts, and there is no reasonable explanation. In the course of this case, Northeast Electric Company submitted two statements to the Higher People’s Court of Beijing Municipality: Note 1, dated April 16, 2009, and Note 2, dated September 2, 2013. Among them, Note 1 indicated that Northeast Electric Company and Shenyang HVS Company signed an agreement on December 18, 2007, in view of the inability of both parties to return their equity and creditor’s right to each other as required by the judgment, agreed that Northeast Electric Company pays the equity transfer price to Shenyang HVS Company, Northeast Electric Company paid CNY 170.46 million to Shenyang HVS Company on December 20, 2007 (in the second instance), and the agreement signed by Northeast Electric Company and Shenyang HVS Company on December 18, 2007, and the three bank entry receipts of Tiexi Subbranch of CITIC Bank Shenyang Branch on December 20, 2007, deemed as evidence. Note 2 stated that on September 18, 2008, Northeast Electric Company, Shenyang HVS Company, New Northeast HVS Company and Hengyu Machinery Company signed a quadripartite agreement, agreed by the New Northeast HVS Company, Hengyu Machinery Company on behalf of Northeast Electric Company returning to Shenyang HVS Company the 95% of the equity in Beifu Machinery Company, and the 95% of the equity in Dongli Logistics Company. On the same day, Northeast Electric Company and Shenyang HVS Company, Fuxin Busbar and Liaoning Xintai Company also signed a quadripartite agreement, agreed that Fuxin Busbar on behalf of Northeast Electric Company returns Shenyang HVS Company 74.4% equity in New Northeast Isolation Company. On September 22, 2008, the parties transferred their equity in accordance with the agreement and completed the equity change business registration. Whether its alleged performance is the return of the said equity or compensation in cash, Northeast Electric Company’s two statements were contradictory. First, Note 1 indicated that Northeast Electric Company had fulfilled its obligation to pay the equity price in the second instance, and for the payment, after investigation by the Higher People’s Court of Beijing Municipality, the sum was privately paid back to Northeast Electric Company after a closed loop. Thus, it is a false payment. Second, in the enforcement procedure, Northeast Electric Company submitted Note 1 on April 16, 2009, indicating that the transfer of the equity involved had been completed, but Northeast Electric Company did not mention the quadripartite agreement signed among Northeast Electric Company, Shenyang HVS Company, New Northeast HVS Company and Hengyu Machinery Company on September 18, 2008. Third, now that Northeast Electric Company and Shenyang HVS Company paid the price on December 20, 2007, then, on September 22, 2008, the quadripartite agreement was adopted, returning the equity to Shenyang HVS Company, which was obviously not in line with common sense. Fourth, the notice of major litigation of Northeast Electric Company was issued on September 26, 2008, which refers to the acceptance of the court’s verdict. However, it was not mentioned that it had fulfilled its judgment on

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September 22, and Northeast Electric Company stated that it received the judgment in the case transmitted by counsel on September 24, now insisting that it fulfilled its judgment on September 22, which is difficult to justify itself. From this, it can only be judged that in the enforcement of the so-called performance of the Supreme People’s Court judgment, there could be some sort of transfer of the involved equity that has occurred in different periods of the past time, which was self interpreted as the performance of the judgment in this case. Therefore, the authenticity of the quadripartite agreement and the credibility of Northeast Electric Company’s interpretation at different stages are highly doubtful. (b) The fact that the Northeast Electric Company coordinated the nonreimbursable return of equity involved in this case cannot be recognized. According to the relevant registration and filing materials of the industrial and commercial administration authorities, on September 22, 2008, the equity of Dongli Logistics Company held by Hengyu Machinery Company, the equity of Beifu Machinery Company held by New Northeast HVS Company, and the equity of New Northeast Isolation Company held by Fuxin Busbar had been transferred to Shenyang HVS Company. However, the registration data indicated that the signed equity transfer agreements respectively between Shenyang HVS Company and New Northeast HVS Company, Shenyang HVS Company and Hengyu Machinery Company, Shenyang HVS Company and Fuxin Busbar, agreeing that Shenyang HVS Company should pay the corresponding equity transfer price to the three companies respectively. Northeast Electric Company said that the equity transfer agreements were made in accordance with the requirements of the industrial and commercial administration. In fact, there was no transfer price and no need to pay the transfer price. In this regard, Northeast Electric Company cannot provide sufficient evidence to prove its statements, and the Higher People’s Court of Beijing Municipality went to the relevant industrial and commercial administration in Shenyang for investigation and did not find enough evidence to prove that the equity transfer agreement was submitted to meet the requirements of industrial and commercial record registration. The Higher People’s Court of Beijing Municipality has read the relevant registration and filing materials of the equity change registration involved. In addition to the agreements on the transfer of equity, there are also the approval of the competent department for the transfer of equity, the resolutions of the shareholders’ meetings and the resolutions of the board of directors in which the relevant companies agreed to transfer, to be assigned or accept the equity, which did not mention the effective judgment and the two quadripartite agreements as the basis for the enforcement of the case. If there were serious doubts in the quadripartite agreement, the people’s court shall judge the relevant facts on the basis of the information filed by industry and commerce administration and determine that the relevant equity transfer and change registration in this case based on the relevant agreements recorded. The equity involved in the case was registered to the name of Shenyang HVS Company on September 22, 2008 and acquired by Shenyang HVS Company under the paid equity transfer agreement and has nothing to do with the quadripartite agreement. Whether Shenyang HVS Company had or had not actually paid the consideration since acquiring the equity involved in the case, and the fact

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that Hengyu Machinery Company was deregistered put forward by Northeast Electric Company in the process of dissent review, New Northeast HVS Company and Fuxin Busbar’s commitment to waiving the demand for payment of equity consideration to Shenyang HVS Company were not final, because they cannot exclude the creditors of New Northeast HVS Company, Hengyu Machinery Company and Fuxin Busbar from claiming rights to Shenyang HVS Company according to the paid equity transfer agreement registered by industry and commerce administration, so they cannot change the nature of the paid equity transfer agreement. Therefore, according to the existing evidence, it cannot be concluded that the equity involved in the case being changed and registered to the name of Shenyang HVS Company was the result of the implementation of the quadripartite agreements coordinated by Northeast Electric Company. It cannot be concluded that Northeast Electric Company fulfilled the obligation to return the equity as determined by the effective judgment. To sum up, Northeast Electric Company’s claim that it had fulfilled its judgment obligation and returned the equity involved in the case to Northeast Electric Company without compensation lacked sufficient evidence. Thus, its review reason could not be established.

Zhuzhou Haichuan Industrial Co., Ltd. v. Changsha Cai’e Subbranch of Bank of China Limited, Hunan Deyihong Metal Materials Co., Ltd. (Enforcement Review of the Ruling on Dispute over Property Preservation): Determination of the Obligation to Assist in Property Preservation Enforcement Shaoyang Liu

Rule 1. In a case of property preservation enforcement, a custodian should assist in enforcement on the subject matters subject to preservation in its custody on the request from a people’s court but should not be obliged to continue to keep such subject matters in its custody free of charge where such subject matters are nonmonetary chattels and the custody or site lease contracts for them between the custodian and the parties subject to enforcement are not renewed or extended after their expiry. 2. The custody expenses incurred by a custodian prior to and until the rendering of effective legal instruments in the case should be settled in priority with the proceeds from the realization of the subject matters subject to preservation and be made up for with the proceeds from further seizure measurements if the said proceeds fail to cover the custody expenses. An applicant for preservation gives only the guarantee on the payment of, rather than bear, the custody charges, which should be covered by the proceeds from the realization of the subject matters subject to preservation and/or further preservation measures. Enforcement Review Collegial Bench: Shaoyang Liu, Jinlong Huang and Lan Ma Edited by Yi Yang; translated by Zuoyong Liu S. Liu (B) The First Circuit Court of the Supreme People’s Court of the People’s Republic of China, Shenzhen, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_26

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Case Information 1. Parties Applicant for Review (Interested party): Zhuzhou Haichuan Industrial Co., Ltd. (hereinafter referred to as Haichuan Industrial Company) Applicant for Preservation: Changsha Cai’e Subbranch of Bank of China Limited (hereinafter referred to as Cai’e Subbranch) Respondent for Preservation: Hunan Deyihong Metal Materials Co., Ltd. (hereinafter referred to as Deyihong Metal Materials Company) 2. Procedural History Objection to Enforcement: No. 15 [2016] Enforcement Objection, Enforcement Department, the Higher People’s Court of Hunan Province (dated Nov. 23 of 2016) Review of Enforcement: No. 2 [2017] Enforcement Review, Enforcement Department, the Supreme People’s Court (dated Sep. 2 of 2017) 3. Cause of Action Enforcement review of the ruling on property preservation in the dispute over financial loan contract

Essential Facts In the case of the dispute over a financial loan contract between Cai’e Subbranch as one party and Deyihong Metal Materials Company, Hunan Jinmu Industrial Co., Ltd., Hunan Jinyou Metal Co., Ltd., Lao X, Wu X, Huang X, Zhang X and Lin X as the other party, the Higher People’s Court of Hunan Province, in response to the application from Cai’e Subbranch, rendered a civil ruling on property preservation to freeze Deyihong Metal Materials Company’s bank deposit of CNY 48 million or to seal up and distrain Deyihong Metal Materials Company’s other properties of equivalent value. To satisfy its operational need, Deyihong Metal Materials Company leased the premises from Haichuan Industrial Company until March 1, 2015, to store its lead concentrates, which had been pledged to Cai’e Subbranch. In a Notification to Assist in Enforcement and a Notice issued on June 4, 2015, the Higher People’s Court of Hunan Province announced that without prior consent from the court, no entity or individual shall transfer, conceal, damage, sell-off, mortgage, donate and/or otherwise dispose of all or any part of the seized lead concentrates stored by Deyihong Metal Materials Company in the premises of Haichuan Industrial Company at the risk of legal penalties. Following the expiry of the Lease Contract between Deyihong Metal Materials Company and Haichuan Industrial Company on March 1, 2015, Deyihong Metal Materials Company neither renewed the Lease Contract with, or returned the leased premises to, Haichuan Industrial Company nor paid the rent and utility bills on the leased premises. Haichuan Industrial Company lodged a lawsuit

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against Deyihong Metal Materials Company to the People’s Court of Shifeng District, Zhuzhou City, Hunan Province over the lease contract dispute. The People’s Court of Shifeng District, Zhuzhou City made a judgment that the Lease Contract under dispute is terminated, and Deyihong Metal Materials Company returns the leased premises to Haichuan Industrial Company, removes the goods stored therein, and pays up the rent in arrears and corresponding interest within 15 days from the effective date of the judgment. Based on the judgment, Haichuan Industrial Company applied for enforcement to clear off the leased premises the goods stored by Deyihong Metal Materials Company, and at the same time, raised in the capacity of an interested party an enforcement objection to the Notification to Assist in Enforcement and the Notice issued by the Higher People’s Court of Hunan Province, and demanded applicant for preservation Cai’e Subbranch to move the stored lead concentrate out of its premises and compensate it for the lost rent. On November 23, 2016, the Higher People’s Court of Hunan Province rendered No. 15 [2016] Enforcement Objection, Enforcement Department, the Higher People’s Court of Hunan Province, rejecting the enforcement objection from Haichuan Industrial Company. Haichuan Industrial Company applied for review against the enforcement ruling rendered by the Higher People’s Court of Hunan Province to the Supreme People’s Court.

Issue Legal justifiability and reasonability for an enforcement assistant’s obligation to take actual care of the seized property which may be reduced or prove to be valueless unconditionally and free of charge when there is not a valid lease contract between the site owner and the respondent for preservation and an effective civil judgment orders a respondent for preservation to move the seized property out of the leased storage site.

Holding The Supreme People’s Court holds after review that, in the enforcement of the civil ruling on property preservation in a civil lawsuit arising from the dispute over a financial loan contract between Cai’e Subbranch and Deyihong Metal Materials Company et al., the seizure measures on all the lead concentrate stored by Deyihong Metal Materials Company in Haichuan Industrial Company’s premises taken by the Higher People’s Court of Hunan Province based on relevant contents as stated in its civil ruling, “(t)o freeze Deyihong Metal Materials Company’s bank deposit of CNY 48 million or to seal up and distrain Deyihong Metal Materials Company’s other properties of equivalent value” are justified. However, despite the undeniable obligation for Haichuan Industrial Company to assist the enforcement court in enforcing

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property preservation within the enforcement period, it is not legally justifiable and reasonable for Haichuan Industrial Company to assume a de facto obligation of assistance completely unconditionally given there was not a valid lease contract between the site owner and the respondent for preservation (the expired contract was not renewed or extended) and the effective civil judgment ordered the respondent for preservation to move the seized property out of the leased storage site. The objection raised by the enforcement assistant Haichuan Industrial Company was, in essence, to claim the financial loss equivalent to the rent for the premises that the property sealed up by the court continued to occupy since the Lease Contract had already expired. The Higher People’s Court of Hunan Province should have promptly redefined related rights and obligations among all the parties by working out a billing mechanism for continuing to take care of the seized property after the Lease Contract expired rather than having avoided the issue of the lost rent incurred on the actual custodian or the custody account charges. If the seized pledge has a value sufficient for covering the possible lost rent, the custodian should keep it until an effective judgment is made and should be given priority in making up for its lost rent during the enforcement period through the disposal of the seized pledge. However, the inspection reports from a quality supervision and inspection authority engaged by Haichuan Industrial Company show that the seized lead concentrate involved in the case was a pile of valueless waste. The Higher People’s Court of Hunan Province should have verified the facts found in the inspection reports and should have taken corresponding measures to dispose of the seized property in an appropriate way rather than having required the enforcement assistant to continue to keep and take care of the valueless property for free if the said facts were confirmed. The rejection of Haichuan Industrial Company’s enforcement objection by the enforcement court of the Higher People’s Court of Hunan Province only and exclusively on the grounds that it was legal to take preservation measures on Deyihong Metal Materials Company’s property and that the Lease Contract dispute between Haichuan Industrial and Deyihong Metal Materials Company was a separate legal relationship was not justifiable and should be corrected. Thus, the Supreme People’s Court made No. 2 [2017] Enforcement Review, Enforcement Department, the Supreme People’s Court on September 2, 2017, ruling that: (1) No. 15 [2016] Enforcement Objection, Enforcement Department, the Higher People’s Court of Hunan Province shall be reversed; and (2) the Higher People’s Court of Hunan Province shall engage a custodian for the seized property based on its ascertained status and define the rights and obligations hereof according to law.

Comment on Rule While broadly covering three categories: property preservation, act preservation and evidence preservation, the civil preservation system is known technically as the one for ensuring that the outcomes of civil litigation can be realized. Generally speaking, the civil action jurisprudential circle, especially in civil law countries, has focused its

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research on it in a narrow sense, tending to regard it as an emergency interlocutory remedy mechanism for the purpose of protecting interested parties from irreparable losses. In terms of the role, it functions as a systemic subprocess to guarantee that judgments are effectively enforced and thus is widely applicable. The civil preservation system has two outstanding merits: procedural fairness and efficacy, and respects basic principles, including peacefulness, voluntariness, participation, intelligibility and good faith, and its main legislative methods: precedent-based legislation, mixed legislation and separate legislation, have their own advantages and disadvantages. The preservation system of civil law countries generally consists of two systems: a false detention system and a false punishment system. The civil preservation system is mainly composed of provisional seizures and provisional injunctions in civil law countries but features a full range of sophisticated injunctions in common law countries. For example, there are two types of injunctions in the property preservation system in civil procedures in the United States: preliminary injunction and temporary injunction, and three options of provisional preservation under the U.S. law available to creditors. All of them are also known as prejudgment remedies. A comparative study of civil preservation procedures in the two legal systems demonstrates the procedural attributes of civil preservation: nonlitigation, promptness, simplicity, ex post protection, procedural safeguard and accessariness. 1. Procedural rules of civil preservation Various civil preservation measures, such as property preservation, act preservation and temporary stabilization of legal status, are lumped into the civil preservation system in the Chinese legal architecture, resulting in a systemic civil preservation system. To be specific, first, in the modern Chinese legal context, the civil preservation system has extended beyond traditional civil lawsuits to apply to various proceedings, including civil actions, arbitrations and incidental civil actions, becoming a crosslegal-discipline protection system and as such a subprocess in the civil procedure, Second, in terms of the coverage of property preservation, a people’s court should limit the value amount of a property preservation measure to the scope requested by parties concerned, and in addition to subject matters and properties involved in a case, a respondent for preservation’s general properties, and even the creditor’s rights due of a debtor under certain circumstances, can also be subject to civil preservation. Third, more lenient criteria of proof for property preservation should be adopted by a people’s court. Fourth, acts should also be added as an object of civil preservation in Chinese civil preservation legislation to compensate for the deficiencies of property preservation and play a complementary role to property preservation. 2. Procedural safeguard of civil preservation The procedural safeguard in civil preservation depends on various factors, including the statuses and functions of both the courts and the parties involved in the civil preservation procedure, the choice of unilateral or bilateral trial modes, the application of oral debates, the availability of appeal relief and so on. In terms of civil preservation structures, the mixed trial structure better satisfies the need for procedural safeguard than the simple trial or “case-based” trial structure. In principle,

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the procedures should be determined by a people’s court according to the nature of property preservation requested by parties involved and the preservation measures. The basic procedural architecture and procedural safeguard rules of the civil preservation system necessitate the following elements: first, improved trial organizations for civil preservation and collegial benches for major preservation matters; second, the availability of optional trial mode systems in the legislation to people’s courts and various ways of court trials suitable to different cases, such as a written trial, oral debate and others; third, right relief mechanisms in the civil preservation procedure; fourth, well-proven problem-shooting processes for erroneous applications; fifth, institutions of conditional appeals against civil preservation rulings; and the model documentation of the order of civil preservation. 3. Specific measures of civil preservation There are no restrictive provisions on civil preservation measures in various countries. Specific preservation measures may be decided on by people’s courts either according to propositions by applicants or at their own discretion as appropriate. China has a distinctive characteristic in this respect: the stipulation by samples mode is adopted. Namely, Chinese legislation provides a list of typical preservation measures from which applicants and courts can choose, reflecting the statutory principle for preservation measures. Specific preservation measures available in the Chinese legal context include sealing up, seizing, freezing and selling off, and other preservation measures on IPRs, share certificates, investment interests, equity, and the creditor’s rights due of a debtor to third parties. 4. Rulings of civil preservation and enforcement The enforcement powers and functions of civil preservation should cover, among others, the right to examine preservation, the right to enforce preservation, the right to review preservation, and the application and management of the challenge system. Reforms to the current civil preservation system in China are recommended to focus on the following two fields: legislative forms, providing a theoretical basis for separate legislation in the preservation procedure, and legislative contents, including working out specific provisions on civil preservation procedures, strengthening the compensation system, and setting restrictions on the eligibility and qualification of preservation procedure adjudicators. Enforcement coincidence takes various forms, including the one between final enforcements, the one between property preservation enforcements and final enforcements, and the one between property preservation enforcements, and accordingly, the solutions also vary with different enforcement coincidences. For coincidences between property preservation enforcements, earlier enforcements, in principle, exclude later ones, yet, without prejudice to the purposes of the preservation enforcement system, various preservation measures, for example, sealing-up and distraining, may be taken repeatedly and simultaneously on the same properties subject to property preservation, that is, earlier preservation enforcements and later ones can coexist; for coincidences between property preservation enforcements and final enforcements, the principle of enforcement priority

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should, in principle, be followed, yet, without prejudice to the purposes of the preservation enforcements, the requests to seal up and detain the same properties subject to civil preservation from the right holders of later final enforcements may be allowed; and for coincidences between final enforcements, the final enforcements of legal priority should prevail over the others. 5. Compensation for errors in civil preservation Compensation should be made for two types of civil preservation errors: those attributed to incorrect civil preservation applications from parties and those attributed to the enforcement of preservation measures by people’s courts within their own terms of reference. Pursuant to the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as Civil Procedure Law), there are provisions on the legal elements of being liable for damages, related issues and the rules of compensation for damages in the civil preservation procedure. In accordance with the State Compensation Law of the People’s Republic of China, the principle of limitation of judicial liability for damages in civil and administrative proceedings is established, namely, limiting the scope of compensation for damages to three circumstances expressly enumerated by law: the compulsory measures that are illegally adopted and obstruct litigations; the preservation measures that are illegally adopted; and the errors in the enforcement of effective legal instruments, thus excluding other errors in civil and administrative litigations, such as wrong judgments and wrong rulings. 6. Rights and obligations of an enforcement assistant in civil preservation enforcement The civil preservation system is an emergency interlocutory remedy mechanism for ensuring that an obligee’s outcomes of civil litigation can be realized for the purpose of protecting interested parties from irreparable losses. Therefore, in contrast to final enforcement, which are done on clear-cut and specific subject matters, such as specific properties and actions of performing, preservation enforcement should attach more importance to balancing compulsion and harmonization, especially when the properties subject to preservation enforcement are ordered to be put in the custody of a third party not involved in the original case, whose obligation to assist in enforcement should, despite being indisputable, should not be a gratis and matter-of-course one. Therefore, in a property preservation case, the lost rent or storage costs incurred by a custodian should be taken into consideration by a court and may be compensated for in priority with the proceeds from realization of the subject matter preserved. Furthermore, in addition to the properties subject to preservation that should be disposed of in a timely manner as set forth in Article 153 of the Interpretations of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as Judicial Interpretations of the Civil Procedure Law), the circumstance in which the subject matter subject to preservation proves to be valueless in the process of property preservation should also be the one where a people’s court may act. It should be noted that assistance in enforcement, as “an auxiliary system” in the enforcement by people’s courts, refers to legal acts as defined in legally effective legal documents to be required to assist in

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enforcement by entities and/or individuals outside the people’s courts. This system has played a significant role in either searching for and locating the persons and/or the properties subject to enforcement or taking control of the properties subject hereto. According to Article 242 of the Civil Procedure Law, a people’s court has the right to seal off, seize, freeze, transfer and realize, as a specific case may be, the properties of the persons subject to enforcement who fail to fulfill the obligations specified in the effective legal documents under the notice of enforcement. When such measures are decided to be taken by a people’s court, a written order should be issued, and a notification to assist in enforcement delivered by a people’s court to entities concerned, who must comply with the order. If such entities refuse to perform their obligation of assisting in enforcement, a people’s court may, in accordance with Article 114 of the Civil Procedure Law and Article 192 of the Judicial Interpretations of the Civil Procedure Law, impose compulsory measures on such entities concerned, including fines, detention, and/or delivery of judicial advices, to procure their performance. However, preservation enforcement is complex in that on the one hand, search for and control of the properties subject to enforcement entails assistance from enforcement assistants, including public security authorities, tax authorities, industrial and commercial authorities, land and resources authorities, financial institutions, employers of the persons subject to enforcement, corporate bodies or natural persons in possession of the properties subject to enforcement in not only doing so but also maintaining the order at the storage sites of the said properties, especially ones of large quantities, such as ore, coal and steel; on the other hand, these subjects obviously have great differences in their ability to perform the obligation of coordination and assistance. Therefore, in addition to being mandatory, preservation enforcement should also be harmonious. That is, it should not only ensure timely enforcement of property preservation rulings in a lawsuit but also respect the concept of enforcement in good faith and protect the parties involved and other related parties fairly. As an important part of enforcement, subjects of assisting in enforcement should also be entitled to certain rights while fulfilling their obligation of assisting in enforcement. With a notification to assist in enforcement, a custodian of the preservation properties has the right to request court officers to complete related formalities, including the delivery or presentation hereof, to ensure the legality of the court’s request to assist in enforcement and has the right to request the court to bear the expenses incurred therefrom.

Qinghai Jintai Financing Guarantee Co., Ltd. v. Shanghai Jinqiao Engineering Construction Development Co., Ltd., Qinghai Haixi Jiahe Hotel Management Co., Ltd. (Enforcement Review of the Ruling on Dispute over Contract for Construction Project): Determination of the Guaranty Liability in the Enforcement Proceeding Where a Guarantor Provides Guarantee during the Trial Stage to the Party Subject to Enforcement Changmao Shao

Rule Where no preservation measures are adopted or such measures adopted are later withdrawn by a people’s court, based on the provision of a guarantee in the trial stage by a guarantor to the party subject to enforcement, such guarantee is similar to a general one in terms of the guarantor’s liability as provided in the Guaranty Law. Where the guarantor in such a guarantee promises to undertake the guaranty liability if the party subject to enforcement has no property available for enforcement or no sufficient property to fulfill his debts, the enforcement rule for general guarantees shall apply. The guarantor’s properties within the scope of the guaranty liability may be enforced if the outstanding debts of debtor remain unfulfilled and his properties convenient to enforcement have been exhausted for enforcement. Enforcement Review Collegial Bench: Jinshan Zhao, Hongtao Ge and Changmao Shao Edited by Ming Li; translated by Zuoyong Liu C. Shao (B) Enforcement Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_27

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Case Information 1. Parties Applicant for Enforcement Review (Guarantor): Qinghai Jintai Financing Guarantee Co., Ltd. (hereinafter referred to as Jintai Financing Guarantee Company) Applicant for Enforcement: Shanghai Jinqiao Engineering Construction Development Co., Ltd. (hereinafter referred to as Jinqiao Engineering Construction Company) Party Subject to Enforcement: Qinghai Haixi Jiahe Hotel Management Co., Ltd. (renamed later as Qinghai Sangong Real Estate Co., Ltd., hereinafter referred to as Sangong Real Estate Company) 2. Procedural History Objection to Enforcement: No. 12 [2017] Enforcement Objection, Enforcement Department, the Higher People’s Court of Qinghai Province (dated May 11 of 2017) Review of Enforcement: No. 38 [2017] Enforcement Review, Enforcement Department, the Supreme People’s Court (dated Dec. 21 of 2017) 3. Cause of Action Enforcement Review of the Ruling on Dispute over Contract for Construction Project

Essential Facts In response to the plaintiff’s application for preservation measures when hearing the case of the dispute over contract for project construction between Jinqiao Engineering Construction Company and Sangong Real Estate Company, the Higher People’s Court of Qinghai Province froze the bank deposit of CNY 15 million (with the actual balance of more than CNY 230,000) on Sangong Real Estate Company’s account and sealed up the use right of a plot of land. On the grounds of the need of securing a bank loan, Sangong Real Estate Company applied for unfreezing its account based on the guarantee provided by Song X, the guarantor, and so the Higher People’s Court of Qinghai Province froze Song X’s bank deposit of CNY 15 million and lifted the freeze on the Sangong Real Estate Company’s account. On May 22, 2014, Jintai Financing Guarantee Company provided a guarantee letter to the Higher People’s Court of Qinghai Province, promising that it shall fulfill the debts of up to CNY 15 million on behalf of Sangong Real Estate Company if the latter is unable to do so and applying for lifting the freeze on Song X’s guaranteed deposit, and thereupon, the Higher People’s Court of Qinghai Province lifted the freeze on Song X’s guaranteed deposit of CNY 15 million. After the case proceeded to the enforcement, the Higher People’s Court of Qinghai Province found after investigation that Sangong Real Estate Company, the party subject to enforcement, had no other properties that could be enforced except for

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the mortgaged land-use rights and the projects in process (worth more than CNY 400 million). The Sangong Real Estate Company’s account, which was frozen in the preservation stage and later unfrozen on the provision of guarantee received incoming and outgoing funds amounting to over CNY 89 million. The Higher People’s Court of Qinghai Province made the ruling of No. 10 [2016] Enforcement, Enforcement Department, the Higher People’s Court of Qinghai Province, ordering Jintai Financing Guarantee Company to satisfy Jinqiao Engineering Construction Company with the outstanding debts of CNY 15 million within three days, and deducted the bank deposit of CNY 8.2 million of the guarantor Jintai Financing Guarantee Company. Jintai Financing Guarantee Company raised an objection to the enforcement ruling, arguing that, according to Article 85 of the Rules on Certain Issues Regarding Enforcement by the People’s Courts (hereinafter referred to as the Enforcement Rules), only under the circumstance where the party subject to enforcement has no properties available to be enforced or has no sufficient properties available to fulfill his debts may a people’s court enforce the properties that fall within the scope of a guarantor’s liability. Thus, it violated the provisions of the abovementioned Enforcement Rules that the enforcement court enforced the guarantor’s properties before having exhausted the project under construction worth more than CNY 400 million available to be enforced of the party subject to enforcement, Sangong Real Estate Company. Therefore, Jintai Financing Guarantee Company requested to revoke the ruling of No. 10 [2016] Enforcement, Enforcement Department, the Higher People’s Court of Qinghai Province, and refund the deducted amount of CNY 8.2 million. Therefore, the Higher People’s Court of Qinghai Province made the ruling of No. 12 [2017] Enforcement Objection, Enforcement Department, the Higher People’s Court of Qinghai Province, affirming that the reason for Jintai Financing Guarantee Company’s objection cannot be established and rejecting its objection. Jintai Financing Guarantee Company refused to accept the enforcement ruling and filed an application for review to the Supreme People’s Court on the grounds, among others, as follows: The conditions are not fulfilled for the applicant for review as the guarantor in this case to undertake the guarantor’s liability because the party subject to enforcement still had land use rights and projects in process available to be enforced; and while confirming the party subject to enforcement still had the projects worth more than CNY 400 million, the Higher People’s Court of Qinghai Province also determined that this case “can be regarded as one that there were no properties under the name of the party subject to enforcement available to be enforced”. Such determination was an extensive interpretation of Article 85 of the Enforcement Rules and had no legal basis.

Issue Whether properties within the scope of a guarantor’s liability should be enforced when the party subject to enforcement still has properties inconvenient to enforcement.

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Holding The Supreme People’s Court made the ruling of No. 38 [2017] Enforcement Review, Enforcement Department, the Supreme People’s Court, on December 21, 2017, rejecting the review claims from Jintai Financing Guarantee Company and upholding the ruling of No. 12 [2017] Enforcement Objection, Enforcement Department, the Higher People’s Court of Qinghai Province.

Comment on Rule Article 85 of the Enforcement Rules provides that “(w)here no preservation measures are adopted or such measures adopted are later withdrawn by a people’s court based on the provision of a guarantee by a guarantor to the party subject to enforcement, if the party subject to enforcement is found to have no property available for enforcement or no sufficient property to fulfill his debts after the hearing stage, the people’s court has the right to make a ruling that has the guarantor’s property within the scope of the guarantor’s liability subject to enforcement even if the liability of such guarantor is not explicitly defined or stipulated in effective legal documents.” However, in regard to specific application of this article, there are controversies over the criterion for the expression “have no property available for enforcement or no sufficient property to fulfill his debts” and the applicability of the determination rule of “incapability of performance” or “incapability of payment” for general guarantees as defined in the Guaranty Law and its Judicial Interpretation to the cases of enforcement guarantee. Guarantees are classified in the Guaranty Law into two types: general guarantees and joint and several liability guarantees, with the former meaning that a guarantor only provides the guarantee of supplementary liabilities for the debtor’s nonperformance, and the latter a guarantor is jointly and severally liable along with the debtor when the debtor fails to fulfill his debts. Articles 17(1) and 17(2) of the Guaranty Law provide that “(a) general guarantee is a case where the parties stipulate in a guaranty contract that the guarantor shall bear the liability of guarantee if the debtor fails to fulfill his debts. Unless a dispute over the principal contract has been tried or arbitrated, and the debts hereof still cannot be fully fulfilled with the debtor’s property having been enforced by law, the guarantor in a general guarantee may refuse to bear the guaranty liability to creditors.” In the case of a general guarantee, the guarantor has beneficium ordinis, to wit, the creditors shall not request the guarantor to fulfill the debts hereof before the property of the debtor has been legally enforced. This is to provide protection to the guarantor in a general guarantee. In the case of joint and several liability guarantees, the guarantor has no such right. That is, when the debtor fails to fulfill his due debts, the creditors may either request the debtor to fulfill his debts or the guarantor to fulfill the corresponding part of the outstanding debts within the scope of the guarantor’s liability, regardless of whether the property of the debtor has been enforced.

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Then, how should we understand the “incapability of performance” as defined in Article 17(1) of the Guaranty Law? Article 131 of the Judicial Interpretation of the Supreme People’s Court on Some Issues Regarding the Guaranty Law of the People’s Republic of China provides that “(t)he term ‘incapability of payment’ as defined herein means the state where the outstanding debts of debtor remain unfulfilled after enforceable personal properties and/or other ones convenient to enforcement of debtor, such as bank deposits, cash, securities, finished goods, semi-finished goods, raw materials, and/or transportation means, have been exhausted for enforcement”, therefore, the term “incapability of performance” as defined in Article 17 of the Guaranty Law should be consistent in meaning with that “incapability of payment” as defined herein, namely, in the case of general guarantees, a general guarantor’s properties may be subject to enforcement when the properties of a guaranteed person are, if any, inconvenient to enforcement. Judging from the provisions of the Guaranty Law and its Judicial Interpretation, despite a lighter liability for a guarantor in a general guarantee, the premise for its liability is all the same—“the properties of debtor convenient to enforcement have been exhausted for enforcement” rather than debtor (namely, the principal obligor) has no property to be enforced or all the properties of debtor are unable to settle debts after enforcement. Given that the guarantee was provided in the trial stage to unfreeze the seized property, for the purpose of facilitating the realization of creditors’ rights and safeguarding the creditors’ interests, the effect of the guarantee provided by the guarantor should not be less than that of the seizure. Protection of creditors’ interests should be given priority to whenever any conflicts of interest between creditors and the guarantor. Therefore, the criterion “the party subject to enforcement has no property available for enforcement or no sufficient property to fulfill his debts”, as provided in Article 85 of the Enforcement Rules, should not be more demanding than that of “incapability of payment” for general guarantees. Based on the aforesaid reasons, the case made clear that an enforcement court should apply the enforcement rule for general guarantees to a guarantor who provides a guarantee in the hearing stage to the party subject to enforcement and promises to assume the guaranty liability if the party subject to enforcement has no property available for enforcement or no sufficient property to fulfill his debts. When the properties of the party subject to enforcement are seriously inconvenient to enforcement, the guarantor’s properties within the scope of the guarantor’s liability may be enforced. This enforcement rule determined through this case conforms to the provisions of the Guaranty Law and its Judicial Interpretation, appropriately balances the interests of creditors and guarantors, facilitates smooth and efficient enforcement, and thus has a high guiding value for judicial practice.

Chen X v. Liu X, Guangdong Shantou Fishery Products Import and Export Corporation, et al. (Application for Enforcement Supervision by the Interested Party): Application of Law for Online Judicial Auction Huifeng Wan

Rule Auctioning property by people’s courts in civil enforcement differs from the traditional auction with essential judicial act and hence bears the nature of public law. Provisions regarding mandatory enforcement should be applied in judicial auction in accordance with the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as Civil Procedure Law) and the Judicial Interpretations hereof. Online auction is one of the maximal measures taken by people’s courts in civil enforcement, which shall also apply provisions regarding mandatory enforcement in accordance herewith.

Case Information 1. Parties Complainant (Interested Party): Chen X Applicant for Enforcement: Liu X

Enforcement Supervision Collegial Bench: Jinshan Zhao, Huifeng Wan and Changmao Shao Edited by Yi Yang; translated by Lin Sun and Sisi Yi H. Wan (B) Enforcement Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_28

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Party Subject to Enforcement: Guangdong Shantou Fishery Products Import and Export Corporation Party Subject to Enforcement: Shopping Mall of Shantou Fishery Products Import and Export Corporation 2. Procedural History Objection to Enforcement: No. 38 [2016] Enforcement Objection, Enforcement Department, the Intermediate People’s Court of Shantou City, Guangdong Province (Guangdong 05) (dated Sep. 18 of 2016) Review of Enforcement: No. 243 [2016] Enforcement Review, Enforcement Department, the Higher People’s Court of Guangdong Province (dated Dec. 12 of 2016) Supervision over Enforcement: No. 250 [2017] Enforcement Supervision, Enforcement Department, the Supreme People’s Court (dated Sep. 2 of 2017) 3. Cause of Action Application for enforcement supervision by the interested party

Essential Facts On April 25, 2016, in the civil enforcement over a loan contract dispute between applicant for enforcement Liu X and Guangdong Shantou Fishery Products Import and Export Corporation, and Shopping Mall of Shantou Fishery Products Import and Export Corporation (parties subject to enforcement), the Intermediate People’s Court of Shantou City, Guangdong Province sold the land use right of the Shantou Fishery products Import and Export Corporation through Taobao online auction platform, the land is located in Lot 13-1, No. 145, Yongtai Road, Shengping District,1 Shantou City. The complainant Chen X made five bids successively, and the auction was concluded by the last bid at the price of CNY 5,282,360.00 at 10:17:26 am on April 26, 2016. After the deal, Chen X did not pay the bidding price. On August 3, 2016, the complainant Chen X raised an objection concerning enforcement to the Intermediate People’s Court of Shantou City, requested the court to dismiss the auction result and refund the bidder deposit CNY 230,000 on the grounds that some procedures of the auction violated relevant laws and regulations of the traditional auction. Upon review, based on the auction process and bid records, the Intermediate People’s Court of Shantou City found that the auction was held fairly and impartially in an open and orderly way, without malicious collusion against Chen X. Open notice had been issued on Taobao online auction platform 15 days before the auction was held, and the procedure thus was in line with relevant laws and regulations. The judicial auction on the Taobao online platform by the Intermediate 1

According to the adjustment of administrative divisions, Jinyuan District and Shengping Districts in Shantou city are merged to Jinping District.

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People’s Court of Shantou City was correctly executed, and the opposition of Chen X was dismissed. Chen X appealed to the Higher People’s Court of Guangdong Province for review. Upon review, the Higher People’s Court of Guangdong Province made No. 243 [2016] Enforcement Review, Enforcement Department, the Higher People’s Court of Guangdong Province, dismissed Chen X’s application for review, and affirmed No. 38 [2016] Enforcement Objection, Enforcement Department, the Intermediate People’s Court of Shantou City, Guangdong Province (Guangdong 05). The complainant Chen X appealed to the Supreme People’s Court, claiming for reversing rulings made by the lower courts and refunding the bidder deposit CNY 230,000.

Issues 1. The application of law for online judicial auction; 2. Whether there is a violation of laws and regulations in this online judicial auction; 3. Whether this auction should be withdrawn.

Holding The Supreme People’s Court dismissed Chen X’s appeal by No. 250 [2017] Enforcement Supervision, Enforcement Department, the Supreme People’s Court, on August 25, 2017.

Comment on Rule 1. The application of law for online judicial auction The Auction Law is applied to auction activities conducted by auction enterprises within the territory of the People’s Republic of China and governs and adjusts the rights and obligations of such equal parties as auctioneers, clients, bidders and vendees in auction activities. That an auctioneer accepts authorization to sell off the objects of auction is based on a “consensus” between the auctioneer and the client, that is, the authorization of auction is a contractual relation to be governed by private law. Judicial auction is a compulsory act when a people’s court exercises the power of enforcement in accordance with law to auction or sell off the property sealed up, seized or frozen for liquidating, so it also has public law character. The enforcement power of the people’s court does not arise from authorization with prior

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consent of the parties or be transferred by the will of the parties but conferred by law, to be mentioned, the provisions of the Civil Procedure Law and relevant Judicial Interpretations. Even in a traditional judicial auction where an auction enterprise is entrusted by the people’s court to sell off property, the enterprise is not an equal party to the court in the auction but shall conduct under the supervision and authorization of the court. As a result, the application of law in judicial auction shall be in accordance with the Civil Procedure Law and provisions of Judicial Interpretations on mandatory enforcement. Online auction is a maximal choice that people’s courts prefer in civil enforcement, so their law application shall also be in accordance with the Civil Procedure Law and provisions of Judicial Interpretations on mandatory enforcement. 2. Whether there is a violation of laws and regulations in this online judicial auction Once an online auction platform publishes the bidding process, bidding number, bidding time and conclusion of a judicial auction, it bears the effect of publication, which forms a binding force to the bidder. This can be verified by the bidding records rendered by the complainant. In this online auction, the Civil Procedure Law and other relevant Judicial Interpretations did not provide that a written confirmation should be entered after the completion of the transaction conclusion. The complainant’s claim that his right and obligations did not arise without a written confirmation will not be upheld. The Civil Procedure Law and other relevant Judicial Interpretations never state that state-owned assets are excluded from the court’s enforcement or shall be executed under approval. Therefore, the ground of violation of law due to the complainant’s opinion that the object of auction belongs to state-owned asset which shall be examined by the State-owned Assets Supervision and Administration Commission of the State Council before auction is untenable and shall not be supported by the court. In addition, the complainant did not provide relevant evidence as to whether the object of the auction was a state-owned asset. 3. The issue proposed by the complainant that bidder No. A××××, later proved to be the entrusted client Liu X, maliciously colludes with bidder No. J××××, to raise the price of the auction object from the reserve price CNY 2.3 million to CNY 5.3 million Online judicial auction is an open and lawful way for people’s courts to dispose of property by bidding through online platforms, which are essentially independent auctions without entrusted clients. Article 15(2) of the Rules of the Supreme People’s Court about Auctioning or Selling off Property by the People’s Courts in Civil Enforcement clearly states that the applicant for enforcement and the party subject to enforcement may act as bidders, and Liu X, the applicant for enforcement, may join the auction as a bidder, as long as he qualifies the conditions required in online judicial action. In an online judicial auction, it is the bidder’s appraise of the value of the auction object that determines whether and when the bidding price rises or the auction fails. In viewing the bidding record rendered by the complainant,

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when the bidding price was bid at CNY 5,182,360 after the complainant bid at CNY 2,377,360 at 9:40:53 am, the complainant raised the bidding price respectively at 10:01:16 am, 10:05:10 am, 10:08:29 am, and 10:17:26 am, from which we found that the complainant had clear judgment on his biddings. The ground of malicious collusion between bidders (No. A×××× and No. J×××××) due to successively raising bidding price is untenable and shall not be supported by the court. 4. The issues proposed by the complainant that the failure of registration for transferring the property right of the object of auction was due to negligence of duty of the court in enforcement, for the court did not make specific and clear announcement to the bidders Before auctioning, the enforcement court issued an announcement, a notice, an introduction of the object, a reminder, etc., relevant to the auction, with special statements in the announcement that the status quo of land use right involved was occupied by the original lessee, and the enforcement court did not bear risks arising from the transfer and registration of the ownership. In addition, the court also reminded bidders who were interested shall come to the site to examine the samples in person; otherwise, it shall be regarded as confirmed and liable to the status quo of this object. From the above, we found that the enforcement court has fulfilled the obligation of notification. The complainant voluntarily participated in the auction, regardless of whether he read the auction notice in detail or not, shall be deemed to understand the potential risks of the object of the auction and to agree to accept the abovementioned auction conditions to bear the risk of his participation in the auction by himself. Pursuant to the Rules of the Supreme People’s Court about Auctioning or Selling off Property by the People’s Courts in Civil Enforcement, Article 23 states that “(i)f an auction is successful, or if the property in an unsuccessful auction is used for liquidating debt, the people’s court shall make a ruling and serve it on the successful bidder or priority creditor within 10 days after the full payment of price or of inadequate amount that shall be made up.” Article 24 hereof states that “(a)fter a successful auction, the successful bidder shall make payment of price to the people’s court or transfer the money into the bank account within the time limit as determined in the auction announcement or within the time limit as indicated by the people’s court.” Article 29(2) hereof states that “(a)fter a real property or registered special movable property or any other property right is auctioned successfully or liquidates debt, this real property or the ownership of the special movable property or any other property right shall be transferred as of the success of the auction or as of the delivery of the ruling on offsetting debts to the successful bidder or priority creditor.” According to abovementioned provisions, after a successful auction, the bidder shall make full payment of price within the time limit as determined in the auction announcement or within the time limit as indicated by the people’s court, and the property right of the object of the auction shall be transferred as of the success of the auction or as of the delivery of the ruling. Where it is necessary to transfer ownership of property rights, the bidder may go through the formalities at the property rights registration department or request the people’s court to assist in the registration of transferring property right. Successful registration is based on the ruling by the people’s court

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on the concluded auction. In this case, the complainant did not make full payment of price within the time limit as determined in the auction announcement or within the time limit as indicated by the people’s court and failed to get the court’s ruling on the concluded auction or to confirm the registration of the property right. The complainant’s claim that the property right of the object of the auction not be registered is on the grounds of the court’s negligence of duty for making specific and clear the defects of the object will be not upheld. 5. Whether this auction should be withdrawn Article 21(1) of the Rules of the Supreme People’s Court about Auctioning or Selling off Property by the People’s Courts in Civil Enforcement states that “(w)here a party or an interested party raises an opposition requesting to withdraw an auction, the people’s court shall uphold it under any of the following circumstances: (1) there is malicious collusion between bidders or between a bidder and the auction agency, which harms the interests of the parties or any other bidder; (2) the bidder does not have the legally required qualification for making bids; (3) there are illegally imposed restrictions on bidders or different bidding conditions for different bidders; (4) the object of auction is not announced according to laws and judicial interpretations; (5) any other circumstance that seriously violates the auction procedure and harms the interests of the parties or bidders.” Where a party or an interested party raises an opposition requesting to withdraw an auction under any of the abovementioned circumstances, the people’s court shall uphold it. After examination, the complainant’s grounds do not satisfy those said provisions, whereupon this auction should not be withdrawn.

Yu X v. Xilin Gol League Longxing Mining Co., Ltd. (Enforcement Supervision over the Ruling on Dispute over Mining Rights): Identification of Circumstances on the Application for a Change of Enforcers in a Dispute over Mining Rights Transfer Jinlong Huang

Rule 1. An effective judgment in a mining right transfer dispute that the transferor shall complete the mining right transfer procedures for the transferee, as stipulated in the contract, does not mean that the legal effect of an actual transfer of mining rights will inevitably be affected through such an enforcement process. The actual handover of mining rights to the winning party does not exclusively depend upon the literal meanings of the effective judgment, the grounds on which the effective judgment is made on related legal issues should be considered and the relevant laws and regulations on mining right transfers should be respected. 2. Where a lawfully established mining right transfer contract has not taken effect, a judgment that the transferor shall complete the mining right transfer procedures for the transferee as stipulated in the said contract cannot constitute the determination of the title to the said mining rights, but constitutes, first of all, the satisfaction of its obligation of applying for approval required for the said contract to take effect, and the mining right transfer registration process cannot be initiated until the approval by the authorities of the said contract. A notification by an enforcement court to land and resources authorities requesting to assist in handling mining right transfer procedures is simply equivalent to the completion of the transferee’s application to competent Enforcement Supervision Collegial Bench: Jinlong Huang, Shaoyang Liu and Yan Zhu Edited by Yi Yang; translated by Zuoyong Liu J. Huang (B) Enforcement Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_29

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authorities for handling such procedures and the initiation of approval procedures by such administrative authorities and can be construed only as a requirement that the land and resources authorities perform their function of examining and approving the transfer contract in accordance with related laws and regulations rather than that the land and resources authorities complete the transfer registration of mining rights. 3. The succession of rights under an unapproved mining right transfer contract is quite different from that of rights or transfer of debts in a general civil judgment. In the enforcement of a mining right transfer dispute case, the change of enforcement applicants is different from that of enforcement applicants in a general civil case, the right of examination of a transferee’s eligibility by administrative authorities should be respected and related provisions on the change of enforcement subjects should be indiscriminately adopted. The issue of whether or not a subject of rights determined in an effective judgment will ultimately be a mining right transferee, or whether or not the mining right transfer procedures can be completed for an entity established in compliance with administrative approval requirements, in essence, remains the mining right transferee’s satisfaction of statutory eligibility requirements, which is within the scope of administrative examination and approval, and thus should be left to relevant administrative authorities to make decisions on it according to related provisions of mining right management.

Case Information 1. Parties Complainant (Applicant for Enforcement): Yu X Party Subject to Enforcement: Xilin Gol League Longxing Mining Co., Ltd. (hereinafter referred to as Longxing Mining Company) 2. Procedural History Objection to Enforcement: No. 11 [2014] Enforcement, Enforcement Department, the Intermediate People’s Court of Xilin Gol League, Inner Mongolia Autonomous Region (dated Dec. 14 of 2016) Review of Enforcement: No. 04 [2017] Enforcement Review, Enforcement Department, the Higher People’s Court of Inner Mongolia Autonomous Region (dated Mar. 15 of 2017) Supervision over Enforcement: No. 136 [2017] Enforcement Supervision, Enforcement Department, the Supreme People’s Court (dated Dec. 26 of 2017) 3. Cause of Action Enforcement supervision over the ruling on dispute over mining rights

Yu X v. Xilin Gol League Longxing Mining Co., Ltd.

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Essential Facts On August 1, 2008, Longxing Mining Company as Party A concluded a Contract on Mining Right Transfer (hereinafter referred to as MRT Contract) with Yu X as Party B, stipulating that Longxing Mining Company will implement paid transfer of its mining right over a mining area to Yu X. Later, Yu X paid the consideration of CNY 1.5 million for the transfer and then performed the preliminary design and mining work on the said mining area. However, Longxing Mining Company failed to complete the mining right transfer procedures for Yu X as required under the MRT Contract. In October 2012, the parties filed their dispute for settlement with the Intermediate People’s Court of Xilin Gol League, Inner Mongolian Autonomous Region, which held that the MRT Contract was the expression of true intent of the parties and thus was lawfully established. However, according to relevant laws, such a contract cannot take effect until the completion of the administrative examination and approval procedures with related administrative authorities. Given the examination of a mining right transferee’s eligibility is within the terms of reference of administrative authorities rather than a people’s court, the request from Longxing Mining Company that the MRT Contract is confirmed to be invalid and the liquidated damages are paid on the grounds that Yu X did not satisfy the application conditions of a mining right holder as required by law was not supported by the court. Meanwhile, given that the parties explicitly stipulated in the MRT Contract that Longxing Mining Company is responsible for completing the right transfer procedures, Yu X’s counterclaim request that Longxing Mining Company be ordered to complete all the approval procedures for the mining right transfer was upheld by the court. Despite being lawfully established, the MRT Contract remained subject to approval and did not take effect, and the liability for breach of contract was premised on the effective establishment of a contract. Yu X’s claim that Longxing Mining Company bears liquidated damages was not supported by the court. Therefore, the Intermediate People’s Court of Xilin Gol League made No. 42 [2012] Trial, Civ. Division, the Intermediate People’s Court of Xilin Gol League, Inner Mongolia Autonomous Region, to the effect that Longxing Mining Company completes the mining right transfer procedures for Yu X as stipulated in the MRT Contract within 15 days of the effectiveness of this civil ruling. Longxing Mining Company appealed against the civil ruling to the Higher People’s Court of Inner Mongolia Autonomous Region, which held that the MRT Contract was the expression of true intent of the parties and was lawfully established upon being signed or stamped by the parties. According to Article 44 of the Contract Law of the People’s Republic of China (hereinafter referred to as Contract Law), “(a) lawfully established contract shall become effective upon its establishment. Where a contract may become effective only after the completion of approval and registration procedures according to the provisions of laws and administrative

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regulations, such provisions shall apply”.1 Article 10 of the Regulations for Transferring Exploration Rights and Mining Rights) provides that, within 40 days from receipt of an application for a mineral exploration or mining right transfer, approval authorities shall make a decision on whether approval is granted to such a transfer and notify both the transferor and the transferee of the application results, with a transfer contract taking effect upon approval or the reasons for denial of approval being given. Article 9(1) of the Judicial Interpretation of the Supreme People’s Court on Some Issues Concerning the Application of the Contract Law of the People’s Republic of China (I) (hereinafter referred to as Interpretation I) provides that according to Article 44(5) of the Contract Law, a contract shall not take effect until completion of approval procedures or approval and registration ones if required by laws or regulations; and a people’s court should determine a contract is not effective if the required approval procedures or approval and registration ones for it have not been completed by parties concerned by the closure of first instance court debate. Despite being lawfully established, the MRT Contract was not effective, as the required approval and registration procedures were not completed by then; that is, its effectiveness still hanged in the balance. Yu X’s satisfaction of the eligibility requirements for a mining right transferee and relevant authorities’ approval of the MRT Contract did not fall within the terms of reference of a people’s court. The affirmation by the court of original jurisdiction that the MRT Contract is lawfully established and Longxing Mining Company should proceed to complete the required mining right transfer procedures is justifiable. If the MRT Contract fails to obtain approval from approval authorities, the parties thereto may claim their rights in accordance with relevant provisions of the Contract Law. Therefore, the Higher People’s Court of Inner Mongolia Autonomous Region made No. 281 [2013] Final, Civ. Division, the Higher People’s Court of Inner Mongolia Autonomous Region, upholding the original judgment. The Intermediate People’s Court of Xilin Gol League took in Yu X’s application for enforcement in March 2014 and issued a Note of Assistance in Enforcement to the land and resources authority, requesting it to assist in handling the required mining right transfer procedures under the MRT Contract for the enforcement applicant Yu X according to the effective judgment and receiving a reply that no transfer application was filed with the authority and the MRT Contract between Longxing Mining Company and Yu X was one between a corporate enterprise and a natural person, the matter which the Intermediate People’s Court of Xilin Gol League requests to assist in enforcing shall, according to law, regulations and local rules and based on 1

Article 502 of the Civil Code provides that, “(a) lawfully established contract shall become effective upon its establishment unless otherwise provided by law or agreed by the parties. Where a contract may become effective only after the completion of approval and registration procedures according to the provisions of laws and administrative regulations, such provisions shall apply. The failure to be effective due to having not completed the required approval procedures does not affect the validity of the stipulations on the obligation of applying for such approval and related stipulations in the said contract, and the affected party may hold the obligatory party having failed to fulfill its obligation of applying for such approval liable for the breach of such obligation. Where approval and registration procedures are required for the change, assignment or termination of a contract according to the provisions of laws and administrative regulations, the preceding provision shall apply.”

Yu X v. Xilin Gol League Longxing Mining Co., Ltd.

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the actual situation, be within the scope of being incapable of assistance, so the land and resources authority cannot assist in completing the procedures specified in the Note of Assistance in Enforcement. Yu X set up a sole proprietorship fully owned by a natural person: Huilan Fluorite Marketing Co., Ltd. of Xilin Gol League (hereinafter referred to as Huilan Fluorite Marketing Company) on May 19, 2014 and then applied to the Intermediate People’s Court of Xilin Gol League for changing the enforcement applicant into this entity. The Intermediate People’s Court of Xilin Gol League ruled against the application. Yu X applied for review, and the Higher People’s Court of Inner Mongolia Autonomous Region made No. 04 [2017] Enforcement Review, Enforcement Department, the Higher People’s Court of Inner Mongolia Autonomous Region, rejecting his application for review. Yu X lodged a complaint against the review ruling delivered by the Higher People’s Court of Inner Mongolia Autonomous Region to the Supreme People’s Court, claiming that according to the determined contents in the effective judgment, completing the mining right transfer procedures for Yu X is a legal obligation that Longxing Mining Company should fulfill according to law. The establishment of the sole proprietorship by Yu X in the course of fulfilling his rights and obligations as determined by the effective judgment was for the purpose of complying with administrative regulations of administrative authorities and completing related procedures for the transfer of the mining rights rather than transferring his rights under the MRT Contract to a third party, nor did it do any damage to the interests of the state or any other parties. Yu X’s application for changing the enforcement applicants was fully in compliance with related laws and administrative regulations on completing mining right transfer procedures under a mining right transfer contract with a natural person being a party thereto, including the Law of Mineral Resources of the People’s Republic of China (hereinafter referred to as Mineral Resource Law), the Interim Measures for Governing Grant and Assignment of Mining Rights (hereinafter referred to as Interim Measures), the Regulations for Administering the Registration of Exploring and Mining the Mineral Resources and the Supplementary Notice of Department of Land and Resources of Inner Mongolia Autonomous Region on Some Issues Relating to Regulating the Administration of Exploration and Mining Rights (hereinafter referred to as Supplementary Notice).

Issues 1. For a mining right transfer contract determined by an effective judgment as lawfully established but not effective, can the legal effect of an actual transfer of mining rights be effected through such an enforcement process that a transferor is ordered to complete the required mining right transfer procedures as stipulated in the said contract;

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2. In a mining right transfer dispute, can the legal eligibility requirements for a mining right transferee be satisfied through such an enforcement process of changing enforcement applicants as a right holder determined by an effective judgment transfers its rights to its own separate entity?

Holding On December 26, 2017, the Supreme People’s Court made No. 136 [2017] Enforcement Supervision, Enforcement Department, the Supreme People’s Court, dismissing Yu X’s complaint.

Comment on Rule 1. Can the legal effect of an actual transfer of mining rights be affected through enforcement procedures The particular determined by the judgment on which the enforcement in this case is based is that Longxing Mining Company is responsible for completing mining right transfer procedures for Yu X, as stipulated in the MRT Contract. In accordance with the prevailing laws and regulations, transfers of exploration and mining rights shall be subject to approval from related approval authorities, and the transfer contracts shall take effect upon approval, if granted, from the said approval authorities. In this case, both the courts of first instance and second instance hold that the eligibility examination of the mining right transferee is exclusively in the realm of relevant administrative authorities. That is, Yu X’s satisfaction of the eligibility requirements for a mining right transferee and relevant approval authorities’ approval of the MRT Contract do not fall within the terms of reference of a people’s court. As the MRT Contract had not obtained approval from related approval authorities, the court of first instance determined that despite being lawfully established, the MRT Contract did not take effect. The second instance decision also came down with a similar conclusion and further affirmed that if the MRT Contract fails to obtain approval from approval authorities, the parties thereto may claim their rights on legal consequences, rights and obligations thereunder through separate means. Given the failure of a transfer contract to be effective due to having obtained no approval from related authorities does not affect the validity of stipulations on the obligation of applying for such approval in the said contract and in consideration of the grounds on which the effective judgment was made that the completion of the required mining right transfer procedures by Longxing Mining Company for Yu X as stipulated in the MRT Contract did not constitute the determination of the title to the said mining rights, but constituted, first of all, the satisfaction of its obligation of applying for approval

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required for the MRT Contract to take effect, and the mining right transfer registration process could not be initiated until the approval of the said MRT Contract. The Intermediate People’s Court of Xilin Gol League, therefore, issued a Note of Assistance in Enforcement to the Bureau of Land and Resources of Xilin Gol League, requesting to assist in handling mining right transfer procedures. Such notification was simply equivalent to the completion of Longxing Mining Company’s application to competent authorities for handling mining right transfer procedures and the initiation of the approval procedures by administrative authorities and could, especially in the current stage, be construed only as a requirement that the Bureau of Land and Resources of Xilin Gol League performs its function of examining and approving transfer contracts in accordance with related laws and regulations. 2. Can legal requirements for a transferee be satisfied through the change of enforcement applicants Mining rights are different from general civil rights in that they entail approval or licensing from administrative authorities. The succession or assignment of rights under an unapproved MRT Contract is quite different from that of rights or transfer of debts in a general civil judgment and cannot be ultimately settled through such enforcement procedures as the change of enforcement applicants. In this case, Yu X requested to complete the mining right transfer procedures in the name of a new entity set up by himself - Huilan Fluorite Marketing Company. The issue in essence remains a mining right transferee’s satisfaction of statutory eligibility requirements, which is within the scope of administrative examination and approval and thus should be left to relevant administrative authorities to make decisions on it according to related provisions of mining right management. Yu X contended that his establishment of the sole proprietorship in the course of fulfilling his rights and obligations as determined by the effective judgment was for the purpose of complying with administrative regulations of administrative authorities and completing related procedures for the transfer of the mining rights rather than transferring his rights under the MRT Contract to a third party, nor did it do any damage to the interests of the state or any other parties. Therefore, his application for changing the enforcement applicants, namely, completing the related procedures in the name of Huilan Fluorite Marketing Company, was fully in compliance with related laws and administrative regulations on completing mining right transfer procedures under a mining right transfer contract with a natural person being a party thereto, including the Mineral Resource Law, the Interim Measures, the Regulations for Administering the Registration of Exploring and Mining the Mineral Resources and the Supplementary Notice. However, this point of view should be asserted with relevant approval authorities. The rejection of Yu X’s request to change enforcement applicants by the Intermediate People’s Court of Xilin Gol League and the Higher People’s Court of Inner Mongolia Autonomous Region is in line with the views on the MRT Contract approval in the effective judgment in this case and does not violate relevant legal provisions and judicial interpretations of enforcement procedures. Article 18 of the Rules on Certain Issues Regarding Enforcement by the People’s Courts (hereinafter referred to as Enforcement Rules) provides that, “(a)n applicant

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is eligible to be an enforcement applicant only with the provision of effective legal instruments or the proof of rights assignment.” Article 18(1) hereof provides that, “(t)he following conditions should be satisfied for an enforcement case to be accepted by a people’s court… (2) The enforcement applicant is a right holder or right inheritor determined by effective legal instruments, namely, a successor of rights.” The phrase “successor of rights” thereof covers those who assumes the creditor’s rights by the means of the transfer, assignment and succession of the creditor’s rights. Article 9 of the Rules of the Supreme People’s Court on Several Issues Concerning the Change or Addition of Parties in Civil Enforcement provides that, “(w)here the creditor’s rights of an enforcement applicant determined by effective legal instruments are transferred to a third party according to law and their acquisition has been recognized in writing by the third party, the application by the third party to change the enforcement applicant into itself or add itself as an enforcement applicant should be supported by a people’s court.” Given Yu X had no evidence, his claim that Huilan Fluorite Marketing Company had acquired his creditor’s rights involved in this case determined by effective legal instruments could not be ascertained. The effective judgment in this case confirmed that the MRT Contract was lawfully established. However, not being effective, that is to say, its effectiveness still hanged in the balance, did not affect the validity of the stipulations of the obligation to perform the approval by the parties. In other words, the stipulations of the obligation to perform approval in the MRT Contract have legal effects. The right holder determined by the effective legal instruments was Yu X, and Yu X should be the enforcement applicant in this case. Article 13 of the Notice of the Ministry of Land and Resources2 on Issues Concerning Improving the Approval and Registration Administration of the Exploitation of Mineral Resources [MLR Notice No. 14 (2011)] provides that, “(o)nly an applicant with the status of an independent corporate enterprise is eligible for applying for mining rights.” The approval authority in this case found that the right holder Yu X determined by the effective judgment was a natural person, and the matter that the Intermediate People’s Court of Xilin Gol League required to assist in enforcing was also to complete the procedures for transferring ownership of mining rights for Yu X under the MRT Contract. According to Article 13 hereof, a natural person is not eligible to be a subject of mining rights, so the approval authority clearly replied that the matter required to assist in enforcing could not be completed. According to Article 19(2) of the Interim Measures, “(a)n applicant of mining rights shall be a corporate enterprise, and an applicant being a natural person shall apply through a lawfully established sole proprietorship”. Indeed, Yu X established a sole proprietorship - Huilan Fluorite Marketing Company on May 19, 2014 and requested the court to change the enforcement applicant in this case into Huilan Fluorite Marketing Company. However, according to Article 79 of the Contract Law, “(a)n obligee may transfer its rights under a contract in whole or in part to a third party except under one or more of the following circumstances: (1) such rights may 2

According to the institutional reform of the State Council in 2018, relevant fuctions and responsibilities of the Ministry of Land and Resources have been exercised by the Ministry of Natural Resources.

Yu X v. Xilin Gol League Longxing Mining Co., Ltd.

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not be transferred in light of the nature of the contract; (2) such rights may not be transferred according to the agreement between the parties; and (3) such rights may not be transferred according to laws and regulations”. The parties to the MRT Contract expressly stipulated in Article 8 hereof that, “(w)ithout agreement through negotiation, either party shall not transfer the mining rights to any third party. Otherwise, in addition to being liable for any financial losses incurred by the other party, the Transferor shall compensate a sum of CNY 2 million to the affected party and bear related legal liabilities”, therefore, the case exactly tallied with the creditor’s rights that “may not be transferred according to the agreement between the parties” in Article 79 of the Contract Law. Based on the mentioned above facts, the replacement of the transferee in this case with Huilan Fluorite Marketing Company could not be affected through the enforcement process of changing application subjects, so Yu X could not solve the issue of a mining right transferee’s satisfaction of statutory eligibility requirements through the enforcement process of changing applicants.

China Institute of Defense Science and Technology v. United Resources Education Development (Yanjiao) Co., Ltd. (Enforcement Supervision over the Ruling on Dispute over Cooperative Schooling Contract): The Handling Approach to Unfulfillable Enforcement of a Compromise Agreement Yan Zhu

Rule 1. Uncertainty with prescribed contents in an enforcement compromise agreement will result in being unable to determine specific performance contents and define the liability for breach of contract, which objectively renders the agreement impossible to be further performed. Under such circumstances, a people’s court may resume enforcing an effective original legal instrument. 2. The matters specified in an enforcement compromise agreement but uncovered by the original enforcement basis, and all disputes arising from the performance hereof may be resolved by the Parties through other legal means, such as separate proceedings.

Enforcement Supervision Collegial Bench: Jinlong Huang, Shaoyang Liu and Yan Zhu Edited by Yi Yang; translated by Zuoyong Liu Y. Zhu (B) Enforcement Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_30

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Case Information 1. Parties Complainant (Party Subject to Enforcement): China Institute of Defense Science and Technology Applicant for Enforcement: United Resources Education Development (Yanjiao) Co., Ltd. (hereinafter referred to as United Resources Education Company) 2. Procedural History Objection to Enforcement: No. 445 [2005] Enforcement, Enforcement Department, the People’s Court of Sanhe City, Hebei Province (dated May 30 of 2016) Review of Enforcement: No. 46 [2016] Enforcement Review, Enforcement Department, the Intermediate People’s Court of Langfang City, Hebei Province (Hebei 10) (dated Jul. 22 of 2016) Supervision over Enforcement: No. 130 [2017] Enforcement Supervision, Enforcement Department, the Higher People’s Court of Hebei Province (dated Mar. 21 of 2017) Supervision over Enforcement: No. 344 [2017] Enforcement Supervision, Enforcement Department, the Supreme People’s Court (dated Oct. 18 of 2018) 3. Cause of Action Enforcement supervision over the ruling on dispute over cooperative schooling contract

Essential Facts On July 29, 2004, Beijing Arbitration Commission rendered the arbitration award No. 0492 [2004] Arbitration, the Beijing Arbitration Award (hereinafter referred to as Award) on the dispute over the cooperative schooling contract of United Resources Education Company v. China Institute of Defense Science and Technology to the effect that: (1) the contract is terminated; (2) the arbitration respondent China Institute of Defense Science and Technology stops all construction activities on Yanjiao Campus; (3) the arbitration respondent China Institute of Defense Science and Technology withdraws from Yanjiao Campus; (4) to refuse all the other arbitration claims from the arbitration applicant (United Resources Education Company) and the counterclaims from the arbitration respondent China Institute of Defense Science and Technology are rejected; and (5) The CNY 363,364.91 arbitration fee of this case is borne 50% by the arbitration applicant (United Resources Education Company). The obligations of the arbitration respondent China Institute of Defense Science and Technology in the aforesaid Items (2) and (3) in this Award are fulfilled within 30 days of the service of this Award.

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In the process of enforcement, the Enforcement Compromise Agreement on the Withdrawal of China Institute of Defense Science and Technology from the Campus upon the Application from United Resources Education Development (Yanjiao) Co., Ltd. (hereinafter referred to as Enforcement Compromise Agreement) was entered into between United Resources Education Company and China Institute of Defense Science and Technology, and states in its Preamble that, “(i)n order to implement the Award, through mediation by the enforcement court, the Parties hereto agrees to implement the following Scheme under the supervision of the enforcement court”. The certain contents are as follows: I. Appraisal stage (I) Appraisal of assets. United Resources Education Company’ s assets: 1. The Parties agree to appraise United Resources Education Company’s assets under the auspices of the people’s court; 2. The appraisal covers the overall appraisal of all the inputs in house properties, roads and facilities by United Resources Education Company and the appraisal of land ownership; and 3. The appraisal values by the appraiser jointly appointed by the Parties will serve as the basic reference prices for the transaction. China Institute of Defense Science and Technology’s assets: 1. The Parties agree to appraise United Resources Education Company’s assets on campus invested by China Institute of Defense Science and Technology under the auspices of the people’s court; 2. The appraisal covers: (1) the fixed assets that China Institute of Defense Science and Technology invested with consent from United Resources Education Company during the term of the Cooperative Schooling Contract; (2) the fixed assets that China Institute of Defense Science and Technology invested without consent from United Resources Education Company during the term of the Cooperative Schooling Contract; and (3) the fixed assets that China Institute of Defense Science and Technology invested after the Cooperative Schooling Contract was terminated by the Award. The specific particulars are ascertained with the evidence that China Institute of Defense Science and Technology and United Resources Education Company jointly provide to the people’s court. (II) The campus occupancy fees are determined by the Parties through negotiation. (III) Given that the foundation earthworks for the teaching building had been completed before the Award by Beijing Arbitration Commission and leaving the teaching building unfinished or the open foundation pit unfilled would affect the safety of the surrounding buildings and students and would also have impacts on the student recruitment of China Institute of Defense Science and Technology, United

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Resources Education Company agrees to have China Institute of Defense Science and Technology go on with the unfinished teaching building until the completion of their construction. (IV) Determination of the loss from the breach. 1. Given that the actual payer of CNY 10 million to Technical Service Center under China Institute of Defense Science and Technology was China Institute of Defense Science and Technology, and the actual user of the campus was also China Institute of Defense Science and Technology, United Resources Education Company agrees that the payment of CNY 10 million will be accounted for in the course of the implementation of the present scheme according to the preexisting agreement of intention between the Parties; 2. Technical Service Center under China Institute of Defense Science and Technology will be liable for any actual loss incurred by United Resources Education Company attributed to the breach by Technical Service Center under China Institute of Defense Science and Technology; 3. The Parties agree that the loss will be settled through negotiation between the Parties, and if failing to reach an agreement on its settlement through such negotiation, a civil ruling will be made in an enforcement hearing under the auspices of the court. II. Delivery stage 1. Subject to mutual agreement through negotiation between the Parties, United Resources Education Company agrees to transfer all its house properties and land use rights and China Institute of Defense Science and Technology agrees to acquire the aforesaid properties; 2. United Resources Education Company will acquire China Institute of Defense Science and Technology’s assets if China Institute of Defense Science and Technology does not acquire United Resources Education Company’ assets; 3. The Parties agree that the aforesaid properties will be realized through auction under the auspices of the court in the event that both the preceding Items (1) and (2) fail. 4. Auction Method: (1) the sum of the appraisal values for all the assets is the starting price for the first auction; (2) in case of abortive auction, the starting price of the next auction will be lowered by 15%, but the abortive auction shall not exceed twice; and (3) when the under-the-hammer price is higher than the starting price for the auction, the fixed assets invested by China Institute of Defense Science and Technology with consent from United Resources Education Company and United Resources Education Company’ preexisting assets will be liquidated in priority if sufficient, and pro-rata if insufficient. When it is not enough to settle, United Resources Education Company agrees to transfer its land plot for the teaching building (as well as the surrounding land plots if necessary) to China Institute of Defense Science and Technology and put its assets thereon in the exclusive possession of China Institute of

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Defense Science and Technology. Both Parties have the right to purchase the assets under auction. Following the conclusion of the Enforcement Compromise Agreement, the enforcement court entrusted Huaxin Asset Appraisal Co., Ltd. to appraise United Resources Education Company’s land plot and all the appendages thereon in Yanjiao Economic Development Zone, with an Appraisal Report for all the parties concerned. United Resources Education Company raised an objection to the Appraisal Report, and no agreement on how to perform the Enforcement Compromise Agreement was reached between the Parties despite repeated negotiation under the auspices of the enforcement court. Both Parties submitted their own written opinions on the validity of the Enforcement Compromise Agreement reached during the enforcement of this case to the enforcement court. Upon review, the enforcement court and the Intermediate People’s Court of Langfang City, Hebei Province held that: (1) the Enforcement Compromise Agreement dated December 8, 2005, between the enforcement applicant: United Resources Education Company and the party subject to enforcement: China Institute of Defense Science and Technology is valid; and (2) the assets on the campus of the enforcement applicant: United Resources Education Company and the party subject to enforcement: China Institute of Defense Science and Technology shall be disposed of in accordance with the terms of the Enforcement Compromise Agreement dated December 8, 2005, between the Parties. The enforcement applicant: United Resources Education Company lodged a complaint with the Higher People’s Court of Hebei Province, which made No. 130 [2017] Enforcement Supervision, Enforcement Department, the Higher People’s Court of Hebei Province, reaffirming that relevant contents in the Award should continue to be enforced. The party subject to enforcement: China Institute of Defense Science and Technology lodged its complaint against the ruling rendered by the Higher People’s Court of Hebei Province to the Supreme People’s Court mainly on the grounds that the ruling on withdrawal from the campus in the Award was substantially changed by the enforcement contents stipulated in the Enforcement Compromise Agreement in the name of resuming the enforcement of the Award; upholding in an alternative approach the request from the breaching party to restore the enforcement of effective legal instruments deviates from the provisions of related laws, and the Enforcement Compromise Agreement has been performed, and its failure to be further performed is caused by the breach of contract on the part of United Resources Education Company.

Issue Whether Award No. 0492 should be enforced further in this case.

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Holding No. 344 [2017] Enforcement Supervision, Enforcement Department, the Supreme People’s Court was made on October 18, 2018, ruling that: (1) Items (1) and (3) in No. 130 [2017] Enforcement Supervision, Enforcement Department, the Higher People’s Court of Hebei Province are upheld; and (2) Item (2) in No. 130 [2017] Enforcement Supervision, Enforcement Department, the Higher People’s Court of Hebei Province is changed into the “further enforcement of Item (3) in the Award rendered by the Beijing Arbitration Commission”, that is, “(t)he Appellee: China Institute of Defense Science and Technology withdraws out of the Yanjiao Campus”; and (3) all the other claims from China Institute of Defense Science and Technology are rejected.

Comment on Rule This case involves issues about the relation between an enforcement compromise agreement and its original Award, as well as how to proceed with enforcement under the circumstance of the objective impossibility of performance of an enforcement compromise agreement. Article 9 of the Rules of the Supreme People’s Court on Several Issues Concerning Enforcement Compromise provides that, “(w)here the party subject to enforcement fails to fulfill an enforcement compromise agreement, the enforcement applicant may request for the resumption of the enforcement of the effective original legal instruments or to raise a lawsuit to the enforcement court for the performance of the enforcement compromise agreement.” According to the judicial interpretation, in principle, only when the party subject to enforcement fails to fulfill an enforcement compromise agreement can the enforcement applicant be entitled to resume the enforcement of effective original legal instruments or proceed to lodge a separate lawsuit concerning the performance of the enforcement compromise. However, in judicial practice, given the more complexity of the context in which an enforcement compromise agreement is concluded by the parties, the judicial interpretation provides no clarity on the resumption of the enforcement of the effective original legal instruments in response to the application from the enforcement applicant when the rights and obligations of the parties to a contract cannot be determined due to the uncertainty of specific performance contents set forth in an enforcement compromise agreement and the liability for breach of contract cannot be defined due to the uncertainty of the legal statuses of the parties to a contract. In this case, it is exactly the uncertainty of the stipulations in the Enforcement Compromise Agreement that led to the uncertainty of specific performance contents and the liability for breach of contract, resulting in the objective impossibility of further performance of the Enforcement Compromise Agreement. The review of this case provided clarification for the first time that a people’s court may resume enforcing

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an effective original legal instrument when an enforcement compromise agreement is objectively impossible to be performed as a result of its own defects. First, the Enforcement Compromise Agreement in this case did not constitute the novation of obligations as defined in the civil law theory, which means a civil juristic act of discharging old obligations by replacing them with newly established ones, and shall have at least one legal element: the clear-cut and unequivocal expression of intent from the parties to completely replace and fully discharge the old obligations with the newly established ones. However, in this case, China Institute of Defense Science and Technology and United Resources Education Company did not stipulate clearly that the contents in the Award would be extinguished through the establishment of the Enforcement Compromise Agreement but instead stated clearly that its purpose was exactly to enforce the said Award. Therefore, in essence, an agreement of this kind is only a means of fulfilling old obligations by establishing new ones. If the new ones are not fulfilled, the old ones will not be annulled and discharged. Therefore, the Enforcement Compromise Agreement in this case did not constitute a novation of obligations. In compliance with the principle of handling the relation between a general enforcement compromise and its original enforcement basis, only through the full performance of an enforcement compromise agreement can the legal relations determined in the effective original legal instruments be discharged and the enforcement terminated. If and when the rights and obligations agreed in an enforcement compromise agreement are not fulfilled, the creditor’s rights determined in the effective original legal instruments cannot be extinguished, and the enforcement applicant can still apply for proceeding with the enforcement of the effective original legal instruments. Judging from the performance of the Enforcement Compromise Agreement in this case, the agreement on assets disposal was not fully performed, so the obligatory relations determined in the effective original legal instruments were not eliminated; that is, the ruling of China Institute of Defense Science and Technology’s withdrawal from Yanjiao Campus still should be implemented. Second, the lack of final certainty with some prescribed contents in the Enforcement Compromise Agreement in this case resulted in the inability to determine specific performance contents set forth in the Enforcement Compromise Agreement and to define the liability for breach of contract, which objectively rendered the Enforcement Compromise Agreement impossible to be further performed. In the enforcement proceeding context, an enforcement compromise agreement between the Parties functions as a contract. To the extent that a contract is the basis for the parties to realize their respective rights and obligations, it is required that the specific performance contents embodying the parties’ rights and obligations be determined. The parties specified the contents of assets disposal, which were uncovered by the Award, through the Enforcement Compromise Agreement in this case, worked out three optional approaches on the delivery of assets: (1) subject to mutual agreement through negotiation between the Parties, United Resources Education Company transfers all its house properties and land use rights to China Institute of Defense Science and Technology; (2) United Resources Education Company acquires China Institute of Defense Science and Technology’s assets if China Institute of Defense Science and Technology does not acquire United Resources Education Company’

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assets; and (3) the Parties agrees that the aforesaid properties will be realized through auction under the auspices of the court in the event that both the preceding (1) and (2) fail, and agreed on related particulars, including the auction scheme, the scope and sequence of assets liquidation and the purchasing right for the Parties. This scheme was simply a framework arrangement on the approaches of assets disposal and contained no clear-cut and unequivocal provisions on specific relations of rights and obligations for the parties. That is, in such trading transactions, there were no determined legal statuses, rights and obligations for United Resources Education Company and China Institute of Defense Science and Technology, and if and when some specific conditions were met, the buyer–seller relations could be reversed, and their roles exchanged, which renders a specific party unable to assert a claim on specific fulfillment from the counterparty under the said framework arrangement. With optional approach (1), there was a preset precondition: “subject to a mutual agreement through negotiation between the Parties”, that is, it is under the circumstance that mutual agreement has already been reached, United Resources Education Company was obliged to transfer all its house properties and land use rights to China Institute of Defense Science and Technology. In other words, if no mutual agreement was reached, United Resources Education Company had no obligation of concluding specific buyer–seller relations with China Institute of Defense Science and Technology in the future. Namely, according to the stipulation of this optional approach, if no mutual agreement between the parties was reached, United Resources Education Company could not be forced to conclude specific buyer– seller relations with China Institute of Defense Science and Technology, and thus the optional approach (1) could not, in fact, lead to the effect pursued by China Institute of Defense Science and Technology, which is confirmed by the objective reality that the Parties failed to reach consensus over more than a decade. Besides, the said framework arrangement or the scheme also did not contain any stipulation on the party or parties that shall be liable for breach of contract if no specific buyer– seller relations are concluded, but instead the subsequent optional approaches: if optional approach (1) fails, namely, China Institute of Defense Science and Technology does not agree to acquire United Resources Education Company’s assets, optional approach (2) will apply; and if both optional approaches (1) and (2) fail, optional approach (3) will apply. However, according to the claims by China Institute of Defense Science and Technology, it has always been proposed to acquire United Resources Education Company’s house properties and land use rights on Yanjiao Campus following optional approach (2), which has never been negotiated seriously and substantially between the Parties. To sum up, the conclusion that United Resources Education Company effectively violated the stipulations in the Enforcement Compromise Agreement could not be drawn and established simply on the grounds that United Resources Education Company did not agree with the China Institute of Defense Science and Technology on the disposal of relevant assets to China Institute of Defense Science and Technology. The optional approach (3) in the Enforcement Compromise Agreement was to sell relevant assets in an auction under the auspices of the court. In general, enforcement

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cases, this agreement constitutes the consensus between the parties on the enforcement measures, and a people’s court may act based on this agreement, provided, always however, that the parties always agree before the action from the people’s court. However, the reality in this case was that there was no ruling on asset disposal in the Award and a significant dispute between the parties even over the basic appraisal scope of the assets to be disposed of. Under such a circumstance, any compulsory disposal of the assets involved in an enforcement compromise agreement by an enforcement court, directly and without prior trial procedures, would have no legal basis. Therefore, as a whole, the Enforcement Compromise Agreement involved in this case was objectively impossible and unable to be performed. China Institute of Defense Science and Technology’s understanding that the Enforcement Compromise Agreement was an agreement with the enforcement effect and its belief that the enforcement court should implement the enforcement according to the stipulations in the Enforcement Compromise Agreement were a misconstruction of law. With the actual performance of the Enforcement Compromise Agreement in this case at a deadlock and no consensus on asset acquisition reached between the Parties with differing stances, the enforcement of this case has not yet been completed over the past ten years. Allowing the deadlock in this case to linger indefinitely simply on the grounds of the existence of related stipulations in the Enforcement Compromise Agreement would not only result in no end to this case but also serious damage to the legitimate rights and interests of the creditors in the effective judgment documents, so the enforcement court had no reason to wait for the Parties to perform their Enforcement Compromise Agreement of their own accord and sit idle indefinitely without any immediate compulsory measures. Third, from the progress of this case, the Parties failed actually to perform in strict accordance with the Enforcement Compromise Agreement, and the enforcement court had been promoting the enforcement of the case in accordance with the Award. From the outset of the appraisal of the assets in 2006, United Resources Education Company had raised objections and demanded to continue the enforcement. Despite the repeated negotiations on China Institute of Defense Science and Technology’s acquisition of assets at certain prices, the actual performance by either Party never materialized; therefore, such claims by China Institute of Defense Science and Technology that it has always strictly complied with the Enforcement Compromise Agreement and United Resources Education Company has repeatedly reneged on their agreement had no factual basis. In addition, resettlement proposals of replacing the land plots were also recommended by the government to the Parties, which in essence went beyond the agreed scope and changed the agreed contents and conditions of the Enforcement Compromise Agreement. Therefore, it could not be concluded that the Enforcement Compromise Agreement has been effectively performed. Meanwhile, since 2006, when the dispute arose between the parties over the performance of the Enforcement Compromise Agreement in this case, the enforcement court has taken based on the Award various enforcement measures, including repeated coordination, mediation, persuasion, field investigation, order on China Institute of Defense Science and Technology to take care of the properties and withdraw out of the site within set time limits and others, and people’s courts at higher level also

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have constantly supervised the process of this case, urging it to be settled as soon as possible. However, although consultations brokered by the enforcement court secured the Enforcement Compromise Agreement performance, such an approach as a practical way of work remains, in essence, the enforcement of an effective judgment and could not be interpreted as the enforcement of an enforcement compromise agreement. China Institute of Defense Science and Technology asserted that the act of enforcement by the enforcement court did not constitute the grounds of United Resources Education Company’s complaints about enforcing the Award, had no legal basis, and was inconsistent with the facts. In addition, there is another question: is the enforcement of the Award in this case a resumed enforcement or a further enforcement? In terms of the legal procedure, the enforcement court had never made a ruling on suspending the enforcement of the Award. Besides, in terms of the actual progress of this case, based on the aforesaid analysis and sorting-out, the enforcement court has never suspended the enforcement of the Award since the dispute over the Enforcement Compromise Agreement performance arose. Therefore, it is not the case of resuming the enforcement of the suspended Award in this case but the further enforcement of the original enforcement basis. Fourth, the matters specified in the Enforcement Compromise Agreement but uncovered by the original enforcement basis and all disputes arising from the performance of the Enforcement Compromise Agreement may be resolved by the Parties through other means, such as separate proceedings. First, there was a dispute between the Parties over China Institute of Defense Science and Technology’s construction of the unfinished works described in the Enforcement Compromise Agreement. That is, China Institute of Defense Science and Technology was allowed to just fill in the foundation pit or to fully complete the construction of the complex teaching building. China Institute of Defense Science and Technology maintained that according to the stipulation in the Enforcement Compromise Agreement, the completion of the complex teaching building construction had been agreed upon by the Parties, while United Resources Education Company contended that the stipulation was limited to filling up the foundation pit instead of continuing to complete the complex teaching building construction. However, whether or not it has been approved, the construction of the teaching building in question will neither affect China Institute of Defense Science and Technology’s performance of its obligation to withdraw from the campus as set out in the Award nor be the reason for China Institute of Defense Science and Technology to continue to occupy Yanjiao Campus. Moreover, the Award made no ruling on the disposal and compensation of the complex teaching building and the real estate of China Institute of Defense Science and Technology on the campus, which was not part of the enforcement in this case. Although the Enforcement Compromise Agreement between the Parties set forth the disposal scheme on related issues, according to the aforesaid analysis, the Enforcement Compromise Agreement was not the basis for the enforcement in this case. When the stipulated disposal scheme cannot be implemented, the enforcement court cannot enforce it according to the Enforcement Compromise Agreement. Now, United Resources Education Company required China Institute of Defense Science and Technology to perform the ruling on withdrawal from the campus before negotiations on asset repurchase, and repeated clashes between the Parties also frustrated the mediations brokered by the courts.

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Therefore, from the current situation of this case, with the grave disputes between the Parties beyond the realistic and objective possibility to be settled exclusively through the enforcement procedure of this case, proceeding with appraising and disposing of the properties uncovered by the enforcement basis not only has no legal basis but will also possibly find no solution. In summary, based on the subject matter in the enforcement basis, it was clarified that the subject matter subject to enforcement in this case was China Institute of Defense Science and Technology’s withdrawal from Yanjiao Campus rather than the controversies and disputes uncovered in the enforcement basis, for which the Parties may resort to other legal means for settlement, including a separate lawsuit. No. 130 [2017] Enforcement Supervision, Enforcement Department, the Higher People’s Court of Hebei Province had a clear illustration of such remedy means to all Parties. This approach of handling this case by the Higher People’s Court of Hebei Province was not only in line with legal provisions but also rather appropriate.

Lianyungang Zhenxing Industrial Group Co., Ltd. v. Jiangsu Huanyu Traffic Engineering Group Co., Ltd., Jiangsu Haitong Construction Project Group Co., Ltd., et al. (Enforcement Supervision over the Ruling on Dispute over Contract for Building of Construction Project): Satisfaction to a Contractor prior to the Initiation of the Enforcement Procedure of an Effective Judgment shall not Release a Contract-Offering Party from Repaying the Actual Builder for his Debts which should be Executed Hereunder Guohui Xiang and Lijuan Huang

Rule After the judgment of the contract for building of construction project dispute case comes into effect and before entering the enforcement procedure, the contractoffering party’s behavior of paying off to the contractor cannot counter the actual builder’s application for enforcement determined by the judgment. The contractoffering party’s own settlement to the contractor is an error in the object subject to

Enforcement Supervision Collegial Bench: Guohui Xiang, Yiquan Mao and Yan Zhu Edited by Ming Li; translated by Zuoyong Liu G. Xiang (B) Enforcement Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China L. Huang Property Penalty and Administrative Enforcement Office of the Enforcement Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_31

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enforcement and cannot be exempted from the obligation to repay the debt to the actual builder determined hereby.

Case Information 1. Parties Complainant (Party Subject to Enforcement): Lianyungang Zhenxing Industrial Group Co., Ltd. (hereinafter referred to as Zhenxing Industrial Company) Applicant for Enforcement: Jiangsu Huanyu Traffic Engineering Group Co., Ltd. (hereinafter referred to as Huanyu Traffic Engineering Company) Party Subject to Enforcement: Jiangsu Haitong Construction Project Group Co., Ltd. (hereinafter referred to as Haitong Construction Project Company) Party Subject to Enforcement: Lianyungang Duoli Water Treatment Equipment Co., Ltd. (hereinafter referred to as Duoli Water Treatment Equipment Company) Party Subject to Enforcement: Lianyungang Hengyanxin Trading Co., Ltd. (hereinafter referred to as Hengyanxin Trading Company) 2. Procedural History Objection to Enforcement: No. 29 [2016] Enforcement Objection, Enforcement Department, the Intermediate People’s Court of Lianyungang City, Jiangsu Province (Jiangsu 07) (dated Dec. 29 of 2016) Review of Enforcement: No. 47 [2017] Enforcement Review, Enforcement Department, the Higher People’s Court of Jiangsu Province (dated Apr. 19 of 2017) Supervision over Enforcement: No. 478 [2018] Enforcement Supervision, Enforcement Department, the Supreme People’s Court (dated Dec. 26 of 2018) 3. Cause of Action Enforcement supervision over the ruling on dispute over contract for building of construction project

Essential Facts In November 2012, Haitong Construction Project Company won the bid for the municipal renovation project of part of the roads in Lianyungang City (Haining East Road: College Road—Yuhai Square—Tong Guan Road), and the project was contracted by Zhenxing Industrial Company. The two parties signed a contract for building of construction project, with a contract price of CNY 58,324,968. Then, Haitong Construction Project Company and Hengyanxin Trading Company signed a subcontract to subcontract the reconstruction project of Julong Road– College Road (Zhenxing Green Garden North Gate Red Light to College Road Red Light) to Heng Yanxin Trading Company. The contract price is CNY 20 million.

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Thereafter, Hengyanxin Trading Company once again subcontracted the works to Duoli Water Treatment Equipment Company. The Duoli Water Treatment Equipment Company has also subcontracted asphalt concrete mixing, transportation and spreading works in its subcontract to Huanyu Traffic Engineering Company for construction. The two parties entered into the project construction cooperation agreement and agreed that the total contract price was CNY 3,437,000, with a commencement date of March 12, 2013 and a completion date of March 20, 2013. 90% of the settlement payment shall be paid by April 30 after the spreading works are completed, and all the construction price should be paid before March 31, 2014. After the completion of the construction of Huanyu Traffic Engineering Company, Huanyu Traffic Engineering Company and Duoli Water Treatment Equipment Company went into settlement, and due to the failure of Duoli Treatment Equipment Company paying the project balance on time, Huanyu Traffic Engineering Company filed a lawsuit in the Intermediate People’s Court of Lianyungang City, Jiangsu Province. The Intermediate People’s Court of Lianyungang City, Jiangsu Province issued No. 0100 [2014] Trial, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province on November 11, 2015, the contents of the judgment are as follows: (1) Duoli Water Treatment Equipment Company shall pay Huanyu Traffic Engineering Company for the project payment CNY 776, 652 from the effective date of this judgment, and pay the relevant interest with the interest rate equal to the same period’s loan interest rate standard issued by the People’s Bank of China (from April 19, 2014 to the date of actual payment); (2) Hengyanxin Trading Company shall be jointly and severally liable for the payment of the arrears of the said works within the scope of the unpaid project payment of Duoli Water Treatment Equipment Company; (3) Haitong Construction Project Company shall be jointly and severally liable for the above works and interest within the scope of the unpaid project payment of Hengyanxin Trading Company; (4) Zhenxing Industrial Company shall be jointly and severally liable for payment of the above project arrears within the scope of the unpaid project payment of Haitong Construction Project Company. When the judgment comes into effect, Huanyu Traffic Engineering Company applied for enforcement on May 13, 2016. On May 27 of the same year, the Intermediate People’s Court of Lianyungang City, Jiangsu Province issued No. 145 [2016] Enforcement, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province (Jiangsu 07), freezing Zhenxing Industrial Company’s deposit of CNY 2,776,652. In addition, on December 4, 2014, Zhenxing Industrial Company and Haitong Construction Project Company audited and settled the project. On January 5, 2016, Zhenxing Industrial Company paid all the project prices to Haitong Construction Project Company. Zhenxing Industrial Company, Haitong Construction Project Company and Huanyu Traffic Engineering Company all approved that after the judgment came into effect and before the application for enforcement, there were CNY 3,626,575.72 unpaid project payments between Zhenxing Industrial Company and Haitong Construction Project Company, and all unpaid project payments had been paid before the application for enforcement. Zhenxing Industrial Company objected to No. 145 [2016] Enforcement, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province (Jiangsu

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07), claiming that the freeze of its deposits by the Intermediate People’s Court of Lianyungang City, Jiangsu Province is an error, and the project payment concerning Haining Road reconstruction project between Zhenxing Industrial Company and Haitong Construction Project Company has been fully paid according to the final audit price of CNY 57,109,675.72, and requested the Intermediate People’s Court of Lianyungang City, Jiangsu Province to lift the freeze on the deposits. The Intermediate People’s Court of Lianyungang City, Jiangsu Province held that, according to the contents of the fourth item of No. 0100 [2014] Trial, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province, Zhenxing Industrial Company shall be jointly and severally liable for the above project arrears within the scope of unpaid payment to Haitong Construction Project Company. According to the evidence provided by Zhenxing Industrial Company and Haitong Construction Project Company, both parties’ project funds were settled before the application for enforcement of Huanyu Traffic Engineering Company, and Haitong Construction Project Company also expressed its approval. Therefore, the reason for the objection to the Zhenxing Industrial Company is established, and its request is supported. The court’s ruling to freeze and transfer the CNY 2,776,652 deposits of Zhenxing Industrial Company in No. 145 [2016] Enforcement, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province (Jiangsu 07) is improper and should be corrected, and the abovementioned ruling to freeze and transfer of the CNY 2,776,652 deposits should be revoked. Huanyu Traffic Engineering Company disagreed with No. 145 [2016] Enforcement, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province (Jiangsu 07), thus applied to the Higher People’s Court of Lianyungang City, Jiangsu Province for review and request the vacation of the ruling. The main reason is that the original judgment of this case clearly determines that Zhenxing Industrial Company shall bear joint and several payment liability to Huanyu Traffic Engineering Company within the scope of unpaid works. If the company has not appealed after receiving the judgment, it shall fulfill the obligations established in the effective legal documents, and its fulfillment to others shall be invalid. The Higher People’s Court of Lianyungang City, Jiangsu Province believes that the fourth item of the main text of the civil judgment is “Zhenxing Industrial Company to bear joint and several liability for the above project arrears within the scope of the unpaid project payment to Haitong Construction Project Company”. The judgment has defined the object and scope of liability for Zhenxing Industrial Company. After the judgment comes into effect, Zhenxing Industrial Company shall, in accordance with the contents of the judgment, repay to Huanyu Traffic Engineering Company CNY 3,626,575.72 of the unpaid project payment of Haitong Construction Project Company from the effective date of the judgment, and shall no longer fulfill to the original creditor. Whether Huanyu Traffic Engineering Company applies for enforcement by the court only means whether it realizes the creditor’s rights by means of the public power of the state, and it does not mean that Zhenxing Industrial Company can choose to repay the debt to the original creditor or to the creditor determined by the judgment after the judgment comes into effect. Therefore, the act of Zhenxing Industrial Company to repay its debts to the original creditors cannot exempt it from

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the fulfilling obligation determined by the effective judgment, nor can it become the cause of its objection against the enforcement of the effective legal documents by the court. The Higher People’s Court of Lianyungang City, Jiangsu Province made No. 47 [2017] Enforcement Review, Enforcement Department, the Higher People’s Court of Jiangsu Province, revoking No. 29 [2016] Enforcement Objection, Enforcement Department, the Intermediate People’s Court of Lianyungang City, Jiangsu Province (Jiangsu 07). Zhenxing Industrial Company dissatisfied with No. 47 [2017] Enforcement Review, Enforcement Department, the Higher People’s Court of Jiangsu Province, thus appealed to the Supreme People’s Court, requesting to revoke the ruling, urging the enforcement court to return the wrongly deducted CNY 2,776,652 of deposit under the name of Zhenxing Industrial Company. The main reason is that the judge of the Higher People’s Court of Lianyungang City, Jiangsu Province hearing the objection to enforcement has no right to explain and confirm the unclear enforcement content in the effective judgment. As far as the legislative intent of Article 26 of the Judicial Interpretation of Contracts for Building of Construction Project, the judicial interpretation of this article breaks through the principle of privity of contract, but it cannot harm the legitimate rights and interests of contract-offering parties and subcontractors because of the protection of the interests of the actual builders. The relationship of the four items of the judgments as the basis of this case are in the order of diminishing levels. Thus, the liability should be gradually reduced. The scope of joint and several liability of Zhenxing Industrial Company should be limited to the smaller amount of unpaid project payments between Zhenxing Industrial Company to Haitong Construction Project Company and Haitong Construction Project Company to Hengyanxin Trading Company.

Issue Whether the contract-offering party can counter the application for enforcement of the actual builder determined in the enforcement basis after the enforcement basis is made, before entering the enforcement procedure, and after fulfilling its obligations to the contractor.

Holding 1. Whether the effective judgment specifies the content of the delivery of the Zhenxing Industrial Company The “holdings” in the enforcement basis of this case contain the following: Haitong Construction Project Company considers itself that the project involved has not been settled with the contract-offering party Zhenxing Industrial Company or with the

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subcontractor Hengyanxin Trading Company. Therefore, the defendant Hengyanxin Trading Company and Haitong Construction Project Company are both at fault and shall be jointly and severally liable within their respective payment scope. The contract-offering party Zhenxing Industrial Company contracted the project involved to Haitong Construction Project Company which holds construction qualifications, and was only responsible to the actual builder Huanyu Traffic Engineering Company within the scope of the unpaid project payment. The fourth item in the main text of the judgment also clarifies that Zhenxing Industrial Company should bear joint and several payment liability for the above project arrears within the scope of the unpaid project payment to Haitong Construction Project Company. In this judgment, the content of the payment of Zhenxing Industrial Company is basically clear, that is, the Zhenxing Industrial Company shall bear joint and several payment liability for the unpaid project money to Huanyu Traffic Engineering Company within the scope of its unpaid project payment of Haitong Construction Project Company. From the judgment, the liability limit of Zhenxing Industrial Company should be taken as a smaller value between the amount of the unpaid project payment by the Duoli Water Treatment Equipment Company and the amount of the unpaid project payment by Zhenxing Industrial Company to Haitong Construction Project Company. The amount of the unpaid project payment of Huanyu Traffic Engineering Company by Duoli Water Treatment Equipment Company has been clarified, and the amount of the unpaid project payment to Haitong Construction Project Company by Zhenxing Industrial Company has not been specified in the main text of the judgment, but the Higher People’s Court of Lianyungang City, Jiangsu Province found out in the review procedure when No. 0100 [2014] Trial, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province has come into effect, Zhenxing Industrial Company still had not paid CNY 3,626,575.72 of project payment. The parties have approved this fact. In the case that the parties have no dispute over the amount of the unpaid project payment by Haitong Construction Project Company, it is not improper for the enforcement court to enforce it within the undisputed amount. 2. Whether Zhenxing Industrial Company may not fulfill its obligation to pay to Huanyu Traffic Engineering Company after fulfilling its obligations to Haitong Construction Project Company Although the counterparty of the contract of Zhenxing Industrial Company is Haitong Construction Project Company, in the case that Huanyu Traffic Engineering Company has filed a lawsuit and No. 0100 [2014] Trial, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province, has clarified that Zhenxing Industrial Company bears joint and several payment liability to Huanyu Traffic Engineering Company, and the object of fulfilling the obligation of Zhenxing Industrial Company has been determined. That is, before the creditor’s rights of Huanyu Traffic Engineering Company are realized, the object of Zhenxing Industrial Company to fulfill or be forced to fulfill its obligations should be Huanyu Traffic Engineering Company, and Zhenxing Industrial Company cannot choose the object of fulfilling in its own discrimination. The effective judgment has fully protected the rights of Zhenxing Industrial Company; that is, Zhenxing Industrial Company only needs to assume

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liability within the scope of the unpaid project payment to Haitong Construction Project Company. As long as Zhenxing Industrial Company strictly complies with the object and scope of the judgment to fulfill its obligations, it will not increase its liability. If Zhenxing Industrial Company’s obligation to pay Huanyu Traffic Engineering Company is exempted because it has fulfilled its contractual obligations to the counterparty of the contract, i.e., Haitong Construction Project Company after the judgment comes into effect, it will increase the risk of the realization of creditor’s right of Huanyu Traffic Engineering Company, and it is against the effective judgment that determined Zhenxing Industrial Company should assume joint and several payment liability to guarantee the creditor’s rights of Huanyu Traffic Engineering Company. Because the object of fulfilling the obligation of Zhenxing Industrial Company is wrong, the effective judgment has not been fulfilled, and the enforcement court has not been improper to take the enforcement measures to Zhenxing Industrial Company according to the effective judgment. In addition, Zhenxing Industrial Company believes that the scope of its actual joint and several payment liability should be limited to the smaller amount of unpaid project payment between Zhenxing Industrial Company to Haitong Construction Project Company and Haitong Construction Project Company to Hengyanxin Trading Company. This understanding is inconsistent with the provisions of the main text of the effective judgment. If Zhenxing Industrial Company considers that the effective judgment is wrong, it should seek relief through other procedures. In summary, Zhenxing Industrial Company’s appeal cannot be established, the Supreme People’s Court does not support such a request and rejects the appeal of Zhenxing Industrial Company.

Comment on Rule 1. How to clarify the content of the basis of enforcement The basis of enforcement is the basis of enforcement by the enforcement agency, and the basis of enforcement should be clear, specific and complete. Article 463 of the Judicial Interpretation of the Civil Procedure Law stipulates that, “(t)he effective legal documents applying for enforcement by the people’s court shall contain the following conditions: (1) the subject of the rights and obligations is clear; (2) the content of payment is clear. Where the legal instrument determines the continued fulfilling of the contract, it shall specify the specific contents of the continued fulfilling.” Article 18 of the Rules of the People’s Court on the Enforcement of Work stipulates that, “(t)he people’s court shall meet the following conditions for accepting enforcement cases… (4) The legal instrument applying for enforcement shall have the content of the payment, and the subject matter of the enforcement and the party subject to enforcement shall be clear.” Article 11 of the Opinions on the Coordinated Operation of the Filing, Trial and Enforcement of the Work of the People’s Court stipulates that, “(t)he main text of the legal document shall be clear

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and specific: (1) where money is paid, the amount shall be clear. If it is necessary to calculate the amount of interest and liquidated damages, there should be a clear calculation base, standard, starting and ending time, etc.” However, the unclear basis of enforcement in practice does cause some cases to be difficult to enforce, which is also a problem to be solved in judicial practice. To facilitate the fair and efficient resolution of disputes, when examining whether the enforcement basis is clear or not, the enforcement agency may conduct a comprehensive analysis according to the facts found in the enforcement basis and the discussion of the part of the “holdings” and further clarify the content of the enforcement basis. In particular, the part of “holdings” is the narration made by the people’s court on the facts of the case and the reasons for the judgment. Although it itself does not constitute the content of the judgment, it cannot be used as the basis for enforcement, but it can be used as an important basis for determining the content of enforcement. If the enforcement agency cannot determine the basis according to its authority and the parties have a large dispute, it may be dealt with in accordance with the “written consultation with the judicial department” stipulated in Article 15 of the Opinions on the Coordinated Operation of the Filing, Trial and Enforcement Work of the People’s Court. If the enforcement cannot be specified in the above way, the application for enforcement content may be rejected. In this case, the fourth item in the main text of the judgment makes it clear that “Zhenxing Industrial Company shall bear joint and several payment liability for the above project arrears within the scope of unpaid project payment to Haitong Construction Project Company”, but Zhenxing Industrial Company believes that “the judgment did not define the scope of the joint and several payment liability and the standard for the scope of the joint and several payment liability, which means the enforcement content is not clear”. In the course of examining the enforcement supervision cases, the Supreme People’s Court cited the expression of the enforcement basis No. 0100 [2014] Trial, Civ. Division, the Intermediate People’s Court of Lianyungang City, Jiangsu Province, further analyzed the contents of the judgment and determined that the limit of liability of Zhenxing Industrial Company should be the smaller amount of the project payment owed by Duoli Water Treatment Equipment Company and the amount owed by Zhenxing Industrial Company to Haitong Construction Project Company. The project payment owed by Duoli Water Treatment Equipment Company to Huanyu Traffic Engineering Company is clarified by the judgment, and the amount of the unpaid project payment of Haitong Construction Project Company to be paid by Zhenxing Industrial Company is not clear in the main text of the judgment, but the parties have no dispute over the amount of the unpaid project payment to Haitong Construction Project Company owed by Zhenxing Industrial Company. Combined with the main text of the effective judgment, the essential facts and the holdings, it is an important method to determine the enforcement scope according to the facts that the parties have no dispute. 2. Zhenxing Industrial Company’s fulfillment of its obligations to Haitong Construction Project Company after the enforcement basis has been made and before entering the enforcement procedure, should not be able to counter

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the application for enforcement by the creditor Huanyu Traffic Engineering Company as determined in the enforcement basis The fulfilling of Zhenxing Industrial Company to Haitong Construction Project Company is a mistake in the object of fulfilling, and its fulfilling to Haitong Construction Project Company cannot be regarded as the act of fulfilling the judgment of this case. The civil enforcement procedure is the act of using state coercive force to realize creditor’s civil rights. After the people’s court has made the basis of enforcement according to laws and has taken effect on the parties, the parties shall be bound by the contents determined by the effective legal documents, and shall have an obligation to fulfill the obligations in accordance with the content determined in the effective legal document, and shall not decide on the object, content and manner of fulfilling on their own discrimination. After the judgment came into effect in this case, Zhenxing Industrial Company shall be bound by the effective legal document, and it shall repay the unpaid project payment to Huanyu Traffic Engineering Company. This obligation cannot be changed regardless of whether the Huanyu Traffic Engineering Company applies for enforcement with the court. The act of Zhenxing Industrial Company fulfilling its obligations to Haitong Construction Project Company is an error of the object of fulfilling and cannot be regarded as the act of fulfilling the judgment in this case. The enforcement measures taken by the enforcement court to Zhenxing Industrial Company according to the effective judgment are not improper. The content of the effective judgment in this case reflects the protection of the rights and interests of the actual builder, and the enforcement procedure should be consistent with the provisions of the effective judgment. Article 26 of the Judicial Interpretation of Contracts for Building of Construction Project stipulates that, “(i)f the actual builder brings a suit against the defendant by the subcontractor or the illegal subcontractor, the people’s court shall accept it according to laws. If the actual builder claims his rights to the contract-offering party as the defendant, the people’s court may add the subcontractor or the illegal subcontractor as the party to the case. The contract-offering party shall only be liable to the actual builder within the scope of the unpaid project payment.” This article aims to protect the legitimate rights and interests of migrant workers. Because a large number of migrant workers exist in the construction industry, the rights and interests of the vast number of migrant workers are behind the interests of the actual construction workers, but because of the illegal subcontracting of the contract for building of construction project, the behavior of defaulting on migrant workers’ wages is common. To avoid actual builders having nowhere to complain and protect the legitimate rights and interests of migrant workers, this article breaks through the principle of privity of contract to a certain extent and allows the actual builder to sue against the contract-offering party for the recovery of the project price. The contract-offering party’s liability for unpaid project payment is conducive to protecting the rights of the actual builder and protecting the legitimate rights and interests of migrant workers on the entity. In this case, if Zhenxing Industrial Company’s obligation to pay Huanyu Traffic Engineering Company is exempted because it has fulfilled its contractual obligations to the counterparty of the contract, i.e., Haitong Construction Project Company, after

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the judgment comes into effect, it would increase the risk of the realization of the creditor’s rights of the actual builder, i.e., Huanyu Traffic Engineering Company, and it is against the provisions of the effective judgment that determined Zhenxing Industrial Company should assume joint and several payment liability to guarantee the creditor’s rights of Huanyu Traffic Engineering Company. Therefore, Zhenxing Industrial Company’s obligation to pay Huanyu Traffic Engineering Company cannot be exempted after it has fulfilled its contractual obligations to Haitong Construction Project Company after the judgment comes into effect.

Yu X v. Inner Mongolia Runpu Iron and Steel Co., Ltd., Ningcheng Xinma Foundry Co., Ltd., et al. (Enforcement Supervision over the Ruling on Dispute over Private Lending): Determination of Whether the Guarantee Terms Agreed between the Parties Constitute the Enforcement Guarantee Guohui Xiang and Dan Wei

Rule An enforcement guarantee is more of the guarantee provided by a party involved or a third party (separately or collectively referred to as the guarantor) to a people’s court. A guarantee provided by a third party for the obligations of the party subject to enforcement shall not be determined as an enforcement guarantee unless an explicit expression of intent by the third party has been made to the people’s court, and the fact that a reconciliation agreement on enforcement was concluded at a people’s court and the guarantee terms agreed by the parties therein alone should not be construed as a promise of the third party being willing to be subject to the enforcement to the people’s court.

Enforcement Supervision Collegial Bench: Guohui Xiang, Ming Yu and Yiquan Mao Edited by Yi Yang; translated by Zuoyong Liu G. Xiang (B) · D. Wei Enforcement Department of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_32

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Case Information 1. Parties Complainant (Applicant for Enforcement): Yu X Respondent: Inner Mongolia Runpu Iron & Steel Co., Ltd. (hereinafter referred to as Runpu Steel Company) Party Subject to Enforcement: Ningcheng Xinma Foundry Co., Ltd. (hereinafter referred to as Xinma Foundry Company) Party Subject to Enforcement: Li X (A) Party Subject to Enforcement: Li X (B) 2. Procedural History Objection to Enforcement: No. 612 [2018] Enforcement Objection, Enforcement Department, the Intermediate People’s Court of Tangshan City, Hebei Province (Hebei 02) (dated Aug. 15 of 2018) Review of Enforcement: No. 377 [2018] Enforcement Review, Enforcement Department, the Higher People’s Court of Hebei Province (dated Sep. 17 of 2018) Supervision over Enforcement: No. 77 [2019] Enforcement Supervision, Enforcement Department, the Supreme People’s Court (dated Sep. 26 of 2019) 3. Cause of Action Enforcement supervision over the ruling on dispute over private lending

Essential Facts In settling the dispute over private lending between Yu X and Xinma Foundry Company, Li X (A) and Li X (B), the Intermediate People’s Court of Tangshan City, Hebei Province, delivered No. 365 [2014] Mediation, Civ. Division, the Intermediate People’s Court of Tangshan City, Hebei Province, requiring that, among others: (1) Xinma Foundry Company repays Yu X the loan principal of CNY 12.4 million and its accrued interest; (2) Xinma Foundry Company repays Yu X the loan principal of CNY 38.045 million and its accrued interest; and (3) Li X (A) repays Yu X the loan principal of CNY 5 million and its accrued interest, and Xinma Foundry Company and Li X (B) are jointly and severally liable for the performance of obligations in this loan. In the process of the case enforcement, the enforcement applicant: Yu X, the parties subject to enforcement: Xinma Foundry Company, Li X (A) and Li X (B), the guarantor: Runpu Steel Company entered into a Reconciliation Agreement on Enforcement, stipulating that: (1) within 12 months from the date of signature of the Reconciliation Agreement on Enforcement, the parties subject to enforcement make a total payment of CNY 24 million to the enforcement applicant by transferring a monthly enforcement installment of CNY 2 million to the Intermediate People’s

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Court of Tangshan City’s enforcement account no later than the 10th of each month from the month of January 2018 onward, with the enforcement applicant being liable for the enforcement costs and any associated expenses with the case; (2) in the event that the parties subject to enforcement fail to make such installments, the Guarantor is jointly and severally liable for making such installments; (3) upon the total payment made, the enforcement under No. 365 [2014] Mediation, Civ. Division, the Intermediate People’s Court of Tangshan City, Hebei Province between the enforcement applicant and the parties subject to enforcement is completed, and the enforcement applicant shall apply to the Court for the removal of the preservation measures against the parties subject to enforcement; and (4) if the parties subject to enforcement fail to make the enforcement installment(s) as required in the foregoing stipulations, the enforcement of the effective original legal instruments between the enforcement applicant and the parties subject to enforcement shall be resumed… As the Reconciliation Agreement on Enforcement was not performed, Yu X applied to the Enforcement Department of the court to freeze Runpu Steel Company’s bank deposit of CNY 55 million and the machinery, and the latter raised an enforcement objection to its assets freeze. On August 15, 2018, the Intermediate People’s Court of Tangshan City made No. 612 [2018] Enforcement Objection, Enforcement Department, the Intermediate People’s Court of Tangshan City, Hebei Province (Hebei 02), revoking the enforcement against Runpu Steel Company, and on September 17, 2018, the Higher People’s Court of Hebei Province made No. 377 [2018] Enforcement Review, Enforcement Department, the Higher People’s Court of Hebei Province, rejecting the request for review and upholding the ruling on enforcement objection. Yu X filed a petition to the Supreme People’s Court, requesting to reverse the aforementioned enforcement objection ruling and enforcement review ruling, and rule that Runpu Steel Company fulfill the repayment obligation.

Issue Whether the guarantee terms agreed by the third party in a reconciliation agreement on enforcement constitutes those of the enforcement guarantee.

Holding Upon review, the Supreme People’s Court holds that in the course of enforcement, either the party subject to enforcement or a third party may provide an enforcement guarantee to a people’s court, and in the latter case, a statement of guarantee from the third party is also required. Given that the provision of a guarantee by a third party to an enforcement court is uncovered by the rights and obligations specified in the effective legal instruments but the voluntary involvement by the third party in the

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enforcement procedure, the third party, if not being a party specified in the effective legal instruments, must make an explicit expression of intent to the enforcement court that it is willing to be subject to the enforcement. As such, an enforcement guarantee is more of the guarantee provided by a guarantor to a people’s court than of the one provided hereby to an enforcement applicant. Therefore, it is ruled that Yu X’s petition is rejected.

Comment on Rule The ruling in this case is a confirmation that a third party’s guarantee for the obligations of the party subject to enforcement, as agreed in a reconciliation agreement on enforcement between the parties thereto, should be determined as an enforcement guarantee. In judicial practice, a reconciliation agreement on enforcement is usually concluded by the parties thereto right at a people’s court and contains guarantee terms agreed by a third party. The crux here is that: whether or not the said guarantee terms shall be construed and determined as the guarantee the third party has given to the people’s court, and further then, as the promise the third party has made to be liable for the outstanding obligations of the party subject to enforcement. Now, let us illustrate the reasons for a judgment from the three following perspectives: the relationship between an enforcement reconciliation and an effective judgment, the legal nature and essentials of the establishment of an enforcement guarantee, and the guarantor’s liability under a guarantee for enforcement reconciliation. 1. The relationship between an enforcement reconciliation and an effective judgment Enforcement reconciliation is a unique institution of civil enforcement in China. Based on the fact that parties in a dispute are the best judges of their own interests, the enforcement reconciliation practice in China encourages the parties to fulfill the respective obligations of their own accord through negotiation, thus eliminating or terminating the enforcement. Enforcement reconciliation is defined by “the performance of one’s own accord” in that the primary purpose of an enforcement process is to maintain the authority of an effective judgment as even if a people’s court manages in the enforcement stage to procure the parties in a dispute to strike a reconciliation agreement, such a reconciliation agreement on enforcement cannot have the effect of enforcement as a decision of civil mediation in a lawsuit does. Since a reconciliation agreement on enforcement is, in essence, a matter of autonomy between the parties concerned, its enforcement depends on the will of the parties concerned, and an enforcement authority shall neither give more legal effect to it nor enforce it indiscriminately as is. Otherwise, there would be a clash with an effective judgment, risking the separation of the trial from the enforcement and the resultant collapse

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of the basic judicial system.1 However, as a substantial change to an effective judgment, an enforcement reconciliation also has significant impacts on the enforcement, so the enforcement authority has both the right and the obligation to examine the legality of a reconciliation agreement on enforcement. Therefore, the involvement of an enforcement authority and the place of signing do not change the basis of the autonomy of the parties concerned for a reconciliation agreement on enforcement. The complainant in this case, namely, the enforcement applicant, claimed that the people’s court should enforce the reconciliation agreement on enforcement, as agreed herein on the grounds that it was signed right at the court. Such understanding was not consistent with the nature of an enforcement reconciliation having no effect of enforcement and in essence confused a reconciliation agreement with an effective judgment, forcing a third party that has not been confirmed to be liable for obligations into the enforcement process. Implementation of such a request by an enforcement authority in the enforcement process would constitute a substantial change to the effective judgment, obviously deviating from the original legislative intention of such an institution—enforcement reconciliation. 2. The legal nature and essentials of the establishment of an enforcement guarantee The enforcement guarantee takes place in the enforcement process, which inevitably entails public power. Therefore, in contrast with a civil guarantee, an enforcement guarantee is more oriented to secure the smooth enforcement of an effective judgment and ensure the smooth completion of the enforcement process. However, as a civil guarantee does, an enforcement guarantee also has the basic function that, by availing itself of the properties of its own or others and/or the guarantees provided by others, an obligor provides a guarantee against the nonperformance of its obligations that may arise in the future and thus is both the outcome of the negotiated agreement between the parties to a case and a third party and that of the acceptance upon examination by a people’s court of a promise made to it by the parties to a case and the third party. In a general civil guarantee, the basic instruments defining a guarantor’s obligations are contracts, and the enforcement process thereof cannot be initiated without confirmation by an effective judgment in the case of disputes between the parties thereto. The most important characteristic of the enforcement guarantee institution is that when the legal guarantee conditions are satisfied, the enforcement authority may make a decision on enforcing the guaranteed properties or the guarantor’s properties directly according to the way and scope as agreed in an enforcement guarantee agreement. That is, an enforcement authority may, without resorting to any additional procedures, directly determine the guarantor’s liability in an enforcement guarantee agreement according to an enforcement guarantee agreement and have the creditor’s rights and interests directly realized in the enforcement process, not only greatly facilitating enforcement by a people’s court but also contributing to enforcement efficiency and judicial resource reduction. Meanwhile, in terms of the subject of 参见江必新主编:《执行规范理解与适用: 最新民事诉讼法与民诉法解释保全、执行条文关 联解读》 , 中国法制出版社2015年版, 第173页。

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obligation determined by the basis of enforcement, a third party is directly subject to enforcement by a people’s court under circumstances where the involvement of the said third party in preexisting debt relationships and the promise made by the said third party to be liable for the obligations jointly and severally with the party subject to enforcement has not been confirmed by an effective judgment is a breakthrough. Based on the principle of trial-enforcement separation, enforcement by an enforcing authority on a third party’s properties straightforwardly and literally according to a reconciliation agreement on enforcement is constrained by a strict condition: the third party’s explicit expression of intent to the people’s court indicating its promise, namely, the third party has made it clear to the people’s court that in the absence of procedural protection inherent in a trial process, it is willing to be subject to the enforcement by the people’s court. This is an option of the third party exercising its procedural rights. Given that it is related to the protection of the third party’s procedural rights, the option must be based on true intention and shall not be in violation of any mandatory provisions of laws. The requirement in judicial interpretations that a third party must offer a written promise to an enforcement court is exactly aimed to facilitate the examination by the enforcement court of the authenticity, legality and clarity of the promise made by the third party so as to avoid any damage that may be done in the process to the interests of the parties concerned. Therefore, the explicit expression of intent indicating that the third party is willing of its own accord to be subject to the enforcement must be explicitly made in writing and must be made to the people’s court. The expression of the intention in any other form and way shall not be inferred to be made to the people’s court. In this case, the Reconciliation Agreement on Enforcement between the parties had the stipulation on the provision of a guarantee by the third party, so the stipulation might be construed as the expression of intent from the third party of its willingness to be involved in the preexisting debt relationship, but the third party neither made the promise of its willingness to be subject to the enforcement nor gave its written opinions on the matter to the people’s court, therefore could not be concluded that the guarantee that the third party provided as agreed in the Reconciliation Agreement on Enforcement was an enforcement guarantee by the third party. The fact that the Reconciliation Agreement on Enforcement was concluded at and “under the auspices” of the people’s court and the guarantee terms agreed by the parties therein could not be determined as the essentials of the establishment of an enforcement guarantee were satisfied. 3. The guarantor’s liability under a guarantee for enforcement reconciliation A guarantee for enforcement reconciliation, namely, the guarantee terms in a reconciliation agreement on enforcement, is expressed in an extreme case as a guarantee to a people’s court. Once established, an enforcement guarantee has the legal effect of compulsory enforcement as other effective judgments do. Does a guarantee for enforcement reconciliation, when expressed as a guarantee to a people’s court, also have the legal effect of enforcement? In other words, can the guarantor be directly enforced against under it? It is generally understood that a reconciliation agreement on enforcement is a special contract “subject to the conditions of effectiveness”

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(having no legal effect until the completion of performance). That is, if there is no, improper or partial performance of a reconciliation agreement on enforcement by either party thereto, the enforcement applicant may apply to resume the enforcement of the effective original judgment. A reconciliation agreement on enforcement per se has no legal effect of enforcement, and of course, the guarantor involved in such reconciliation agreement on enforcement cannot be directly enforced against as per the guarantee terms therein.2 Article 18 of the Enforcement Reconciliation Regulations enacted in 2018 provides, “(w)here a reconciliation agreement on enforcement has the guarantee terms agreed by the parties, and the guarantor has made a promise to a people’s court that the guarantor itself will voluntarily be subject to the direct enforcement if the party subject to enforcement fails to perform the reconciliation agreement on enforcement, the people’s court may, directly based on the application from the enforcement applicant and the stipulations in the guarantee terms, make a decision on enforcing the guaranteed properties or the guarantor’s properties when the enforcement of effective original legal instruments is resumed.” This article is a further clarification on the guarantee for enforcement reconciliation, suggesting that subject strictly to certain conditions, a people’s court may directly enforce the properties of a guarantor and has its theoretical basis of respecting the autonomy of the parties concerned. Despite the involvement of public power in the examination process in an enforcement guarantee, the scope of enforcement and the guarantor’s liability ultimately depend upon the stipulations between the parties, having no significant differences from those in a civil guarantee. Under the circumstance where the guarantor has clearly promised to a people’s court that the guarantor itself will voluntarily be subject to the direct enforcement if the party subject to enforcement fails to perform the reconciliation agreement on enforcement, given that it is the effective original judgment of which the enforcement is to be resumed by a people’s court, rather than that a reconciliation agreement on enforcement is to be enforced by the people’s court, the scope of the guarantor’s properties subject to be enforcement shall not exceed that of the obligations as determined in the effective original judgment. When a guarantor has explicitly made such a promise to a people’s court and if an enforcement applicant chooses to resume the enforcement, the people’s court should proceed with the enforcement according to the expression of true intent of the parties concerned. Yet, in consideration of the severity of the consequences of an enforcement guarantee, a clear illustration of possible guarantee liabilities a guarantor may undertake in the future should be made to the guarantor before making a promise to the people’s court. Of course, we also do not rule out the case where a guarantee provided by a third party, as far as the true intention of such third party is concerned, is to cover both the resumed enforcement of the effective original legal instruments and the performance of a reconciliation agreement on enforcement. In this case, an enforcement applicant may, through a lawsuit, choose to request the third party to perform the guarantor’s obligations as required in the reconciliation agreement on enforcement rather than 2

参见肖建国、赵晋山:《民事执行若干疑难问题探讨》 ,载 《法律适用》 2005年第6期。

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the resumed enforcement of the effective original legal instruments. If the lawsuit is taken in, the people’s court may rule that the enforcement of the effective original legal instruments is terminated. As such, the measures adopted in the enforcement stage, such as sealing up, seizure and freezing, also automatically turn into property preservation measures in the proceedings.

Laiwu Mining Co., Ltd. of Laiwu Steel Group Limited v. Shanxi Jinghai Industrial Co., Ltd., Fengzhen Xinxin Powdered Iron Co., Ltd., et al. (Dispute over Equity Transfer): Determination of Equity Transfer Transactions among Mining Companies Qinglin Jia and Di Yang

Rule The transfer of a mining company’s stock equity and the transfer of its mining rights as its properties are different in nature. Where there is no change of the mining right holders and thus no change in the ownership of mining rights, an equity transfer should not be construed indiscriminately as a disguised transfer of mining rights. If the transferee’s failure to cooperate in completing the procedures of changing the stock equity as requested by the transferor leads to the nonperformance of stipulations of such change, the transferee should bear the adverse consequences thereof. In the absence of the transferor’s breach of contract, the transferor’s notification to rescind a transfer contract does not have the legal effect of contract recission.

Collegial Bench for the Second Instance: Qinglin Jia, Jianhua Wu and Di Yang Edited by Deqiang Han; translated by Zuoyong Liu Q. Jia (B) The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China D. Yang Environment and Resources Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_33

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Case Information 1. Parties Appellant (Defendant in the First Instance, Plaintiff in the Counterclaim): Laiwu Mining Co., Ltd. of Laiwu Steel Group Limited (hereinafter referred to as Laiwu Mining Company) Appellee (Plaintiff in the First Instance, Defendant in the Counterclaim): Shanxi Jinghai Industrial Co., Ltd. (hereinafter referred to as Shanxi Jinghai Company) Appellee (Plaintiff in the First Instance, Defendant in the Counterclaim): Fengzhen Xinxin Powdered Iron Co., Ltd. (hereinafter referred to as Xinxin Powdered Iron Company) Appellee (Plaintiff in the First Instance, Defendant in the Counterclaim): Fengzhen Fengsheng Mining Co., Ltd. (hereinafter referred to as Fengsheng Mining Company) 2. Procedural History First Instance: No. 00013 [2014] Trial, Civ. Division, the Higher People’s Court of Inner Mongolia Autonomous Region (dated Apr. 5 of 2016) Second Instance: No. 590 [2016] Final, Civ. Division, the Supreme People’s Court (dated Dec. 5 of 2017) 3. Cause of Action Dispute over equity transfer

Essential Facts Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company as Party A signed the Inner Mongolia Jinghai Mining Equity Transfer Contract (draft) with Laiwu Mining Company as Party B [hereinafter referred to as Equity Transfer Contract (draft)] on September 16, 2010, on the transfer of the subject matter: the full stock equity, mining rights and exploration right of the newly established Inner Mongolia Jinghai Mining Co., Ltd. (hereinafter referred to as Inner Mongolia Jinghai Mining). The Equity Transfer Contract (draft) stipulates that within three months upon the signing of the Equity Transfer Contract (draft), Party A shall complete all the procedures of the exploration right and part of the mining rights over a mining area of approximately 22 square kilometers according to the resource integration plan formulated by the local government and shall complete the change of the registration items of shareholders and the legal representative of Inner Mongolia Jinghai Mining in collaboration with Party B. Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company as Party A signed the Integrated Transfer Contract on the Mining Rights and Related Assets within the Integrated Mining Area Located in Cow-raising Valley of Yuanshanzi on Birch Hillside, Guantun Town, Fengzhen City, Inner Mongolia

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Autonomous Region on October 30, 2010, with Laiwu Mining Company as Party B (hereinafter referred to as Transfer Contract), stipulating that Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company shall collectively prepare an integration plan for the Mining Area of approximately 22 square kilometers to be submitted to Mineral Resources Integration Leading Group of Fengzhen City for approval, and jointly establish Inner Mongolia Jinghai Mining as the sole owner of the mining rights over the above mentioned Mining Area upon the completion of and completes the mining rights and asset integration. In addition, the Transfer Contract also stipulates that the subject matter to be transferred is all the assets of Inner Mongolia Jinghai Mining, which holds the mining rights to the aforementioned Mining Area upon completion of the industrial and commercial registration and the integration of the existing mining rights; the total price for the transfer is CNY 222 million; within seven days of the Transfer Contract taking effect, Party A shall grant a Letter of Entrustment on Use and control of the existing mining physical assets within the aforementioned Mining Area to Party B, and Party B shall take over all the said assets and be responsible for the profits and losses from the transferred assets; Party B shall remit CNY 111 million (including the advance payment of CNY 20 million) into the bank escrow account as agreed upon and established by the Parties; after the Transfer Contract takes effect, Party A shall complete the mining right integration as soon as possible as required in the resource integration plan formulated by the People’s Government of Fengzhen City so that Inner Mongolia Jinghai Mining may obtain a Certificate of Exploration & Mining Rights for the said Mining Area; within 30 days of obtaining the Certificate, the Parties shall jointly complete the changes of the shareholder registration items of Inner Mongolia Jinghai Mining; and within seven days thereafter, Party B shall pay the balance of the total price for the transfer to Party A in the amount of CNY 111 million. Besides, in order to ensure the performance of the Transfer Contract, the Parties also signed the Payment Agreement on the Integrated Transfer Contract Price for the Mining Rights and Related Assets Located in Cow-raising Valley of Yuanshanzi on Birch Hillside, Guantun Town, Fengzhen City, Inner Mongolia Autonomous Region (hereinafter referred to as Payment Agreement) the same day. Later, Laiwu Mining Company as Party A, Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company as Party B, and Laiwu Subbranch of Agricultural Bank of China Limited as Party C signed the Escrow Agreement on the Transaction Funds (hereinafter referred to as Escrow Agreement) on February 16, 2012, and Laiwu Mining Company deposited CNY 71 million into the special account for escrow funds. On November 19, 2010, Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company handed over the mine and all the physical assets thereon to Laiwu Mining Company. On November 24, 2010, Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company collectively invested CNY 10 million to set up and register a new mining right holder: Inner Mongolia Jinghai Mining Co., Ltd. (hereinafter referred to as Fengzhen Jinghai Company), with its registered legal representative being He X, the person appointed by Laiwu Mining Company. During the period from November 2010 to March 2012, the mining right integration scheme prepared by Shanxi Jinghai Company, Xinxin

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Powdered Iron Company and Fengsheng Mining Company was submitted to relevant natural resource authorities and government departments for approval. On May 20, 2013, the Department of Natural Resources of Inner Mongolia Autonomous Region (the former Department of Land and Resources) approved the integration scheme. By September 1, 2014, Fengzhen Jinghai Company had successively obtained mining rights over the mining area of 22.883 square kilometers. On May 29, 2012, Laiwu Mining Company issued a notarized letter of notification, proposing to rescind the Transfer Contract immediately. Both Parties had since negotiated in writing on the performance and termination of the Transfer Contract. On April 11, 2014, the shareholder of Fengzhen Jinghai Company approved the equity transfer and had its shareholder registered as Shanxi Jinghai Company. On September 11, 2014, Shanxi Jinghai Company sent a notification to Laiwu Mining Company, requiring Laiwu Mining Company to work with Fengzhen Jinghai Company in completing the equity transfer procedures. The court of first instance delivered the judgment: (1) Laiwu Mining Company continues to perform the Transfer Contract and the Payment Agreement concluded on October 30, 2010, with Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company, pays the balance of the contract price in the amount of CNY 182 million to Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company within 10 days from the effective date of the judgment, works with Shanxi Jinghai Company to reregister the full stock equity of Fengzhen Jinghai Company as that of Laiwu Mining Company, and releases the mortgage of Shanxi Jinghai Company’s land use right; (2) other claims from Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company are rejected; and (3) the counterclaims from Laiwu Mining Company are dismissed. Laiwu Mining Company filed an appeal against the first instance judgment.

Issues 1. Determination of the nature and validity of the Transfer Contract in this case; 2. Whether the Transfer Contract and the Payment Agreement have been rescinded; 3. Whether the Transfer Contract and the Payment Agreement should be further performed.

Holding Upon review in the trial of second instance, the Supreme People’s Court holds: 1. The nature of a contract shall be determined based on the main rights and obligations of the parties stipulated in the contract. Although mining rights may

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constitute the main properties of a company, a mining right transfer is not the equity transfer of a company. Where there is no change of the mining right holders and thus no change in the ownership of mining rights, an equity transfer should not be construed indiscriminately as a disguised transfer of mining rights. In this case, the Transfer Contract was voluntarily entered into between the Parties, representing the true manifestations of intention of Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company as one Party and Laiwu Mining Company as the other and therefore is legal and valid. 2. According to Article 3.3 and Article 5 of the Transfer Contract, the stipulated period of the completion of the mining right integration by Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company and the transfer of the mining rights to Fengzhen Jinghai Company is not a definite time limit. In fact, Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company completed the resource integration and the mining right transfer procedures as agreed in the Transfer Contract, and Fengzhen Jinghai Company acquired the mining rights in 2014. After the signing of the Transfer Contract, the integration and transfer of the mining rights had been going on, Laiwu Mining Company managed to take over the mine in 2010, and there existed no circumstances of the rescission of contract provided in Articles 931 and 942 of the Contract Law of the People’s Republic of China (hereinafter referred to as Contract Law); therefore, the claim by Laiwu Mining Company that Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company broke the Transfer Contract had no sufficient factual basis. The Parties failed to reach an agreement on the rescission of a contract through negotiations after the notification of rescission of the contract issued by Laiwu Mining Company. Laiwu Mining Company did not have the right to rescind a contract by agreement, and its claim in the appeal that Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company failed to exercise their right of objection within a reasonable period of time and the Transfer Contract had been rescinded lacked the factual and legal basis and thus could not be established.

1

The current Article 562 of the Civil Code provides, “(t)he parties may terminate a contract by agreement through negotiation. The parties may stipulate the causes for the rescission of a contract by one party, and if one or more than one of the stipulated causes of rescission occurs, the party with the right to terminate the contract may do so.” Infra. 2 The current Article 563 of the Civil Code provides: “(t)he parties may terminate a contract when one or more than one of the following circumstances occurs: (1) the purpose of the contract cannot be achieved due to force majeure; (2) prior to the expiration of the term for performance, either party expressly states or indicates through its conducts that it will not fulfill its main obligation; (3) the other party still fails to perform its main obligations delayed within a reasonable time after having been demanded for such performance; (4) the purpose of a contract cannot be realized due to the delay in performance of its obligations or other breaches by either party; and (5) other circumstances as provided by law. In the case of a nonfixed-term contract involving ongoing performance, either party may terminate the contract at any time provided that the other party is notified in advance of a reasonable period.” Infra.

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3. The failure to fulfill the obligation of changing stock equity was not exclusively caused by Shanxi Jinghai Company but by Laiwu Mining Company’s refusal to cooperate in doing so. As a result, the judgment delivered by the court of first instance that the Parties continue to perform the Transfer Contract and Laiwu Mining Company pays the remaining amount of the contract is justified. The Supreme People’s Court delivered No. 590 [2016] Final, Civ. Division, the Supreme People’s Court, rejecting the appeal and upholding the original judgment.

Comment on Rule 1. The nature and validity of an equity transfer contract for a mining company The nature of a contract shall be determined based on the rights and obligations of the parties stipulated in the contract. According to the facts found in this case, the signatories to the Transfer Contract were Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company as one Party and Laiwu Mining Company as the other Party, and the subject matter of the contract was all the assets owned by Inner Mongolia Jinghai Mining Co., Ltd. (with its registered name is Fengzhen Jinghai, hereinafter referred to as Fengzhen Jinghai Company), including all the exploration and mining rights over the mining area of approximately 22 square kilometers after the completion of the existing mining right integration, all the physical assets within the Mining Area owned by Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company and the full stock equity of Fengzhen Jinghai Company. The main contractual obligation of Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company was to set up Fengzhen Jinghai Company, hand over the existing mining rights and related physical assets “within the integrated mining area located in Cow-raising Valley of Yuanshanzi on Birch Hillside, Guantun Town, Fengzhen City, Inner Mongolia Autonomous Region” to Laiwu Mining Company, and transfer the integrated mining rights to Fengzhen Jinghai Company as well as the full stock equity of Fengzhen Jinghai Company to Laiwu Mining Company, while the main obligations of Laiwu Mining Company to pay the amount of contract and appoint the legal representative of the newly established Fengzhen Jinghai Company. Although the integration and transfer of the mining rights were covered by the Transfer Contract, the acquisition of the exploration and mining rights and then the transfer thereof to Fengzhen Jinghai Company were only the contractual obligations of Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company to Laiwu Mining Company, whereas the transfer of the mining rights involved in this case was a transaction between Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company as a whole and an outsider Fengzhen Jinghai Company, and according to related laws, the approval procedures are required for such a transaction of the transfer of the mining rights. Based on the facts found in the case, the relevant approval procedures were completed, and the mining rights in the case were

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also registered under the name of Fengzhen Jinghai Company. The legal relationship between Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company as one Party and Laiwu Mining Company as the other established on the stipulations in the Transfer Contract is the one about the transfer of Fengzhen Jinghai Company’s stock equity, which is not legally subject to any administrative approval. When mining rights are registered under the name of a mining enterprise as a legal person, it is the property of the legal person. Although the transfer of the stock equity of a mining legal person may result in some changes to its asset structure, its actual controller and other aspects, and may eventually affect the actual exercise of the mining rights, but according to the principle of the independence of corporate personality, the transfer of a company’s stock equity and the transfer of its mining rights as its properties are different in nature in that there are significant differences in various aspects, including trading parties, subject matters, examination and approval procedures, applicable laws and so on. Although mining rights may constitute the main properties of a mining company, a mining right transfer is not the equity transfer of the mining company. Where there is no change of mining right holders and thus no change in the ownership of mining rights, an equity transfer should not be construed indiscriminately as a disguised transfer of mining rights. In this case, the conclusion of the Transfer Contract constituted the true manifestation of intention of Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company, and therefore, the Transfer Contract was legal and valid. Laiwu Mining Company’s claim in the appeal that the Transfer Contract is in nature about the transfer of mining rights not only violated the prohibitive provisions in relevant laws and regulations but also lacked the factual and legal basis and therefore could not be established. 2. Whether the Transfer Contract and the Payment Agreement have been rescinded Article 8 of the Contract Law provides, “(a) lawfully established contract shall be legally binding on the parties thereto. All the parties shall fulfill their own obligations in accordance with the terms thereof, and neither party may arbitrarily modify or rescind the contract.”3 Article 44 hereof provides, “(a) lawfully established contract becomes effective upon its establishment.” The Transfer Contract involved in the case was legal and valid and should not be arbitrarily rescinded unless by agreement through consultation or by the occurrence of legal circumstances. Laiwu Mining Company argued that the principle of holistic interpretation of a contract should be followed, and the moment when Fengzhen Jinghai Company acquired the mining right certificate should be within three months from the effective date of the Transfer Contract, or no later than the expiry date of the mortgage term, 3

The current Articles 119 and 465 of the Civil Code. Article 119 of the Civil Code provides, “(a) lawfully established contract is legally binding on the parties.” Article 465 hereof provides, “(a) lawfully established contract shall be safeguarded by law and shall be legally binding only on the parties thereto except as otherwise provided by law.”

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or at most no later than the expiry date as agreed in the Escrow Agreement on the Transaction Funds, namely, May 16, 2012. According to the Equity Transfer Contract (draft), the Transfer Contract and the Escrow Agreement on the Transaction Funds, the period of three months for obtaining the said certificate as stipulated in the Equity Transfer Contract (draft) was modified by the text of the Transfer Contract and should be determined based on the text of the Transfer Contract. The Escrow Agreement on the Transaction Funds was about the stipulations on the period for agreed matters therein and the consequences of the overdue consummation of these agreed matters therein, so its expiry did not necessarily change the agreement about the period for obtaining the said certificate as set forth in the Transfer Contract. In fact, Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company completed the resource integration and the mining right transfer procedures as agreed in the Transfer Contract, Fengzhen Jinghai Company acquired the mining rights in 2014, and various documents verified that during the period from the signing of the Transfer Contract to the final acquisition of the mining rights by Fengzhen Jinghai Company, the integration and transfer of the mining rights had been going on, Laiwu Mining Company took over the mine and related assets thereto in 2010, and there existed no circumstances of the rescission of contract provided in Articles 93 and 94 of the Contract Law. Therefore, the claim by Laiwu Mining Company that Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company broke the Transfer Contract had no sufficient factual basis. The Parties failed to reach an agreement on the rescission of a contract through negotiations after the notification of the rescission of contract issued by Laiwu Mining Company. Laiwu Mining Company asserted that Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company failed to raise an objection lawsuit within the legal time limit of three months, and the notification of the rescission of the contract should take effect. Article 96 of the Contract Law provides, “(t)he party availing itself of the rescission of a contract in accordance with Article 93(2) and Article 94 hereof shall notify the other party. The contract is rescinded when the notification reaches the other party. If objecting to such rescission, the other party may request a people’s court or an arbitration institution to affirm the validity of such rescission. Where the rescission of a contract is subject to such procedures as approval or registration, etc. as required by laws or administrative regulations, such provisions shall prevail.”4 Article 24 of the Judicial Interpretation of Issues 4

The current Article 565 of the Civil Code provides, “(i)f one party requests to rescind a contract by law, it shall notify the other party, and the contract shall be terminated when the notification reaches the other party. The notification may state that if the debtor fails to perform its obligations within a certain period of time specified in the notification, the contract shall be automatically terminated. If the debtor fails to perform its obligations within such period of time, the contract shall be terminated upon the expiration of the period specified in the notification. If the other party objects to such rescission of a contract, either party may request a people’s court or an arbitration institution to confirm the validity of such rescission. If one party, without notifying the other party in advance, requests to terminate a contract by law by bringing a lawsuit or applying for arbitration, and a people’s court or an arbitration institution supports the request, the contract shall be terminated upon the service of a copy of the statement of complaint or the arbitration application to the other party.”

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Concerning the Application of the Contract Law (II) provides, “(i)f a parties have objections to the rescission of a contract or the set-off of debts as stipulated in Articles 96 and 995 of the Contract Law, but the objection is raised after the expiration of the prescribed time limit for such objection, which should not be supported by a people’s court; in the case of no prescribed time limit for objection and the objection is raised more than three months later from the date of receipt of the notification of the rescission of a contract or the set-off of debts, the lawsuit should not be supported by a people’s court.” That is the interpretation of the time limit of raising an objection to the rescission of a contract and its legal consequences. Given that the rescission of a contract has a significant impact on the parties, for the purposes of providing equal protection to the legitimate rights and interests of the parties to a contract and of preventing the abuse of the right to rescind a contract, the exercise of the right to rescind a contract should conform to the stipulations on or satisfy the legal conditions for the rescission of a contract. That is, without the right to rescind a contract by agreement or by law, a party may not do so. On June 4, 2013, the Research Office of the Supreme People’s Court made a written response to the request for instructions on the understanding and application of Article 24 of the Judicial Interpretation of Issues Concerning the Application of the Contract Law (II) (SPC Research, 2013, Issue No. 79),“(w)here a party availing itself of Article 96 of the Contract Law of the People’s Republic of China notifies the other party of the rescission of a contract, such rescission shall not be legally effective unless the conditions as set forth in Article 93 or Article 94 hereof are satisfied”. According to the facts found in this case, Laiwu Mining Company issued the notification of the rescission of the Transfer Contract mainly based on the period of obtaining the certificate as set forth in the Transfer Contract. Since the period for obtaining the certificate stipulated in the Transfer Contract was not a definite period, Laiwu Mining Company did not have the right to terminate the Transfer Contract by agreement. Therefore, Laiwu Mining Company’s claim in the appeal that Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company failed to exercise their right of objection within a reasonable period of time, and thus the Transfer Contract had been rescinded lacked the factual and legal basis and thus could not be established.

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The current Article 568 of the Civil Code provides, “(w)here the parties owe obligations to each other and the subject matters of the obligations are the same in type and quality, either party may set off its obligations against these of the other party except for otherwise provided by laws, agreements between the parties or by the nature of obligations. If the parties request set-off, the notification of such set-off shall be given to, and shall be effective upon its arrival at, the other party. The set-off shall not be subject to any conditions or time limits.”

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3. Whether the Transfer Contract and the Payment Agreement should be further performed Article 7 of the Judicial Interpretation of Some Issues Concerning Applicable Laws for the Mining Right Dispute Cases provides, “(i)n the absence of legally invalid circumstances, a people’s court shall support the request by a transferee to perform the obligation of completing the approval procedures by the transferor, or the request by a transferor to perform the obligation of assisting by the transferee in completing the approval procedures under a lawfully established mining right transfer contract with the exception that the conditions for such a performance are not legally or practically met. On the basis of the facts of a case and the request of a transferee, a people’s court may order the transferee to complete the approval procedures on behalf of the transferor, and the transferor shall perform its obligation of assistance in doing so and bear all the expenses incurred on the transferor therefrom.” That is the provision on the enforced performance of the obligation of completing, or assisting in completing the approval procedures under a lawfully established mining right transfer contract. As such, when a mining right transfer contract is lawfully established, the mining right holder as the transferor shall, as required by law, submit the contract to competent natural resources authorities for approval. When a mining right transfer contract is lawfully established, the mining right holder (as the transferor) shall provide the transferee with all the documents, such as certificates, seals and other related instruments, required for going through such approval procedures. Even if it is agreed that it is the transferee who is responsible for such approval procedures, the transferor shall not be exempted from the obligation of cooperation and assistance. In the judicial practice of handling mining right dispute cases, in addition to a mining right transfer contract between the mining right holder and the transferee, this provision on the obligation of completing the approval procedures also applies to the circumstances of divisions, mergers, acquisitions, reorganizations, equity transfers, investments and property transfers of or among mining enterprises. Under these contracts, the mining right holders do not necessarily change into the other parties thereto but often newly established entities. Where there are changes of the mining right holders, these contracts are often characterized as those of mining right transfer or those with mining right transfer clauses. These contracts in either form or content are more complex, and their further performance should be decided based on a comprehensive judgment of various factors, such as legal provisions, contractual stipulations, handover of mines and assets, separate transfer contracts, the subject matters of contract, changes of mining rights, conditions for substantial performance and so on. In this case, following the establishment of the Transfer Contract and the Payment Agreement, the mine and physical assets were handed over by Shanxi Jinghai Company, Xinxin Powdered Iron Company and Fengsheng Mining Company to Laiwu Mining Company, Fengzhen Jinghai Company was incorporated, and He X, a person appointed by Laiwu Mining Company, was registered as the legal representative of Fengzhen Jinghai Company. Since November 2010, the mining right integration scheme in this case was submitted to competent authorities of land and resources

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and related government departments for approval, and in September 2014, Fengzhen Jinghai Company acquired mining rights over the mining area of 22.883 square kilometers, including two mining rights and one exploration right. The Transfer Contract stipulated that within 30 days of receipt of the integrated exploration and mining right certificate, both Parties shall jointly complete the changes in shareholder registration items for Fengzhen Jinghai Company, and Laiwu Mining Company shall pay the balance of the contract amount within seven days thereafter. Considering that after the new mining rights were reregistered under Fengzhen Jinghai Company’s name, Shanxi Jinghai Company wrote to Laiwu Mining Company to request the change of Fengzhen Jinghai Company’s stock equity but Laiwu Mining Company did not cooperate, and as such, the failure to fulfill the obligation of changing the stock equity was not exclusively caused by Shanxi Jinghai Company, but by Laiwu Mining Company’s refusal to cooperate in doing so. Therefore, the judgment delivered by the court of first instance that the Parties continue to perform the Transfer Contract and Laiwu Mining Company pays the remaining amount of the contract was justified.

Wuliangye Yibin Co., Ltd. v. Gansu Binhe Food Industrial (Group) Co., Ltd., Beijing Tan’s Ruifeng Commercial and Trading Co., Ltd. (Dispute over Infringement of Trademark Rights): Determination of Trademark Right Infringement and Liabilities Jiayin Cao

Rule 1. To determine whether the alleged infringement poses an infringement on the exclusive right of the registered trademark, it is necessary for the people’s court to consider such factors as the usage mode of the accused infringing mark, the malice of the accused infringer and reputation of the registered trademark, hence to determine whether the infringing mark triggers confusion and misunderstanding to the public. 2. Where the evidence submitted by the infringed was insufficient to prove the exact amount of profits obtained by the infringer due to its infringement, yet sufficient to prove that the amount of profits shall be higher than that of the maximum legal damages provided in the Trademark Law of the People’s Republic of China, the people’s court shall consider such factors as manifestation of the infringement, the duration and scope of selling the alleged infringing commodities, the malice of the accused infringer, reputation of the registered trademark claimed to be protected, and the reasonable expenses incurred from the infringed for stopping the infringement, then the people’s court shall discretionarily calculate the final amount of damages which can be higher than statutory maximum. Collegial Bench: Junli Xia, Guimei Lang and Xiurong Ma Edited by Ming Li; translated by Lin Sun and Sisi Yi J. Cao (B) The Third Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_34

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Wuliangye Yibin Co., Ltd. (hereinafter referred to as Wuliangye Company) Respondent in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Gansu Binhe Food Industrial (Group) Co., Ltd. (hereinafter referred to as Binhe Food Company) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Beijing Tan’s Ruifeng Commercial and Trading Co., Ltd. (hereinafter referred to as Tan’s Ruifeng Commercial and Trading Company) 2. Procedural History First Instance: No. 4718 [2013] Trial, Civ. Division, the First Intermediate People’s Court of Beijing Municipality (dated Jan. 20 of 2014) Second Instance: No. 2462 [2014] Final, Civ. Division, the Higher People’s Court of Beijing Municipality (dated May 26 of 2016) Reopening: No. 234 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated May 28 of 2019) 3. Cause of Action Dispute over infringement of trademark rights

Essential Facts Wuliangye Company was the exclusive licensee of trademarks No. 1789638 “Wuliangye”, No. 160992 “WULIANGYE with logo”, and No. 3879499 “Wuliangye 68”, who has used these trademarks for a long time and gained good reputation from the public. On March 31, 2012, Wuliangye Company purchased the alleged infringing liquors “Jiuliangye (53% vol)” and “Jiuliangye (45% vol)”, both of which were notarized to be commodities produced by Binhe Food Company and sold by Tan’s Ruifeng Commercial and Trading Company. Wuliangye Company held that its exclusive right to use the registered trademark being infringed upon by the parties using the highlighted mark “Jiuliangye”, so it brought a suit to the First Intermediate People’s Court of Beijing Municipality, requesting Tan’s Ruifeng Commercial and Trading Company immediately to stop the alleged infringing acts; Binhe Food Company to pay damages (lawyer’s fee, evidence preservation fees and other reasonably incurred fees) CNY70 million to Wuliangye Company; Tan’s Ruifeng Commercial and Trading Company and Binhe Food Company to publish an announcement on China Intellectual Property News and The Mirror to relief of consequences thereof on Wuliangye Company.

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However, these claims were dismissed by the First Intermediate People’s Court of Beijing Municipality, in civil ruling of No. 4718 [2013] Trial, Civ. Division, the First Intermediate People’s Court of Beijing Municipality (dated Jan. 20, 2014), on the grounds that “trademark similarity” shall be determined on the possibility to trigger confusion. Although trademark “Wuliangye” was well known to the public, it was not easy for those seeing the mark of the alleged infringing commodities to leave an impression that there was certain relation between them. In the second instance, the Higher People’s Court of Beijing Municipality dismissed the appeal of Wuliangye Company in civil ruling, No. 2462 [2014] Final, Civ. Division, the Higher People’s Court of Beijing Municipality (dated May 26, 2016), and affirmed the ruling of the first instance. Then, Wuliangye Company appealed to the Supreme People’s Court for reopening the case and requested to set aside rulings of the first and second instances and to uphold its claims.

Issues 1. Whether Binhe Food Company’s production and sale of the alleged commodities infringe the exclusive right of registered trademark of Wuliangye Company; 2. What liabilities Binhe Food Company shall bear if it constitutes an infringement of trademark right.

Holding The Supreme People’s Court finds that the alleged infringing commodities’ trademark is “Jiuliangye”, while its main identifiable part is also “Jiuliangye”. Compared with “Wuliangye”, the registered trademark of Wuliangye Company, there is only one difference of character to indicate numbers.1 When the alleged trademark is used on similar liquor commodities, it may make the relevant general public confused about the origin of the commodity or believe that there exists a certain connection between these commodities. In addition, according to facts ascertained: since July 2002, Binhe Food Company began to apply for registering such trademarks under the 33rd Category of ‘alcoholic beverages’, such as “Jiuliangye”, “Jiuliangchun(春, spring)”, “Jiuliangchun(醇, mellow)” and “Jiuliangwang” and so on, which are of the same font style as those of Wuliangye Company’s liquor series “Wuliangye”, “Wuliangchun(春, spring)”, “Wuliangchun(醇, mellow)” and “Wuliangwang”; Binhe Food Company also has applied for registering trademarks 1

Translator’s note: in this case, Jiuliangye and Wuliangye both mean alcoholic beverage made from cereals, “Jiu” as in Jiuliangye means nine, and “Wu” as in Wuliangye means five.

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such as “Binhe Jiuliangye”, “Binhe Jiuliangchun(春, spring)”, “Binhe Jiuliangwang”, “Binhe Jiuliangchun(醇, mellow)” and “Binhe Jiuliangshen”, among which the characters as “Jiuliangye” stood out of “Jiuliangchun” with the last character “ye” and “chun” being similar in font style to those of products of Wuliangye Company. All these facts reflect the subjective intention of Binhe Food Company to take advantage of others’ trademark goodwill. In conclusion, Binhe Food Company’s production and sale of the alleged infringing commodities constitute infringement to the exclusive right of Wuliangye Company to use a registered trademark. Wuliangye Company claims that the compensation for infringing upon the exclusive right to use registered trademark shall be computed on the basis of the profits obtained from infringement by Binhe Food Company during the period of infringement. Wuliangye Company also provides relevant evidence to prove the profits obtained from infringement, including notarized documents of magazines and web pages about Binhe Food Company’s development, commodity sales and trademark using records, videos of product advertisements on TV and online, and evidence obtained upon application of Wuliangye Company from competent departments under the request of the court of first instance. Among the evidence mentioned above, the notarized documents of magazines, videos and web pages provide introductory information on the overall development, commodity production and sales of Binhe Food Company and its associated enterprises, from which it is impossible to distinguish the production and sales volume of the alleged infringing commodities. In addition, there are no relevant contracts, bills or other evidence to prove the specific profits obtained by Binhe Food Company due to infringement. Regarding evidence of the sales of the alleged infringing commodities and their profits during the period of infringement, the competent departments, China National Association for Liquor and Spirit Circulation, Statistics Bureau of Minle County, and Taxation Bureau of Minle County, Gansu Province, all sent official documents stating that it was impossible to provide profit information under the request of the competent court. Although the financial reports of Binhe Food Company in 2011 and 2012 provided by Taxation Bureau of Minle County can prove the total profits of the Company during that period, it is impossible to distinguish the proportion of alleged infringing commodities and their corresponding profits, so the report is still unable to clearly prove the profits of Binhe Food Company incurred from infringement. In view of the fact that the claimed amount of compensation is much higher than CNY 500,000, the maximum amount of legal compensation provided in Article 56 of the Trademark Law of the People’s Republic of China (Rev. 2001) (hereinafter referred to as Trademark Law), the Supreme People’s Court determined that Binhe Food Company shall pay compensation of CNY 5 million to Wuliangye Company, with factors been taken into account as the manifestation of the alleged infringement, the sales profit and sales scope of the commodities during the infringement period of the involved company, the malice of Binhe Food Company, the popularity of the registered trademark of Wuliangye Company, and the reasonable fees incurred to stop the infringement.

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Comment on Rule This case involves a dispute over trademark infringement and issues on whether the alleged infringing acts constitute an infringement on the exclusive right of the registered trademark and on how to determine the amount of compensation where the right holder claims an amount on the basis of profits obtained by the infringer due to its infringement yet with no sufficient evidence submitted. 1. Determination on Trademark Right Infringement According to the Trademark Law and relevant Judicial Interpretations, whether the alleged trademark constitutes infringement of the registered trademark shall be determined on their similarities and if it may result in confusion to the relevant public. In adjudicate practice, to determine whether there is a confusion triggered by trademarks, we shall take the general attention of the relevant general public as the standard; compare not only the whole structure but also the major parts of the trademarks, and such comparison shall separate different objectives; take into account the notability and reputation of the registered trademark claimed for protection. Besides, whether the infringer intentionally uses the alleged infringing mark should also be considered. In the case before, among the trademark “Binhe Jiuliangye” or “Jiuliangye” used on the packaging of the alleged infringing commodities, characters “Binhe” are smaller, while “Jiuliangye” is more prominent, separating them from each other. Therefore, the trademark actually used by Binhe Food Company is different from that of registered “Binhe Jiuliangye”, which is claimed in this case for the exclusive right to use. Under these circumstances, the issue to determine is whether the method for Binhe Food Company to use the trademark on the alleged infringing commodities constitutes an infringement on the exclusive right of registered trademark of Wuliangye Company. Upon comparison, the Supreme People’s Court holds that Binhe Food Company has subjective intention to take advantage of the trademark goodwill of Wuliangye Company. As a result, Binhe Food Company’s producing and selling the alleged infringing commodities constitute an infringement on the exclusive right of registered trademark of Wuliangye Company and shall bear infringement liabilities. 2. Determination of the Amount of Compensation Article 56 of the Trademark Law states, “(t)he amount of compensation for infringing of the exclusive right to use a trademark shall be the amount of the profits that the infringer has earned as a result of the infringement during the period of infringement, or the amount of the losses that the infringed has suffered as a result of the infringement during the period of infringement, including any reasonable expenses the infringed has paid in its effort to put an end to the infringement. Where the profit earned by the infringer or the losses suffered by the infringed as a result of the infringement are difficult to determine, as mentioned in the preceding paragraph, the people’s court shall, on the basis of the circumstances of the infringement, decide to

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make it no more than CNY500,000.” Article 13 of the Judicial Interpretation of the Supreme People’s Court Concerning the Application of Laws in the Trial of Cases of Civil Disputes Arising from Trademarks states, “(w)hen determining the compensation liabilities of the infringer in accordance with Article 56(1) of the Trademark Law, the people’s court may compute the amount of compensation according to the method of computation as selected by the right holder.” Accordingly, the right holder can choose how to compute the amount of compensation, and his computational method shall be the prior choice for the people’s court in computing the damages. Where the right holder chooses the method of calculating the compensation, he shall submit corresponding evidence, but if the evidence is insufficient to prove the profits gained by the infringer or the losses suffered by the infringed, the people’s court may determine at discretion the amount of compensation within the maximum amount prescribed by law. In adjudicate practice, it is often difficult for the right holder to prove the specific amount, so the people’s courts always apply the computation by law to determine the amount of compensation. However, if the existing evidence proves the profits gained by the infringer or the losses suffered by the infringed much higher than the maximum amount of legal compensation, the loss of the right holder shall not be determined by statutory compensation, in case of an unfair result that the amount of compensation is too low to fully compensate the loss. In the case before the Court, Wuliangye Company’s claim shall be upheld on the grounds that the compensation can be determined on the profits obtained out of infringement during the infringement period by Binhe Food Company. The profits gained by Binhe Food Company due to infringement during the period of infringement shall include profits obtained by the Company from producing and selling the alleged infringing commodities during the period, but when calculating the infringement profits, the portion obtained from producing and selling other brands’ products shall be deducted. The main evidence provided by Wuliangye Company to prove the profits gained by Binhe Food Company from infringement includes magazines and notarized web pages about the enterprise’s development, commodity sales, records of trademark use, and videos of product advertisements on TV and online and evidence obtained upon application of Wuliangye Company from relevant departments under the request of the court of the first instance. Among the evidence mentioned above, the notarized documents of magazines, videos and web pages are introductory information on the overall development, commodity production and sales of Binhe Food Company and its associated enterprises, from which it is impossible to distinguish the production and sales volume of the alleged infringing commodities, and there are no corresponding contracts, bills or other evidence to prove the specific profits gained by Binhe Food Company as a result of infringement during the period of infringement. As to evidence of the sales of the alleged infringing commodities and their profits during the period of infringement, the competent departments, China National Association for Liquor and Spirit Circulation, Statistics Bureau of Minle County, and Taxation Bureau of Minle County, Gansu Province all sent official documents stating

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that it was impossible to provide profit information under the request of the competent court. In view of the fact that the financial reports of Binhe Food Company for 2011 and 2012 are provided upon the request of the court of the first instance by the local Taxation Bureau of Minle County, this evidence is accepted by this Court. Although the financial report indicates that the total profit of commodity sales of Binhe Food Company in 2011 was CNY9,451,600.36, with the total net profit of that year being CNY-3,049,323.68; in 2012, the cumulative total profit of commodity sales was CNY8,273,493.28, with the total net profit being CNY-3,949,403.89, it is impossible to distinguish the proportion of the alleged infringing commodities and the specific profits, so this evidence is insufficient to clearly prove the profits gained by the Binhe Food Company as a result of infringement. Nevertheless, it can be seen from the above data that the total profit of commodity sales of Binhe Food Company in 2011 and 2012 is much higher than CNY500,000, the maximum of legal compensation stipulated in Article 56 of the Trademark Law. It is obviously unreasonable to determine the amount of compensation according to statutory compensation. Then, the Supreme People’s Court determined that Binhe Food Company shall pay compensation of CNY5 million to Wuliangye Company, on the grounds of the manifestation of the alleged infringement, the sales profit and scope of the commodities during the infringement period of Binhe Food Company, and the subjective malice of Binhe Food Company, as well as the popularity of the registered trademark of Wuliangye Company and the reasonable fees incurred to stop the infringement, coupled with relevant data on total profit of commodity sales. One of the important grounds for determining the amount of compensation in this case is the data provided by the tax authorities about the total profits of commodity sales of the infringer during the period of the infringement because when other direct evidence is absent, it is more objective to refer to the above evidence to determine the profits gained by the infringer as a result of infringement. This computation method, although different from the legitimate one which is fully referred by factors as circumstances of infringement, makes the amount of compensation equal to the actual loss of the right holder, so that the loss suffered by the right holder from infringement can be compensated to the full extent, which reflects the orientation of judicial policy for strengthening the protection of intellectual property rights.

ANDIS Company v. Trademark Review and Adjudication Board of the State Administration for Industry and Commerce, Ningbo Brofa Hairdressing Appliance Co., Ltd. (Administrative Dispute over Trademark Opposition Review): Determination of Similar Commodities Lihua Mao

Rule Table for Differentiating Similar Goods and Services is but not the only criterion for the people’s court to determine whether the involved commodities are similar because similar relations between commodities will vary with the constantly changeable conditions of transactions in a market driven by the development of social economy. Thus, the concept of “similar commodities” in trademark law shall be determined with a consideration of a “similar trademark” to serve the function that trademarks shall be able to indicate the origin of commodities.

Collegial Bench: Li Zhu, Lihua Mao and Shu Tong Edited by Wenyan Ding; translated by Lin Sun and Sisi Yi Due to the institutional reform of central institutions, relevant functions and duties of the Trademark Office and the Trademark Review and Adjudication Board of the State Administration for Industry and Commerce now are exercised by the National Intellectual Property Administration of the People’s Republic of China. L. Mao (B) The Third Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_35

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): ANDIS Company Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Trademark Review and Adjudication Board of the State Administration for Industry and Commerce (hereinafter referred to as Trademark Review and Adjudication Board) Third Party in the First and Second Instances: Ningbo Brofa Hairdressing Appliance Co., Ltd. (hereinafter referred to as Brofa Hairdressing Company) 2. Procedural History First Instance: No. 5641 [2014] Trial, Adm. Division, the First Intermediate People’s Court of Beijing Municipality (dated Nov. 20 of 2015) Second Instance: No. 2280 [2016] Final, Adm. Division, the Higher People’s Court of Beijing Municipality (dated Jun. 12 of 2016) Reopening: No. 22 [2018] Reopening, Adm. Division, the Supreme People’s Court (dated Oct. 31 of 2018) 3. Cause of Action Administrative dispute over trademark opposition review

Essential Facts On June 24, 2009, Brofa Hairdressing Company applied to Trademark Office of the State Administration for Industry and Commerce for registering the (opposed) trademark No.7494974, “安迪仕andis”, which was specified under the 7th Category as pet clippers, electric scissors, etc. Nevertheless, the cited trademark, “ANDIS”, was applied for registration by ANDIS Company on January 10, 1994 and approved registration on November 8, 1995, specifying commodities under the 8th Category as electric hairdressing equipment and electric hair clipper, etc. On August 3, 2012, ANDIS Company filed an opposition against the opposed trademark to Trademark Review and Adjudication Board, on the grounds that the opposed trademark caused the similarity of the trademark of the cited trademark of ADIS Company. In respect of target consumers, functions, purposes of use, etc., the Trademark Review and Adjudication Board found that it was too differential between the opposed trademark commodities as “the washing machine” and the cited trademark ones as “the electric hairdressing equipment”; hence, the Board did not find them similar commodities. As a result, the opposed trademark was approved for registration. Then, ANDIS Company filed an administrative suit to the First Intermediate People’s Court of

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Beijing Municipality. In the first instance, the court held that the pet clipper specified by the opposed trademark was an electric cleaner and device for animals, while electric scissors were motor-driving and hand-held electrical tools that drove the working head through an actuator, widely used in gardens, orchards, tea gardens and clothing industries. However, both the electric hairdressing equipment and electric hair clipper specified by the cited trademark were tools for hair cutting. In the Table for Differentiating Similar Goods and Services, the specified commodities under these two trademarks were separately listed in parallel categories without necessity for cross-category retrieval, and they were also different in respect of functions, purposes of use, marketing channels, target consumers, etc., so they were not similar commodities. As a result, the opposed trademark was not in conformity with Article 28 of the Trademark Law of the People’s Republic of China (Rev. 2001)(hereinafter referred to as Trademark Law). The claim of ANDIS Company was denied by the court. Dissatisfied with the ruling, ANDIS Company appealed to the Higher People’s Court of Beijing Municipality, who dismissed the appeal and affirmed the original decision in the second instance. Then, ANDIS Company appealed to the Supreme People’s Court for reopening the case, requesting the rulings of the first and second instances to be set aside, and Trademark Review and Adjudication Board to review the case.

Issue Whether pet clipper and electric scissors specified by the opposed trademark are similar commodities as electric hairdressing equipment and electric hair clipper specified by the cited trademark.

Holding The Supreme People’s Court finds that the Table for Differentiating Similar Goods and Services, which compiles, on the basis of years of work experience, commodities and services with certain connections easy to trigger confusion, is designed to help the competent authority search, review and administrate trademarks. On the one hand, Table for Differentiating Similar Goods and Services does not list all the items under similar commodities and services; on the other hand, the similar relations between commodities may vary with the constantly changeable conditions of transactions in a market driven by the development of social economy. The Table for Differentiating Similar Goods and Services can be referred, as criterion but not the only and essential, by the people’s court to determine whether the involved commodities are similar. The concept of “similar commodities” in trademark law shall be considered in combination with that of “similar trademark”, serving to the function that trademark

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is used to indicate the origin of commodities. For commodities partially identical with respect to functions, purposes of use, branches of production, marketing channels, target consumers, etc., if identical or similar trademarks are used, the relevant general public may believe that there exist certain connections between them so that confusion may result. In this case, the motor-driving pet clipper and electric scissors upgrade to portable and convenient lightweight power supply devices, and pets increasingly become daily companions; thus, such commodities specified by the opposed trademarks highly overlap with respect to functions, purposes of use, branches of production, marketing channels, target consumers, etc. With that of the cited trademark, if their trademarks are identical or similar, the relevant general public may believe that there exist certain connections between them so that confusion may result. The registration application of the opposed trademark breaches Article 28 of the Trademark Law, ANDIS Company’s application for reopening the case is approved.

Comment on Rule This case is brought to trial for modification via certiorari. In regard to the application of law, in this case, we shall determine how to treat Table for Differentiating Similar Goods and Services when deciding similar commodities in administrative cases for reviewing trademark opposition. Table for Differentiating Similar Goods and Services is a synthesis of translated and adjusted categories and definitions of similar commodities and services that to be considered with certain connections in and between which may to trigger confusion. It is complied, by Trademark Office of the State Administration for Industry and Commerce, for trademark search, review and administration, and on the basis of International Classification of Goods and Services for the Purposes of the Registration of Marks rendered by World Intellectual Property Organization, and China’s practical experience and realities since its adoption of this international classification in January, 1988. On the one hand, Table for Differentiating Similar Goods and Services cannot list all, let alone the items constantly emerging under similar commodities and services, so it is necessary to determine the similarities in judicial practice; on the other hand, the similar relations in and between commodities and services may vary with the constantly changeable transaction in the market driven by the development of social economy, with some of these relations being more overlapping, and the rest, less. Table for Differentiating Similar Goods and Services can be largely referred by the people’s court when determining whether the involved commodities are similar, but it is not the only lawful, the sole or the essential criterion. To determine the similarity of some commodities and services, practical conditions such as the functions, purposes of use, methods of transaction, specific serving industries, venues and target customers shall also be taken into consideration.

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The collegial bench finds that the concept of “similar commodities” in trademark law shall be considered in combination with that of “similar trademark”, and they cannot be separately considered on the grounds that they both serve to the function that trademark is used to indicate the origin of commodities. For commodities partially identical with respect to functions, purposes of use, branches of production, marketing channels, target consumers, etc., if identical or similar trademarks are used, the relevant general public may believe that there exist certain connections between them so that confusion may result. In this case, the original motor-driving pet clippers and electric scissors upgraded with science development to portable and convenient lightweight power supply devices in daily life, greatly changed in their size and shape. Such changes make them more similar to household electric hairdressing equipment and electric hair clippers; hence, their similarities have increased. Moreover, as pets increasingly become daily companions or even family members, it is necessary that clippers and electric scissors for pets are almost undifferentiated as exquisite as those for humans. After considering the practical situation of marks of the registered trademark and commodities, the Collegial Bench finds that pet clippers and electric scissors, specified by the opposed trademark, are highly similar to electric hairdressing equipment and electric hair clipper specified by the cited trademarks, in respect of functions, purposes of use, branches of production, marketing channels, target consumers, etc., if their trademarks are identical or similar, the relevant general public may believe that there exist certain connections between them so that confusion may result. In this case, the registration application of the opposed trademark breaches Article 28 of the Trademark Law.

DBS Bank Singapore v. Wuxi Humei Thermal Power Engineering Co., Ltd. (Dispute over Letter of Credit): Legal Judgment on Discrepancies in the Principle of Strict Compliance Bona Zhang

Rule In the case of a letter of credit (L/C) dispute between the beneficiary and the issuing bank, it is a common defense strategy for the issuing bank to refuse to make the payment under the L/C on the grounds that there are discrepancies in the documents submitted by the beneficiary. In view of that, the L/C examination standard of “strict compliance” should be correctly understood and applied. The relevant records about the “origin standard” on the certificate of origin are sufficient to express the function of the document, and the relevant data on the document can mutually corroborate the data required by the L/C as well as the data on the other documents required by the L/C. In that circumstance, the issuing bank shall pay when the beneficiary submits the compliant documents.

Case Information 1. Parties Appellant (Defendant in the First Instance): DBS Bank Ltd. (hereinafter referred to as DBS Bank) Collegial Bench for the Second Instance: Xiaoli Gao, Ying Liang and Shuo Wang Edited by Ming Li; translated by Zuoyong Liu B. Zhang (B) The Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_36

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Appellee (Plaintiff in the First Instance): Wuxi Humei Thermal Power Engineering Co., Ltd. (hereinafter referred to as Humei Thermal Power Engineering Company) 2. Procedural History First Instance: No. 0004 [2014] Trial, Civ. Division, the Higher People’s Court of Jiangsu Province (dated Sep. 2 of 2016) Second Instance: No. 327 [2017] Final, Civ. Division, the Supreme People’s Court (dated Jul. 26 of 2017) 3. Cause of Action Dispute over letter of credit

Essential Facts On June 10, 2013, DBS Bank issued a sight payment L/C (No. 553–01- XXXXXXX) Humei Thermal Power Engineering Company as the beneficiary. L/C 32B stipulates that the total amount of the L/C is USD 8,938,290.98; 31D stipulates that the expiration date of the L/C is December 5, 2013; 44C stipulates that the latest shipment date is November 20, 2013; Document 46A requires that Humei Thermal Power Engineering Company shall submit such documents as the commercial invoice and certificate of origin; 40E stipulates that the latest version of the UCP shall apply; 44E stipulates that the loading port is Shanghai, China; 44A describes the cargo as a set of power plant equipment under Contract HWM12-002 to be used for the PT DABI OLEO 2X90T/H + 15 MW power station, CIF Dumai, Indonesia. Since then, the latest shipment date and expiration date of the L/C have been revised to November 30, 2013 and December 16, 2013, respectively. On November 29, 2013, Humei Thermal Power Engineering Company sent the complete set of documents required by the L/C to DBS Bank by DHL express via the notifying bank, China Construction Bank Wuxi Branch. The commercial invoice indicates that the price term of the transaction involved was USD 8,938,290.98 CIF Dumai, Indonesia. In Column 7 of the certificate of origin, in addition to other content related to the number of pieces, types of packaging and product names (including the corresponding quantity and HS code of the importer), it is also filled in with the words “Power plant equipment under Contract HWM12-002 to be used for the PT DABI OLEO 2X90T/H + 15 MW power station, CIF Dumai, Indonesia”; in the entries of gross weight or other quantity and price (FOB) in Column 9, in addition to other related content, it is also filled in with the words “USD: 8,938,290.98”. On December 5, 2013, DBS Bank issued a notice of dishonor through the notifying bank, China Construction Bank Wuxi Branch, stating that “(t)he FOB price listed in Column 9 of the certificate of origin is USD 8,938,290.98, but the CIF price shown in the invoice is also the same amount; therefore they constitute a discrepancy. That

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discrepancy cannot be accepted by us; therefore, our bank refuses to make payments under the L/C”. Humei Thermal Power Engineering Company held that the reason for DBS Bank’s refusal to pay cannot be justified and that the bank should pay all the amounts under the L/C and the corresponding interest. Therefore, the company filed a lawsuit in the court of first instance, requesting an order for DBS Bank to pay all the amounts under the L/C in this case and the interest thereon. The court of first instance rendered the judgment (No. 0004 [2014] Trial, Civ. Division, the Higher People’s Court of Jiangsu Province) on September 2, 2016, ordering DBS Bank to pay Humei Thermal Power Engineering Company CNY 55,448,732.79 within 10 days from the effective date of the judgment, in addition to the compensation for late payment losses calculated based on the People’s Bank of China’s RMB benchmark loan interest rate for the same period from December 6, 2013 to the actual payment date. DBS Bank refused to accept the first instance judgment and filed an appeal to the Supreme People’s Court, requesting to revoke the first instance judgment and change it to dismiss all the claims of Humei Thermal Power Engineering Company.

Issue Whether there are discrepancies in the documents under the L/C.

Holding The Supreme People’s Court, after due trial, holds that it is clearly specified in the L/C involved that the “latest version of the UCP” shall apply; therefore the relevant provisions of the UCP 600 shall be applied in this case. In accordance with the provisions of Articles 14(f) and 14(d) of the UCP600, although the UCP600’s document examination standards have established strict compliance rules for “ostensible” consistency, they do not require the most accurate compliance; as long as there is no discrepancy between the documents and the requirements of the L/C or between different documents themselves, it should be determined that the submitted documents are compliant, and the issuing bank should pay. In this case, as long as the certificate of origin submitted by the beneficiary, Humei Thermal Power Engineering Company, to the issuing bank, DBS Bank, appears to meet its functions, and the data therein do not conflict with the data required by the L/C and that in other documents required by the L/C, it should be determined that the submitted documents are compliant. The certificate of origin involved in the case is a format text, and the parties cannot modify the column titles. The “(FOB)” in Column 9 is the content already

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contained in the column title, and the expression “(FOB)” should not be interpreted as FOB price of goods under the international trade term, because: first, the expression does not conform to the basic format of the international trade terms; second, the FOB price under the international trade terms is obviously different from the CIF price, and it is impossible to simply apply a certain formula or any other format to convert the two. The format of the abovementioned certificate of origin serves international trade in the China-ASEAN Free Trade Area (CAFTA). It is impossible for international trade in this area to allow the parties to use FOB prices only and exclude other prices. If the “(FOB)” in Column 9 of the form is understood as the FOB price of goods under international trade terms, it obviously does not meet market demand. Therefore, it is unreasonable to interpret the “(FOB)” in Column 9 of the abovementioned certificate of origin as the FOB price under the terms of international trade. A reasonable interpretation of this “(FOB)” should be of a guiding nature, that is, it guides the parties to fill in the prices of corresponding goods in this column. The price term of the goods agreed upon in the fundamental contract of this case is “CIF Dumai, Indonesia”, and the amount of the L/C is USD 8,938,290.98. To meet the requirements of the L/C, the beneficiary, Humei Thermal Power Engineering Company, directly filled USD 8,938,290.98 in Column 9 of the certificate of origin. Column 7 of the certificate of origin involved in this case has been filled in with “a set of power plant equipment under Contract HWM12-002 to be used for the PT DABI OLEO 2X90T/H + 15 MW power station, CIF Dumai, Indonesia” and other information; together with “USD:8,938,290.98” in Column 9, it shows that the data can be mutually confirmed and can also be mutually verified with the prices of goods specified in the L/C and the commercial invoice of other documents required by the L/C. More importantly, the “Origin Standard” in Column 8 is filled in with the word “WO” (indicating products completely produced in the country of export), which is sufficient to express the function of the document. That is, although the data in Column 9 of the certificate of origin involved in this case are consistent with the CIF price required by the L/C and its documents, there is no contradiction between the documents and will not cause ambiguity in the understanding of the documents. Therefore, it should not be considered as a discrepancy. In the case that Humei Thermal Power Engineering Company’s submission is compliant, DBS Bank should pay to the former, and the first-instance judgment is correct. The second-instance judgment then rejected the appeal and upheld the original judgment.

Comment on Rule In L/C disputes, the most common focus is whether there are discrepancies under the L/C. This case is a typical one regarding whether the submitted documents under an L/C constitute an incompliance. Through the second instance judgment, the Supreme People’s Court clarified how to apply the doctrine of strict compliance for L/Cs in judicial practice, which is of great significance.

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1. Regarding the Document Examination Standards for L/Cs The L/C is an important means of payment in international trade and is a typical documentary transaction. By using the L/C in the transaction, the seller can receive payment before the buyer confirms the receipt, and the buyer can obtain a valid certificate of rights for the goods at the time of payment. In particular, as a thirdparty payment tool, L/C replaces commercial credit with bank credit, which greatly reduces the risk of the seller obtaining payment. Whether it can obtain payment depends on a series of documentary mechanisms. By setting the payment terms based on documents, the issuing bank can use its expertise to determine whether the documents submitted by the beneficiary meet the requirements of the L/C before making a decision on whether to make a payment without the effort to investigate the performance of the underlying transaction. Therefore, in the L/C mechanism, the payment terms and the beneficiary’s payment requests are all embodied in the form of documents. Whether the payment terms are met actually becomes a question of whether the documents are consistent. These issues are of great significance to the commercial vitality of the legal system for L/Cs: what kind of document examination standard is applicable, how to understand and implement the standard, and how to practically use the document examination standard developed from the doctrine of document compliance. Document examination standards are a problem common to all document transactions. In this field, there are not only international practices but also jurisprudence of national courts in different countries. Based on that, a series of theories on document examination standards have been developed, including literal or mirror standards, strict compliance standards, substantial compliance standards, and intermediate standards. After a long period of commercial transactions and judicial practice, the doctrine of strict compliance has gradually become a standard for examining documents that are generally accepted in the practical field and by courts in both common law and civil law countries. “The so-called doctrine of strict compliance means that when the beneficiary submits various documents to the bank to request the latter to pay in accordance with the L/C, these documents must strictly comply with the requirements of the L/C before the bank can make the payment; the bank has the right to refuse the documents that fail to strictly comply with the terms of the L/C, and there is no exception even in case of minor and insignificant deviations.”1 Article 14(d) of the UCP600 stipulates, “(d)ata in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.” Article 6(1) of the Rules on Certain Issues in Hearing Cases Involving Letter of Credit Disputes stipulates, “(w)hen the people’s court is hearing a case of the dispute over an L/C, if the examination of documents is involved, it shall be conducted in accordance with relevant international practices or other provisions agreed by the parties; if the parties have not agreed, the determination shall be made in accordance with the Uniform Customs and Practice for Documentary Credits 1

R. D. Harbottle (Mereantile) Ltd. v. National Westminister Bank Ltd. (1978) QB 146, p. 269.

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(UCP) and relevant standards specified by the International Chamber of Commerce, with regards to whether the documents are ostensibly consistent with the L/C terms, and whether the documents are ostensibly consistent with each other.” Article 6(2) of the Rules on Certain Issues in Hearing Cases Involving Letter of Credit Disputes provides, “(i)f the documents under the L/C and the terms of the L/C, and the contents of documents are not ostensibly and completely consistent, but does not cause any ambiguity between them, it should not be regarded as a discrepancy.” This provision is consistent with the provisions of Article 14 of the UCP600 in terms of the standards for document examination, which means that in cases of L/C disputes, Chinese courts apply the doctrine of strict compliance to issues related to the standards for trial. 2. Legal Judgments on Discrepancies under the Doctrine of Strict Compliance The doctrine of strict compliance is a combination of stability and flexibility. The bank has the flexibility to independently determine whether the documents submitted by the beneficiary meet the requirements of the L/C. It seems difficult to define the boundary of “strict compliance”, which has caused considerable controversy over whether the discrepancy is constituted, thus causing many disputes. It can be seen from the UCP600 and the Rules on Certain Issues in Hearing Cases Involving Letter of Credit Disputes that although a criterion of “ostensible” compliance has been established for document examination, it does not require the most accurate consistency and leaves room for the issuing bank to, based on common sense, determine whether there are discrepancies. In other words, the doctrine of strict compliance does not require that all the details of the documents submitted by the beneficiary are completely accurate and consistent or that the documents are completely the same in relevant aspects, nor does it mean that the documents should aimlessly conform to the terms of the L/C; therefore, it is not unbearable perfectionism.2 Rather, it emphasizes that there are no contradictions or mutual conflicts between the documents and the requirements of the L/C or between the documents themselves so that a balance can be duly struck between ensuring transaction security and reducing the transaction cost of the L/C. In identifying document conformity under the doctrine of strict compliance, the key lies in a “noncontradictory, nonconflicting, noninconsistent” requirement, which can be understood from the following four perspectives: First, the provisions of the L/C must be respected, and the examination must be conducted in strict accordance with the requirements of the L/C. The conditions or terms of the L/C are very strict testing standards themselves. Therefore, if the documents are almost the same, it constitutes a nonconforming presentation.3 Second, after examination of the documents required by the L/C, the parties can, by carefully investigating the inconsistencies between the documents under the L/C and the terms of the L/C and between the documents themselves, realize the uniqueness of meaning or the consistency in the conclusion, or they can only find 2 3

Official Comment 1, reprinted in McKinney’s Cons Laws of NY, Book 621/2, UCC 5–108, at 367. Equitable Trust Company of New York v. Dawson Partners Ltd. (1927) 27 Lloyd’s L Rep 49 (HL).

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a slight deviation from banking practices and conventions, which will not lead to either ambiguity in the understanding of the documents or ostensible confusion of transactions. In this case, although the data in the “(FOB)” column of the certificate of origin appear to be consistent with the CIF price data, both the invoice and the certificate of origin show that the fundamental transaction is enforced on CIF price terms. Apart from the certificate of origin in this case, other documents show no FOB price. If the “(FOB)” is understood as the FOB price of goods under international trade terms, it neither meets market demand nor is it consistent with common sense. Once it is interpreted as a term of a guiding nature, there will be no ambiguity in the understanding of the documents, and such judgment does not exceed the scope of common sense of the document examiner. Third, it is necessary to pay attention to the relationship between documents themselves and between documents and basic transactions. The entire documents must be clearly related to the same transaction. For example, the L/C number, the description of the goods, the type of the goods, the number of commercial invoices, and the quantity of the goods can all play a role in establishing a relationship between the documents. If, after a comprehensive evaluation of the documents submitted by the beneficiary, it can be clearly seen that there is a connection between the documents and between the information in the documents, rather than contradicting each other or inconsistent with the terms of the L/C, and if they reflect all the content required by the L/C, then it should be determined that the presentation is consistent, and the beneficiary has the right to receive the payment. Fourth, it is necessary to interpret the information or data based on the basic functions of each document. Article 14(f) of the UCP600 stipulates, “(i)f a credit requires presentation of a document other than a transport document, insurance document, or commercial invoice, without stipulating by whom the document is to be issued or its data content, banks will accept the document as presented if its content appears to fulfill the function of the required document and otherwise complies with subarticle 14(d).” Each document submitted by the party has its function to be satisfied, and the purpose is to show the rights and obligations of buyers and sellers behind the data or information in the document, and the existence of so-called discrepancies could adversely affect the function of the document and the interests of the buyer. If the data in the same document may cause some confusion in understanding, but it can still be clarified through other relevant information, then it should not be regarded as a discrepancy.4 It is natural that this kind of clarification should be understood as a confirmation of the rationality between the information or data of the document rather than a remedy or forced interpretation of inconsistencies. In this case, the expression (“FOB”) in the certificate of origin does not cause the documents to lose their functions, and the information in the documents can be mutually confirmed and can also be mutually corroborated with the contents of the L/C and other documents required by the L/C. Therefore, it should not be deemed to constitute a discrepancy.

4

参见林建煌:《品读UCP600跟单信用证统一惯例》 , 厦门大学出版社2008年版, 第210页。

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3. Regarding the Duty of Related Personnel for Reasonable and Prudent Document Examination There are exceptions to the doctrine of strict compliance and viewpoints that oppose the doctrine of strict compliance. Such developments reflect the ideal and the pursuit of justice in the judiciary and academic fields, but they cannot serve as operational standards to guide the practice of specific examination of documents on a daily basis. The decision on whether the documents are compliant should still be made by examiners with practical experience. The doctrine of strict compliance is only a principled provision. In document examination, the examining bank is still left with a certain degree of flexibility and autonomy, and sometimes they are even required to make judgments based on rules of experience. “The principle used to guide the practice of document examination on a daily basis must clarify the minimum requirements for each typical document under the L/C and clarify what constitutes the due and reasonable care in the verification of whether the documents presented for examination meet these requirements.”5 Therefore, on the basis of the UCP600 and other related laws and regulations, it is necessary to conduct empirical research on the specific conditions of strict compliance issues involved in document examination by issuing banks and to summarize experience to form guidelines for document examination. The theory on the examiner’s standards represented by Professor Kozolchyk has been widely recognized in theoretical and practical circles. He believes that the document examiner judges the discrepancies based on the safe and effective practical experience of his industry, which is the basis for the court’s judgment and that the court should consider “what kind of decision a rational examiner will make in this situation” before making a verdict. The court should not act as the document examiner, and its decision should be based on the judgment of the rational examiner who is most qualified to evaluate whether the documents are consistent.6 When deciding whether a compliant presentation is constituted, a rational document examiner must take into account the specific circumstances of the case. His conclusion should be based on the actual situation, and at the same time, he must adhere to certain principles. First, the value of L/C lies in the need to serve trade and promote business development rather than to set obstacles. When issuing an L/C, the bank’s first consideration is not the recovery of the payment but respect for the principles of L/C independence and compliance with documents and the maintenance of the bank’s commercial reputation. If banks frequently and easily refuse to pay on the grounds of discrepancies, it will not only severely harm the L/C mechanism itself but also ultimately harm the interests of the banking and business circles. Second, document examination is an art, not a science. In the opinion of the International Chamber of Commerce Banking Commission, banks should not act like

5

Boris Kozolchyk, “Strict Compliance and the Reasonable Document Checker”, Brooklyn Law Review (56), 1990, p.48. 6 参见高晓力:《信用证审单标准问题研究》 ,载 《人民司法》 2002年第4期, 第36页。

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robots but should use their judgment to make a specific analysis of each case.7 Document examination is not making decisions in a rigorous, mechanical, and intuitive way but a technical task that incorporates the appropriate discretion and judgment of the examiner. Document examiners should conduct an independent examination on the appearance of the documents rather than making subjective judgments on the elements between documents based on their examination experience. Third, the purpose of document examination is not to find discrepancies and then have reasons to refuse payment. After all, an L/C is a tool of payment, not a tool of refusal. Really experienced, prudent and responsible bank examiners can not only use professional examination techniques to identify discrepancies and draw reliable conclusions or accurate judgments, but more importantly, they can skillfully deal with the consequent problems to protect the interests of customers, reduce the risk of banks’ refusal of payment, and ensure that L/C, as an international payment method that embodies the wisdom of businesspeople, can give play to its unique functions and value for the development of international trade against the backdrop of globalization.

参见徐冬根:《银行信用证审单标准的法哲学思考: 精确性、模糊性还是原则性》 , 载 《现代 法学》 2004年第5期。

7

Zhoushan Enji Shipping Development Co., Ltd., Yisheng Dahua Petrochemical Co., Ltd. v. Han X (Dispute over the Establishment Application of the Fund of Liability Limitation for Maritime Claims): Applicability of Limitation of Liability for Maritime Claims Ke Zhao

Rule The applicable ship classifications of the provisions on limitation of liability of maritime claims in the Maritime Code of the People’s Republic of China (hereinafter referred to as Maritime Code) should be the ships as defined in Article 3 hereof. The Measures for Handling the Maritime Compensation Limits as to Vessels of Less than 300 Gross Tonnage and Vessels Engaging in Coastal Transport and Coastal Operations (hereinafter referred to as LLMC Measures) is derived from the authorization of the Maritime Code, so its scope of application should be exclusively limited to the ships as defined in Article 3 hereof.

Collegial Bench: Shumei Wang, Xiaohan Yu and Xiwu Huang Edited by Ming Li; translated by Zuoyong Liu K. Zhao (B) The Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_37

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Case Information 1. Parties Applicant in the Reopening (Objector in the First Instance, Appellant in the Second Instance): Zhoushan Enji Shipping Development Co., Ltd. (hereinafter referred to as Enji Shipping Company) Applicant in the Reopening (Objector in the First Instance, Appellant in the Second Instance): Yisheng Dahua Petrochemical Co., Ltd. (hereinafter referred to as Yisheng Petrochemical Company) Respondent in the Reopening (Applicant in the First Instance, Appellee in the Second Instance): Han X 2. Procedural History First Instance: No. 90 [2016] Special Procedure, Civ. Division, Xiamen Maritime Court (Fujian 72) (dated Oct. 28 of 2016) Second Instance: No. 1587 [2016] Final, Civ. Division, the Higher People’s Court of Fujian Province (dated Dec. 14 of 2017) Reopening: No. 453 [2018] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 29 of 2018) 3. Cause of Action Dispute over the establishment application of the liability limitation fund for maritime claims

Essential Facts Vessel No. 3003-X-ZJJ, a conventional steel freighter with a gross tonnage of 2,071 tons launched on January 20, 2012, owned by Han X and operated by Zhangjiajie Jixiang Shipping Co., Ltd., holds all valid documents, including the Interprovincial Conventional Freighter Transportation License in the middle and lower reaches of the Yangtze River and its tributaries, the Seaworthiness Certificate for Inland Freighters, and is authorized to navigate in Class-A navigation areas working as a self-discharging sand dredger. On May 9, 2016, Vessel No. 3003-X-ZJJ was on its way back to port at D9 buoy light in Minjiang Estuary when Vessel No. Enji-01 collided with Vessel No. 3003-X-ZJJ, causing damage to the latter and the goods on board. Han X then applied to Xiamen Maritime Court for constituting a liability limitation fund for maritime claims for nonpersonal casualties. Xiamen Maritime Court held that during the accident, Vessel No. 3003-X-ZJJ was sailing within the Minjiang estuary, so was a “ship” defined in Article 4 of the LLMC Measures issued by the State Council and Han X may apply to limit the liability for maritime claims. Xiamen Maritime Court made the ruling of No. 90 [2016] Special Procedure, Civ. Division, Xiamen Maritime Court, Fujian Province

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(Fujian 72), holding that Han X’s application for constituting a limitation fund for liability of maritime claims shall be approved. Enji Shipping Company filed an appeal against the judgment of first instance. Thereafter, the Higher People’s Court of Fujian Province held that, despite an inland ship, Vessel No. 3003-X-ZJJ, namely, the vessel involved in the case, was engaging in navigation operations within coastal waters, so was a “ship engaging in coastal operations” defined in Article 4 of the LLMC Measures, and may apply for constituting a limitation fund for liability of maritime claims in accordance herewith, and thus made the ruling of No. 1587 [2016] Final, Civ. Division, the Higher People’s Court of Fujian Province, holding that the appeal shall be dismissed and the ruling of first instance shall be upheld. Enji Shipping Company filed an application once again against the decision of second instance with the Supreme People’s Court, requesting a reopening.

Issue The applicability of the legal system of limitation of liability of maritime claims to inland ships.

Holding Upon reopening, the Supreme People’s Court holds that Article 210(2) of the Maritime Code provides that the limitation of liability for ships with a gross tonnage not exceeding 300 tons and those engaging in transport services between the ports of the People’s Republic of China as well as those for other coastal works shall be worked out by the competent authorities of transport and communications under the State Council and implemented after its being submitted to and approved by the State Council. Article 4 of the LLMC Measures issued by the Ministry of Communications1 provides that “(f)or ships engaging in coastal transport services between the ports of the People’s Republic of China or engaging in other coastal operations, their limitation of maritime claims is 50% of the limitation of liability specified in Article 3 hereof with a gross tonnage less than 300 tons, and 50% of the limitation of liability specified in Article 210(1) of the Maritime Code with a gross tonnage equal to or more than 300 tons.” Article 3 of the Maritime Code provides that “(t)he Ship as referred to herein means sea-going ships and other mobile units, but does not include ships or crafts to be used for military or public service purposes, nor small ships with a gross tonnage less than 20 tons.” The ships to which the provisions on the limitation of liability for maritime claims in the Maritime Code apply should be the sea-going ships defined in Article 3 hereof. According to the facts found by the 1

According to the deployment of the central institutional reform, relevant functions and responsibilities of the Ministry of Communications have been exercised by the Ministry of Transport.

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courts of first instance and second instance, Vessel No. 3003-X-ZJJ, which holds the Seaworthiness Certificate for Inland Freighters and the Interprovincial Conventional Freighter Transportation License in the middle and lower reaches of the Yangtze River and its tributaries, is authorized to navigate in Class-A navigation areas and thus is an inland ship. The site of the collision accident in this case, namely, the Minjiang estuary in Fujian Province, was not within the navigation areas Vessel No. 3003-X-ZJJ was authorized to sail in. However, the vessel classification and the authorized navigation areas of Vessel No. 3003-X-ZJJ do not change with its actual navigation area. Therefore, Vessel No. 3003-X-ZJJ, as an inland ship, was neither governed by the Maritime Code nor fell within the classifications of ships covered by the LLMC Measures. Pusuant to Article 83 of the Judicial Interpretation of the Supreme People’s Court on Certain Issue in Applying the Special Maritime Procedure Law of the People’s Republic of China, where interested parties object to constituting a limitation fund for liability of maritime claims proposed by an applicant, a maritime court should examine the eligibility of the applicant, the nature of claims involved in the accident and the amount of fund. The eligibility for an applicant means that the applicant should be the one meeting the requirements as specified in Article 101 of the Special Maritime Procedure Law of the People’s Republic of China, and the ships involved in accidents should be those as defined in Article 3 of the Maritime Code. The conclusion made by both the courts of first instance and second instance that an inland ship can apply for constituting a limitation fund for liability of maritime claims lacked legal basis, and their approval of Han X’s application for constituting such a limitation fund was an error in the application of law and should be rectified. Therefore, the Supreme People’s Court rules that the civil rulings made by the courts of first instance and second instance shall be vacated, and Han X’s application for constituting a limitation fund for liability of maritime claims shall be rejected.

Comment on Rule The limitation of the liability of maritime claims is a system that limits an obligator’s total liability for the loss of life, goods, or other property arising from the operation of a ship to a certain limit. This system is widely used in maritime judicial practice and is conducive to encouraging maritime salvage, meeting the requirements of the development of the marine insurance business, and playing a positive role in promoting the sound development of maritime transportation. Limitation of liability of maritime claims is a unique legal system of compensation for damages in the Maritime Code and is different from the general principle of compensation for damages in civil law in that the applicability of limitation of liability to ship classifications, obligors, circumstances, types of claims and scopes of liability limitation all depend on the legal provisions. Therefore, it is a statutory privilege granted by the Maritime Code to shipowners, managers and charterers.

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There have been three international conventions on limitation of liability since the twentieth century: the International Convention for the Unification of Certain Rules Relating to the Limitation of Liability of Owners of Seagoing Vessels (1924) has not been widely accepted and has not yet come into force; the currently effective International Convention for the Unification of Certain Rules Relating to the Limitation of Liability of Owners of Seagoing Vessels (1957) has established the “limitation of liability for shipowners” as a legal system initially unified in the world; and the Convention on Limitation of liability of Maritime Claims (1976), effective on December 1, 1986, is exactly the international treaty that China modeled relevant contents of its Maritime Code on, albeit having not been a party hereto thus far.2 Chapter 11 of the Maritime Code specifically treats the core issues under this system: ship classifications, subjects of liability, the circumstances under which the right to limitation of liability is extinguished, restricted and nonrestricted claims, calculation of liability limits, liability fund allocation, the relations between “limitation of liability of maritime claims” and the “unit limitation of liability”, offsetting against mutual claims, the procedure of limitation of liability, and so on. The legal issue to be solved in this case is the prerequisite one concerning the applicability of limitation of liability of maritime claims system, namely, the applicable classifications of ships. The applicable classifications of ships mean that against which classifications of ships when maritime claims are lodged, shipowners or operators may limit their liability for damages by laws and regulations on the limitation of the liability of maritime claims. The Maritime Code has set the minimum threshold for the application of this system in Chapter 11 hereof as ships with a gross tonnage of 300 tons or more and authorized competent authorities of transport and communications under the State Council to work out and implement relevant regulations on the limitation of liability for other classifications of ships: with a gross tonnage less than 300 tons, engaging in transport services among ports within the People’s Republic of China, engaging in other coastal operations and engaging in the carriage of passengers by the sea among ports within the People’s Republic of China. However, in judicial practice, there is still controversy about the applicable classifications of ships, with some holding that the system of limitation of liability of maritime claims applies to both the sea-going and inland ships, whereas others contending that the system hereof as provided in the Maritime Code applies to sea-going ships only, and inland ships may resort to applicable LLMC Measures to correspondingly limiting their liability of maritime claims. The significance of this case lies in clarifying the applicable scope of the system of limitation of liability of maritime claims and providing a unified standard for the adjudication of this issue. As an established system in the Maritime Code, the limitation of liability of maritime claims should cover the same ship classifications as the Maritime Code per se does. Article 3 of the Maritime Code provides that “(t)he Ship as referred to herein means sea-going ships and other mobile units, but does not include ships or crafts to be used for military or public service purposes, nor small ships with a gross tonnage less than 20 tons.” Therefore, the classifications of 2

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ships that the provisions on limitation of liability of maritime claims in the Maritime Code apply to should be ships as defined in Article 3 hereof. In addition, Article 210(2) of the Maritime Code provides that the limitation of liability for ships with a gross tonnage less than 300 tons, engaging in transport services among ports within the People’s Republic of China, and engaging in other coastal operations shall be formulated by the competent authorities of transport and communications under the State Council and implemented after it is submitted to and approved by the State Council. The Maritime Code has authorized the Ministry of Communications to work out and implement relevant regulations on the limitation of liability for ships with a gross tonnage less than 300 tons. The LLMC Measures issued by the Ministry of Transport in 1993 and approved by the State Council was derived from the authorization of the Maritime Code, so its scope of application should fall within that of the Maritime Code. In other words, the LLMC Measures should also apply to exclusively the ships as defined in Article 3 of the Maritime Code rather than inland ships. During the revision of the Maritime Code, some scholars proposed that the scope of application of limitation of liability of maritime claims herein should be extended to cover the passenger and cargo transportation within inland navigable waters connected with the sea and between coastal waters and inland waters connected with the sea, and the applicable ship classifications of limitation of liability of maritime claims herein should also be extended to cover ships sailing in the aforesaid waters. This proposition is more in line with the principle of scientific legislation and a unified legal system and is worthy of further exploration. However, before the introduction of some explicit modifications, the applicable ship classifications of the system of limitation of liability of maritime claim should remain limited to the ships as defined in Article 3 hereof. In addition, given significant differences between inland water and sea-going transportation in the value of vessels, operational characteristics and value of measurement, there should still be different applicable scopes of limitation of liability of maritime claims between the two types of transportation even if the applicable scope of the limitation of liability of maritime claims in the Maritime Code is properly expanded.

Changjiang Geotechnical Engineering Corporation (Wuhan) v. Wenling Subbranch of China Construction Bank Co., Ltd., Zhongbo Construction Engineering Group Co., Ltd. (Dispute over Independent Letter of Guarantee): Determination of an Independent Letter of Guarantee and the Fraud Related Hereto Ke Zhao

Rule Whether a letter of guarantee (L/G) is an independent L/G or a general guarantee under the Guaranty Law is defined by the existence in the L/G text of any stipulations on the independent payment liabilities of the L/G issuer upon complying presentation. If an L/G sets forth the required documents against which payments will be made and the maximum amounts of payments, and the issuer does not need to resort to additional means except for the required documents to determine the performance of underlying transactions, the independence and the documentation attribute of the issuer’s payment liabilities may be confirmed, and the L/G may be determined as an independent L/G. In an L/G fraud defense, a people’s court needs to examine underlying transactions under an independent L/G, but limit the scope of such examination to the clear awareness by the beneficiary of no breach of contract by the counterpart of the underlying contract or no other facts lead to the payment under the said independent L/G.

Collegial Bench for the Second Instance: Shumei Wang, Dongxu Ma and Zaiyu Guo Edited by Ming Li; translated by Zuoyong Liu K. Zhao (B) The Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_38

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Case Information 1. Parties Appellant (Plaintiff in the First Instance): Changjiang Geotechnical Engineering Corporation (Wuhan) (hereinafter referred to as Changjiang Geotechnical Company) Appellee (Defendant in the First Instance): Wenling Subbranch of China Construction Bank Co., Ltd. (hereinafter referred to as Wenling Subbranch) Third Party (Third Party in the First Instance): Zhongbo Construction Engineering Group Co., Ltd. (hereinafter referred to as Zhongbo Construction Company) 2. Procedural History First Instance: No. 20 [2016] Trial, Civ. Division, the Higher People’s Court of Zhejiang Province (dated Nov. 26 of 2018) Second Instance: No. 302 [2019] Final, Civ. Division, the Supreme People’s Court (dated Jun. 28 of 2019) 3. Cause of Action Dispute over independent L/G

Essential Facts Changjiang Geotechnical Company (General Contractor) and Zhongbo Construction Company (Contractor) concluded on July 29, 2009, the contractor agreement on the construction of the Tawurgha and Baniwalid projects in Misratah, Libya. To perform the contractor agreement mentioned above, Zhongbo Construction Company (Applicant) applied to Wenling Subbranch (Issuer) for issuing letters of guarantee (L/Gs). During the period from 2009 to 2010, Wenling Subbranch issued seven L/Gs in favor of Changjiang Geotechnical Company (Beneficiary), with each stating that “(w)ithin five business days upon receipt of your formal notification in writing of any breach of contract on the part of the said applicant and a notice of claim stating specific claim amounts signed and stamped by your legal representative (personin-charge) or duly authorized agent, this bank will pay the corresponding guarantee amounts if the applicant, Zhongbo Construction Company, fails to fulfill its liabilities set out in the contractor agreement and/or the Appendixes thereto, including ones agreed by the Parties thereto as may be amended, supplemented or novated through changes to the terms thereof. This bank shall be liable directly, unconditionally and irrevocably for guaranteeing the amounts hereon”. On March 25, 2011, Zhongbo Construction Company sent Wenling Subbranch a Notification of Suspending the Payment of the Guarantee Amounts on Advance Payment L/Gs and Performance Bonds, citing that the riots and armed conflict in Libya during the performance of the Contract constituted “force majeure” events and requesting Wenling Subbranch to terminate payments for the L/Gs due and suspend

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payments for the L/Gs undue. Wenling Subbranch notified Changjiang Geotechnical Company of a Notice on Zhongbo Construction Company L/Gs, stating that due to the force majeure events and Zhongbo Construction Company’s demand, the performance bond may be suspended. The amounts under advance payment L/Gs may be handled based on the principle of “paying the balances to either side” after account settlements between Zhongbo Construction Company and Changjiang Geotechnical Company, and from this day onwards, L/G extension and reopening will be stopped. On March 28, 2011, Zhongbo Construction Company sent Changjiang Geotechnical Company a Request Letter on Promptly Suspending Contract Performance and Terminating L/G Extension, requiring that the contract performance is forthwith suspended, the completed works settled, the right to terminate the contract reserved and any L/G extension stopped. On several occasions, Changjiang Geotechnical Company issued claim notices to Wenling Subbranch on each of the seven L/Gs involved in this case, claiming a total amount of CNY 700 million against Wenling Subbranch on the grounds of Zhongbo Construction Company’s breach of contract. On December 7, 2015, Wenling Subbranch sent Changjiang Geotechnical Company a notification requesting to return the original L/Gs, stating that the said L/Gs expired and requiring Changjiang Geotechnical Company to have them returned. On March 7, 2016, the People’s Court of Wenling City, Zhejiang Province decided to take in the application for the corporate reorganization of Zhongbo Construction Company, and Changjiang Geotechnical Company filed a lawsuit amid the dispute over the confirmation of general bankruptcy claims on November 22, 2016, with the Court against the Defendant, Zhongbo Construction Company and the Third Party, Wenling Subbranch, requesting to confirm its bankruptcy claims due totalling more than CNY 800 million and the accrued interest to Zhongbo Construction Company. The Court made No. 13673 [2016] Trial, Civ. Division, the People’s Court of Wenling City, Zhejiang Province (Zhejiang 1081), ruling that the contractor agreement between Changjiang Geotechnical Company and Zhongbo Construction Company was terminated, and all the other claims made by Changjiang Geotechnical Company were dismissed. Changjiang Geotechnical Company filed an appeal against the civil judgment made by the People’s Court of Wenling City, Zhejiang Province with the Intermediate People’s Court of Taizhou City, Zhejiang Province, which delivered No. 1355 [2018] Final, Civ. Division, the Intermediate People’s Court of Taizhou City, Zhejiang Province (Zhejiang 10), rejecting the appeal and upholding the first instance judgment. Later, Changjiang Geotechnical Company applied against the second instance judgment made by the Intermediate People’s Court of Taizhou City, Zhejiang Province for reopening the case, and the Higher People’s Court of Zhejiang Province (the court of first instance) rejected the application. The court of first instance held that this case was a dispute over independent L/Gs, and the five advance payment L/Gs and two performance bonds that Wenling Subbranch issued in favor of Changjiang Geotechnical Company (Beneficiary) in response to the request from Zhongbo Construction Company under the contractor agreement between Changjiang Geotechnical Company and Zhongbo Construction Company are legal and valid. The effective judgment concluded that Changjiang Geotechnical Company may have been aware that its advance payment was not

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sufficient to cover the works already completed by Zhongbo Construction Company and that the cause of the failure to continue the projects was the riots and armed conflict in Libya, the country where the projects were located. Therefore, Changjiang Geotechnical Company’s request to Wenling Subbranch for payments under these L/Gs could not be justified, and Wenling Subbranch and Zhongbo Construction Company’s defense that Changjiang Geotechnical Company’s request for payments under these L/Gs constituted L/G fraud was justified and upheld by the court of first instance. Changjiang Geotechnical Company filed an appeal against the first instance judgment to the Supreme People’s Court (the court of second instance), which concluded that the determination of the L/Gs in this case as independent L/Gs in the first instance judgment was right.

Issue Whether the L/G is an independent L/G or a guarantee under the Guaranty Law.

Holding Upon review, the Supreme People’s Court holds that: 1. The nature of the L/Gs involved Article 1 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee provides, “(f)or the purpose of the Provisions, an ‘independent L/G’ means anyone provided in writing by a bank or a nonbanking institution as the issuer to a beneficiary that promises to pay a specific amount or any amount up to the guaranteed amount of the said guarantee to the beneficiary upon receipt of a request for payment and presentation of documents complying with requirements of the guarantee.” Whether an L/G is an independent L/G or a guarantee under the Guaranty Law is defined by the existence in the L/G text of any stipulations on the independent payment liabilities of the L/G issuer upon complying presentation rather than some specific wordings of the guaranty liability. Article 3(1) hereof sets forth three circumstances under which the expression of intent to provide an independent L/G by an issuer may be determined. Among them, the third is the one where according to the L/G text per se, the payment obligation of an issuer is independent of the underlying transaction relationship and the legal relationship in an L/G application; that is, the issuer has only the payment liability in the case of complying presentation. Every L/G involved stipulated in Article 1 of its text the maximum guaranteed amount and stated in Article 3 of its text that “(w)ithin five business days upon receipt of your formal notification in writing of any breach of contract on the part of the said applicant and a notice of claim stating specific

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claim amounts signed and stamped by your legal representative (person-in-charge) or duly authorized agent, this bank will pay the corresponding guarantee amounts”. The L/Gs involved set forth the required documents against which payments would be made and the maximum amounts of payments, and the issuer did not need to resort to additional means except for the required documents to determine the performance of underlying transactions; as such, the independence and documentation attribute of the issuer’s payment obligation could be confirmed. Therefore, the determination of these L/Gs involved as independent L/Gs in the first-instance judgment is correct. 2. The justifiability of Changjiang Geotechnical Company’s right to make a demand The issuer of an independent L/G has the payment obligation conditional on complying with the presentation to the beneficiary. Such obligation is independent of, and not affected by, underlying transactions and the relationships established in the independent L/G application. Although payments against compliant documents are, indeed, a risk allocation arrangement accepted voluntarily by the parties to an independent L/G deal, the risk of fraud by the beneficiary is not expected to be one that the parties are willing to take on. Therefore, the Judicial Interpretation on Independent L/Gs sets forth the exceptions to the principle of independence in which a beneficiary determined to have been engaged in material fraud is not protected by the principle of independence, and an issuer has the right to refuse to make payments. Article 18 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee provides that “(w)hile hearing independent L/G fraud dispute cases or handling applications for the suspension of payments under an independent L/G, a people’s court may examine and determine the related facts of underlying transactions according to specific circumstances as set forth in Article 12 hereof claimed by the parties.” In this case, since Wenling Subbranch and Zhongbo Construction Company filed an L/G fraud defense, it was necessary for this Court to examine underlying transactions involving these independent L/Gs. Considering the institutional value of the “Payable on Demand” of an independent L/G, the examination of underlying transactions in this case shall be done following the principles of limitation and necessity, and the scope of examination shall be limited to whether the beneficiary of no breach of contract by the counterpart of the underlying contract or no other facts justifying the payments under the said independent L/Gs, namely, to be specific, to one, or more than one, of the five circumstances provided in Article 12 thereof. Article 12 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee provides that “(u)nder any of the following circumstances, a people’s court shall determine that it constitutes an independent L/G fraud: (1) a beneficiary is in collusion with the L/G applicant or others in fabricating underlying transactions; (2) a beneficiary submits fictitious or falsified third-party documents for its claims; (3) an obligor of underlying transactions is determined by a court judgment or an arbitration award to have no obligation of making payments or compensations; (4) a beneficiary confirms that the liabilities under underlying transactions have been fully fulfilled or the events of being due for payments as specified in an independent L/G has not occurred; or (5) others where a

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beneficiary knowingly abuses its right to make a claim.” The contractor agreement explicitly stipulated in Article 34 thereof that if a delay in the project process or other liabilities is attributed to force majeure events and/or general contractor’s own causes, either Party shall be exempted from any liability for such delay, and both Parties shall make concerted effort to mitigate any loss from such delay. Changjiang Geotechnical Company was aware that the risks from force majeure are shared by all parties. No. 1355 [2018] Final, Civ. Division, the Intermediate People’s Court of Taizhou City, Zhejiang Province (Zhejiang 10), found that because of armed conflict in Libya, Zhongbo Construction Company and Changjiang Geotechnical Company withdrew from the projects involved. Zhongbo Construction Company’s failure in performing the Contract was due to force majeure and thus did not constitute a breach of contract. In this context, Changjiang Geotechnical Company was clearly aware that it had no right of claim under the L/Gs involved in this case. Having been well aware that the projects involved in this case were impossible to continue due to force majeure, Changjiang Geotechnical Company still insisted on making a claim for payments under the performance bonds from Wenling Subbranch on the grounds that Zhongbo Construction Company was in breach of contract. Such an act was a lack of good faith and an abuse of the right of claim. The failure to uphold Changjiang Geotechnical Company’s claim by the court of first instance in accordance with Subparagraph 5 of Article 12 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee is justifiable. In addition, in light of related evidence obtained during the hearing, including witness testimonies, evidentiary documents presented by witnesses, meeting minutes of the project construction, Changjiang Geotechnical Company’s financial statements of revenues to the Ministry of Commerce of the People’s Republic of China and opinions from the Chinese Councilor’s Office in Libya, No. 1355 [2018] Final, Civ. Division, the Intermediate People’s Court of Taizhou City, Zhejiang Province (Zhejiang 10), also found that the confirmed amount of completed works was valued at no less than CNY 2.6695 billion, which was higher than the amount of advance payment made by Changjiang Geotechnical Company, indicating that the advance payment had been used for the projects rather than improperly possessed by Zhongbo Construction Company. That is, Zhongbo Construction Company was under no liability to return the advance payment to Changjiang Geotechnical Company. The effective judgment concluded that Zhongbo Construction Company, the underlying transaction obligor, had no liability of payment. The seven L/Gs involved in this case consisted of five advance payment L/Gs and two performance bonds. However, despite different designations, all of them stipulated substantially the same relationships of rights and liabilities and were, in essence, independent L/Gs. According to Subparagraphs 3 and 5 of Article 12 hereof, the failure to support Changjiang Geotechnical Company’s request for payments in the first instance judgment was justifiable. Therefore, the second instance judgment dismissed the appeal and upheld the original judgment.

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Comment on Rule As independent L/Gs issued by banks and other financial institutions have increased rapidly over recent years, exceeding commercial documentary letters of credit both in terms of the volume and the scale, cases of independent L/G disputes involving every link of the entire transaction process from issuing, modification, transfer, payment to claim are also increasing year by year in judicial practice. This case concerns a payment dispute between the beneficiary and the issuer, mainly involving the principle of L/G independence, the determination of exceptional circumstances and the determination criteria of L/G fraud. 1. Distinguishing independent L/Gs from general L/Gs under the Guaranty Law An independent L/G is a creditor’s rights guarantee mechanism wherein a beneficiary obtains payments from its issuer upon formal documents and the obligatory relationships in underlying transactions may, then, be separately settled between the beneficiary and the obligor, also known as the mechanism of “Pay First and Argue Later”. According to the definition in Article 1 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee, an independent L/G shall be issued in writing and establishes a unilateral contractual relationship between the issuer and the beneficiary. Namely, in an independent L/G, the issuer has the payment liability conditioned on the presentation of required documents to the beneficiary, and complying with the presentation is the sufficient and necessary condition for the issuer to fulfill its payment liability. An independent L/G is fundamentally different from a general guarantee in that the former is independent of, while the latter is subordinate to, underlying transaction relationships. The documentation attribute of the payment liability of an independent L/G issuer dictates the independence of an independent L/G, namely, being independent of both the underlying transactions and the relationships established in the independent L/G application. Except for statutory circumstances, the issuer may exercise its right of defense only on the grounds of the inconsistency of the documents presented by the beneficiary with the independent L/G texts rather than the underlying transaction relationships and the independent L/G application relationship beyond the independent L/G texts. The amounts of payments made by the issuer are determined by the independent L/G texts, and the documents presented without regard for the underlying transactions. However, a general guarantee has a subordinate nature: the rights and liabilities are premised on the establishment of the principal claims, the guaranty liabilities are limited to the scope of the principal claims, and the guarantor as the underlying transaction obligors has the right of defense against the underlying transaction creditors, which derives from the underlying transactions and is premised on the underlying contracts. However, in practice, some L/Gs both stipulate that the ICC Uniform Rules for Demand Guarantees may apply and that the guarantees are joint and several liability ones, resulting in conflicts in the expression of intent of guarantee terms and thus confusion in determining their nature.

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Whether or not an L/G is an independent L/G or a guarantee under the Guaranty Law is defined by the existence in the L/G text of any stipulations on the independent payment liabilities of the L/G issuer upon complying presentation rather than that of some specific wordings of the guaranty liability. As a professional financial institution, an L/G issuer is supposed to explicitly clarify the nature of an L/G by means of related guarantee terms, so when there is a dispute over its understanding, the explanation in favor of the beneficiary shall be adopted. Article 3(1) of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee stipulates that under three circumstances, an issuer shall be determined to make the expression of intent to provide an independent L/G: (1) the expression “Payable on Demand” is explicitly used in the text; (2) it has been stipulated in the guarantee terms that the ICC Uniform Rules for Demand Guarantees shall apply; and (3) according to the L/G text per se, the independence and the documentation attribute of the issuer’s payment liability can be confirmed. Furthermore, in regard to an independent L/G, two elements must be explicitly specified in the texts: the documents against which payments are made and the maximum amounts. The absence of them means that an issuer has to determine the performance of underlying transactions beyond the documents presented, and the independence and documentation attribute of an independent L/G is thus out of the question. In this case, even if described as an independent L/G, such an L/G shall be determined as a subordinate guarantee. Article 3(2) hereof further stipulates that corresponding underlying transactions under an independent L/G per se do not suffice to change the independence and documentation attribute of an issuer’s payment liabilities and thus do not affect the determination of the nature of an independent L/G. To avoid misunderstandings of legal application in practice, Article 3(3) hereof stipulates that once an L/G is determined as an independent L/G, the rules of adjudication of an independent L/G rather than the relevant guarantee provisions in the Guaranty Law shall apply.1 In this case, the L/Gs involved all specified the related documents and the maximum amounts of payments, so the issuer needed not to confirm the performance of underlying transactions except for examination of the documents presented, and the independence and documentation attribute of the issuer’s payment liabilities may be determined. Therefore, the L/Gs involved shall be determined as independent L/Gs. 2. The principle of limited examination for determining independent L/G fraud While enabling beneficiaries to realize their creditor’s rights directly and quickly and avoid being involved in underlying transaction disputes, independent L/Gs also create the possibility of being availed of to make improper claims. When deviating from independent L/G documents, stipulations in the underlying transaction contract and guarantee purposes, the claims are made in bad faith for illegal gains. While respecting the credit function of an independent L/G serving as a substitute for a guarantee in cash and upholding the contractual arrangement of “Pay First and Argue Later”, the independent L/G institution shall at the same time prevent 1

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and discourage the possibilities of beneficiaries fraud and rights abuse. Therefore, fraudulent demands from beneficiaries are generally listed around the world as an exception to the prime and unconditional liability on independent L/G guarantors of making payments on demand. Article 18 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee provides that “(w)hile hearing independent L/G fraud dispute cases or handling applications for the suspension of the payments under an independent L/G, a people’s court may examine and determine the related facts of underlying transactions according to specific circumstances as set forth in Article 12 hereof claimed by the parties.” In the case of the fraud exception, if the examination of underlying relationships constitutes a prerequisite for a judicial judgment, a people’s court needs to examine underlying transaction relationships to determine whether or not the beneficiaries have prima facie evidence to justify their claims. In an L/G fraud defense, a people’s court may break through, instead of blatantly disregarding, the independence of an independent L/G to examine the underlying contracts, that is to say, such examination shall be limited to the necessary scope. First, such an examination is not needed for all L/G frauds. For example, in a case of fraud involving falsified documents, just a prima facie examination of the forged documents themselves may determine whether it constitutes L/G fraud, and thus there is no need to go further to examine the underlying contracts. Only in the cases where fraud is suspected to have been committed through underlying contracts is such examination of underlying transactions needed; second, When it is necessary to review the underlying contract, such examination shall be limited to a certain scope, namely, whether or not the beneficiary, being well aware of no breach of contract by the underlying transaction obligor or other facts justifying the payments due under the said independent L/Gs, proceeds still to abuse its right to make claims maliciously,2 and shall also focus on the existence of any beneficiary fraud instead of that of any breach of the underlying contracts by the obligor. A people’s court shall strictly limit its scope of examination to the very matters related to fraud and shall not go beyond the scope of fraud to determine whether the underlying contracts are in breach; otherwise, the further trial of disputes under the underlying contracts would be affected; third, the typified disposal of independent L/G fraud also contributes to limiting the scope of the examination. Such an approach has been used in various jurisdictions, which groups L/G fraud into different types: uncomplying documents for a claim, the underlying transaction contracts in violation of public order and good customs, obvious nonexistence of invalid underlying transaction contracts or defaults of the obligors. Independent L/G fraud is also characterized into various categories in China. Article 12 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee provides that “(u)nder any of the following circumstances, a people’s court shall determine that it constitutes an independent L/G fraud: (1) the beneficiary is in collusion with the L/G applicant or others

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in fabricating underlying transactions; (2) the beneficiary submits fictitious or falsified third-party documents for its claims; (3) an obligor of underlying transactions is determined by a court judgment or an arbitration award to have no liability of making payments or compensations; (4) the beneficiary confirms that the liabilities under underlying transactions have been fully fulfilled or the events of being due for payments as specified in an independent L/G has not occurred; or (5) others where the beneficiary knowingly abuses its right to make a claim. In the Chinese judicial practice of hearing independent L/G fraud cases, the principle of limited examination of underlying transactions under independent L/G shall be reflected in the fact that a people’s court will examine only the five circumstances as set forth in Article 12 thereof. 3. The determination criteria of independent L/G fraud In this case, since Wenling Subbranch and Zhongbo Construction Company filed an L/G fraud defense, this Court needed to examine the underlying transactions involving these independent L/Gs. Considering the institutional value of the “Payable on Demand” of an independent L/G, the examination of the underlying transactions in this case shall be done following the principles of limitation and necessity, and the scope of examination shall be limited to the five circumstances provided in Article 12 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee, which include the three circumstances: no real transactions, document fraud and obvious abuse of the right to claim for payment. Specifically, the first circumstance is “the beneficiary is in collusion with the L/G applicant or others in fabricating underlying transactions”, constitutes no real transactions, the second is “the beneficiary submits fictitious or falsified thirdparty documents for its claims”, constitutes document fraud, and both of them are easy to judge and identify. While either the third is “an obligor of underlying transactions is determined by a court judgment or an arbitration award to have no liability of making payments or compensations” or the fourth is “the beneficiary confirms that the liabilities under underlying transactions have been fully fulfilled or the events of being due for payments as specified in an independent L/G has not occurred”, it is the case of obvious abuse of the right to demand payment and the most common case of independent L/G fraud. The abuse of the right to request for payment is that being well aware of no right to request for payment, a beneficiary deliberately conceals the facts and still proceeds with documents seemingly complying with L/G terms, for example, a request for payment and a statement of breach, so as to lure or induce the issuer to make misguided payments. Therefore, such abuse of the right to request payment constitutes fraud. Given the complexity and diversity of independent L/G fraud in practice, Subparagraph 5 of Article 12 thereof stipolates a catch-all provision for all other circumstances under which the right to claim for payment is obviously abused. However, for the purpose of safeguarding the fundamental value of the independence of an independent L/G, prudence should be exercised in applying the said catch-all provision in judicial practice. The circumstance of this case falls under Subparagraphs 3 and 5 of Article 12 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over

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Independent Letter of Guarantee. The contractor agreement explicitly stipulated in Article 34 that if a delay in the project process or other liabilities is attributed to force majeure events or the general contractor’s own causes, either Party shall be exempted from any liability for such delay, and both Parties shall make concerted effort to mitigate any loss from such delay. Changjiang Geotechnical Company was aware that the risks from force majeure are shared by all parties. The second-instance judgment in a separate trial found that it was because of armed conflict in Libya that Zhongbo Construction Company and Changjiang Geotechnical Company withdrew from the projects involved. Zhongbo Construction Company’s failure in performing the contract was due to force majeure and thus did not constitute a breach of contract. In this context, Changjiang Geotechnical Company was clearly aware that it had no right of claim under the L/Gs involved in this case. Changjiang Geotechnical Company still insisted on making a claim for payments under the performance bonds from Wenling Subbranch on the grounds that Zhongbo Construction Company was in breach of contract. Such an act was a lack of good faith and an abuse of the right of claim. Subsequently, the effective judgment in a separate trial also found that the confirmed amount of completed works was valued at no less than CNY 2.6695 billion, which was higher than the amount of advance payment made by Changjiang Geotechnical Company, indicating that the advance payment had been used for the projects rather than improperly possessed by Zhongbo Construction Company. That is, Zhongbo Construction Company was under no liability to return the advance payment to Changjiang Geotechnical Company. The effective judgment concluded that Zhongbo Construction Company, the underlying transaction obligor, had no liability of payment, satisfying the third circumstance as provided in Article 12 hereof. Therefore, the court of the separate trial determined that Changjiang Geotechnical Company’s claim constituted an abuse of the right to demand payment and rightly did not uphold the payment request from Changjiang Geotechnical Company. There are some disputes over the application of Subparagraph 3 of Article 12 of the Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee. The first question is about the point of time when an effective judicial decision or an effective arbitration award takes effect. To uphold the functions of facilitating transactions and building the trust of an independent L/G, the circumstance of a beneficiary abusing its right to make claims shall have to be determined rather obvious to be determined as a fraud of an independent L/G. Therefore, Subparagraphs 3 and 4 of Article 12 hereof stipulate, respectively, that such circumstances shall be determined by both judicial decisions or arbitration awards and the evidence that the beneficiary itself confirms no right to make claims. However, Article 12 hereof does not explicitly specify the point of time when such judicial decisions and arbitral awards are made. A claim made by a beneficiary after an effective judicial decision or arbitral award on no payment or compensation liability of an underlying transaction obligor is easier to be determined to have no basis of good faith. However, can a beneficiary’s claim made prior to the existence of such a judicial decision or arbitral award be determined as independent L/G fraud? In this regard, there is still much controversy in practice. The doctrine of liberal construction applies in some countries to the point of time for adjudication. As long

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as an effective judicial decision or arbitral award on no payment or compensation liability of an underlying transaction obligor is made prior to the actual payment by a bank, the court may, upon such adjudication, support the bank to terminate payments to avoid disputes over unjustified gains. However, some scholars prefer the principle of strict interpretation, holding that as long as no effective judicial decision or arbitral award to this effect is made, a claimant shall not be determined to be subjectively fraudulent and malicious to uphold the independence of an L/G and the mechanism of “Pay First and Argue Later”. In this case, the effective judgment in a separate trial was made after Changjiang Geotechnical Company’s request for payment. However, rather than exclusively invoking Subparagraph 3 of Article 12 hereof to conclude that Changjiang Geotechnical Company’s claim constituted an abuse of the right of payment, the court in this case made a joint application of Subparagraphs 3 and 5 thereof in determining the right abuse by Changjiang Geotechnical Company. Such an approach not only took into account the mentioned above controversy but was also more prudent. Another controversy is about the res judicata of an effective judgment. For the purpose of maintaining the consistency of effective judgments and substantive civil rights and liabilities between the parties, an effective civil judgment has the res judicata. However, do all items of expression in an effective judgment have the binding force? Usually, the res judicata of an effective judgment is simply limited to the scope defined by the main body of a judgment. However, since the judicatory grounds on which an effective judgment is made are mainly judgments on the main legal facts and legal issues, the recognition of the res judicata of the main body of an effective judgment inevitably gives a certain degree of the res judicata to the judgments on the main legal facts and legal issues in a lawsuit. Therefore, substantial judgments on legal facts and issues based on the full cross-examination and debate between parties shall have the res judicata and be binding on both all the parties involved and a court, and any contents of claims from a litigating party that are in conflict with the main facts and main conclusions affirmed by a preexisting effective judgment shall not be upheld by a court. In this case, the amount of completed works by Zhongbo Construction Company was the main fact affirmed in the effective judgment in a separate trial. The substantive judgments on this fact under dispute were made following full testification, cross-examination and debate in a separate hearing and had the res judicata. Therefore, the request made by Changjiang Geotechnical Company in this case to negate the main fact affirmed in a preexisting effective judgment in a separate trial shall not be supported. Based on the main fact of the amount of completed works involved by Zhongbo Construction Company affirmed in the effective judgment in a separate trial, the first instance judgment that Zhongbo Construction Company has not misappropriated the project funds involved and has no liability to Changjiang Geotechnical Company to return the advance payment is justified.

Sinohydro Engineering Bureau No. 4 Co., Ltd. v. China CAMC Engineering Co., Ltd., Xining Railway Subbranch of China Construction Bank Co., Ltd. (Dispute over Independent Letter of Guarantee Fraud): Application of the Exception Rule on Advance Payment Guarantee Fraud Yinglin Xu

Rule 1. An advance payment in a construction project is, in essence, an advance loan rather than an advance payment of the project funds. Therefore, the subject matters guaranteed by an advance payment guarantee include not only the use of the advance payment for the construction of the project but also the repayment of the advance payment. 2. As long as advance payment is not fully repaid through installment deductions even if it has been used wholly or mainly for the project, the beneficiary still has the right to make a claim for payment under the advance payment guarantee after the occurrence of some milestone events, including the repayment due. 3. Without reduction clauses in an advance payment guarantee, the beneficiary’s claim for payment in full under the advance payment guarantee should not be determined as an independent letter of guarantee (L/G) fraud even if the advance payment has been partially repaid pro rata through installment deductions.

Collegial Bench for the Second Instance: Xingye Yang, Guishun Li and Hongyu Chen Edited by Zaiyu Guo; translated by Zuoyong Liu Y. Xu (B) The Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_39

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Case Information 1. Parties Appellant: Sinohydro Engineering Bureau No. 4 Co., Ltd. (hereinafter referred to as Sinohydro Company) Appellee: China CAMC Engineering Co., Ltd. (hereinafter referred to as CAMCE) Third Party in the First Instance: Xining Railway Subbranch of China Construction Bank Co., Ltd. (hereinafter referred to as Railway Subbranch) 2. Procedural History First Instance: No. 88 [2015] Trial, Civ. Division, the Higher People’s Court of Qinghai Province (dated Dec. 24 of 2018) Second Instance: No. 349 [2019] Final, Civ. Division, the Supreme People’s Court (dated Aug. 28 of 2019) 3. Cause of Action Dispute over independent L/G fraud

Essential Facts On October 2, 2013, CAMCE and its Bolivian counterparty entered into a Turnkey Contract (MOPSV/VMT LPI. NO001/2013) on the construction of Bid Section I of the Montero–Bulo Bulo Railway Project in Bolivia, with the total amount being Boliviano 722,170,582.88. On April 4, 2014, CAMCE (Party A) and Sinohydro Company (Party B) concluded a Subcontract for Civil Engineering and Equipment Installation for the Railway Project (hereinafter referred to as Subcontract), which stipulates that Sinohydro Company is responsible for completing the civil engineering construction and equipment installation for the Bid Section I of the Railway Project within a period of 24 months (namely, 730 calendar days, the same as in set forth in the Turnkey Contract) starting on December 13, 2013 (the commencement date, subject to the specific date as set forth in the Notice of Commencement issued by the project owner or its advisory engineer) for a total consideration of Boliviano 375,245,807.00. Upon the application from Sinohydro Company, Railway Subbranch issued on April 16, 2014, an Advance Payment Guarantee and a Performance Bond to and in favor of CAMCE, stating in the Advance Payment Guarantee to CAMCE that “(t)his Bank hereby undertakes that this Bank will unconditionally pay any total amount up to CNY 66,315,000 within seven business days upon receipt of a written notice of claims, without any supporting documents required, from you stating that Party B fails to fulfill its contractual obligations as stipulated in the contract. This Guarantee is effective on the date of issuance and remains valid until its guarantee amount is exhausted for payment to Party A. Any written claims shall be directly lodged with

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and delivered to, or notified of via mail, cable or other legal means, this Bank within the validity period of this Guarantee. The original of this Guarantee when having expired, should be returned to this Bank for writing off. With the amount guaranteed being CNY 23,210,247, the Performance Bond shall be valid until Party B performs and completes all the works under this Subcontract and remedies any defects therein and contains all the other stipulations as stated in the Advance Payment Guarantee”. On May 26, 2014, CAMCE remitted CNY 45,210,046.14 to Sinohydro Company through the Bank of China’s Subbranch of Beijing Zhongyin Building, and Sinohydro Company and CAMCE agreed that the remaining advance payment, which will be paid in Boliviano to CAMCE’s subaccount established in the Province of Santa Cruz, Bolivia, will be made available to Sinohydro Company for funding the project construction as needed. On November 3, 2015, the Bolivian project owner terminated the Turnkey Contract with CAMCE. On November 5, 2015, CAMCE sent a Written Notice of Claim to Railway Subbranch, requesting the payment under the advance payment guarantee involved in this case and stating in the Written Notice of Claim that “(a)s of this October, Sinohydro Company has seriously been behind the schedule of project construction, suspended many works and laid off many workers. With only one month left away from the prescribed deadline for the project, Sinohydro Company is unlikely to be able to fulfill its obligations under the Subcontract”. On November 10, 2015, Railway Subbranch sent a Reminder Notice to Sinohydro Company, stating that according to terms and conditions in the Advance Payment Guarantee and the Performance Bond, we, this Bank, will fully pay the amount claimed by the beneficiary unconditionally within seven business days after receipt of the beneficiary’s written Notice of Claim. This Reminder Notice is hereby sent to require you to deposit the amount into your bank account established at this Bank on or prior to November 17, 2015, for timely payment of the claim as required in the Advance Payment Guarantee and Performance Bond. On November 18, 2015, Sinohydro Company filed a lawsuit with the Higher People’s Court of Qinghai Province, requesting that “(1) to confirm that CAMCE’s application for payment under the Advance Payment Guarantee and Performance Bond from Railway Subbranch constitutes fraud and thus has no effect; (2) to order Railway Subbranch to stop the payment of CNY 66,315,000 under advance payment guarantee to CAMCE; (3) to order Railway Subbranch to stop the payment of CNY 23,210,247 under the Performance Bond to CAMCE; (4) to order CAMCE to bear all legal costs and preservation costs incurred in this case and attorneys’ fees incurred by Sinohydro Company in this case”. On November 19, 2015, CAMCE gave notice of terminating the Subcontract to Sinohydro Company. On December 24, 2018, the court of first instance rendered No. 88 [2015] Trial, Civ. Division, the Higher People’s Court of Qinghai Province, rejecting the claims from Sinohydro Company. Then, Sinohydro Company filed an appeal to the Supreme People’s Court against the first instance judgment. The claims from Sinohydro Company were as follows:

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(1) CAMCE refused to audit the completion settlement statements for stage 9–11 works and refused to pay the project funds for stage 9–11 works, leading to Sinohydro Company’s failure in satisfying the project schedules in July and August and the resultant dismissal of its workers. There were causal relationships between the nonperformances by both parties, and more importantly, it was the nonperformance by CAMCE that preceded. Therefore, CAMCE’s claim for payments under the Advance Payment Guarantee and the Performance Bond constituted fraud; (2) the Advance Payment Guarantee was to guarantee that the advance payment would be used by Sinohydro Company for the exclusive purpose of the project construction. Since the advance payment received by Sinohydro Company had been fully used for the project in question, CAMCE no longer had the right to make a claim under the Advance Payment Guarantee. Therefore, CAMCE’s request to pay the full amount under the Advance Payment Guarantee was the act of “abusing the right to demand payments when having been aware that it had no right to do so”, constituting the letter of guarantee fraud; and (3) the fact that more than CNY 18 million out of the advance payment was used for the construction of stage 1–8 works, as listed in the settlement statements for stage 1–8 works confirmed by both parties, was recognized by CAMCE, and deducted from the settlement amounts for stage 1–8 completed works as the installment repayments for the advance payment, so the maximum claim amount (even if CAMCE was entitled to) should be limited to the remaining amount of the advance payment, and should not have the right to make a claim for payment in full under the Advance Payment Guarantee, and otherwise would constitute the letter of guarantee fraud. Sinohydro Company requested that the first instance judgment be revoked and that all claims from Sinohydro Company be supported.

Issue Whether CAMCE’s claim for the payment under the Advance Payment Guarantee constitutes fraud.

Holding Upon review, the Supreme People’s Court holds: Judging from the stipulations in and the actual performance of the Subcontract, the advance payment involved in the case was a financing facility offered by CAMCE to Sinohydro Company for the start-up of the project involved in this case and should be repaid pro rata by Sinohydro Company according to the completed works of the project, rather than only and exclusively the project funds paid in advance. Whether the advance payment was fully used for the project involved in the case would not affect CAMCE’s right to claim as long as the advance payment was not fully repaid

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to the provider. Given that there were no reduction clauses in the Advance Payment Guarantee, its guaranteed amount did not change automatically with the performance of Sinohydro Company. CAMCE, the beneficiary, did not need to prove that its amount of claim should be the amount payable under the underlying transaction, so its demand for payment in full under the Advance Payment Guarantee should not be deemed to be an abuse of its right to make a claim. The issuance of an independent L/G should be construed as the L/G applicant’s waiver of its defense against the beneficiary’s breach(es) under the underlying transaction, and thus, the existence of a breach(es) under the underlying contract and the causalities of such breach(es) in this case would not affect the right of CAMCE to exercise its rights under the Advance Payment Guarantee, and CAMCE’s claim to pay under the Advance Payment Guarantee did not constitute a fraudulent demand for payment under an independent L/G. Therefore, the Supreme People’s Court rejected the appeal from Sinohydro Company and upheld the original judgment.

Comment on Rule A contractor usually needs to make significant upfront inputs once the contract is signed. Given the characteristics of international projects, such as longer construction periods and larger contract amounts, advance payments usually make up for 10%30% of the total contract amounts and are largely absorbed soon in the initial stages of a project. Does the beneficiary still have the right to claim under the advance payment guarantee after the occurrence of some milestone events, including the repayment due, as set forth in an advance payment guarantee? Should the beneficiary’s claim for payment in full under an advance payment guarantee be construed as the abuse of its right to claim where a part of the advance payment has been reimbursed and thus constitute a fraudulent demand for payment? In-depth analysis and research on these legal issues in judicial practice should be conducted, and the accurate determination of the nature of an advance payment has a decisive influence on the correct understanding of these legal issues. 1. The nature of project advance payments Project advance payment is a method of billing and payment in response to the characteristics and objective laws of construction projects. The specific purposes of advance payments are usually stipulated by the parties in a project contract, and the project owner has the right to take back the advance payments if they are used by the contractor for other purposes than those agreed upon. Given a significant input of start-up funds needed by the contractor for preparations before the project commencement, a project owner usually pays in advance a certain part of the contract amount to the contractor to meet its huge working capital requirements so as to ensure the smooth progress of the project construction. In paying a huge advance payment before the construction and delivery of a project, the project owner is undoubtedly putting itself at very high risk, as its huge inputs previously made will likely be wasted in the

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event of a failure to meet the contract requirements or to deliver the project achievements, as agreed upon due to the contractor’s nonperformance, insolvency or force majeure events. Therefore, before making an advance payment to the contractor, the project owner usually requires the contractor to provide an advance payment guarantee of the same amount and in the same currency. An advance payment guarantee is usually issued by a financial institution acceptable to, and in the format approved by, the project owner. To guarantee its own rights and interests, the project owner usually specifies the repayment requirements of the advance payment in the contract, requiring that a preset proportion of the advance payment be repaid when each installment of the project fund is made until the advance payment is fully repaid, while the contractor may also request the project owner to return the advance payment guarantee once the advance payment is fully repaid. Clause 14.2 of the General Conditions of Contract (the 1st edition, 1999), formulated by Fédération Internationale Des ingénieurs Conseils (FIDIC) and widely used and universally recognized in the international engineering world, provides that “(t)he Employer shall make an advance payment, as an interest-free loan for mobilization, when the Contractor submits a guarantee in accordance with this Subclause”.1 FIDIC’s General Conditions of Contract is generally used in foreign loan projects in China, and its interpretations of the nature of advance payments are representative in international engineering practice. However, in a specific case, the nature of advance payments should be determined according to the specific stipulations by the parties. In this case, Article 20.1 of the Subcontract stipulates that Sinohydro Company shall issue to CAMCE an advance payment guarantee covering 20% of the Contract Amount via a bank acceptable to CAMCE within seven days of the effective date of the Subcontract. Article 20.2.2 of the Subcontract stipulates that CAMCE shall pay the advance payment of the same amount within seven business days upon receipt of the advance payment guarantee and its verification. The installment repayment of the advance payment shall be made in synchronization with the completed works under the Turnkey Contract until the advance payment is fully repaid. During the contract performance, the amounts payable to and requested by Sinohydro Company out of the settlement amounts for the completed stage 1–8 works calculated on the settlement statements for the completed stage 1–8 works confirmed by the parties were also the net amounts based on the settlement values of the completed stage 1–8 works deducting the corresponding installment repayments of the advance payment. Judging from the stipulations in and the actual performance of the Subcontract, the advance payment involved in the case was a financing facility offered by CAMCE to Sinohydro Company for the start-up of the project involved in this case and was repaid in pro rata installments by Sinohydro Company according to the completed works of the project, rather than only and exclusively the project funds paid in advance. It was more of an advance loan than of the project funds paid in advance. Thus, the judgment determined the advance payment in this case as the interest-free loan provided by CAMCE to Sinohydro Company for the purpose of starting the project involved in this case. 1

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2. The guarantee scope of an advance payment guarantee An advance payment guarantee involves the interests and risks of the project owner, the contractor and the guarantor bank, so correct determination of the guarantee scope of an advance payment guarantee is helpful to clarify the rights and obligations of the parties involved in the advance payment guarantee. An advance payment guarantee is the written promise made by the guarantor (the bank) upon request from an applicant (the payee of advance payment in a contract, usually an exporter) to and in favor of a beneficiary (the payer of the advance payment in a contract, an importer in most cases) guaranteeing that upon receipt of a claim for payment from the beneficiary if the applicant fails to perform or partially performs, the guarantor will repay the advance payment.2 The debtor in an advance payment guarantee is liable to reimburse any amounts of the advance payment, possibly with interest, already repaid by the guarantor bank in respect of its failure to deliver any goods, equipment, construction and/or services as required by the terms of the contract.3 The advance payment guarantee’s role is to ensure that the project owner may make a claim against the contractor and recover the advance payment in the event the contractor fails to perform or fails to perform in full. The contractor shall guarantee that the advance payment guarantee remains valid and redeemable until the advance payment is fully repaid, and the guaranteed amount of an advance payment guarantee may be reduced over time as the advance payment is repaid in installments. An advance payment guarantee functions to bind the contractor to fulfill as agreed in a contract its obligation of repaying the advance payment that it has been previously offered. In this case, because the advance payment involved in the case was a financing facility provided by CAMCE to Sinohydro Company to start the project involved in the case and would be repaid by Sinohydro Company in proportion as the project went along, it was, in essence, an advance loan rather than an advance payment of the project funds. Therefore, the subject matters guaranteed by the advance payment guarantee included not only the use of the advance payment for the construction of the project but also the repayment of the advance payment. Even if having been used wholly or mainly for the project, the advance payment was not fully repaid through deduction. Therefore, the beneficiary still had the right to make a claim for payment under the advance payment guarantee after the occurrence of some milestone events, including the repayment due, as set forth in the ADG. 3. Determination of the exceptions to advance payment guarantee fraud An advance payment under a project undertaking contract is usually stipulated to be deducted pro rata as installment repayments as the project construction goes on. Subject to consent from the beneficiary, the guaranteed amount of an advance payment guarantee can be reduced with the progressive completion of the contracted project, and the contractor should complete the reduction procedures in time during 2 3

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the subsequent project stages. Therefore, in an advance payment guarantee, the establishment of the reduction clause is essential. In the case of international projects, when there are expressly stated reduction clauses in an advance payment guarantee, the risk under the advance payment guarantee the applicant is exposed to before the expiry of the advance payment guarantee will be gradually reduced with the progressive fulfillment of its obligations. However, given that an independent L/G is independent of the underlying transactions, its guaranteed amount cannot be automatically reduced with the applicant’s fulfillment of the underlying transaction, and only reduction clauses (if any) in the original advance payment guarantee can lead to a change in its guaranteed amount. In addition, the guarantor bank examines only the documents presented by the beneficiary, so unless the guarantor bank can determine the performance of relevant stages by relying on its own records, an independent guarantee must also specify the documents for proving to meet the reduction conditions. Without reduction clauses in an advance payment guarantee, the applicant may still face the risk of being demanded to make the payment in full under the advance payment guarantee if the beneficiary chooses to do so as required in the advance payment guarantee, even if the debtor in the underlying transaction4 has partially repaid the advance payment through installment deductions. And then, without reduction clauses in an advance payment guarantee, does it constitute fraud for the beneficiary to make a claim for payment in full hereunder? This issue has been addressed in an earlier case handled by the Higher People’s Court of Jiangsu Province. In the case of Jiangsu Taihu Boiler Co., Ltd. v. PT. KRAKTAU Engineering Co., Ltd. and Wuxi Branch of Bank of China Co., Ltd. (Dispute over Letter of Guarantee Fraud),5 the court concluded that as Taihu Boiler’s claim that the guaranteed amount under the advance payment guarantee is proportionally reduced was not incorporated in the advance payment guarantee, KRAKTAU’s demand for full payment according to the advance payment guarantee requirements did not constitute fraud. The arguments on reduction clauses in this case provide a useful reference for establishing the judgment criteria for the issues of this kind. The stipulation in the advance payment guarantee involved in this case “valid until the advance payment is fully deducted by CAMCE” is not sufficient to be deemed a reduction clause, and furthermore, no documents (required to be presented) against which the reduction in the guaranteed amount should be made were expressly listed in the advance payment guarantee. Therefore, although the expression “the advance payment will be deducted in synchronization with the completed works under the underlying contract until the advance payment is fully repaid” was included in Article

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In practice, the issuance of a letter of guarantee may, in most cases, be applied by a subsidiary or affiliate as the L/G applicant, but only by the group company on behalf of a subsidiary or affiliate for its underlying transaction with the L/G beneficiary due to the centralized financial control or a financial holding company exclusively for all bank financing affairs across the group company, thus, the instructing party (instructing the issuance of an L/G) may not be the party assuming the obligations in the underlying transaction (the L/G applicant). 5 No. 0006 [2013] Final, Foreign-related Commercial Division, the Higher People’s Court of Jiangsu Province. Sources: China Judgments Online.

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20.2.2 of the Subcontract, such a reduction clause was not included in the claim conditions in the advance payment guarantee, and the total amount of the advance payment guaranteed by the guarantor bank was not automatically reduced pro rata due to the installment deductions. In the absence of a reduction clause expressly stipulated in the advance payment guarantee, CAMCE, as the beneficiary was under no obligation to certify that the amount it claimed under the advance payment guarantee should be the amount payable to CAMCE under the underlying transaction. Therefore, Sinohydro Company’s claim for full payment under the advance payment guarantee was not the act of abusing its right to claim when having known that it did not have such right to claim, and thus did not constitute a fraudulent claim under an independent L/G. According to the settlement statements for stage 1–8 completed works confirmed by CAMCE and Sinohydro Company, CAMCE acknowledged that more than CNY 18 million had already been deducted as the installment repayments for the advance payment. However, according to the second instance judgment of this case, CAMCE still had the right to claim in full the total guaranteed amount of CNY 66,315,000 under the advance payment guarantee against Sinohydro Company. Was this result fair to Sinohydro Company? Sinohydro Company asserted that CAMCE’s claim amount should be limited to the balance of the advance payment, namely, the remaining amount of the advance payment net of the amounts of installment deductions. Was the assertion from Sinohydro Company justified? That is were its grounds established? With the basic working principle of an independent L/G being that a beneficiary obtains payment from the L/G issuer upon presentation of formal documents and separate settlements of the creditor-debtor relationships in the underlying transaction between the beneficiary and the applicant/debtor are then made, namely, the creditor’s right guarantee mechanism of “Pay First and Argue Later”, Sinohydro Company may, having made the payment under the advance payment guarantee, lodge its own claim against CAMCE or recover the excessive amount from CAMCE by exercising its right of recourse through the dispute resolution mechanism for the underlying transaction if believing that CAMCE had made an improper or excessive claim. This is the essence of the risk reversal mechanism of “Pay First and Argue Later” with an independent L/G. 4. The determination of the causalities of breaches under the underlying contract has no effect on the beneficiary’s realization of its rights under an independent L/G The principle established by the Supreme People’s Court in Guiding Case No. 109: Anhui Foreign Economic Construction (Group) Co., Ltd. (Reopening Applicant) v. Inmobiliaria Palacio Oriental S.A. (Reopening Respondent), Banco de Costa Rica and Anhui Branch of China Construction Bank Co., Ltd. (Third Parties in the First and Second Instances)(Dispute over L/G Fraud)6 is that the L/G beneficiary’s breach(es) under the underlying contract does not necessarily affect its right to make a claim for 6

No. 134 [2017] Reopening, Civ. Division, the Supreme People’s Court. Sources: China Judgments Online.

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payments under the independent L/G upon presentation of required documents. Even if an effective judgment or arbitration award determines the beneficiary’s breaches under the underlying contract, the existence of such breach(es) of contract is not necessarily the necessary and sufficient condition for constituting an L/G fraud. Although the arbitration award by Colegio Federado de Ingenieros y de Arquitectos de Costa Rica found that Inmobiliaria Palacio Oriental S.A. had breaches in its performance of the contract but did not determine that Anhui Foreign Economic Construction (Group) Co., Ltd. was exempted from its liability of making payments under the L/G or making compensations to the beneficiary as the result of the existence of the breaches by Inmobiliaria Palacio Oriental S.A. Therefore, Inmobiliaria Palacio Oriental S.A.’s claim for payment under the independent L/G could not be determined on the basis of the aforesaid arbitral award as an L/G fraud as defined in Article 12(3) of the Rules of the Supreme People’s Court on Several Issues Concerning Trial of Independent Guarantee Disputes. It is worth noting that the Supreme People’s Court also held the same view in the case of Liaoning High-Tech Energy Group Co., Ltd. v. Biomass Electricity Co., Ltd. and Liaoning Branch of China Construction Bank Co., Ltd. (Dispute over L/G Fraud).7 In that case, the Supreme People’s Court held that the determination of the causalities of breaches under the underlying contract did not affect Biomass Electricity Co., Ltd.’s realization of its rights under the independent L/G and ruled that the assertion that the breaches under the underlying contract by Biomass Electricity Co., Ltd. preceded and the request to terminate payments under the independent L/G on the grounds thereof from Liaoning Gaoke Energy Group Co., Ltd. were legally unjustified. All these cases reflect the Supreme People’s Court’s prudent attitude in including a beneficiary’s breaches into the scope of examination of L/C fraud. In this case, Sinohydro Company claimed that CAMCE refused to audit the completion settlement statements for stage 9–11 completed works and refused to pay the project funds for stage 9–11 completed works, rendering the workers, machinery and equipment running idle, and the construction failing to be carried out at full swing, and the failure to operate at full capacity was precisely the logical cause behind Sinohydro Company’s dismissal of workers. Since an independent L/G is independent of the underlying contract, neither the applicant nor the issuer has any right of defense with relation to the contents of the underlying contract, including the termination or invalidation of the underlying contract, and the beneficiary’s breaches under the underlying contract against the guarantee applicant. Only under the circumstance of an L/G fraud can the applicant have the right to defend against the underlying contract and request the guarantor bank to terminate payments under an independent L/G, and the guarantor bank also has the right to assert itself against the beneficiary’s rights under an L/G.8 The Supreme People’s Court holds that the issuance of an independent L/G should be construed as the L/G applicant’s waiver of its defense against the beneficiary’s breach(es) under the underlying transaction, and thus, the existence 7

No. 5067, No. 5068 and No. 5069 [2017] Appeal, Civ. Division, the Supreme People’s Court. Sources: China Judgments Online.

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of a breach(es) under the underlying contract and the causalities of such breach(es) in this case would not affect the right of CAMCE to exercise its rights under the advance payment guarantee. Therefore, this stance staked out by the Supreme People’s Court is a further reaffirmation of the “independent” characteristic of an independent L/G.

Tang X, et al. v. The People’s Government of Jin’an District, Fuzhou City, Fujian Province, Jin’an Branch of Fuzhou Land and Resources Bureau (Dispute over Administrative Reconsideration Decision): Judgment of the Issue of the Administrative Reconsideration Agency being a Codefendant Yan Wang and Jing Lu

Rule 1. The time limit for response to government information disclosure refers to the statutory period from the time when the administrative agency receives the application for government information disclosure to the time when it makes the response, rather than the mail delivery time of the Letter of Response. 2. The case where the reconsideration agency determines that the original administrative act is illegal on the grounds of violations of legal procedures is one where the original administrative agency and the reconsideration agency are codefendants.

Collegial Bench: Yan Wang, Qiang Wei and Jun He Edited by Deqiang Han; translated by Jing Duan Y. Wang (B) The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China J. Lu Southeast University, Nanjing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_40

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Applicant in the Second Instance): Tang X. et al. (totaling 17) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): the People’s Government of Jin’an District, Fuzhou City (hereinafter referred to as Jin’an Government) Respondent in the Reopening (Third Party in the First Instance, Appellee in the Second Instance): Jin’an Branch of Fuzhou Land and Resources Bureau (hereinafter referred to as Jin’an Branch) 2. Procedural History First Instance: No. 302 [2016] Trial, Adm. Division, the Intermediate People’s Court of Fuzhou City, Fujian Province (Fujian 01) (dated Dec. 23 of 2016) Second Instance: No. 207 [2017] Final, Adm. Division, the Higher People’s Court of Fujian Province (dated Apr. 25 of 2017) Reopening: No. 2741 [2019] Appeal, Adm. Division, the Supreme People’s Court (dated Apr. 29 of 2019) 3. Cause of Action Government information disclosure and administrative reconsideration

Essential Facts 17 people, including Tang X, complained that the three colored pictures, Document No. 35 (No. 35 [2009] Document, Land and Resources Bureau of Fujian Province) and Reply No. 289 (No. 289 [2012] Adm. Reply, Fujian Government) provided by Jin’an Branch were not the information they applied for and not what they needed and that it was wrong for Jin’an Government to merely determine that the government information disclosure made by Jin’an Branch was illegal. Thus, they asked to reverse the sued administrative reconsideration decision and requested Jin’an Branch to redisclose the information applied therefor. Jin’an Government defended that the situation where 17 people, including Tang X, applied for the disclosure of government information by means of consultation fell within the scope of consultation rather than that stipulated in Regulations on Government Information Disclosure. It was not inappropriate for Jin’an Branch to disclose the four documents to Tang X. and others, but the response procedure was overdue. Therefore, the sued administrative reconsideration decision determined that the disclosure of government information made by the Jin’an Branch was illegal and that the Government requested to dismiss the claims of the 17 people, including Tang X.

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On November 6, 2015, 17 people, including Tang X, applied to Jin’an Branch to disclose information regarding “(w)hat is the legal basis for transforming more than 1,500 mu of primary farmland into construction land? What are the relevant documents (including meeting minutes and records)? Please disclose the legal basis and relevant documents concerning primary farmland transformation released by governments of all levels including the central government, Fujian Province, Fuzhou City, Jin’an District, Huanxi Town and relevant departments of land resources”. On November 10 of the same year, Jin’an Branch issued a receipt of acceptance, accepting the application for government information disclosure by 17 people, including Tang X. On November 24, Jin’an Branch issued No. 025 [2015] Notification of Government Information Disclosure (hereinafter referred to as Notification No. 25). On November 30, 2015, Jin’an Branch sent to Tang X. et al. by registered mail documents and materials including the abovementioned Notification, Notice of Department of Natural Resources of Fujian Province on the Revision Work of Further Strengthening the Overall Planning of Land Use (No. 35 [2009] Document, Land and Resources Bureau of Fujian Province), Reply of Fujian Provincial People’s Government on the Overall Planning of Land Use of Jin’an District (2006–2020) (No. 289 [2012] Adm. Reply, Fujian Government), Overall Planning of Land Use of Jin’an District (2006–2020) Part, and Overall Plan Map of Land Use of Huanxi Town, Jin’an District (2006–2020) Part. On January 18, 2016, Tang X. et al. filed an application for administrative reconsideration with Jin’an Government, asking to reverse Notification No. 25 made by Jin’an Branch and requesting Jin’an Branch to disclose the information they applied for. On January 25, 2016, Jin’an Government delivered to Jin’an Branch Notification of Administrative Reconsideration Response (No. 3 [2016] Adm. Reconsideration Response, Jin’an Government, Fuzhou City). On February 4, 2016, Jin’an Branch made the administrative reconsideration response. On March 15, 2016, Jin’an Government issued the Letter of Administrative Reconsideration Decision (No. 3 [2016] Adm. Reconsideration, Jin’an Government, Fuzhou City), determining that Notification No. 25 made by Jin’an Branch was illegal under the procedural limb while sending the Letter by mail to Tang X. et al. The 17 people, including Tang X, refused to accept it and sued Jin’an Branch and Jin’an Government as codefendants in the People’s Court of Taijiang District, Fuzhou City, Fujian Province. The People’s Court of Taijiang District held that Jin’an Government should be the defendant in this case, but Tang X. et al. refused to withdraw the lawsuit after explanation, and then the court ruled to dismiss the case. On October 10, 2016, Tang X. et al. refused to accept it and initiated administrative proceedings of the case. On December 23, 2016, the court of first instance made the administrative decision, No. 302 [2016] Trial, the Intermediate People’s Court of Fuzhou City, Fujian Province (Fujian 01), dismissing the claims of the 17 people including Tang X. The court of second instance made the administrative decision, No. 207 [2017] Final, the Higher People’s Court of Fujian Province, on April 25, 2017, dismissing the appeal and sustaining the decision of first instance. After the decision came into effect, the 17 people, Tang X. et al., applied to the Supreme People’s Court for reopening, requesting to reverse the decisions of the courts of first and second instances, to reverse the administrative reconsideration

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decision made by Jin’an Government and to order Jin’an Branch to redisclose the information they applied therefor.

Issues 1. Whether the content of the application for government information disclosure put forward by the applicant in the reopening is within the scope as stipulated in the Regulations on Government Information Disclosure; 2. Whether the act of response to the information disclosure application made by Jin’an Branch is illegal in the procedural aspect; 3. Whether it is correct for the court of first instance to list Jin’an Government, the reconsideration agency, as the defendant alone.

Holding The Supreme People’s Court holds that based on the description of the content of the information applied for by the Applicant, the application for information disclosure was of a consultative nature and did not fall within the scope as stipulated in the Regulations on Government Information Disclosure.1 The third party in the first instance did not violate the relevant laws and regulations in giving the written notification and providing the four documents to the Applicant. It was not improper that the sued administrative reconsideration decision made by the Respondent, Jin’an Government, determined that the content of Notification No. 25 made by the third party in the first instance was appropriate. The third party in the first instance accepted the application for government information disclosure of the Applicant on November 10, 2015 and issued Notification No. 25 on the 24th of the same month, which was delivered to the Applicant by mail on the 30th of the same month. In accordance with Article 24(2) of the Regulations on Government Information Disclosure, the time limit for response refers to the statutory period from the time when the administrative agency receives the application for government information disclosure to the time when it makes the response rather than the mail delivery time of the Letter of Response. Therefore, the administrative procedures by which the third party in the first instance issued Notification No. 25 complied with the provisions on the time limit for response in the Regulations on Government Information Disclosure. There were errors in ascertaining facts and applying laws in that the Respondent, after reconsideration, determined that the issuing of Notification No. 25 by the third 1

The Regulations on Government Information Disclosure cited in this case is the old version as the judgment of this case had taken effect before the new version came into effect and the old version was applicable at the time of citation, unless otherwise noted.

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party in the first instance was procedurally illegal, which was based on its judgment that the response time of the third party exceeded the statutory time limit since it accepted the application for government information disclosure on November 9, 2015 and mailed the Notification to the Applicant on November 30. Meanwhile, it was also inappropriate that the courts of first and second instances failed to correct it. In addition, the case where the reconsideration agency confirmed that the original administrative act was illegal on the grounds of violations of legal procedures was not one where the reconsideration changed the original administrative act; and the court of first instance was inappropriate in its judicial procedures as it only listed the Respondent as the defendant for trial and judgment. This did not exert substantial influence on the fair trial of the case, so the Supreme People’s Court points it out to correct it. What should be clarified is that it is not within the scope as stipulated in the Regulations on Government Information Disclosure if the Applicant proposes consultation to the administrative agency in the name of application for information disclosure. The reply or nonreply of the administrative agency will have no actual impact on the rights and obligations of the Applicant. The third party in the first instance responded with Notification No. 25 upon the consultation application submitted by the Applicant, informing that the government information applied for by the Applicant was open while providing the information and the relevant four documents in its possession in the way specified by Article 26 thereof. Correspondingly, the Respondent made the sued administrative reconsideration decision against the application for administrative reconsideration put forward by the Applicant, confirming that the issuance of Notification No. 25 by the third party in the first instance was illegal under the procedural limb. Whether it was Notification No. 25 made by the third party in the first instance or the sued administrative reconsideration decision made by the Respondent, both of the results were to the benefit of the Applicant. It lacked the necessity and effectiveness of protecting people’s interests and rights through lawsuits that the Applicant initiated legal proceedings against Notification No. 25 involved in the case and the sued administrative reconsideration decision. Therefore, the Supreme People’s Court ruled to dismiss the application for the reopening of the case filed by the Applicant, Tang X. et al.

Comment on Rule The decision of this case is essentially a correction of the information disclosure act made by the original administrative agency, the determination of the original administrative act by the reconsideration agency and the improper handling of the case by the court of first instance. The core issues in this case are whether the content of the application for government information disclosure put forward by the Applicant to Jin’an Branch, which made the original administrative act, falls within the scope as stipulated in the Regulations on Government Information Disclosure, whether the act of response to the information disclosure application made by Jin’an

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Branch is illegal in the procedural aspect, and whether it is appropriate for the court of first instance to list Jin’an Government as the defendant alone. The conclusions and decisions are drawn pursuant to the applicable rules of the current law and the facts of the case. Since the definition of “government information” has not been modified in the pre-existing and existing Regulations on Government Information Disclosure, the application for information disclosure made to the administrative agency in the consultative nature is still different from the application for government information disclosure in the normative sense, which should be analyzed in light of specific situations in practice. In addition, Article 22(3) of the Interpretations of the Administrative Procedure Law stipulates, “(w)hen the reconsideration agency determines that the original administrative act is illegal, it is a change of the original administrative act, except that the reconsideration agency determines the original administrative act is illegal on the grounds of violations of legal procedures.” Where the administrative reconsideration agency determines that the Respondent’s response to information disclosure application is illegal in the procedural aspect based on violations of legal procedures, which is not regarded as a change of the original administrative act, the people’s court shall list the administrative agency that made the original administrative act and the reconsideration agency as codefendants and handle the case in accordance with law. The following are further explanations of the reasoning of the decision in terms of the factual and legal judgment of the case, the situation and the jurisprudence of the administrative reconsideration agency as a codefendant. 1. The distinction between consultation of government affairs and application for information disclosure Article 2 of the Regulations on Government Information Disclosure provides, “(t)he term ‘government information’ mentioned herein refers to the information produced or obtained by administrative agencies in the course of performing their duties, which is recorded and preserved in a certain forms.” Article 13 hereof provides, “(a)part from the government information proactively disclosed by administrative agencies as stipulated in Articles 9, 10, 11 and 12 herein, citizens, legal persons or other organizations can also apply to the departments of the State Council, local people’s governments at all levels and departments of local people’s governments at or above the county level for obtaining relevant government information according to their special needs of production, life and scientific research.” The application for government information disclosure refers to the act that an applicant applies to an administrative agency to obtain relevant government information according to his special needs, which must point to specific government information recorded and preserved in certain forms, whereas the application for consultation refers to the application submitted by an applicant to an administrative agency for government information disclosure, requiring guidance and explanation on policy documents, legal provisions, acts and events as well as other specific matters.2 It may or may not be put forward in the form of questions. In practice, a common application for consultation is 2

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that the applicant requires the administrative agency to give an answer to the question proposed or to provide explanations. The application, in the form of consultation, for government information disclosure does not point to specific government information with a certain carrier; instead, it is inquiry and consultation with the administrative agency on a specific matter, the purpose of which is to ask the administrative agency to give specific explanations on the matter rather than to provide specific government information.3 Therefore, the application in the form of consultation for government information disclosure in essence falls into the category of consultation and is not the application for government information disclosure, neither falls within the scope as stipulated in the Regulations on Government Information Disclosure. It should not be handled in the way of responding to the application for government information disclosure. In this case, the content of the application for information disclosure put forward by those 17 people, including Tang X. to Jin’an Branch, is “(w)hat is the legal basis for transforming more than 1,500 mu of primary farmland into construction land? What are the relevant documents (including meeting minutes and records)? Please disclose the legal basis and relevant documents concerning primary farmland transformation released by governments of all levels including the central government, Fujian Province, Fuzhou City, Jin’an District, Huanxi Town and relevant departments of land resources”. It can be seen from the above that the applicant is requiring the administrative agency to provide explanations and clarifications for the relevant administrative acts concerning land in the form of asking questions. The foundation of the right to consult comes from the supervision power vested in citizens, legal persons or other organizations by the Constitution and other laws.4 It does not require the administrative agency to make subjective judgments on the authenticity and legality of government information, as its purpose is not to obtain specific government information. Moreover, the content of the consultation does not include the file names, document numbers or other characteristic descriptions that can point to the specific government information. On the other hand, the foundation of the right to apply for government information disclosure lies in the legal right to know—citizens’ freedom and right to receive, seek and obtain intelligence information held by the government. Since there is a clear boundary between consultation and the application for information disclosure and the administrative agency will be burdened with extra obligations if they are confused, the response of the administrative agency to the “consultation” itself is not compulsory, without a practical impact on the applicant’s rights and obligations. This kind of response is in nature similar to that of the administrative agency to petition, which is nonactionable. From a practical point of view, if the review of low standards is adopted to evaluate whether the response has an actual impact on the applicant’s rights and obligations, a large number of disputes caused by consultation will flood into the court, thus probably leading to a huge waste of administrative and judicial resources. This would also mislead the public and result in the abuse of the right to government information disclosure. 3 4

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2. The calculation of the time limit for response to government information disclosure In essence, the construction of a government information disclosure system should revolve around two lines of logic, namely, “sovereignty logic” and “governance cycle”. The former provides theoretical support of legitimacy for system design through the protection of citizens’ rights, whereas the latter realizes the optimal allocation of administrative resources and plays a service role for public production, life and economy through vesting in government-specific powers by legal norms and thus generating the relationship of rights and obligations with citizens therefrom. The design of a government information disclosure system, aiming at protecting citizens’ right to know, promoting transparent administration and benefiting the construction of a service-oriented government, should achieve a balance between the protection of citizens’ right to know and the optimal allocation of administrative resources.5 The principle of high efficiency and convenience advocated by the government information disclosure system has strict restrictions on the time limit for response. Compared with the pre-existing Regulations on Government Information Disclosure, the time limit of 20 working days for general response stipulated in Article 33 of the existing Regulations on Government Information Disclosure has been extended correspondingly, but it is indeed a severe challenge for administrative agencies with cumbersome circulation procedures. First, the administrative agency usually confirms the acceptance date in the form of acceptance notification, but based on the laws in our country, the effective date usually starts from the delivery date. For example, for an application submitted by mail, the postmark date when the application letter is delivered to the administrative agency is deemed the delivery date, and the time limit for response starts from the next day. Therefore, the review process at the acceptance stage on the part of the administrative agency should be counted in. Second, in regard to the application of the correction and remedy methods, the administrative agency usually sends a notification of correction and remedy to the applicant to extend the time in practice (because the time for correction and remedy can be deducted from the statutory time limit for response). In accordance with Article 30 of the existing Regulations on Government Information Disclosure, on the premise that the content of the application is unclear, the administrative agency should inform the applicant to make changes and provide supplements and notify him of additional requirements concerning the correction and remedy methods. Once the applicant initiates reconsideration or litigation, the administrative agency will face huge legal risks. Finally, in terms of the application of time limit extension, attention should also be paid in practice to controlling the number of extensions and forbidding repeating application in addition to the procedures of review and approval, extension of time limit and notification process stipulated therein. In this case, 17 people, including Tang X, submitted an application for information disclosure to Jin’an Branch on November 6, 2015. On November 10 of the same year, Jin’an Branch issued a receipt of acceptance, accepting the application for 5

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government information disclosure by the 17 people, including Tang X. Therefore, the starting point of the legal time limit for the information disclosure act on the part of Jin’an Branch should be the date when the acceptance receipt was issued, that is, November 10. On November 24 of the same year, Jin’an Branch issued Notification No. 25. On November 30, 2015, Jin’an Branch sent to Tang X. et al. by registered mail documents and materials including the abovementioned Notification, Notice of Department of Natural Resources of Fujian Province on the Revision Work of Further Strengthening the Overall Planning of Land Use (No. 35 [2009] Document, Land and Resources Bureau of Fujian Province), Reply of Fujian Provincial People’s Government on the Overall Planning of Land Use of Jin’an District (2006–2020) (No. 289 [2012] Adm. Reply, Fujian Government), Overall Planning of Land Use of Jin’an District (2006–2020) Part, and Overall Plan Map of Land Use of Huanxi Town, Jin’an District (2006–2020) Part. In accordance with the provisions of the Regulations on Government Information Disclosure, the date when the Notification was issued, rather than the mail delivery date of it, should be deemed the completion date of the information disclosure act. As the period of time when the documents are in transit is not counted, the information disclosure act of Jin’an Branch has not exceeded the statutory time limit. Therefore, the reconsideration agency Jin’an Government made a mistake in determining that the information disclosure act was illegal in the procedural aspect. The court should correct it. 3. The judgment of the administrative reconsideration agency being the codefendant To solve the practical dilemma of administrative reconsideration “upholding and shielding” other administrative agencies, give full play to the supervisory function of administrative reconsideration and ensure that the reconsideration agency exercises its reconsideration duties in accordance with law, Article 26(2) of the Administrative Procedure Law (Rev. 2015) has changed the pre-existing law’s standard for the identification of defendants after the reconsideration agency upholds the original administrative act, stipulating that “(i)n cases where the reconsideration agency decides to uphold the original administrative act after reconsideration, the administrative agency that made the original administrative act and the reconsideration agency are codefendants”. This provision shows that the legislature focuses on the administrative nature of the administrative supervision function of administrative reconsideration. The reconsideration agency that decides to uphold the original administrative act will be listed as codefendants with the original administrative agency so as to supervise its exercise of reconsideration duties pursuant to law. As a new type of codefendant system, it is different from the codefendant system in traditional litigation theory in which more than two administrative agencies jointly make an administrative act. Although the codefendants here make the reconsideration decision and the original administrative act, respectively, there is a high degree of correlation between these two acts. The reconsideration decision to uphold the original administrative act serves as an enhancement of it, and the validity of the decision is also attached to the original act. Thus, it is a new development of joint litigation theory.

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With the promulgation and implementation of the existing Administrative Procedure Law, a new codefendant system has been established for cases where the reconsideration agency decides to uphold the original administrative act after reconsideration. The Judicial Interpretations of the Administrative Procedure Law, which is implemented simultaneously with the existing Administrative Procedure Law, clarifies the judgment standards for the reconsideration agency’s “decision to uphold the original administrative act” on the basis of summarizing and rethinking the old law and drawing lessons from the mature experience of administrative proceedings in Taiwan region of China as well as that in foreign civil law countries: first, the reconsideration agency decides not to change the result of the original administrative act; second, the reconsideration agency decides to dismiss the reconsideration application; third, other situations that are deemed as upholding the original administrative act are also included. In this case, Jin’an Government issued the Letter of Administrative Reconsideration Decision (No. 3 [2016] Adm. Reconsideration, Jin’an Government, Fuzhou City) on March 15, 2016, determining that Notification No. 25 made by Jin’an Branch was illegal under the procedural limb while sending the Letter by mail to the 17 people including Tang X. Even if the information disclosure act on the part of Jin’an Branch exceeded the statutory time limit, it should still fall within the situation stipulated in Article 22 of the Judicial Interpretations of the Administrative Procedure Law that “(w)hen the reconsideration agency determines that the original administrative act is illegal, it is a change of the original administrative act, except that the reconsideration agency determines the original administrative act is illegal on the grounds of violations of legal procedures”.

Jiangguan Agricultural Economic Cooperative of Minqiang Village Committee, Xinzhou Town, Longlin Multiethnic Autonomous County, Guangxi Zhuang Autonomous Region v. The People’s Government of Longlin Multiethnic Autonomous County, the People’s Government of Baise City (Dispute over Administrative Ruling and Administrative Reconsideration Concerning Forest Ownership): Decision to Modify Applicable in the Trial of Administrative Ruling Cases Xiujiang Guo and Qiaoyun Zhang

Rule For disputes over the ownership of natural resources such as land and forestland, the law stipulates that the administrative agency shall make administrative rulings first. If the party refuses to accept the administrative ruling, he can bring an administrative lawsuit pursuant to law. The people’s court has full jurisdiction over civil disputes handled by the act of administrative ruling. In order to practically resolve disputes in administrative proceedings, if it is decided after trial that the sued act of administrative Collegial Bench: Xiujiang Guo, Zhihua Yang and Aitao Liu Edited by Deqiang Han; translated by Jing Duan X. Guo (B) Administrative Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China Q. Zhang The First Circuit Court of the Supreme People’s Court of the People’s Republic of China, Shenzhen, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_41

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ruling is illegal and the related result is wrong and that the ownership of the disputed rights can be determined according to the existing evidence, the people’s court shall render a decision to modify it pursuant to Article 77 of the Administrative Procedure Law, thus directly determining the ownership of the disputed rights and practically resolving administrative disputes.

Case Information 1. Parties Applicant in the Reopening (Third Party in the First and Second Instances and in the Reopening): Jiangguan Agricultural Economic Cooperative of Minqiang Village Committee, Xinzhou Town, Longlin Multiethnic Autonomous County, Guangxi Zhuang. Autonomous Region (hereinafter referred to as Jiangguan Cooperative) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): The People’s Government of Longlin Multiethnic Autonomous County, Guangxi Zhuang Autonomous Region (hereinafter referred to as Longlin Government) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): The People’s Government of Baise City, Guangxi Zhuang Autonomous Region (hereinafter referred to as Baise Government) Respondent in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Liuwo Agricultural Economic Cooperative of Minqiang Village Committee, Xinzhou Town, Longlin Multiethnic Autonomous County, Guangxi. Zhuang Autonomous Region (hereinafter referred to as Liuwo Cooperative) Respondent in the Reopening (Third Party in the First and Second Instances and in the Reopening): Nanlin Agricultural Economic Cooperative of Minqiang Village Committee, Xinzhou Town, Longlin Multiethnic Autonomous County, Guangxi Zhuang Autonomous Region (hereinafter referred to as Nanlin Cooperative) 2. Procedural History First Instance: No.123 [2017] Trial, Adm. Division, the Intermediate People’s Court of Baise City (Guangxi 10) (dated Dec. 30 of 2017) Second Instance: No.506 [2018] Final, Adm. Division, the Higher People’s Court of Guangxi Zhuang Autonomous Region (dated Sep. 14 of 2018) Reopening via Certiorari: No. 1486 [2019] Appeal, Adm. Division, the Supreme People’s Court (dated Jun. 24 of 2019) Reopening: No. 134 [2019] Reopening, Adm. Division, the Supreme People’s. Court (dated Jul. 26 of 2019)

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3. Cause of Action Dispute over administrative ruling and administrative reconsideration concerning forest ownership

Essential Facts The name of the disputed land between Liuwo Cooperative and Jiangguan Cooperative is “Kelu”, also known as “Ponanduan” and “Naniang”, with an area of 43.5 mu.1 Nanlin Cooperative claims the ownership of approximately 7.95 mu of the very edges of the land in dispute. On February 25, 1954, the then People’s Government of Longlin Multiethnic United Autonomous District, Guixi Zhuang Autonomous Region (the previous name of the government) issued to villagers of Liuwo Cooperative, including Huang X the Land and Property Ownership Certificates No. ××55, No. ××61, No. ××62, No. × ×68 and No. ××70 (hereinafter referred to as Land Certificates No. ××55, No. ×× 61, No. ××62, No. ××68 and No. ××70). On June 19, 1981, the then Revolutionary Committee of Longlin Multiethnic Autonomous County issued to the then Jiangguan Production Team, Minqiang production brigade, Zhelang Commune (now Jiangguan Cooperative) Forest Ownership Certificate No. 00×××5 (hereinafter referred to as Forest Certificate No. 00×××5). In May 1990, the People’s Government of Guangxi Zhuang Autonomous Region issued the Land Use Certificates of Collective Land for Construction Longtujijian (1990) No. 21-××36 and No. 21-××64 to Ban X (A) and Ban X (B), villagers of Liuwo Cooperative, respectively. The two pieces of land were both located in Liuwo Tun, Minqiang Village, with the same area of 156.18 square meters. After that, each of Ban X(A) and Ban X(B) built a house in the disputed area. In 2000, disputes arose over the ownership of the disputed land between Liuwo Cooperative and Jiangguan Cooperative. On May 20, 2000, the People’s Mediation Committee of Minqiang Village, Xinzhou Town, Longlin County issued a mediation agreement (No. 1 [2000] Civil, Mediation), confirming the claims of Jiangguan Cooperative that it owned the mountain boundaries of Dongxiangduo and Ponanduan as the Forest Certificate No. 00×××5 served as the evidence to prove it. On December 30, 2000, the Government of Xinzhou Town handled the disputes and affirmed that the Revolutionary Committee of the county organized manpower to register the disputed land and issued certificates to Jiangguan Cooperative after examination in 1981. On September 30, 2003, the then Longlin Government issued to Huang X and other villagers of Liuwo Cooperative eight Certificates of Land Contracting and Management Rights No. 2106×××04-No. 2106×××08 and No. 2106×××40-No. 2106× ××42, and the contract period started from October 1, 2003 to September 30, 2033.

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Translator’s note: Mu (亩) is a unit of area in China. One Mu equals approximately 666.67 m2 .

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On April 16, 2011, the Government of Xinzhou Town organized all parties to conduct on-site inspection, took on-site inspection records and drew on-site inspection maps. According to the record, Liuwo Cooperative has been farming on the disputed land all the time from the period of land reform, establishment of cooperatives, Four Assignment,2 the implementation of the production responsibility system in 1982 to date. The heads of Jiangguan Cooperative, Liuwo Cooperative and Nanlin Cooperative, representatives of the masses as well as the surveyors all signed on-site inspection maps for confirmation. On March 31, 2012, Longlin Government issued the Decision on Dealing with Land Ownership Disputes concerning “Nanduan” and “Kelu” (Place Names) among Liuwo Cooperative, Nanlin Cooperative and Jiangguan Cooperative of Minqiang Village, Xinzhou Town (No. 2 [2012] Adm. Decision, Longlin Government) (hereinafter referred to as Decision No. 2), determining that 31.38 mu of the disputed land and the attached crops on the ground were owned by Liuwo Cooperative. On June 27, 2012, Longlin Government issued the Decision on Revoking No. 2 [2012] Adm. Decision, Longlin Government (No.3 [2012] Adm. Decision, Longlin Government), taking into consideration that problems such as the location and scope of the disputed land remained unresolved in Decision No. 2, thus revoking the Decision. On August 23, 2013, Longlin Government organized all parties concerned to conduct on-site inspection of the disputed land, took on-site inspection records and drew on-site inspection maps. After identification and clarification by all parties on the spot, the following main contents were confirmed: (1) the boundaries of the disputed land were clarified, and the distribution of attached crops on the ground of the disputed land as recorded during the on-site inspection on April 16, 2011 was recognized. (2) The boundaries of the land as in Forest Certificate No. 00× ××5 submitted by Jiangguan Cooperative that concerned the disputed land were confirmed. (3) The boundaries of the land as in Land Certificates No. ××55, No. ××61, No. ××62, No. ××68 and No. ××70 submitted by Liuwo Cooperative that concerned the disputed land were confirmed; and the boundaries of the land as in Land Certificates No. ××57, No. ××60 and No. ××64 that did not concern the disputed land were confirmed; the eight Certificates of Land Contracting and Management Rights submitted by Liuwo Cooperative that concerned the disputed land were confirmed; the two houses built by Ban X (B) and Ban X (A), villagers of Liuwo Cooperative, were confirmed to be within the area of the disputed land. (4) Nanlin Cooperative could not identify the specific location and boundaries of the land recorded in the three stubs of Land Certificates held thereby. All present at the on-site inspection, including the heads of all parties involved, representatives of the masses, representatives of grassroots organizations and staff of the mediation working group, signed the on-site inspection records and maps for confirmation. 2

Translator’s note: Four Assignment, one of the important agricultural policies in China in the early 1960s, refers to uniformly adjusting and assigning four important means of production, i.e., the rural collectively owned land (forests, water coverage and grasslands), livestock, farm tools and labor, to certain production teams according to the practical situations in order to benefit production and facilitate management.

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On June 3, 2012, Jiangguan Cooperative entrusted Guangxi Gongming Judicial Expertise Center to identify whether the official seal of “Longlin Government” stamped on the abovementioned eight Certificates of Land Contracting and Management Rights, and the samples—the official seal of “Longlin Government” stamped by the Government on nine documents from 2003 to 2011—were the same official seal. On June 7, 2012, Guangxi Gongming Judicial Expertise Center issued the Judicial Expertise Opinion (No. 080 [2012], Judicial Expertise, Guangxi Gongming) that stated: the official seal of “Longlin Government” in the eight Certificates of Land Contracting and Management Rights was not stamped by the same seal with that in the sample documents from 2003 to 2007, but was stamped by the same seal with that in the sample documents from 2008 to 2011. On September 26, 2014, Longlin Government issued the Decision on Dealing with Land Ownership Disputes (No. 1 [2014] Adm. Decision, Longlin Government) (hereinafter referred to as Decision No. 1) and decided that: the ownership of the disputed land went to Jiangguan Cooperative; the land use right of the built houses on the disputed land belonged to Ban X (B) and Ban X (A), and that the parts of the land that involved the place names “Naniang” and “Kelu” as recorded in the eight Certificates of Land Contracting and Management Rights should be revoked and corrected. Liuwo Cooperative refused to accept the Decision and applied for administrative reconsideration. On January 14, 2015, Baise Government made the administrative reconsideration decision (No. 1 [2015] Adm. Reconsideration, Baise Government) and maintained Decision No. 1. Liuwo Cooperative still refused to accept it and initiated administrative proceedings. In the same year, the People’s Court of Longlin County made the administrative decision (No. 5 [2015] Trial, Adm. Division, the People’s Court of Longlin County), holding that Longlin Government did not make a thorough investigation of the mountain boundaries in 1981 in the process of confirming ownership and that Forest Certificate No. 00×××5 lacked some necessary content, so it could not be used as the basis for confirming ownership. All parties to the ownership disputes had no objection to the fact of building houses on the disputed land and had not applied for mediation. Longlin Government exceeded its authority to decide in Decision No. 1 that the land use right of the built houses on the disputed land should be owned by Ban X (B) and Ban X (A). Therefore, it was decided to reverse Decision No.1. Jiangguan Cooperative refused to accept it and filed an appeal. On August 6, 2015, the Intermediate People’s Court of Baise City made the administrative decision (No. 78 [2015] Final, Adm. Division, the Intermediate People’s Court of Baise City), holding that Longlin Government should be supported in confirming the ownership of the disputed land to Jiangguan Cooperative based on the Forest Certificate No. 00×××5 issued to it in 1981, where the evidence was sufficient. However, Decision No. 1 revoked at the same time the eight Certificates of Land Contracting and Management Rights without listing the certificate holders as the parties, which was illegal under the procedural limb. Thus, it was decided to reverse the decision of first instance and Decision No. 1 and to order Longlin Government to make a new decision.

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On October 28, 2016, Longlin Government issued the Decision on Dealing with Land Ownership Disputes (No. 4 [2016] Adm. Decision, Longlin Government) (hereinafter referred to as Decision No. 4), and the main contents were listed as follows: (1) the land “Nanpoduan” in the place of “Dongxiangduo” registered in Forest Certificate No. 00×××5 was located within the scope of the disputed land as identified at the site, which was the basis for confirming the ownership in this case. (2) The land registered in the eight Certificates of Land Contracting and Management Rights was located within the scope of the disputed land as identified at the site, but the certificate issuing was a unilateral and invalid act because it happened after the land ownership disputes arose when the ownership was not confirmed yet. Therefore, it could not be regarded as evidence for confirming ownership. (3) The land in Land Certificates No. ××60, No. ××64 and No. ××68 were not located within the scope of the disputed land. The place names recorded in Land Certificates No. ××55, No. ××57, No. × ×61, No. ××62 and No. ××70 were the same as the names of the disputed land, but they could not be determined as within the scope of the disputed land without further evidence. (4) The land recorded in the Land and Property Certificate submitted by Nanlin Cooperative was not within the scope of the disputed land. The following decisions were made: (1) the disputed land should be collectively owned by Jiangguan Cooperative. (2) The land use right on the 312.36 square meters of the disputed land where the houses were already built belonged to Ban X (B) and Ban X (A), villagers of Liuwo Cooperative. The area should be consistent with that recorded in the Land Use Certificates of Collective Land for Construction held by them. Liuwo Cooperative refused to accept it and applied for administrative reconsideration. On May 14, 2017, Baise Government made the Administrative Reconsideration Decision (No. 7 [2017] Adm. Reconsideration, Baise Government) (hereinafter referred to as Reconsideration Decision No. 7), maintaining Decision No. 4. On June 19, 2017, Liuwo Cooperative filed an administrative lawsuit concerning this case, requesting to reverse Decision No. 4 and Reconsideration Decision No. 7, to reverse Forest Certificate No. 00×××5 and to order Longlin Government to make a new decision. The administrative decision of the Intermediate People’s Court of Baise City (No. 123 [2017] Trial, Adm. Division, the Intermediate People’s Court of Baise City) held that the place names recorded in the eight Land and Property Ownership Certificates submitted by Liuwo Cooperative had lost their legal effect although they involved the disputed land and that there was doubt about the authenticity of the eight Certificates of Land Contracting and Management Rights, which were illegal as well. In 1981, Longlin Government issued Forest Certificate No. 00×× ×5 to Jiangguan Cooperative to redetermine the ownership of the disputed land. Jiangguan Cooperative claiming ownership with this Certificate was based on facts and law. Decision No. 4 made by Longlin Government was correct in confirming the ownership of the disputed land to Jiangguan Cooperative. Reconsideration Decision No. 7 made by Baise Government was not inappropriate in upholding Decision No. 4. Pursuant to Article 69 of the Administrative Procedure Law, the decision dismissed the lawsuit of Liuwo Cooperative, who refused to accept it and filed an appeal. The administrative decision made by the Higher People’s Court of Guangxi Zhuang Autonomous Region (No. 506 [2018] Final, Adm. Division, the Higher

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People’s Court of Guangxi Zhuang Autonomous Region) held that the five Land and Property Ownership Certificates held by Liuwo Cooperative should serve as the evidence for confirming the ownership in this case since they were stored in Longlin Archives Bureau with no objection to their authenticity by all parties while concerning the disputed land. Jiangguan Cooperative did not provide evidence and sources for the ownership of the land “Dongxiangduo” registered in Forest Certificate No. 00×××5; thus, it could not prove the legality of the procedures of certificate issuance. Decision No. 4 identified the facts unclearly and applied laws improperly. Reconsideration Decision No. 7 was wrong in maintaining Decision No. 4, and the decision of first instance was wrong in dismissing the lawsuit of Liuwo Cooperative. In accordance with Subparagraphs 1 and 2 of Article 70 and Article 89(1) (2) of the Administrative Procedure Law, it was decided to reverse the decision of first instance, Decision No. 4 and Reconsideration Decision No. 7, requesting Longlin Government to make a new decision. Jiangguan Cooperative refused to accept it and petitioned to the Supreme People’s Court for reopening this case, requesting to reverse the decision of second instance, uphold that of first instance and reopen the case pursuant to law. On June 24, 2019, the Supreme People’s Court made the administrative ruling (No. 1486 [2019] Appeal, Adm. Division, the Supreme People’s Court) and reopened the case via certiorari on the grounds that the Court found that the Higher People’s Court of Guangxi Zhuang Autonomous Region made an error in the effective decision.

Issue Whether the decision to modify can be applied to cases of administrative ruling concerning forest ownership.

Holding Article 3 of the Measures for Investigation and Handling of Land Ownership Disputes provides that the investigation and handling of land ownership disputes shall be based on laws, regulations and land management rules, considering the actual situations and facing reality while respecting history. Article 4 of the Regulations on Mediation and Handling of Ownership Disputes Concerning Land, Forest and Water Resources in Guangxi Zhuang Autonomous Region provides that mediation and handling of ownership disputes concerning land, forest and water resources shall be carried out in accordance with the principles that are conducive to production, management and social harmony and stability. Article 30 (1) (2) of the Regulations provides that if all parties to the ownership disputes have certain evidence, but the evidence does not suffice to support the ownership claim, then the people’s government of the county or the municipal city can make the decision to confirm the ownership taking

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into account the interests of all parties. Subparagraphs 1 and 6 of Article 34 hereof provide that Land and Property Ownership Certificates obtained pursuant to law during the land reform period as well as the Land and Forest Certificates issued by the people’s governments at or above the county level pursuant to law can be used as evidential materials to handle ownership disputes concerning land, forests and water resources. In this case, the on-site inspection records and maps made by Longlin Government on August 23, 2013 prove that the boundaries of the land recorded in Land Certificates No. ××55, No. ××61, No. ××62, No. ××68 and No. ××70 submitted by Liuwo Cooperative are all within the scope of the disputed land. A number of investigation records taken by Longlin Government of inquiring villagers in Jiangguan Cooperative, Liuwo Cooperative and Nanlin Cooperative can also prove that Liuwo Cooperative had been farming, managing and using the disputed land for many years before the disputes occurred. Forest Certificate No. 00×××5, by which Jiangguan Cooperative claimed the ownership of the disputed land, lacks evidence and a source of ownership. Moreover, Jiangguan Cooperative, being far away from the disputed land, did not provide evidence of its long-term management and use. In accordance with the aforementioned provisions, the disputed land shall be owned collectively by the villagers of Liuwo Cooperative. There is unclear identification of facts and insufficient main evidence in confirming the ownership to Jiangguan Cooperative in Decision No. 4 and Reconsideration Decision No. 7. The decision of second instance reversed Decision No. 4 and Reconsideration Decision No. 7 based on clear facts and sufficient evidence and shall be supported by the Court. Article 1 of the Administrative Procedure Law provides that administrative proceedings should settle administrative disputes. Article 77(1) hereof stipulates that where an administrative punishment is evidently inappropriate or any other administrative act is erroneous in determining or confirming an amount, the people’s court may enter a decision to modify it. Administrative ruling cases concerning forest ownership directly involve the confirmation of the area and the ownership of the disputed forest, thus falling into the category of cases involving the determination and confirmation of an amount, so the people’s court is entitled to enter a decision to modify it pursuant to law. Meanwhile, Article 61 (1) hereof also provides that in cases involving an administrative agency’s ruling on civil disputes, if a party applies for settling the relevant civil disputes concurrently, the people’s court can settle the civil disputes concurrently. Moreover, Article 140 (2) of the Judicial Interpretation of the Supreme People’s Court on the Application of the Administrative Procedure Law of the People’s Republic of China provides that when a people’s court handles civil disputes concurrently while trying the case involving an administrative agency’s ruling on civil disputes, it will not accept another case separately. Since the basic disputes in administrative ruling cases concerning forest ownership are civil disputes, the people’s court, in handling civil disputes, should have full judicial jurisdiction including the right to modify. The plaintiff was dissatisfied with the administrative ruling concerning forest ownership, which in essence was the plaintiff being dissatisfied with the ruling on civil disputes by the administrative agency, and then initiated an administrative lawsuit that in nature already contained his claims for civil disputes. Therefore, there is no need to bring a separate civil lawsuit concerning those civil

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disputes. The people’s court should settle civil disputes concurrently with administrative ruling disputes. In this case, Decision No. 4 and Reconsideration Decision No. 7 were administrative rulings on civil disputes, which the people’s court had the judicial power to modify. Thus, decisions should be made on the civil disputes concerning forest ownership concurrently with the trial and judgment of the legality of the sued Decision No. 4 and Reconsideration Decision No. 7. The court of second instance decided to reverse Decision No. 4 and Reconsideration Decision No. 7, believing that the five Land and Property Certificates held by Liuwo Cooperative sufficed to be the evidence for confirming the ownership in this case and that the Forest Certificate No. 00×××5 provided by Jiangguan Cooperative had no evidence to prove the source of ownership. At that time, the conclusion that the disputed land should be determined to be owned by Liuwo Cooperative already came to light. Under this circumstance, the court of second instance did not make a decision on the ownership of the disputed land directly but ordered Longlin Government to conduct a new administrative act, which went against the legislative purpose of resolving administrative disputes practically in the Administrative Procedure Law. This is the inappropriate application of law and manner of decision and thus should be corrected by the Court. The decision of reopening the case reverses the administrative decisions of first and second instances, reverses Reconsideration Decision No. 7 and modifies Decision No. 4 as follows: the disputed land shall be owned collectively by the villagers of Liuwo Cooperative.

Comment on Rule 1. Civil disputes, the basis of administrative ruling, originally fall into the scope of judicial jurisdiction Administrative ruling refers to a quasi-administrative judicial activity in which the legal administrative agency, under the authorization of laws and regulations, judges and mediates between the parties to civil disputes that are closely related to administrative activities. This is caused by the existence of civil disputes and triggered by administrative intervention with civil disputes. Settling disputes over civil activities among equal subjects is supposed to be a judicial function in the field of judicial power, but with the continuous expansion of the administration scope, it has become difficult for the judicial agency to deal with all disputes. Therefore, some civil disputes among some equal subjects, pursuant to laws and regulations, shall be handled by the administrative agency in the first place due to the fact that some disputes involve technicalities and professional knowledge and that the administrative agency can handle them through simple procedures and flexible methods with quick relief, as it has strong professional and technical knowledge as well as administrative management experience. In other words, administrative ruling is adopted to deal with civil disputes among equal subjects that require professional knowledge and are closely

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related to administration, as stipulated in Article 14 of the Land Administration Law, Article 17 of the Forest Law and Article 16 of the Grassland Law. The fundamental legal relationship in administrative ruling is civil. It is only because of the intervention of the administrative agency that results in the administrative ruling. Therefore, unlike other administrative cases, the administrative proceedings initiated by administrative ruling are featured by civil, mediatory and quasijudicial characteristics. When a party brings an administrative lawsuit against an administrative ruling, his claims essentially include his civil claims as a plaintiff in civil litigation, and the party’s claims for civil rights and interests have been included in and transformed into administrative claims. In the trial of administrative ruling cases, there are both administrative and civil legal relations concerning both administrative disputes and civil disputes. As administrative ruling is inseparable from the civil disputes involved, the fact determination, evidence acceptance and judgment reasons and results in administrative disputes and civil disputes will inevitably influence each other. Settling administrative disputes without dealing with relevant civil disputes results in a lack of integrity in the substantive handling of the case. In accordance with the principle of comprehensively examining the legality of the sued administrative act in the administrative procedure law and the proceeding purpose of resolving the administrative disputes in essence, the people’s court should deal with the relevant civil disputes at the same time when determining on the legality of the administrative act. 2. The decision to modify can be applied to the act of administrative ruling Article 77 (1) of the Administrative Procedure Law provides that where an administrative punishment is evidently inappropriate or any other administrative act is erroneous in determining or confirming an amount, the people’s court may enter a decision to modify it. “erroneous in determining or confirming an amount” usually refers to situations where errors occur in the determination of the specific amount of money involved in the sued administrative act or in the determination of the ownership associated with the amount, which mainly include two kinds: one is there are errors in the calculation of the specific amount of indemnity or compensation in administrative indemnity or administrative compensation cases; the other is there are errors in the determination of the specific area of the disputed land that should be owned by all parties in administrative ruling cases concerning land, forest and grassland ownership. At the same time, Article 61(1) thereof clearly provides that in cases involving an administrative agency’s ruling on civil disputes, the people’s court can settle the civil disputes concurrently. Article 140 (2) of the Judicial Interpretation of the Supreme People’s Court on the Application of the Administrative Procedure Law of the People’s Republic of China further provides that when a people’s court handles civil disputes concurrently while trying a case involving an administrative ruling on civil disputes, it will not accept another case of civil disputes separately. Disputes arising from the administrative ruling can be resolved concurrently by trying civil disputes. In this case, the ownership of the disputed forest is the core issue of the dispute. Decision No. 4 determined that 43.5 mu of forest in the disputed land should be collectively owned by Jiangguan Cooperative. After trial of second instance, it

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was held that Decision No. 4 made a mistake in confirming the ownership of 43.5 mu of forest in the disputed land to Jiangguan Cooperative and that 43.5 mu of forest in the disputed land should be owned by Liuwo Cooperative. This case falls into the situation where the administrative act makes an error in the determination of the specific amount. The court of second instance should have rendered a decision to modify it so as to settle the disputes in essence pursuant to Article 77 of the Administrative Procedure Law instead of making the decision to reverse and redecide. That is, the wrong application of law and incorrect manner of decision, which should be modified through reopening in accordance with law. 3. The application of the decision to modify is in line with the legislative purpose of resolving administrative disputes in essence Article 1 of the Administrative Procedure Law provides that one of the legislative purposes of administrative procedure law is to resolve administrative disputes. When the people’s court makes administrative decisions and chooses the appropriate manner of decision as stipulated by administrative procedure law, it must obey and serve the legislative purpose of resolving administrative disputes in essence. The decision to modify and the decision to reverse and redecide are both legal manners of decision stipulated in administrative procedure law. Compared with the decision to reverse and redecide, the decision to modify directly determines the result of the disputed matters without requiring the defendant to take another administrative act, which is more conducive to the practical resolution of administrative disputes. Therefore, under circumstances where the decision to modify is applicable in accordance with law, the people’s court choosing to apply the decision to reverse and redecide goes against the legislative purpose of resolving administrative disputes in administrative procedure law. This is the wrong application of law and incorrect manner of decision, which should be modified in accordance with law. Cases concerning land and forest ownership are typical administrative ruling ones. In practice, due to inadequate understanding of the applicable scope of the decision to modify, it is often replaced by the decision to reverse and redecide in a large number of cases, leading to a great quantity of circular proceeding cases. It is common that after the court reverses the decision of confirming the ownership made by the government, the party is dissatisfied with the decision remade by the government and thus applies for administrative reconsideration again and then refuses to accept the decision and brings an administrative lawsuit again. The case would go round and round through reconsideration, first instance, second instance and reverse and redecision repeatedly. In some cases, the problem concerning the ownership of the disputed land and forest remains unresolved after three or four rounds of reverse and redecision. This case has also gone through the government’s decisions to confirm ownership twice and the court’s decision to reverse and redecide twice. This kind of case where the decision to modify is applicable to resolve the administrative disputes in essence inappropriately adopts the decision to reverse and redecide, leading to a great reduction of administrative and judicial efficiency, a waste of administrative and judicial resources as well as human and financial resources of both parties to the civil disputes, and severe damage to judicial credibility and authority. Disputed

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natural resources such as mountains, forests and land will be put on hold for a long time because the disputes cannot be resolved, and social wealth cannot be developed and utilized in a timely and effective manner. Even serious mass incidents will be triggered if the disputes remain unsettled for a long time, and the long-term complaint and petition of some parties will also affect social harmony and stability. Compared to the decision to reverse and redecide, the application of the decision to modify directly makes the decision on the civil disputes, which is in line with the legislative purpose of resolving administrative disputes in essence in administrative procedure law and helps the parties to avoid “second injury” due to the delay in redecision or careless redecision on the part of the administrative agency. It stabilizes social relations, saves judicial and administrative resources to the maximum extent, improves proceeding efficiency and reduces the parties’ burden, thus achieving twice the result with half the effort.

Liu X v. The People’s Government of Yingzhou District, Fuyang City, Anhui Province, The Urban and Rural Management and Law Enforcement Bureau of Yingzhou District, Fuyang City, Anhui Province, et al. (Dispute over Administrative Compulsory Demolition): The Legitimate Rights of Actual Users of Illegal Buildings should be Protected Lei Tong and Xiaoyu Xu

Rule In dealing with the legal relationships related to illegal buildings, the administrative agency should make corresponding decisions according to different situations, which are mainly divided into two kinds: first, for illegal buildings under construction, punishments can be inflicted on the illegal builders; second, for illegal buildings that have been completed for many years and sold, new proprietors are concerned when the administrative agency implements compulsory demolition, that is, actual users of the illegal buildings are also involved apart from the builders of the buildings. Therefore, the compulsory demolition of illegal buildings by the administrative agency, in fact, directly impacts the interested parties who have bought and lived in them, with little influence on the original builders of the buildings. In this case, the Collegial Bench: Lei Tong, Wei Yan and Zhigang Zhang Edited by Deqiang Han; translated by Jing Duan L. Tong (B) Administrative Division and the Fourth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Beijing, China X. Xu The Fourth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Zhengzhou, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_42

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administrative agency must take into consideration the legitimate rights and interests of the interested parties who are directly affected by administrative measures when coping with illegal buildings. Even if the parties concerned have not actually obtained the title deeds of the houses or apartments involved in the case, they, as the actual users, should enjoy the right to know, the right to make statements and the right to defend concerning the administrative decisions relevant to the buildings, which is the right to due process granted to the interested parties by administrative law. The administrative agency cannot replace the performance of the corresponding procedural obligations to the interested parties involved in the compulsory demolition with the punishment on the illegal builders and the compulsory performance of the procedural obligations.

Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Liu X Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): the People’s Government of Yingzhou District, Fuyang City, Anhui Province (hereinafter referred to as Yingzhou Government) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): the Urban and Rural Management and Law Enforcement Bureau of Yingzhou District, Fuyang City, Anhui Province (hereinafter referred to as Yingzhou U.M.A.L.E.) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Wenfeng Subdistrict Office of Yingzhou District, Fuyang City, Anhui Province (hereinafter referred to as Wenfeng Subdistrict Office) Third Party in the First Instance, Appellee in the Second Instance: Luo X 2. Procedural History First Instance: No.190 [2016] Trial, Adm. Division, the Intermediate People’s Court of Fuyang City, Anhui Province (Anhui 12) (dated Mar. 6 of 2017) Second Instance: No.696 [2017] Final, Adm. Division, the Higher People’s Court of Anhui Province (dated Dec. 19 of 2017) Application for Reopening: No. 2376 [2018] Appeal, Adm. Division, the Supreme People’s Court (dated Nov. 20 of 2018) 3. Cause of Action Dispute over administrative compulsory demolition

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Essential Facts At the end of 2006, Luo X., the third person, built three houses in XX Group, XX Community of Wenfeng Subdistrict Office of Yingzhou District. In 2008, Liu X. bought the houses involved in the case and lived there since. On June 21, 2016, Wenfeng Subdistrict Office of Yingzhou District applied to Urban Construction Headquarters of Yingzhou District to investigate and deal with houses illegally built by Luo X. Yingzhou U.M.A.L.E., with the assistance of Housing and Urban-Rural Development Bureau of Yingzhou District, Fuyang City and Urban-Rural Planning Bureau of Fuyang City in investigation, determined after filing the case, inquiry and on-site inspection that the houses built by Luo X. in XX Group of Wenfeng Subdistrict Office in 2006 were illegal constructions as Luo had not applied for the permit for a planned construction project. After performing the procedures of notifying the hearing and notifying before the punishment, Yingzhou U.M.A.L.E. issued to Luo X. the written decision of administrative punishment (No. 156 [2016] Adm. Punishment, Yingzhou U.M.A.L.E.) on July 20, 2016, requesting Luo to demolish the buildings by himself within five days. Luo X failed to perform it within the time limit. After fulfilling the procedures of making the announcement and sending the letter of demand, Yingzhou U.M.A.L.E. issued the written decision on compulsory demolition on August 5. On September 12, 2016, Yingzhou U.M.A.L.E. demolished the houses involved. Liu X. believed that he had purchased the houses involved and thus was the proprietor of the houses. The compulsory demolition violated his legitimate rights and interests, so he appealed to the court. On March 6, 2017, the court of first instance made the administrative decision, No. 190 [2016] Trial, Adm. Division, the Intermediate People’s Court of Fuyang City, Anhui Province (Anhui 12), dismissing Liu X’s lawsuit. On December 19, 2017, the court of second instance decided to dismiss the appeal and upheld the decision of first instance (No. 696 [2017] Final, Adm. Division, the Higher People’s Court of Anhui Province). After the decision came into effect, Liu X petitioned to the Supreme People’s Court for reopening the case, requesting to reverse the administrative decisions of first and second instances and to support his claims in the first instance.

Issue Whether there are interests in administrative law involved between the actual users of illegal buildings and the compulsory demolition of those buildings.

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Holding After review of the case, the Supreme People’s Court holds that the sued compulsory demolition act takes aim at the houses that Liu X. actually lived in and used, which resulted in Liu X losing his interests of living in and using the houses. Therefore, there are legal interests involved between Liu X. and the sued compulsory demolition act. When the administrative agency deals with illegal buildings that have been completed for many years and sold, it must take into account the legitimate rights and interests of the interested parties that are under the actual and direct influence of administrative conduct. Liu X., as the actual occupier and resident in the houses, should enjoy the right to know, the right to make statements and the right to defend concerning the administrative decisions relevant to the buildings, which are the rights to due process granted to the interested parties by administrative law. Yingzhou U.M.A.L.E. forcibly demolished the houses that Liu X actually lived in without fulfilling its procedural obligations, including informing Liu X and sending the letter of demand. This violates Liu’s right to know, right to make statements and right to defend, thus constituting the procedural violation of law. The courts of first and second instance considered that the administrative agency had already notified the third party Luo X, builder of the illegal construction, and sent him the letter of demand in accordance with the Administrative Enforcement Law; thus, it was decided that the compulsory demolition by the administrative agency was in compliance with law. These are wrong application of law. Therefore, the Supreme People’s Court decided to remand the case to the Higher People’s Court of Anhui Province.

Comment on Rule Due to the complicated historical reasons and realistic forms, dealing with illegal buildings has always been a difficult task for administrative law enforcement departments. On the one hand, illegal buildings, without obtaining a permit for a planned construction project or without sticking to the permit, seriously affect the city image and people’s daily life and even threaten public safety; on the other hand, although laws such as the Urban and Rural Planning Law, the Administrative Punishment Law, and the Administrative Enforcement Law have provided for how to deal with illegal buildings, it is impossible to cover all aspects and procedures. In practice, various complicated situations arise, and the relevant administrative litigation cases thereof have become tricky in administrative trials. First, whether Liu X, as the actual user of the houses, is qualified to be the plaintiff to institute legal proceedings against the administrative compulsory act. The houses involved in the case were built without the permit for a planned construction project and thus were determined as illegal buildings by the urban and rural planning department. The houses were built in 2006. In accordance with Article 40 of the

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then effective City Planning Law of the People’s Republic of China,1 construction which is undertaken within a planned urban area without a permit for a planned construction project or not in line with the requirements stated in the permit and which seriously affects city planning shall, by order of the competent department of city planning administration of the local people’s government at or above the county level, be suspended, removed within a prescribed period of time or be punishable by the confiscation of illegal buildings, structures or facilities; construction which affects city planning but can still be remedied shall, by order of the competent department of city planning administration of the local people’s government at or above the county level, be corrected within a prescribed period of time and be concurrently punishable by a fine. Therefore, some believe that Liu X. should not be the object of punishment for illegal construction, as he is not the builder. Meanwhile, Liu X. has not obtained the title deed of the houses because they were illegally built. Thus, it is believed that Liu X. is not the counterparty of the administrative act of compulsory demolition. Pursuant to Article 25(1) of the Administrative Procedure Law, the counterparty of the administrative act and other citizens, legal persons or other organizations whose interests are affected by the administrative act have the right to bring a lawsuit. Whether a party has interests involved or not determines whether the party can bring an administrative lawsuit as a plaintiff. The most direct manifestation of having interests in the administrative procedure law is that the rights and obligations of the party concerned have been changed due to the implementation of the sued administrative act, which means the party has been in fact affected. In this case, the evidential materials submitted by Liu X. sufficed to prove that he paid for the compulsorily demolished houses involved in the case, and the compulsory demolition of the houses led to Liu’s loss of interests to use and live in the houses. Therefore, it should be determined that Liu X. has interests in the sued demolition act. Second, whether there is any illegality in the sued compulsory demolition act. Judging from the perspective of formalities, the administrative agency, pursuant to the Urban and Rural Planning Law, the Administrative Enforcement Law and other provisions, has completed the formalities including notifying the hearing, notifying before the administrative punishment, making the decision of administrative punishment, sending the letter of demand, making the announcement and making the decision of enforcement. However, the series of procedures were all aimed at Luo X., the illegal builder. The houses involved in the case have been completed for many years. Since the administrative agency has already known the actual occupier of the houses in the preliminary investigation process, the counterparty of the administrative act concerning the houses involved of notifying, sending the demand letter, making the decision of enforcing the demolition and enforcing the demolition should no longer be limited to the original builder of the houses while ignoring the actual resident or occupier whose interests are obviously affected. The administrative agency’s failure to inform the actual user of the decisions related to the houses involved has violated Liu’s right to know and the right to make statements and defend, leading to his loss of 1

This Law was implemented on April 1, 1990, and was repealed on January 1, 2008.

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opportunities to claim his legitimate rights and interests, which not only goes against the principle of due process but also runs contrary to the spirit of substantive rule of law. In dealing with the legal relationship concerning illegal buildings, the administrative agency should handle them properly according to different situations rather than enforce the law mechanically. It should ensure that the legitimate rights and interests of the administrative counterparties and interested parties are not harmed while safeguarding public interests. Third, whether the loss of indoor property falls into the trial scope of administrative enforcement cases concerning houses. Some hold that the object of examination in administrative enforcement cases concerning houses is the act of compulsory demolition of the houses and that the loss of indoor property exceeds the scope of examination in such cases. Although the relevant administrative punishment decisions and administrative enforcement decisions are directly aimed at houses, they will often inevitably involve property in the houses. In fact, if the administrative agency directly enforces compulsory demolition without registering indoor items and storing them in other places properly beforehand, it will definitely lead to property losses. Therefore, the determination of whether there are indoor property losses in compulsorily demolished houses is directly related to the judgment of the legality of the sued act of compulsory demolition. When the party proposes that the act of compulsory demolition results in indoor property losses, the people’s court shall examine and determine in the same case.

Ouyang X v. The People’s Government of Panyu District, Guangzhou City, Guangdong Province (Dispute over Administrative Enforcement of Housing Demolition): Determination of the Plaintiff’s Eligibility of a Lessee Chuxiao Song and Ninghui Huang

Rule The statement of “having a stake” as set forth in the Administrative Procedure Law of the People’s Republic of China on the plaintiff’s eligibility means that an administrative act under litigation may lead to some special damage to or adverse impact on the rights and obligations of the plaintiff as different from others. In a case of housing expropriation, if the lessee has an inseparable addition to the house to be expropriated or has independently carried out business activities in the rented house in accordance with law, the act of forcible demolition may cause some special damage to or adverse impact on the lessee’s accessions or fixtures, personal belongings or the justifiable exercise of his management right different from others. Under such circumstances, the lessee shall be construed as having a stake in the administrative act and to be eligible as a plaintiff.

Collegial Bench: Chuxiao Song, Zhihua Yang and Xinze Tian Edited by Deqiang Han; translated by Zuoyong Liu C. Song (B) · N. Huang The First Circuit Court of the Supreme People’s Court of the People’s Republic of China, Shenzhen, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_43

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Ouyang X Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): The People’s Government of Panyu District, Guangzhou City, Guangdong Province (hereinafter referred to as Panyu District Government) 2. Procedural History First Instance: No. 440 [2017] Trial, Adm. Division, Guangzhou Railway Transportation Intermediate Court (Guangdong 71) (dated Dec. 29 of 2017) Second Instance: No. 751 [2018] Final, Adm. Division, the Higher People’s Court of Guangdong Province (dated Jul. 24 of 2018) Reopening: No. 159 [2019] Reopening, Adm. Division, the Supreme People’s Court (dated Jul. 30 of 2019) 3. Cause of Action Administrative enforcement of housing demolition

Essential Facts On August 12, 2014, Ouyang X. and the sublessor Zhang X. signed a store lease contract, agreeing that Zhang X. would lease the house involved in the case to Ouyang X. for business operation, with the lease term being from September 1, 2014 to September 1, 2019. On October 31, 2016, the People’s Government of Xinzao Town, Panyu District, Guangzhou City, Guangdong Province (hereinafter referred to as Xinzao Town Government) and the house owner, Hu X, signed an Agreement on House Expropriation, Compensation and Resettlement at Zengbian Village, Xinzao Town on compensation and resettlement of the house involved. On January 12, 2017, the Xinzao Town Government and Hu X. signed a housing handover agreement, agreeing that Hu X. would hand over the expropriated house under the abovementioned Agreement to the Xinzao Town Government for disposal. The document, No. 58 [2017] Department of Natural Resources of Guangdong Province (Construction), issued by the People’s Government of Guangdong Province, approved the expropriation of collective land at Zengbian Village and Nanyue Village, Xinzao Town, as state-owned land. On March 6, 2017, the People’s Government of Guangzhou City issued Notices No. 27, No. 28 and No. 29 [2017] Land Expropriation, Guangzhou People’s Government, announcing the plan for land expropriation and associated compensation and resettlement. On March 30, 2017, the No. 6 Team of the Land Expropriation and Demolition Group under the Land Expropriation, Demolition and Construction Headquarters of Cisco (Guangzhou) Smart City issued a notice to

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Ouyang X, the lessee of the house to be expropriated, stating that in accordance with the Agreement on House Expropriation, Compensation and Resettlement at Zengbian Village, Xinzao Town, it was due for the owner of the real estate to hand over his house and the Xinzao Town Government would take it back, so Ouyang X. was notified to vacate the house by the deadline. Thereafter, demolition of the house as mentioned was completed in June 2017. Ouyang X. deemed that the housing demolition was unlawful and filed the administrative lawsuit to the Guangzhou Railway Transportation Intermediate Court, requesting to confirm that the housing demolition by the Panyu District Government was illegal. On December 29, 2017, the court of first instance made the administrative ruling of No. 440 [2017] Trial, Adm. Division, Guangzhou Railway Transportation Intermediate Court (Guangdong 71), which held that in case of the demolition of the leased house mentioned by Ouyang X, the administrative counterpart shall be the owner of the house on the collective land, and Ouyang X., as a lessee, cannot file an administrative lawsuit for the housing demolition involved. Whereupon, the court of first instance dismissed the litigation raised by Ouyang X, whereas Ouyang X. appealed against the judgment of first instance. On July 24, 2018, the court of second instance made the administrative ruling of No. 751 [2018] Final, Adm. Division, the Higher People’s Court of Guangdong Province, holding that the Xinzao Town Government and the owner of the house had reached an agreement on compensation for housing expropriation and that the ownership of the house had been transferred. Ouyang X, as the lessee, had no legal stake in the demolition of the house. The notice issued by the Land Expropriation, Demolition and Construction Headquarters of Cisco (Guangzhou) Smart City, to Ouyang X. was to inform that the ownership of the house had been transferred and, as entrusted by the original owner, to notify the lessee to move out by the deadline; and the notice thereby did not set forth new rights or obligations to Ouyang X, so it was insufficient to prove that Ouyang X. shall be deemed as having a stake in the housing demolition. The dispute between Ouyang X. and the original owner of the house due to the housing lease contract can be resolved through civil means in accordance with law. The court of second instance hereby decided to dismiss the appeal and uphold the ruling of first instance. Ouyang X. requested reopening the case for a new trial and claimed that the conduct of housing demolition under litigation had caused losses to the lessee, including those related to the renovation of the house and items inside it; Ouyang X. shall be construed as having a stake in the housing demolition and, in accordance with law, be entitled to file this administrative lawsuit. Ouyang X. requested the Supreme People’s Court to withdraw the administrative rulings of first instance and second instance and to instruct the Guangzhou Railway Transportation Intermediate Court to retry this case.

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Issues 1. Whether Ouyang X, as the lessee, shall be construed as having a stake in the act of the forced demolition of the house and therefore has the plaintiff’s eligibility; 2. The instruction to retry a case in which it has been ruled to dismiss the litigation shall be made on the premise that after due review, it has been confirmed that the litigation meets the statutory conditions thereof.

Holding The Supreme People’s Court holds that pursuant to Article 25(1) of the Administrative Procedure Law, the administrative counterpart of an administrative act and other citizens, legal persons or organizations having a stake in the administrative act are entitled to file a lawsuit. In other words, a party shall enjoy the plaintiff’s eligibility as long as having a stake in the administrative act. The statement “having a stake” means that an administrative act under litigation may lead to some special damage to or adverse impact on the rights and obligations of the plaintiff as different from others. In a case of house expropriation, if the lessee has an inseparable addition to the house to be expropriated or has independently carried out business activities in the rented house in accordance with law, forced demolition of the house may probably cause such special damage to or adverse impact on the lessee’s addition to the house, on the lessee’s belongings or the justifiable exercise of his management right as different from others. Under such circumstances, the lessee shall be deemed to have a stake in the administrative act and to be eligible as a plaintiff. In this case, Ouyang X. filed an administrative lawsuit, requesting to determine that the demolition of the rented house is illegal, and provided preliminary evidence that the house had been renovated and used for business activities, so as to prove that the forced demolition of the rented house by the Panyu District Government may violate his lawful property rights and interests, and that Ouyang X. has a stake in the demolition and has the plaintiff’s eligibility in this case. In addition, Article 49 of the Administrative Procedure Law states that the filing of a lawsuit shall meet the statutory conditions thereof. The claim that Ouyang X. has the plaintiff’s eligibility in this case is only one of such conditions, whereas it is still necessary to review whether it meets other statutory conditions for lawsuits. In this case, Ouyang X’s lawsuit did not exceed the lawsuit period; in case of the administrative act by No. 6 Team of the Land Expropriation and Demolition Group under the Land Expropriation, Demolition and Construction Headquarters of Cisco (Guangzhou) Smart City, a temporary agency set up by the Panyu District Government, to issue a notice requiring the lessee to vacate his house by the deadline, its effect shall be borne by the Panyu District Government, who is the appropriate defendant in this case; it is lawful for the case to be governed, on a centralized basis, by the Guangzhou Railway Transportation Intermediate Court, and Ouyang X’s filing

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of the lawsuit meets the legal requirements thereof. In view of the above, on July 30, 2019, the Supreme People’s Court issued No. 159 [2019] Reopening, Adm. Division, the Supreme People’s Court, revoking the administrative rulings of first instance and second instance and instructing the Guangzhou Railway Transportation Intermediate Court to retry this case.

Comment on Rule The issue in the first instance, second instance and reopening of this case is about whether the lessee shall be construed as having a stake in the housing demolition. The adjudication for this case essentially indicates that Ouyang X, as a lessee, made inseparable additions to the rented house and independently carried out business activities in the rented house in accordance with law. Thus, the act of forced housing demolition will involve the disposal of additions to the property and facilities necessary for the business activities, and it will also involve compensation for the forced business suspension. Therefore, Ouyang X. has a stake in the act to implement the administrative forced demolition hereof and shall have the plaintiff’s eligibility. Except as mentioned above, before the substantive trial procedure is initiated, a comprehensive review shall be conducted to verify whether the lawsuit satisfies the statutory conditions hereof, and only after the conditions have been met can a ruling be made to instruct the retrial. 1. The qualified house lessee has the plaintiff’s eligibility in the case of house expropriation Pusuant to Article 25(1) of the Administrative Procedure Law, the administrative counterpart of an administrative act and other citizens, legal persons or organizations with a stake herein are entitled to file a lawsuit. The statement “having a stake” means that the administrative act under litigation may lead to some special damage to or adverse impact on the rights and obligations of the plaintiff as different from others. In a case of house expropriation, if the lessee has an inseparable addition to the house to be expropriated or has independently carried out business activities in the rented house in accordance with law, forced demolition of the house may probably cause such special damage to or adverse impact on the lessee’s addition to the house, on the lessee’s belongings or the justifiable exercise of his management right as different from those on persons other than the property owner and the like. Under such circumstances, the lessee shall be construed as having a stake in the administrative act and to be eligible as a plaintiff. In the trial practice of house expropriation cases, some courts dogmatically apply the law and hold that the lessee is not the expropriation-affected party only because he does not have the ownership of the house and that such a party does not have the plaintiff’s eligibility in any administrative case involved with house expropriation; therefore, the administrative counterpart’s lawsuit is dismissed only on a procedural basis. Such a practice does not clarify whether the interests of the parties concerned

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are truly affected. Therefore, it blocks access to legal remedies of the housing lessee in the case of house expropriation, who has significant additions and carries out business practices to protect their lawful rights and interests. Thus, it constitutes a serious violation of the litigation right of the administrative counterpart. In addition, such practice also involves the improper application of law and conflicts with the legislative purpose of the Administrative Procedure Law for the substantive resolution of administrative disputes and even aggravates the conflict on the contrary. By clarifying the conditions under which the lessee has a stake in the housing demolition and has the plaintiff’s eligibility, the reopening of this case has set a benchmark for the court trials of similar cases contributing to guide the court to better protect the eligible lessee’s litigation right in the cases of house expropriation. 2. The filing of a lawsuit shall comply with the statutory conditions hereof, and such compliance shall be reviewed before a substantive trial The statutory conditions for administrative litigation refer to the provision in Article 46 of the Administrative Procedure Law, which states that “(a) citizen, legal person or other entities that intends to file a lawsuit directly with the people’s court shall file it within six months from the date he knows or should have known the administrative act, except as otherwise provided by law. The people’s court will not accept a lawsuit concerning a real estate that is filed more than twenty years from the date when the administrative act was conducted, or other cases filed more than five years from the date when the administrative act was conducted”; in addition to the provision in Article 49, which states that “(t)he filing of a lawsuit shall meet the following conditions: (1) the plaintiff is a citizen, legal person or other entities that complies with the provisions in Article 25 hereof; (2) there is a definite defendant; (3) there is a specific claim and factual basis; and (4) it falls into the scope and jurisdiction of the people’s court for acceptance”. The administrative ruling of the reopening in this case discusses, respectively over whether Ouyang X’s litigation exceeds the statutory six-month lawsuit period, whether the Panyu District Government is a qualified defendant and whether this case falls within the scope and jurisdiction of the people’s court for acceptance, and it finally determines that Ouyang X’s lawsuit meets the statutory conditions hereof. It further verifies the principle that the people’s court shall file and hear administrative cases that meet the conditions for lawsuit. In addition, by explaining the ways to review the conditions for lawsuits, it also better guides administrative counterparts to seek relief in accordance with law.

Zhejiang Fangjue Import and Export Co., Ltd. v. Zhenjiang Customs of the People’s Republic of China, Anhui CONCH Group Ltd. (Third Party in the First Instance) (Dispute Over Administrative Sanction by Customs): Judicial Recognition and Jurisdiction of Intellectual Property Rights of Export Goods Qiang Wei and Qingxing Lin

Rule The use of a mark highly similar to the registered trademark of another enterprise in a prominent place of the package of exported goods has a role in identifying the source of the said goods. Regardless of whether the disputed goods are all sold abroad, such an act shall constitute the act of trademark use under the Trademark Law of the People’s Republic of China. Customs have the authority to take customs protection actions concerning intellectual property rights in accordance with law when the export goods suspected of infringement are inspected.

Collegial Bench: Qiang Wei, Jun He and Shaohua Li Edited by Deqiang Han; translated by Zuoyong Liu and Yi Zheng Q. Wei (B) · Q. Lin The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China © Law Press China 2022 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-16-8410-4_44

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Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Zhejiang Fangjue Import & Export Co., Ltd. (hereinafter referred to as Fangjue Im.&Ex. Company) Respondent in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Zhenjiang Customs of the People’s Republic of China (hereinafter referred to as Zhenjiang Customs) Third Party in the First Instance (Appellee in the Second Instance): Anhui CONCH Group Ltd. (hereinafter referred to as CONCH Company) 2. Procedural History First Instance: No. 48 [2016] Trial, Adm. Division, the Intermediate People’s Court of Zhenjiang City, Jiangsu Province (Jiangsu 11) (dated Sep. 27 of 2016) Second Instance: No. 157 [2017] Final, Adm. Division, the Higher People’s Court of Jiangsu Province (dated Dec. 31 of 2017) Reopening: No. 925 [2019] Appeal, Adm. Division, the Supreme People’s Court (dated Mar. 31 of 2019) 3. Cause of Action Administrative sanction by customs

Essential Facts On September 17, 2015, Zhenjiang Customs made a Decision of No. 01 [2015] Administrative Sanction Concerning Intellectual Property Rights, Zhenjiang Customs (hereinafter referred to as No. 01 Decision of Administrative Sanction) to the effect that for the cement declared on June 26, 2015, to Zhenjiang Customs to be exported to Gabon in three batches (15,000 tons in total with the total declared CGNAH ” value of USD 765,000), Fangjue Im.&Ex. Company used the trademark “CGNA without prior permission from CONCH Company: the registrant of a similar trademark “CONCH ” that has been put under recordation with the General Administration of Customs of the People’s Republic of China (hereinafter referred to as GACC) (with the record No. T2015-40,232), which was prone to cause public confusion. According to Subparagraph 2 of Article 57 of the Trademark Law, the said cement constituted the infringing goods on others’ exclusive right to use a registered trademark, and Fangjue Im.&Ex. Company’s export of the said cement constituted the act of exporting the infringing goods. Therefore, Zhenjiang Customs made the decision to impose the following administrative sanction against Fangjue Im.&Ex. Company: (1) the said 15,000 tons of infringing cement shall be confiscated; and (2) a fine

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of CNY 400,000 shall be borne thereby. Fangjue Im.&Ex. Company initiated the administrative proceedings against the customs sanction. On September 27, 2016, the court of first instance made the judgment of No. 48 [2016] Trial, Adm. Division, the Intermediate People’s Court of Zhenjiang City, Jiangsu Province (Jiangsu 11), rejecting Fangjue Im.&Ex. Company’s claim. On December 31, 2017, the court of second instance made the decision of No. 157 [2017] Final, Adm. Division, the Higher People’s Court of Jiangsu Province, rejecting Fangjue Im.&Ex. Company’s appeal and maintaining the first instance judgment. After the second instance decision taking effect, Fangjue Im.&Ex. Company applied for reopening to the Supreme People’s Court, requesting that the judgments made by the court of first instance and the court of second instance be vacated, and the Respondent’s decision of administrative sanction be revoked.

Issues 1. Whether there is an infringement of the mark used by Fangjue Im.&Ex. Company on CONCH Company’s exclusive right to use its registered trademark; 2. The legality of the decision of administrative sanction involved in this case.

Holding Upon reopening, the Supreme People’s Court holds that in case of the first legal issue, first, the CONCH Company legally owns the exclusive right to use the registered trademark “CONCH ”, which was recognized as a well-known one and has higher market CGNAH ” by Fangjue Im.&Ex. Company for the visibility; second, the use of the mark “CGNA goods involved in this case was an obvious infringement on CONCH Company’s exclusive right to use the registered trademark and was tinged with an obvious subjective intention; and third, the mark “CONCH ” by Fangjue Im.&Ex. Company constituted the act of use as defined in the Trademark Law. Specific to the second legal issue: first, Zhenjiang Customs has the jurisdiction over this case; second, the sanction decision made by Zhenjiang Customs was the act of its independent exercise of functions and powers within the framework of law; and third, Zhenjiang Customs followed the legal procedures of administrative enforcement. Therefore, it was proper and justifiable for the court of first instance to reject the litigation of Fangjue Im.&Ex. Company, and for the court of second instance to reject the appeal of Fangjue Im.&Ex. Company and uphold the judgment of first instance. Therefore, the Supreme People’s Court made the ruling, dismissing Fangjue Im.&Ex. Company’s application for reopening this case.

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Comment on Rule This case involves legal issues related to intellectual property rights, especially those related to the territorial protection and jurisdiction of trademark rights. Given that regional protection as a feature of trademark rights often appears in some special forms and covers some indistinct zones, there are always controversies over it in theory and practice. Therefore, in this respect, we need to conduct further study and discussion. 1. The applicability of different determinations concerning trademark infringement involving foreign-related OEM production in this case Generally speaking, foreign-related OEM production per se is not a legal concept rather than a form of international processing trade. Common sense has it that foreignrelated OEM production means the activity where all the OEM products made by Chinese manufacturers/processers according to the direct entrustment by their overseas clients are shipped abroad instead of being marketed within the territory of the People’s Republic of China. With regards to trademark infringements involving foreign-related OEM production, it has been controversial in theory and practice whether or not the use by a Chinese manufacturer/processer on identical or similar goods a mark identical or similar to a registered trademark within China should be construed to constitute an infringement on the Chinese right holder’s exclusive right to use the said registered trademark. In this case, Fangjue Im.&Ex. Company in the first instance invoked several typical cases as the application reference in determining that its action does not constitute a trademark infringement, for example, the Dispute over Trademark Infringement of Reopening Applicant Pujiang Ya-Huan Locks Co., Ltd. v. Respondent Laise Anti-theft Product International Co., Ltd. (No. 38 [2014] Reopening via Certiorari, Civ. Division, the Supreme People’s Court) and the Review of the Administrative Dispute over Trademark Objection of Reopening Applicant Ryohin Keikaku Co., Ltd. v. the Trademark Review and Adjudication Board of the State Administration for Industry and Commerce and Beijing Miantian Textiles Co., Ltd. (No. 02 [2012] Reopening via Certiorari, Adm. Division, the Supreme People’s Court). Zhenjiang Customs cited various cases as the application reference in determining that such an act does constitute a trademark infringement, including the Dispute over Trademark Infringement of Appellant Shanghai Diesel Engine Co., Ltd. v. Respondent Jiangsu Changjia Jinfeng Power Equipment Co., Ltd. {No. 00036 [2015] Final, Civ. Division (IPR), the Higher People’s Court of Jiangsu Province}. In the second instance, CONCH Company also invoked one typical case as the application reference in determining that such an act constitutes a trademark infringement, namely, the Dispute over Trademark Infringement of Reopening Applicant Zhejiang Rongda Trading Co., Ltd. v. Respondent Yu X (No. 121 [2016] Reopening, Civ. Division, the Higher People’s Court of Zhejiang Province). First, Subparagraphs 1 and 2 of Article 57 of the Trademark Law (Rev. 2013) provide, respectively that “(a)nyone or more than one of the following acts constitutes an infringement on the exclusive right to use a registered trademark: (1) use of

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a trademark identical with a registered trademark on the identical kind of goods without the permission from the registrant of the said registered trademark; (2) use of a trademark similar to a registered trademark on the identical kind of goods, or use of a trademark identical with or similar to a registered trademark on a similar kind of goods without the permission from the registrant of the said registered trademark and is prone to cause public confusion.” And the next question is how to define the use of a trademark. Article 48 of the Trademark Law provides that “(f)or the purpose of this Law, the use of a trademark refers to the affixation of a trademark to goods, goods packaging or containers, as well as goods trading documents, or the use of a trademark in advertising, exhibition and other commercial activities in order to identify the source of goods.” Both the Customs Law and the Regulation of the People’s Republic of China on the Customs Protection of Intellectual Property Rights (hereinafter referred to as Regulations on the Customs Protection of Intellectual Property Rights) confer on customs the authority to provide the customs protection to the intellectual property rights related to import/export goods and protected by Chinese laws and regulations. Second, in judicial practice, given that for the present time, foreign-related OEM production is still an important part of China’s foreign processing trade, the principle of the case-by-case decision is followed by people’s courts at all levels for trademark infringement cases related to foreign-related OEM production. Generally speaking, the adjudication scale for trademark infringement cases involving foreign-related OEM production should be as follows: (1) the determination as noninfringement is limited under certain conditions to Chinese processors made exclusively to overseas orders infringement, and generally speaking, is not extended to cover other types of Chinese enterprises in export trade as these enterprises organize domestic processors to produce or process goods to be reexported, such production or processing and affixation trademarks on the goods form part of the domestic production and circulation of the goods, falling within the category of the use of a trademark under the exclusive right to use the said registered trademark; (2) the limitation of the determination as noninfringement under certain conditions to Chinese processors is premised on the good faith from these Chinese processors, namely, Chinese processors have fulfilled their duty of care in examining overseas trademarks provided by their overseas customers; and (3) due to malicious preemptive registration and counterfeiting of trademarks both at home and abroad, Chinese processors should act on the principle of good faith and integrity, respecting others’ intellectual property rights and making a reasonable effort in avoiding the use of domestic influential trademarks, especially well-known trademarks, on their goods made to overseas orders. Notably, providing well-known trademarks, especially the well-known trademarks of Chinese proprietary brands, with the protection proportionate to their goodwills and crackdown on any malicious infringements have been not only the basic purposes of China’s trademark laws and judicial policies, but also the basic requirements for China to implement the innovation-driven strategy, promote economic transformation and upgrading and strictly protect intellectual property rights. It is exactly based on the aforesaid understanding that there are two types of judgments on trademark infringement cases involving foreign-related OEM production: infringement

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and noninfringement, which is in line with the current requirement from China’s economic development stage and reflects special judicial policies in responding to the need to develop China’s foreign processing trade. Over recent years, for trademark infringement cases involving foreign-related OEM production, people’s courts have recently also made different determinations: infringement or noninfringement based on different situations. In this case, the entrustment of Chinese processors by Fangjue Im.&Ex. Company to produce the cement involved in the case to be exported to Gabon was, in essence, the act of Chinese enterprises organizing the production and processing of goods and exporting them and thus did not have the preconditions for the application of special judicial policies for foreign-related OEM production. 2. Infringement determination of the disputed goods exclusively to be sold abroad Article 146(1) of the General Principles of the Civil Law of the People’s Republic of China provides that “(t)he law of the place where an infringing act is committed shall apply in handling compensation claims for any damage caused by the act. If both parties are citizens of the same country or have established domicile in another country, the law of their own country or the country of domicile may be applied.”1 Article 48 of the Law of the People’s Republic of China on the Application of Laws over Foreign-Related Civil Relationships provides that “(t)he law of the place where protection is claimed shall apply to the ownership and contents of intellectual property rights”, and Article 50 hereof provides that “(t)he law of the place where the protection is claimed shall apply to the liability for infringement of intellectual property rights …”. In accordance with the abovementioned legal provisions, the law of the place where an infringing act is committed and/or the protection is claimed, namely, the law of the People’s Republic of China, shall apply to an infringement act taking place within the territory of the People’s Republic of China. In this case, Fangjue Im.&Ex. Company claimed that since all the cement involved in this case was to be sold abroad rather than within the territory of the People’s Republic of China, there was no use of a trademark and no material damage to the registered trademark of CONCH Company. However, since 2010, CONCH Company has used the trademark “CONCH ” on cement exported to Gabon and has already built up relatively high market visibility. When concluding, the sales contract for 15,000 tons of cement between Fangjue Im.&Ex. Company and the outsider in this case on May 27, 2015 CGNAH ” on the said cement, related persons from and requesting to print the mark “CGNA the outsider had raised the doubt that the mark is similar to the registered trademark “CONCH ” of CONCH Company, especially the red slash in the middle of the symbol “N ”, but Fangjue Im.&Ex. Company insisted that they are different and requested to CGNAH ”, demonstrating that Fangjue Im.&Ex. Company failed to produce the mark “CGNA make a reasonable effort to avoid the use of others’ trademarks and had a significant subjective intention to use a mark suspected of infringing on others’ trademarks. This act will also cause significant damage to CONCH Company’s export to and CGNAH ” used by Fangjue Im.&Ex. Company on the goods sales in Gabon. The mark “CGNA 1

There are no provisions in the Civil Code corresponding to this Article.

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involved in this case is substantially similar to the registered trademark “CONCH ” of CONCH Company. According to law, its use constitutes the act of use as defined in the Trademark Law and is obviously an act of infringement on CONCH Company’s exclusive right to use its registered trademark “CONCH ” even if all the goods made within the territory of the People’s Republic of China are to be sold abroad. 3. The legality of the decision of administrative sanction made by the Customs (1) Zhenjiang Customs has administrative jurisdiction over this case According to Article 44(1) of the Customs Law, Customs shall, in accordance with the provisions of laws and administrative regulations, protect intellectual property rights related to import/export goods. Article 2 of the Regulations on the Customs Protection of Intellectual Property Rights provides that “(f)or the purpose of this Regulation, the expression ‘Customs Protection of Intellectual Property Rights’ refers to the provision of protection by Customs to the exclusive right to use trademarks, copyrights and copyrights-related rights and patent rights which are related to the import/export goods and protected by the laws and administrative regulations of the People’s Republic of China.” Thus, Customs has the authority to protect intellectual property rights which are related to the import/export goods and protected by laws. Article 23 of the Customs Law provides that “(e)xport goods shall be subject to Customs control during the period from their Customs declaration to their departure from the country.” Article 3 of the Regulations for Implementing the Administrative Penalties by the Customs of the People’s Republic of China provides that “(c)ustoms administrative sanctions shall be within the jurisdiction of the Customs where violations are found or occurred. If two or more Customs have the jurisdiction, the Customs where violations are first found shall have the jurisdiction.” In this case, first, the cement involved was declared by Fangjue Im.&Ex. Company to Zhenjiang Customs on June 26, 2015 and shipped at Zhenjiang Port. As long as having not departed out of the territory of the country, the said cement was still subject to the supervision of Zhenjiang Customs even though having arrived at Zhangjiagang. Second, Zhenjiang Customs issued a Notice of Customs Inspection to the customs agent of Fangjue Im.&Ex. Company on July 14, 2015, and found that Fangjue Im.&Ex. Company was suspected of infringing on the exclusive right to use the registered trademark of CONCH Company in its inspection into the goods involved the next day. Then, Zhenjiang Customs initiated related investigations, dealt with the matter according to law and came out with the investigation conclusions. The cement involved was the goods declared to and shipped at Zhenjiang Customs and was also the clue that led to Zhenjiang Customs’ suspicion of a possible infringement, further inspection and investigation in accordance with law, and the final conclusion that Fangjue Im.&Ex. Company was suspected of infringing on CONCH Company’s exclusive right to use its registered trademark. Therefore, Zhenjiang Customs was the one that found the illegal act and had administrative jurisdiction over the illegal act. (2) Zhenjiang Customs exercises its administration authority independently within the framework of law

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Zhenjiang Customs reported the case to its superior authority, Nanjing Customs, for instructions, which in turn notified the intellectual property rights holder of the matter for confirmation, but these moves had no material impacts on the rights and obligations of Fangjue Im.&Ex. Company. What had immediate impacts on the rights and obligations of Fangjue Im.&Ex. Company were a series of actions taken by Zhenjiang Customs, the inspection and investigation leading to the said decision, the seizure of the goods involved in the case, the collection and discovery of related evidence, the determination of the illegal facts, the hearings for safeguarding the parties’ right to make their statements and defense, and the final application of laws. All these actions were taken independently by Zhenjiang Customs in accordance with law. Therefore, Zhenjiang Customs independently exercised its administrative authority within the framework of law. (3) Zhenjiang Customs followed the legal procedures of administrative enforcement Article 16 of the Regulations on the Customs Protection of Intellectual Property Rights provides that “(w)here import/export goods are found to be suspected of infringing on intellectual property rights, Customs shall promptly notify in writing the intellectual property right holders of such suspected infringement. Where the right holder confirms that the goods involved infringe on its intellectual property rights under recordation with the General Administration of Customs of the People’s Republic of China (GACC) and requests the Customs to impound the goods involved, it shall make a written application to the Customs and place a security deposit with the Customs in accordance with related provisions, and the Customs shall impound the suspected goods on the written application and security deposit provided by the right holder, make investigations and take related measures.” In this case, CONCH Company reregistered its trademark “CONCH ” with the GACC on July 14, 2015. Zhenjiang Customs issued on the same day a Notice of Customs Inspection to the customs agent of Fangjue Im.&Ex. Company, made its inspection into the goods involved the next day, and then issued a written notice to the intellectual property rights holder and conducted related investigations according to law after finding that Fangjue Im.&Ex. Company was suspected of infringing on CONCH Company’s exclusive right to use its trademark registered with the GACC. These moves taken by Zhenjiang Customs are in conformity with relevant provisions. According to Article 23 of the Measures for Implementing the Regulations on Customs Protection of Intellectual Property Rights, during the investigation and disposal by Customs in accordance with its authority, if the suspected goods are requested to be impounded by customs, the right holder should place a security deposit of CNY 100,000 with Customs for the goods worth more than CNY 200,000. In this case, the goods involved in the case were declared separately by Fangjue Im.&Ex. Company in three batches, so Zhenjiang Customs’ requirement to place a security deposit of CNY 100,000 for each batch was justified. 4. Conclusion With the development and social progress, China has promoted the intellectual property rights strategy and strengthened intellectual property rights protection. The

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general public has also attached more importance to the intellectual property rights innovation, application and protection, contributing to a better social atmosphere of respecting intellectual property rights and distaining counterfeited products. In particular, since the implementation of the Belt and Road Initiative, Chinese enterprises have more actively ventured into overseas markets, leading to closer integration with other parts of the world. In addition, it is not only the legal obligation enshrined in Chinese laws and regulations but also a solemn commitment by China to the international community to effectively crack down on infringements and counterfeiting acts of export goods, strengthen the intellectual property rights protection and constantly improve the international brand image of “made-in-China” products. In this case, the provision of intellectual property rights customs protection, the punishment of the infringer and the protection of the legitimate rights and interests of the intellectual property rights holder by Zhenjiang Customs in accordance with relevant laws and regulations should be supported. While adjudicating cases involving the protection of the legitimate rights and interests of private enterprises, the improvement of business environment governance and the promotion of the Belt and Road Initiative, and supervising the legal exercise of their functions and powers by administrative authorities, the Supreme People’s Court also supports the crackdown on illegal acts and the protection of the legitimate rights and interests of the parties concerned by administrative authorities in accordance with law.